119 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg cultivation of accounting-based financial management technology and e-commerce adoption on the development of msmes in banyumas regency (an approach to planned behavior theory) dona primasari, siti magfiroh, sudjono sudjono departement accounting, jenderal soedirman university, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 the long-term goal of this research is to enrich the development of science, especially the development of msmes related to the adoption of information technology by studying using theory of planned behavior. the specific purpose of the study is to examine what factors influence the adoption of government program applications at msmes in banyumas regency. data collection in this study was carried out by distributing questionnaires through direct delivery to 100 respondents of msmes in banyumas regency who were respondents. the sampling technique in this study using random sampling techniques. whereas for data analysis using statistical product and service solution (spss) and structural equation modeling (sem) with the amos program. from the results of data processing and analysis it was found that theory of planned behavior was able to identify the factors that influence the adoption of accounting-based financial management technology and e-commerce adoption at msmes in banyumas regency keywords: e-commerce, accounting based financial management technology, msmes, theory of planned behavior address correspondence: e-mail: dona_primasari@yahoo.com dona primasari / finance, accounting and business analysis 2 (2) 2020 120 introduction banyumas is one of the regencies in central java with a fairly high msme growth rate. although the growth of msmes in the regency of banyumas is quite rapid, it is not in line with the development process. according to mr. warno noto s.h as the head of the msmes empowerment, protection, and supervision section stated that "the growth of msmes in banyumas district is very rapid. however, the development of msmes in the banyumas district is still relatively slow, human resources are still low, the lack of technological knowledge about production and the limited market share and capital are factors that inhibit the development of msmes, and there are even a few msmes that can only survive operating for two to three only year. broadly speaking, human resource factors, technological knowledge and marketing strategies are the main factors that hamper the development of msmes in banyumas regency. so far the government has launched various programs to support the progress of the development of msmes in banyumas regency, one of the programs to assist financial management is the issuance of accounting supportive financial management software, including sql ledger, gnucash and turbo cash to support msmes operational activities. in addition, the government also supports the movement of msmes product marketing techniques through the deputy for business development and restructuring in business systems development affairs to conduct internet utilization assistance activities in the form of websites for msmes through a site called www.sentraukm.com. this activity is an activity that has been carried out in the 2007 fiscal year in 2 provinces, namely in bandung, west java and in the city of surakarta, central java (department of cooperatives, 2008). unfortunately, based on field surveys it is known that the msmes actors have not maximized the government programs, some of the msmes practitioners claimed not to know about the programs that were proclaimed by the government. some are not willing to use program facilities provided by the government for various reasons. the behavior of msmes actors certainly affects the existence of an msmes. in the theory of planned behavior, the main factor of an individual's displayed behavior is the intention to display a certain behavior (ajzen, 1991: 5). intention is assumed to be a motivational factor that influences behavior. intention is an indication of how hard someone is trying or how much effort is made to display a behavior. this study tries to apply alternative models that are expected to explain the phenomenon of the adoption process of accounting-based financial management technology and e-commerce technology for msmes, as well as factors that can make a person feel the use of accounting-based financial management technology and the use of e-commerce profitably. literature review theory of planned behavior (tpb) according to grizzell (2003) theory of planned behavior is a theory of reasoned action that is enhanced by the addition of perceived behavior control. theory of planned behavior is a theory that predicts the consideration of behavior because behavior can be considered and planned. then this theory was further developed by several researchers (for example: krugger and carrud, 1993; ajzen, 1991; stavroc, 1991; sharma et. al. 2003). peach et. al. (2006) and wellington et. al. (2006) states that theory of planned behavior has advantages over other behavioral theories, because theory of planned behavior is a behavioral theory that can identify a person's beliefs about control over something that will occur from the results of behavior, thus distinguishing between one's desired behavior and those that will no will. ajzen (2002) suggests that theory of planned behavior has emerged as one of the most influential frameworks and concepts that are popular in humanitarian research. according to this theory, human behavior is guided by 3 types of considerations: a. confidence regarding possible consequences or other responses to behavior (trust behavior). b. beliefs about normative expectations from others and motivation to agree with expectations based on normative beliefs c. confidence regarding the presence of factors that may be further across from behavior (trust control). in other words, theory of planned behavior is a development theory of theory of reasoned action. in line with this, east, (1997) states that theory of planned behavior is derived from theory of reasoned action, with the difference being the addition of the variable perceived behavior control to the research framework. micro, small and medium enterprises in accordance with law number 20 year 2008, the definition of micro, small and medium enterprises as follows "micro business is a productive business owned by individuals and / or individual dona primasari / finance, accounting and business analysis 2 (2) 2020 121 business entities." small business is a productive economic business that stands alone, which is carried out by people individuals or business entities that are not subsidiaries or branches of the company that are owned, controlled, or become a part of either directly or indirectly of medium enterprises or large enterprises that meet the criteria of small business. " accounting information system belkaoui (2000) defines accounting information as quantitative information about economic entities that are useful for making economic decisions in determining choices between alternative actions. e-commerce impelementation e-commerce is defined by ellswood (1995) as the implementation of business with the help of information technology and communication technology. e-commerce (electronic commerce) can simply be interpreted as an activity or sale and purchase transaction electronically. buying and selling activities that occur are identical to conventional trading activities. the difference is only when the payment process occurs, and the delivery of products by sellers is done electronically (online via the internet). theoritical framework the government through the ministry of cooperatives and the ministry of information communication has launched various facilities to support the development of msmes in indonesia. the facilities are in the form of financial management technology based on accounting and e-commerce technology specifically for msme entrepreneurs. phenomenon in the field, especially in banyumas regency shows that msme actors have not used all the facilities that the government has planned. this study examines the factors that influence msmes in adopting and using accounting and ecommerce-based financial management technologies, with the aim of identifying factors that can be maximized so that reuse of accounting and e-commerce-based financial management technologies for micro businesses small medium hypotheses development and research methods according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: 1. attitude towards behavior influences intention to use in adopting accounting and e-commerce-based financial management technologies for msmes 2. subjective norm influences intention to use in adopting accounting and e-commerce-based financial management technologies for msmes 3. perceived behavior control influences intention to use in the adoption of accounting and e-commercebased financial management technologies for msmes 4. intention to use affects the usage behavior in the adoption of accounting and e-commerce-based financial management technologies for msmes 5. perceived behavior control influences usage behavior in the adoption of accounting and e-commercebased financial management technologies for msmes the method used in this research is d is descriptive verification method with a quantitative approach. the population in this study is the msmes in banyumas regency. the research sample included 100 msmes trade sector actors at msmes in banyumas regency. data collection in this study was carried out by distributing questionnaires through direct delivery to msmes in banyumas district who were respondents. the sampling technique in this study using purposive sampling technique . the data analysis technique uses statistical product and service solution (spss) and structural equation modeling (sem) with the amos program. finding the effect of attitude towards behavior on intention to use in the adoption of accounting and ecommerce based financial management technologies for msmes attitude toward behavior positively influences intention to use, which means that the higher the attitude behavior will increase the intention to use. these results support previous research conducted by ajzen (1991), and research by dharmmesta and khasanah (1999) which states that the variables that influence an individual's intention to do something (intention to use) are attitude toward behavior, subjective norm, and perceived behavior control. attitude toward behavior that affects intention to use reveals that msmes who have an attitude of acceptance towards technology adoption will be interested in adopting accounting and e-commerce-based financial management technologies. msmes who feel that adopting accounting and e-commerce based dona primasari / finance, accounting and business analysis 2 (2) 2020 122 financial management technologies will not produce anything negative, will be interested in adopting accounting and e-commerce based financial management technologies. the phenomenon in banyumas district shows that msmes will be interested in using financial management technology based on accounting and e-commerce if they see the benefits of the application. based on the interview process, it is known that the principals who have not used accounting and e-commerce-based financial management technology because of their concern about the difficulties they face when using various applications and in contact with technology. the stigma that arises will influence the msmes to find a path that they think is safe and comfortable, namely the conventional system. the influence of subjective norms on intention to use in the adoption of accounting and e-commerce based financial management technologies for msmes the relationship between subjective norm and intention to use has a significant positive effect. this means that subjective norm influences intention to use. these results are consistent with research by barnet and persley (2004) and ajzen (1992) which states that interest (intention to use) is influenced by perceived behavior control and subjective norms. ajzen (2004) also states that perceived behavior control has a strong influence on interest (intention to use). subjective norms also influence the growth of interest in msmes to adopt accounting and ecommerce-based financial management technologies. good social value in the eyes of the public about financial management technology based on accounting and e-commerce and positive views from important people such as friends or family of msme practitioners about financial management technology based on accounting and e-commerce will influence the desire of msme actors to adopt management technology accounting and e-commerce based finance. so far, there are a number of msmes that have begun to glance at accounting and e-commerce-based financial management technologies in banyumas, even though they are not large enough. based on field data it is known, that there is a social value stigma that arises that the use of financial management technologies based on accounting and e-commerce is in accordance with the regulations of the banyumas regent. the recommendation from the bupati is proven to be able to act as a norm reference for msme practitioners to use accounting and e-commerce-based financial management technology. the effect of perceived behavior control influences intention to use in the adoption of accounting and e-commerce-based financial management technologies for msmes perceived behavior control positively influences intention to use, which means that an increase in perceived behavior control influences intention to use. the results of this study support the study of ajzen (2004) which states that although perceived behavior control has a strong effect on intention to use . one's perception or thinking that adopting accounting and e-commerce based financial management technology is easy to do enables the person to adopt accounting and e-commerce based financial management technology in their marketing needs, and interest in adopting growing accounting and e-commerce based financial management technology in a person really allows that person to really adopt the technology of financial management based on accounting and e-commerce. the open minded attitude of msmes in banyumas regency has proven to encourage the realization of the use of financial management technologies based on accounting and e-commerce. the attitude of self-control that accepts something new that is felt to be beneficial will certainly have an impact on the use of financial management technologies based on accounting and e-commerce. the effect of intention to use affects the usage behavior in the adoption of accounting and e-commerce based financial management technologies for msmes intention to use positively affects usage behavior, which means that the higher or increasing intention to use will affect the increase in usage behavior. these results support the research of wellington et. al. (2006) where the intention (intention) is a feeling when someone plans or intends to do it, which will soon be manifested in behavior (usage behavior). this result is also consistent with ajzen's (2004) study which states that interest (intention to use) can have a strong influence directly on usage behavior. if the msmes feel that they can control their behavior to continue to use accounting and e-commerce based financial management technology after they decide to use accounting and e-commerce based financial management technology, it will generate interest in msmes to adopt the adoption of financial management technology based accounting and e-commerce. the use of accounting and e-commerce-based financial management technology adoption by msme actors is due to the interest that arises because of the consideration of msme actors as a whole, namely attitude toward behavior, subjective norm, and perceived behavior control. the effect of perceived behavior control on usage behavior in the adoption of accounting and edona primasari / finance, accounting and business analysis 2 (2) 2020 123 commerce-based financial management technologies for msmes perceived behavior control positively influences usage behavior, which means that an increase in perceived behavior control influences usage behavior. the results of this study support the study of ajzen (2004) which states that although perceived behavior control has a strong effect on usage behavior when mediated by intention to use, but if perceived behavior control directly on usage behavior the effect is there but it is weak. ajzen (1992) states that a strong perception factor is important for convincing oneself so as to generate strong interest in a person. raising and growing attitudes toward behavior, subjective norms, and perceived behavior control needs to be done so that the interest to conduct financial management and use e-commerce remains. the results of this study support previous studies and prove that the theory of planned behavior can be applied to assess the behavior of msme actors in the adoption of accounting and e-commerce-based financial management technologies for msmes. one's perception or thought that adopting accounting and e-commerce based financial management technology is easy to do enables the person to adopt accounting and e-commerce based financial management technology in their marketing and marketing needs, and interest in adopting accounting and e-commerce based financial management technology what grows in a person really enables that person to really adopt accounting and e-commerce based financial management technologies. if the msmes feel that they can control their behavior to continue to use accounting and e-commerce-based financial management technologies, it will generate interest in msmes to adopt accounting and e-commerce-based financial management technologies. conclusion 1. attitude toward behavior positively influences intention to use, which means that the higher the attitude behavior will increase the intention to use. these results support previous research conducted by ajzen (1991), and research by dharmmesta and khasanah (1999) 2. the relationship between subjective norm and intention to use has a significant positive effect. these results are consistent with research by barnet and persley (2004) and ajzen (1992). a good social value in the eyes of the community about e-commerce and positive views from important people such as friends or family of msme practitioners about e-commerce will influence the desire of msme entrepreneurs to adopt e-commerce. 3. perceived behavior control influences intention to use in the adoption of accounting and ecommerce-based financial management technologies for msmes 4. intention to use affects the behavior of users in the adoption of accounting and e-commerce-based financial management technologies for msmes. intention to use positively affects usage behavior, which means that the higher or increasing intention to use will affect the increase in usage behavior. these results support the research of wellington et. al. (2006) where the intention (intention) is a feeling when someone plans or intends to do it, which will soon be manifested in behavior (usage behavior). this result is also consistent with ajzen's (2004) study which states that interest (intention to use) can have a strong influence directly on usage behavior. 5. perceived behavior control influences usage behavior in the adoption of accounting and ecommerce-based financial management technologies for msmes. the results of this study support the study of ajzen (2004) which states that although perceived behavior control has a strong effect on usage behavior. theoretical implications this research has broad implications in the future, especially for research relating to the relationship of behavioral factors in the implementation of new systems and technologies. based on the findings of the research results and conclusions on the hypotheses and research problems, it can be explained that in the application of a system must pay attention to the socialization of costs and benefits to employees when they use the new system. research limitations this study has limitations that need to be considered in evaluating the results of research. the limitation of this study lies in the instrument of measuring the research variables used by translating the previous research instruments conducted abroad and in the private sector, so that there may be differences in cultural backgrounds, and characteristics of respondents resulting in differences in understanding. it is also possible that respondents mistakenly perceive their true intentions so that future research needs deeper study. dona primasari / finance, accounting and business analysis 2 (2) 2020 124 references abernethy, m. a., and jan bouwens. 2005. “ determinants of accounting innovation”. abacus. amalia, soraya. 2010. “persepi pegawai pajak terhadap pemanfaatan teknologi informasi pada kinerja individual (studi kasus pada kpp pratama tegal)”. skripsi ayub,k. .2012. 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0.01 valid 2 subjective norm 0.298**-0.782** 0.01 valid 3 perceived behavior control 0.713**-0.835** 0.01 valid 4 intention to use 0.445**-0.843** 0.01 valid 5 usage behavior 0.602**-0.815** 0.01 valid source: data processed, 2019 no variable cronbach alpha information 1 attitude towards 0.928 reliabel 2 subjective norm 0.864 reliabel 3 perceived behavior control 0.894 reliabel 4 intention to use 0.951 reliabel 5 usage behavior 0.721 reliabel source: data processed, 2019 table 2. validity test results dona primasari / finance, accounting and business analysis 2 (2) 2020 125 figure 1. estimated full model equation table 3. evaluation of fit structural model indexes indeks fit result recommended value evaluasi model chi-square 141,512 the smaller the better probabilitas 0,027 > 0,05 moderate chi-square/df 111 <2 fit gfi 0,813 > 0,90 fit rmsea 0,063 < 0,08 fit agfi 0,097 > 0,90 fit ifi 0,093 > 0,90 fit tli 0,947 > 0,90 fit cfi 0,967 > 0,90 fit nfi > 0,90 fit source: data processed, 2019 table 4. output of regression weights regression weights: (group number 1 default model) estimate s.e. c.r. p label iu <--at .211 .152 3.395 .003 par_13 iu <--sn .515 .214 2.413 .016 par_14 iu <--pbc .458 .139 3.301 *** par_15 ub <--iu .232 .204 3.138 .012 par_16 ub <--pbc .256 .189 2.350 .034 par_20 at4 <--at 1.000 at3 <--at 1.051 .159 6.609 *** par_1 at2 <--at 1.155 .178 6.500 *** par_2 at1 <--at -.713 .159 -4.488 *** par_3 sn3 <--sn 1.000 sn2 <--sn 1.272 .186 6.830 *** par_4 sn1 <--sn 1.178 .168 7.021 *** par_5 pbc3 <--pbc 1.000 pbc2 <--pbc .897 .120 7.461 *** par_6 pbc1 <--pbc .843 .120 7.009 *** par_7 iu1 <--iu 1.000 iu2 <--iu 1.105 .158 6.984 *** par_8 iu3 <--iu .906 .145 6.246 *** par_9 dona primasari / finance, accounting and business analysis 2 (2) 2020 126 estimate s.e. c.r. p label ub1 <--ub 1.000 ub2 <--ub .997 .147 6.775 *** par_10 ub3 <--ub .977 .130 7.501 *** par_11 ub4 <--ub 1.153 .164 7.027 *** par_12 source: data processed, 2019 65 finance, accounting and business analysis volume 1 issue 1, 2019 bulgarian universal pension funds – are they a real source for financing the state budget deficit jeko milev associate professor, unwe, bulgaria info articles abstract history article: received 5 june 2018 accepted 12 december 2018 published 29 january 2019 bulgarian pension funds have been operating for more than 15 years since the fundamental reform in the pension system in our country was implemented in 2002. for the whole period bulgarian lev has been fixed to the euro due to the currency board system. in such an environment bulgarian central bank cannot finance the budget deficits of the state. bulgarian government is trying to balance the budget or to form small deficits because in a currency board monetary system eventual shortages of cash inflows should be compensated by the private sector – mainly by the institutional investors – banks, pension funds, insurance companies etc. in this situation bulgarian pension funds are one of the cash sources that could be used. but are they a real source in the long term? in the next lines a research is done on the structure of the government bond portfolio held by bulgarian pension funds and how these financial institutions actually support the financing of the deficits formed by the bulgarian government for the last 10 years. the research is trying to find answers to the following questions: 1. is the share of government bonds in bulgarian universal pension fund portfolio constant or is it variable for the last 10 years. 2. what is the share of the bulgarian government bonds in government bond portfolio managed by the pension funds? 3. could we expect that these financial institutions will continue to finance the budget deficits of the bulgarian government in the long term and to what extent? the last question is quite important having in mind that the introduction of the funded component of the pension system was accompanied by a transfer of the contribution due for the first pillar of the system (pay-as-you-go) towards the second one (fully funded with defined contributions). so part of the deficit formed into the pay-as-yougo pension system is due to this reduction of the contribution rate paid by those individuals insured into the universal pension funds. keywords : pension funds, investments, government bonds, regulation, economic crisis. address correspondence: e-mail : jekomilev@yahoo.com jeko milev / finance, accounting and business analisys 66 introduction bulgarian pension system was significantly reformed in the year of 2000. as a result of this reform and following the recommendations of the world bank a three-pillar pension system was established. bulgarian demographic structure has been worsening for the last 20 years. due to the economic slump which was a logical result after the collapse of the communist regime and the continuous lack of economic reforms, the country’s birth rates dropped and the emigration processes deepened. the negative changes were extremely severe in 1990’s and as a consequence the real value of pension benefits fell seriously. the continuous aging of the population has been making pay-as-you-go system unsustainable in the long term. some populist decisions in early 1990’s (such as receiving full pension rights earlier for some labor categories or getting invalidity pension without being disabled) made the situation even worse. the hyperinflation from the late 1996 and early 1997 melted the savings of all bulgarians including pensioners. as a result the average pension amount dropped to $5 per month. in such extreme economic situation bulgarian authorities took some decisive steps to start a pension reform whose aim was to respond to the worsening demographic structure and to support the existing payg system1. bulgarians were given the opportunity to save and to accumulate resources for their future retirement. the long-term goal of the implemented reform is to achieve an income replacement rate at around 70% of the final salary of the insured person. the second pillar of the system is so-called supplementary mandatory pension insurance. it takes the form of two types of pension funds: universal and occupational. all persons born after 31.12.1959 could insure themselves in a universal pension fund, while all individuals working under the first and second labor category (i.e. working in hard working conditions) could insure themselves in occupational pension fund. the third pillar of the system is supplementary voluntary pension insurance, wherein all participants choose to make contributions for supplementary benefits. the contribution rates for universal pension funds have been adjusted several times during the years. they were increased gradually from an initial rate of 2% in 2002 to 3% in 2004, 4% in 2006 and finally 5% in 2007. the contribution rates for occupational pension funds are 12% for people working under the first labor category and 7% for people working under the second labor category. each person may choose only one universal and/or one occupational pension fund. insurance in a universal pension fund gives an individual the right to2: • a supplementary lifetime retirement pension; • a lump sum of up to 50% of the amount accrued in the individual account in the case of permanently reduced working capacity by more than 89.99%; • a lump sum or deferred payment to the heirs of the deceased insured person. insurance in an occupational pension fund gives an individual the right to: • a term occupational pension for early retirement; • a lump sum of up to 50% of the amount accrued in the individual account in the case of permanently reduced working capacity by more than 89.99%; • a lump sum or deferred payment to the heirs of the deceased insured person. in order to better protect the funds of the insured, legislation in bulgaria states that pension funds are separate legal entities from the pension insurance companies that manage them. investment regulations the introduction of a system that functions on a fully funded principle was a serious challenge for the bulgarian regulators3. the implementation of a compulsory second pillar in a country where the capital market has been just started with low liquidity and a few financial instruments suitable for investment vehicles for this type of institutions imposes many risks both on insured individuals and pension companies. the lack of traditions in pension insurance of this kind was also an obstacle with unforeseeable consequences as no one was sure whether the public would support the reform4. the regulators had to reflect all these constraints into the rules supposed to govern the newly formed pension insurance companies. so it was of little surprise that they gave a priority to strict investment regulation. during the first years of their existence, pension insurance companies from the second pillar of the system were obliged to invest minimum 50% of their assets into government bonds. the investment constraints concerning the universal and occupational 1 milev, j., 2012 ten years after the start – problems and challenges facing the bulgarian pension funds 2 social security code, 1999 3 nenovsky, n., milev, j. 2014 bulgarian wellfare system (1989 – 2014) evolution, problems, challenges 4 milev, j. 2015, payg vs. fully funded pension system – alternative or complementary components in the pension system – the case of bulgaria jeko milev / finance, accounting and business analisys 67 pension funds in bulgaria were the following: table 1: investment limits concerning second pillar pension funds in bulgaria until 2006 instrument investment limit 1. government bonds min. 50% 2. bank deposits max. 25% 3. corporate bonds max. 20% 4. corporate equities max. 10% 5. mortgage bonds max. 30% 6. municipal bonds max. 10% 7. investment property max. 5% 8. foreign instruments max. 20% source: social security code, 2000 by adopting such investment limits the legislator was clearly trying to prevent pension companies from assuming risky investments in their initial years of operation. at the same time these rules were aiming to convince the insured individuals in the financial security of the system. the last was very important because many people suffered huge money losses from their “investments” in some financial pyramids, very popular in the mid 1990’s in bulgaria. this type of investment regulation was reasonable for the first years of operation of the bulgarian pension funds. but it is well-known from financial theory that low-risk instruments are associated with low return. pension funds are long term investors and they have some comparative advantages in investments on capital markets5. variable income assets are more volatile in value than fixed income instruments but their yield tend to exceed that of bonds especially in the long term. during the first years of their existence bulgarian pension funds invested predominantly into securities issued by the bulgarian state. so implementing this pension reform just few years after the adoption of the currency board monetary system bulgarian state ensured a real source for financing its budget deficits. of course this should be viewed as a secondary effect of the reform and not a main reason behind its logic. bulgarian pension funds used to support the deficit formed within the first pillar of the pension system. it is difficult to estimate what part of this deficit is due to the implementation of the funded component within the pension system and what part of it is due to the constantly reduced contribution rate paid for the first pay-as-you-go pension pillar. one of the most important risks that face insured individuals in a funded pension system is the inflation risk6. if pension funds were not able to compensate the insured for the lost purchasing power of their accumulated savings they would not serve the aim for which they were established. that’s why it was very important bulgarian pension funds to extend their investments in corporate instruments such as equities and bonds in order to increase their chances of achieving a positive real return in the long horizon. in 2006 some very important changes were introduced in pension fund investment regulations partly because of the upcoming membership in european union in 2007. many of the limits were relaxed and the existing minimum requirement for investments in government debt was removed. table 2: current investment limits concerning second pillar pension funds in bulgaria instrument investment limit 1. government bonds no limit 2. bank deposits max. 25% 3. corporate bonds max. 25% 4. corporate equities max. 20% 5. shares and/or units issued by collective investment schemes max. 15% 6 shares in special purpose investment company max. 5% 7. mortgage bonds max. 30% 8. municipal bonds max. 15% 9. investment property max. 5% 10. investments in assets denominated in currency different from lev and euro max. 20% source: social security code, 2007 bulgarian pension funds seriously changed the structure of their asset portfolios in the next year 2007 choosing to put the money of the insured individuals to a much greater extent into corporate securities and reducing the share of government bond portfolio. this could be viewed as a positive trend because the core idea behind the implementation of the funded pillar was to relax the financial burden on the state pension system in the long term. but if the structure of the investment portfolios of the pension funds was preserved in the years until the paid-out phase then the positive effects of the funds would be 5 davis, e. philip,1995, pension funds retirement income security and capital markets. an international perspective, oxford university press, uk 6 blake, d. 2006, pension finance, john willey & sons ltd, uk jeko milev / finance, accounting and business analisys 68 mitigated as a result of the massive sales of government bonds whose ultimate final payer is the government itself. investing mainly in government bonds, pension funds could destroy the basic difference between the payg pension system and the fully funded one. changing their portfolio structure in 2007 bulgarian pension funds were able to channel a significant part of the savings of the insured individuals into the bulgarian stock exchange. so they had their part in the formation of the financial balloon in that same year. in 2008 the world financial crises hit our country and as a result of this the main index of the bulgarian capital market plunged by some 80%. the pension funds were not able to withstand the massive sales of corporate equities and the losses reported at that year were some double digit numbers. this negative event actually influenced the trade on the bulgarian stock exchange for the next decade. most of the pension funds especially those with foreign owners have been avoiding bulgarian corporate securities. so they turn their faces towards government securities again. and as a result, instead of contributing for the development of the stock market and the increase of trade volumes with private securities, pension funds in our country started to invest heavily again in government bonds. so an interesting trend has been forming in the next years. for the whole period after 2010 there is a very clear trend for increasing the share of government securities. at the end of 2016 at about 50% of all assets of universal pension funds are government bonds. 0,00 10,00 20,00 30,00 40,00 50,00 60,00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of government bonds into the asset portfolio managed by upf doverie government bonds 0,00 10,00 20,00 30,00 40,00 50,00 60,00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of government bonds into the asset portfolio managed by upf saglasie government bonds 0,00 20,00 40,00 60,00 80,00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of government bonds into the asset portfolio managed by upf dsk rodina government bonds jeko milev / finance, accounting and business analisys 69 so at the start of the reform bulgarian compulsory pension funds were obliged to invest minimum 50% of their assets into government securities and now they have structured a similar portfolio although there is no such restriction any more. the next step of the research was to see what part of the government securities portfolio is invested into bulgarian government bonds and how the share of the bulgarian government securities have been changed for the period. here the trend is also an upward one. the following graphs are showing this for the same four universal pension funds: 0,00 20,00 40,00 60,00 80,00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of government bonds into the asset portfolio managed by upf en en government bonds 0,00% 5,00% 10,00% 15,00% 20,00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of bulgarian government bonds into the asset portfolio managed by upf doverie bulgarian government bonds 0,00% 10,00% 20,00% 30,00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of bulgarian government bonds into the asset portfolio managed by upf saglasie bulgarian government bonds 0,00% 20,00% 40,00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of bulgarian government bonds into the asset portfolio managed by upf dsk rodina bulgarian government bonds jeko milev / finance, accounting and business analisys 70 so at around 20% of the asset portfolio is invested into bulgarian government bonds. we can make a very clear implication here pension funds in our country like bulgarian government bonds and the savings of the future generation retirees are used to support the expenditures of the bulgarian state. the fundamental question is why we have such trend? why long term investors such as pension funds predominantly invest in securities which really have small volatility but their return is quite small as well. we can look for the answers in several directions and in the next lines we tried to focus some of them. the first one concerns the crises of 2008. bulgarian pension funds effectively changed the structure of their portfolios in 2007, just one year after the liberalization of the investment limits which gave the opportunity to invest much more aggressively in corporate securities. 2008 was the year of the big hit over the funded component of the bulgarian pension system. the losses during that single year were double digit numbers and they raised the debate whether pension insurance companies could manage the savings of the future generation pensioners. this debate continues even in 2017 nevertheless the pension institutions were able to recover these losses in the next 5 years after the crises. it was become quite apparent that although pension funds are long term investors they cannot afford to report losses of the scale of 2008. the public and the politicians are not ready to bear such negative results and the debate for reversing the reform of 2002 starts in a promptly manner. the second direction in which we may look for the answer why pension funds in bulgaria invest so strongly in government bonds concerns the regulation which requires pension institutions in our country to reassess their assets on a daily basis and to report the results every day. in such an environment there is a natural stimulus to avoid investments which could fluctuate significantly in a short term. so although pension funds are long term investors they compete among themselves on a short term basis. they are obliged to report their return for each calendar year and no one wants to take the risk of reporting losses even for a single year. the third reason for the increasing share of government bonds is related to the coming period of paying pension benefits. the first insured individuals in universal pension funds that will receive pensions from the second pillar of the pension system are those born in 1960. they have right to obtain pension from their fund five years before the legal age for retirement. currently the age is 61 years for women and 64 years for men. this means that women born in 1960 will have the right to get pension in 2021. some of them will have enough resources in their universal pension fund to finance the minimum amount of pension benefit which means that they could get retired in 2016 and afterwards. so pension funds need to have liquidity to finance those benefits and government bonds are of the first choice. what are the basic concerns about this type of portfolio structure? first, the pay-out phase is coming closer and we may expect that pension funds from net buyers of bulgarian government bonds will turn into net sellers of these securities. this means that in the medium term there is an increasing probability the bulgarian government to lose one important source for financing its budget deficits. all other things being equal one may expect a downward pressure on government bond prices during the pay-out phase. this means that pension funds in the country will stop being a real source for financing the state budget deficits or at least they will continue to be such a source but to a much smaller extent. second, as pension funds are going to sell some of their holdings in government securities the stimulus for the government to reform the investment regulations will increase. the possibility of reforming the system following the polish experience is becoming serious7. third, having so many bulgarian government securities into their portfolios, bulgarian funds put under question the funded component of the pension system. in this way the private pension institutions in the country will depend on the government to refinance or 7 in poland the government effectively cancelled part of its debt held by the pension funds in 2014. polish pension funds were forced to transfer the government bonds held by them into the state governed first pillar. the government just promised to pay part of the pension of the future retirees equal to the value of the transferred bonds. 0,00% 20,00% 40,00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 share of bulgarian government bonds into the asset portfolio managed by upf en en bulgarian government bonds jeko milev / finance, accounting and business analisys 71 to repay its debt in order to finance their pension obligations. but in this way the difference between the pay-as-you go pension system and the fully funded one is quite dubious. conclusion bulgarian pension system was seriously reformed in the year 2000. as a result a compulsory funded component was introduced. during the first years of their operation the universal pension funds invested heavily into government bonds following the very strict investment regulations. what is interesting in bulgarian case is that pension funds continued to invest predominantly into government bonds even after the relaxation of the very strict regulations in 2006. the reasons for this trend are several but maybe the most important one concerns the financial crises that hit our country in 2008 just two years after the new investment regulations came into force. from one hand this investment behavior effectively supports the government expenditures in times of currency board regime, fixed exchange rate and central bank which cannot fully use its monetary policy instruments. but from another hand this type of investment policy risks low investment returns in the long term and could raise continuous debates about the role of the pension funds for supporting the panting pay-as-you go pension system. the future of the pension funds in bulgaria depends on whether they will be able to pay part of the pension due to the insured individual in amount not less than the envisaged reduction of the pension benefit received from the first pillar pay-as-you go system. the success of the pension reform depends on the future efforts made by the pension funds themselves but also on some future reforms which should make our second funded pillar much more resilient to future shocks both internal and external. jeko milev / finance, accounting and business analisys 72 references: blake, d. 2006, pension finance, john willey & sons ltd, uk davis, e. philip,1995, pension funds retirement income security and capital markets. an international perspective, oxford university press, uk nenovsky, n., milev, j. 2014 bulgarian wellfare system (1989 – 2014) evolution, problems, challenges. milev, j. 2015, payg vs. fully funded pension system – alternative or complementary components in the pension system – the case of bulgaria milev, j., 2012ten years after the start – problems and challenges facing the bulgarian pension funds social security code, promulgated state gazette, no. 110/17.12.1999, effective 1.01.2000 world bank. 1994. averting the old age crisis: policies to protect the old and promote growth. new york, n.y.: oxford university press bulgarian financial supervisory commission www.fsc.bg bulgarian stock exchange www.bse-sofia.bg national social security institute www.nssi.bg national statistics institute www.nsi.bg http://www.fsc.bg/ http://www.fsc.bg/ http://www.bse-sofia.bg/ http://www.bse-sofia.bg/ http://www.nssi.bg/ http://www.nssi.bg/ 127 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg bulgaria: economic impacts of erm ii and banking union participation dimitar chobanov institute of economics and politics, university of national and world economy, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 the purpose of this article is to identify the benefits, costs, and risks of bulgaria’s accession to the exchange rate mechanism ii and the european banking union. a descriptive approach is applied. the main findings are that there are costs and risks that are not thoroughly discussed or are underestimated implying that the net impact on bulgaria’s economy is not definitely positive. identifying the effects of erm ii and european banking union participation is a specific task determined by the procedure for euro area accession applied especially for bulgaria and croatia. on the other hand, bulgaria has been operating a currency board arrangement for the whole period of existence of the euro with a fixed exchange rate of the lev. a descriptive and comparative analysis is made where effects are qualitatively rather than quantitatively assessed. three degrees of probability are assigned to risks which are author’s judgement based on the publicly available information. keywords: bulgaria, erm ii, european banking union, convergence address correspondence: e-mail: chobanov@gmail.com dimitar chobanov / finance, accounting and business analysis 2 (2) 2020 128 introduction bulgaria has been a member of the european union since 2007 with derogation concerning the obligation to adopt the euro as a legal tender. according to the treaties with the eu it must be done but there is not explicit deadline for it. after some informal unsuccessful queries, in 2018 the bulgarian government and the central bank declared their intention to further deepen the eu integration by participating in the european economic and monetary union (emu). some requirements assigned by the european commission and the european central bank had to be met to give consent. they were in areas of banking and non-banking financial supervision, macroprudential framework, governance of state-owned enterprises, money laundering and insolvency framework. at the same time additional requirement was set to bulgaria to join the european banking union simultaneously to erm ii before becoming a member of the euro area. meeting the latter required implementation of asset quality review and stress test of part of bulgaria’s banking system by affirmed by ecb methodology. six banks were selected and reviewed. for two of them stress test showed capital deficiencies applying the worst-case scenario. this imposed raising additional capital for both banks. the process was completed in the beginning of july 2020. thus, on july 10th, 2020 ministers of finance of the euro area countries plus denmark together with the presidents of the ecb and the danish central bank decided that bulgaria meet all the requirements. since july 13th, 2020 bulgarian lev has been participating in the exchange rate mechanism ii with central parity of 1.95583 lev per euro. the compulsory intervention rates have been agreed with upper limit of 2.24920 levs per euro and lower limit of 1.66246 levs per euro. bulgaria preserves its currency board arrangement and unilaterally commits to maintain its fixed exchange rate of 1.95583 levs per euro without commitment for this by the ecb. apart from this starting from october 1st, 2020 bulgaria joins the european banking union by close cooperation. until then an assessment of significant credit institutions will be made to identify banks that will be under ecb’s direct supervision. there is a great number of studies about the benefits and costs of countries’ participation in the euro area. for example, hristozov (2019) explores the problem of possible change in the rate of inflation. however, there are not such estimations about the preparatory phase. the purpose of this paper is to identify the main economic impacts including risks of bulgaria’s participation in the erm ii and the european banking union. in bulgaria, such discussion hasn’t been carried out and thus risks have been neglected and underestimated. review of literature the impact of emu participation has been broadly studied. this analysis includes all phases – preparatory, period at the erm ii, and the actual euro area membership. the preparatory and erm ii phases themselves are not usual subjects for a separate research. (backe et. al 2004) points out that the countries that aim the introducing the euro in the medium term issues related to the erm ii participation could be quite different than the issues concerning countries with more distant prospect. their analysis reviews the considerations underlying the erm ii participation. erm ii has been often perceived as a “waiting room” that offers at best little value-added and may even entail certain risks (backe et. al 2004). most countries’ plan the minimum possible duration (2-3 years), with relatively narrow limits of exchange rate variation and a central rate that eventually will be the conversion rate. erm ii is seen as a mechanism that does not necessarily provide discipline, credibility, adjustability, and multilateralism. they see little disciplinary effect from erm ii membership. it is considered as an intermediate exchange rate regime with increased risk of speculative attacks. the standard interval of +/-15% is perceived as too broad implying large exchange rate fluctuations. there is also uncertainty about the involvement of the ecb in the coordinated intra-marginal interventions. according to the pre-accession economic program 2003 of the czech republic the participation of the currency at the erm ii does not eliminate monetary turbulence. the eurosystem position is that countries should join the mechanism when they have achieved a sufficient level of nominal and real convergence and have economic policies and structures consistent with this regime. it also can help manage the expectations and consolidate economic policies for promoting stability and convergence. erm ii is a voluntary arrangement of fixed but adjustable central parities. it also leaves some room to accommodative policies. it is also multilateral meaning that decisions are taken on a case-by-case basis on a mutual agreement of all the parties involved. if national policies are inconsistent with the sustainability of the central parity, the first option for parties involved is to try making the country’s authorities change these policies. the other option is to change the central parity. erm ii is a medium of preserving and even intensifying the convergence process until the sustainable achievement of the maastricht criteria. erm ii participation does not need to be limited to only two years dimitar chobanov / finance, accounting and business analysis 2 (2) 2020 129 which is the minimum. it could last longer and the exchange rate may be used as a policy variable in order economy to be adjusted to catch-up quicker. european banking union has been developing since the great recession. since it is still evolving there are a great number of studies related to this topic. (elliot 2012), (millar 2012), (beck 2012) among others describe the essence of the banking union, its interconnections to the fiscal union by the framework for deposit guarantee. it also requires changes in bank regulations, supervision, and resolution. however, it is much easier to describe the features of the banking union than it is to design or implement it. there are some key issues regarding this topic: the trade-off of economic growth and financial stability, centralized versus local supervision, single regulator or multiple specialized regulators, independence from political interference or accountability. choices that must be made are subjective and the theory is not sufficiently developed to have a well-grounded answer. results and discussion what are the benefits? it is a crucial step of the further and deeper integration of bulgaria to the european union. it is an expression of trust of european institutions like the commission and the ecb and the governments of the euro area countries. this is considered as a success by the credit rating agencies as it is a stabilizing mechanism. fitch ratings announced that: “all things being equal, we would upgrade bulgaria’s long-term foreign currency idr by two notches between admission to the erm ii and joining the euro.” given the situation of covid-19 pandemic probably this upgrade will be applied later. still, the period at the erm ii is hard to be determined so eventually this statement could be confirmed by fitch ratings. the other two major credit rating agencies are expected to upgrade bulgaria’s rating as well. as a result, the cost of financing government and private sector would decrease. hence, foreign debt servicing costs would be lower reducing the interest expenses in the state budget. in a short term, the probability of upgrading bulgaria is low. since the adoption of the currency board arrangement in bulgaria there have always been discussed whether the exchange rate between bulgarian lev and the deutsche mark and later the euro is correct. with the accession to the erm ii the rate of 1.95583 levs per euro is confirmed to be the sustainable one by the european institutions and especially by the ecb. benefits related to the membership at the banking union are: delinking sovereigns and banks are the primary reason for the establishment of the banking union. it is aimed at preventing sovereign problems to spread to banks as it happened in greece as well as preventing banking problems to spread to sovereigns as in ireland or cyprus. bailing-out banks by national governments increases borrowing costs for them but simultaneously driving up banks’ financing costs. the banking union should prevent this. a single european supervisor is aimed at rebuilding depositors’ confidence. it should not allow banks to hide bad assets. this implies that the available information about the asset valuation would be more reliable which means more precise data about the capital adequacy ratios. it should also eliminate national biases and the associated supervisory forbearance. on national level supervision is often indulgent towards local banks due to pressures and interests. european supervisor should be able to assess independently financial situation of specific banks in a systemic context. as a part of the preparation for the erm ii and the banking union accession two of bulgarian banks had to raise additional capital. previous crisis showed that this step is very important to preserve the sustainability of the banking system and the public finances. the sooner it is done, the lower are the funding costs. initially the covid-19 pandemic negatively affected the economy, but it is expected that financial and banking sector will be hurt as well. improvement of the legal framework about the governance of the state-owned enterprises is another benefit of the preparation process. it was a requirement of the eu institutions towards bulgarian authorities. the other steps concerned the supervision on non-banking financial institutions and the legislation about the money laundering. costs and risks as bulgarian lev participates in the erm ii an amendment of law on the bulgarian national bank was made. it is according to the eu legislation and states that the exchange rate between the lev and the euro could be changed during this period. according to art. 29 (3): “as from the date of participation of the republic of bulgaria in the exchange rate mechanism ii, the official exchange rate of the lev to the euro shall be equal to the central rate between the euro and the lev, as agreed under the paragraph 2.3 of the resolution of the european council on the establishment of the exchange rate mechanism in the third stage of economic and monetary union amsterdam, 16 june 1997 and article 1.1 and 17.1 of the agreement of 16 dimitar chobanov / finance, accounting and business analysis 2 (2) 2020 130 march 2006 between the european central bank and the national central banks of the member states outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of economic and monetary union.” according to the provisions the exchange rate could be changed by unanimous decision by the ministers of finance and governors of central banks including bulgaria’s. this operation no longer requires approval by the bulgarian parliament as it is given by the amendment of the law. exchange rate risk increases compared to the previous provisions. however, the short-term probability of materializing this risk is low. the impact of this risk on funding costs for the government and the private sector could be negative. another risk is related to the insufficient extent of nominal and real convergence at the start of the accession. according to the latest convergence reports by the ecb and the european commission bulgaria does not meet the criterion on the price stability. according to the eurostat data as of the end of 2019 bulgaria is still the poorest eu country. the gross domestic product per capita in purchasing power standard in bulgaria is only 53% of the eu average. (for comparison, the second poorest country is croatia with 65% of the eu average). moreover, the price level in bulgaria is 52.8% of the eu average. there is no formal requirement about the gdp per capita in pps but unofficially this ratio should be at least 70% of the eu average at the time of accession to the emu. as it is evident croatia is much closer to this threshold while bulgaria will need much more time to reach it. this means that bulgaria’s stay at the erm ii could last very long to achieve more sustainable levels of convergence. apart from this the convergence of price level would lead to higher rates of inflation which could be an obstacle to meeting the price stability criterion in sustainable way. bulgaria and croatia will be the two countries participating in the banking union and outside the emu. the mechanism of close cooperation means that the ecb will supervise directly significant banks and any other bank considered important for the stability of the national banking system. for the rest of the banks ecb will issue instructions. in such circumstances an asymmetry will emerge because the ecb will have the power while the bnb will be liable. the ecb will make decisions and the bnb will implement them and will be responsible for eventual errors. initially, there will be uncertainty which banks will be supervised directly by the ecb. banking legislation and rules in bulgaria should quickly be synchronized to these in the euro area. at present, there are differences in terms of requirement about the capital adequacy and liquidity (minimum reserve requirements). in bulgaria, they are higher. for example, the mrr ratio in bulgaria is 10% while it is 1% in the euro area. it is not appropriate bulgarian banks to be treated differently depending on the supervising institution. the mrr ratio is much higher than in the euro area on purpose. as in bulgaria a lender of last resort function of the central bank is absent due to the currency board arrangement, banks should acquire liquidity on the interbank money market. so, it is of their own interest to have enough reserves in case of deposit withdrawals. apart from this a gradual decrease of minimum reserve requirement ratio should be implemented by the bnb. banks should change their liquidity management and should hold more excess reserves to avoid liquidity shortages and sudden increases of overnight interest rates. a major risk is that subsidiaries of euro area banks might transform them into branches which are not separate legal persons registered in bulgaria. eventually over eur 2.5 billion is expected to outflow from bulgaria’s economy. it is a policy of the ecb to create champion banks to be competitive on global markets. so, the management of the banking supervision at the ecb promotes bank consolidation and withdrawal of capital from subsidiaries. in bulgaria some of the largest banks are owned by banks from the euro area and probability of transforming their subsidiaries to branches is high. this is a win-win situation for banks as capital adequacy ratio is lower in the euro area than in bulgaria. so, they will be able to raise additional capital for mother banks and continue running their business in bulgaria at lower administrative costs. the european banking supervision will also encourage consolidation of banks of the local market. as a result, the concentration of the market will decrease the competition and ultimately affect the customers. profitability ratios will probably rise on the account of bank clients. for the depositors, such operation will mean that they become customers of foreign based banks and their deposits will be insured at other institution abroad. hence, part of the contributions of these banks at the local deposit insurance fund and in resolution fund will be transferred to the respective foreign funds. as a result, a major capital outflow is possible from bulgaria to the euro area countries because of the change of the banks’ legal form from subsidiaries to branches. direct consequence of this is the drop of foreign direct investment in the banking sector and that could worsen the financial account of the balance of payments and decrease the foreign investors’ confidence. this, along with the political uncertainty and rather unfavorable business environment could jeopardize the inflow of foreign investment in the country. dimitar chobanov / finance, accounting and business analysis 2 (2) 2020 131 yet, the negative effect on the investment is expected to be small. capital outflows will have another negative impact in terms of lowering official foreign exchange reserves. as they cover the monetary base it eventually will contract leading to higher interest rates. on the other hand, lower minimum reserve requirement ratio will counteract so the overall effect is hard to be determined. in period of economic restructuring a rise in interest rates might result in more severe and more protracted recovery with greater social cost in terms of higher rate of unemployment, lower incomes and purchasing power and even social unrests. as banks become branches their investment portfolio could shift from securities issued by the bulgarian government to these of euro area countries. the latter are eligible as a collateral for loans by the ecb while the former will not be eligible until bulgaria joins the emu. according to the author’s calculations based on ministry of finance data banks on the bulgarian market hold at least 40% of issued government securities. as the largest banks will be supervised by the ecb and eventually change their securities holdings the demand on the local market for government securities will decrease. this might increase the funding costs for the government. as a result, a crowding-out effect could arise for the private investment. accession to the banking union is risky because the union itself is far from completed. a common guarantee scheme for deposits is necessary which implies an agreement for a fiscal union which will regulate fiscal transfers on eu level. such an agreement still looks distant as there are many different opinions of governments. the so-called frugal countries like austria, netherlands, denmark, and sweden do not agree with large grants to not so disciplined countries and require implementation of reforms as a precondition. the latter countries consider these requirements as excessive international control over their national policies. still, there is no agreement between the parties. the euro area is already excessively indebted as the government debt to gross domestic product ratio is close to 100%. many european governments depend on the ecb’s negative interest rate policy to service their debts and the not so precise assessment of the risks by the market participants. the lack of structural reforms aimed at increasing efficiency of the public costs and the rising government intervention on the markets do not promote faster economic development. capital markets union is the other element of the euro area that should be built to have a genuine economic and monetary union. hence, the european single currency union is still under construction and is not sustainable enough conclusion accession to the erm ii and the banking union is an important step towards adoption of the euro as a legal tender in bulgaria. however, the assessment of the period at the erm ii showed that there are many issues that should be addressed but they are not even discussed. for example, an accord between the bulgarian authorities and the foreign owned banks could be made to preventing them to withdraw their capital from the banking system in the country until it joins the euro area. this article describes some of the effects, but a complete impact analysis is necessary to compare benefits to costs and risks and to generate measures to mitigate these risks. underestimating risks or even neglecting them is not a responsible reaction by the authorities and they should prepare such analysis as quickly as possible. it is possible that costs and risks outweigh benefits. because of the current level of convergence, the price level, and the real income per capita are about 53% of the eu average bulgaria is not ready for a short period at the erm ii. the price stability criterion is a challenge. due to the covid-19 crisis meeting the budget deficit and stability of interest rates criteria could be a challenge as well. references backe, peter, thiman, christian, arratibel, olga, calvo-gonzalez, oscar, mehl, arnaud, nerlich, carolin, 2004, the acceding countries’ strategies towards erm ii and the adoption of the euro: an analytical review, european central bank occasional paper series no. 10/february 2004 bayoumi, tamim,1992, the effect of the erm on participating economies, imf staff papers vol. 39, no. 2, june 1992 beck, thorsten, (editor), 2012, banking union for europe: risks and challenges, voxeu e-book, center for european policy research, october 2012 czech national bank, 2003, the czech republic’s euro area accession strategy, joint document of the czech government and the czech national bank, october 2003 elliot, douglas, 2012, key issues on european banking union. trade-offs and some recommendations, global economy & development working paper 52, november 2012 dimitar chobanov / finance, accounting and business analysis 2 (2) 2020 132 fitch ratings, 2020, fitch revises bulgaria’s outlook to stable; affirms at “bbb”, april 2020, available at: https://www.fitchratings.com/research/sovereigns/fitch-revises-bulgaria-outlook-to-stableaffirms-at-bbb-24-04-2020 hristozov, yanko, 2019, does the introduction of the euro lead to high inflation? myth or fact? economic archive, issue 1, year 2019, 3-18. millar, anita, 2012, eu banking union – operational issues and design considerations, report prepared for the international regulatory strategy group, london, october 2012 the law on bulgarian national bank 112 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg bulgarian pension system – is it a sustainable social security structure in the long term jeko nikolaev milev university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 bulgarian pension system consists of three pillars. the first one functions on a payas-you-go principle and is a mandatory one, the second and third pillars are fully funded. the insurance into the second column is compulsory and that into the third one is voluntary. the unfavorable demographic trends in the country have an adverse effect on the pay-as-you-go part of the system. at the same time the minor accumulation of resources into the second and third pillar makes the sustainability of the pension system under question especially in the long term. the current research is trying to put some light on this issue by following the reforms made in the recent years and the tendencies concerning the government decisions on each of the pillars of the pension system. the paper is structured in two parts. the first one focuses on the pay-as-you-go part of the system and the factors that influence its financial health. the second one concentrates on the current problems of the funded component of the pension system and the way it must be strengthened in the long term to effectively support the dominant state pension system. further reforms are needed to raise the sustainability of the pension system as a social security structure in the long term. keywords: bulgarian pension system, demographic structure, risks, pay-as-you-go address correspondence: e-mail: j.milev@unwe.bg jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 113 introduction the payg part of the pension system in bulgaria has been effectively supplemented by fully funded columns since the beginning of 2000’s. following the model promoted by the world bank in the mid 1990’s, the policymakers in bulgaria introduced pension insurance similar to that in a number of countries in central and eastern europe. the insured individuals in bulgaria were given the opportunity to save and to accumulate resources for their future retirement. the long-term goal of the implemented reform is to achieve an income replacement rate at around 70%-75% of the final salary of the insured person. the second pillar of the system takes the form of two types of pension funds: universal and occupational. all persons born after 31.12.1959 must insure themselves in universal pension fund, while all individuals working under the first and second labor category (i.e. working in hard working conditions) must insure themselves in occupational pension fund. this rule was a little bit relaxed in 2015 when the insured individuals into the second pillar of the system were given the opportunity to opt out of the funded component of the pension system and to contribute only into the first pillar. the third pillar of the system is supplementary voluntary pension insurance, wherein all participants can choose to make additional contributions for supplementary benefits. the sustainability of the pension system in the country depends on further development of each of the pillars. the fully funded mandatory pillar of the pension system in bulgaria has been existing for almost 20 years. the fully funded voluntary pension pillar is even older (the first voluntary pension funds in bulgaria started their activity in the mid 1990’s). in the early 2000’s these two new pillars of the pension scheme were seen as supplementary elements of the pay-as-you go part of the system that would allow future generation retirees achieve replacement rates adequate to their preretirement income. the world financial crises of 2008 changed the attitude toward the pension funds in bulgaria. that could easily be seen by the promoted policy of the governments since then. the funded part of the pension system is not seen as a priority element anymore. review of the literature according to davis (1995) the funded component of the pension system if structured in a proper way, could support effectively the payg part of the system in a time of consistent population aging. blake (2006) also considers funded pillars of the pension system as a must if government really wishes to effectively manage the risk of poverty among the elderly. szczepanski (2015) notes that in a situation of demographic aging state payg pension systems “cannot guarantee the level of benefits and financial security in old age as was possible in the 1980’s and 1990’s”. daneva (2018) notes that this type of reform is needed in countries with high emigration rates, where the deficits of the payg part of the system tend to become constant. in a research of manov (2003) for the private pension funds it is shown the positive relationship between contributions paid into a personal pension account and the wish for paying those contributions on the “real wage”. the fully funded pension insurance is seen as a method for managing the grey sector in economy. however, orzag and stigliz (2001) consider the funded component of the pension system as not suitable for all the countries. they disagree with many of the ideas in the main report of the world bank (1994) which was the basis for promoting the private pension schemes in central and east european countries. according to them the administrative costs are too high and many of the countries do not have capacity to manage this type of schemes. szczepanski (2015) also notes that many of the supposed advantages of the private pension schemes did not materialize in practice and significant normative changes were needed in order to raise the effectiveness of the second and third pillar of the system. methods for the purpose of the analyses statistical data is used for the development of the demographic tendencies in the country and their impact on the payg part of the pension system. the reforms regarding fully funded pension pillar are researched and analysed with the aim to put some light on the possibilities of this part of the pension system to contribute effectively to the sustainability of the pension system in the long term. pay-as-you-go (payg) pillar of the bulgarian pension system in 2020 – reforms, problems and challenges the main motives about the reform made in the late 1990’s were closely related to the unfavorable prognosis regarding the future demographic trends in the country influenced by both the high emigration rates of young individuals in the mid 1990’s and the expected low birth rates in the coming years. the oldage dependency ratio (the ratio between the individuals aged 65 and more and individuals aged between jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 114 15 and 65) constantly rises. table 1. old age dependency ratio in bulgaria (2007 – 2019) year dependency ratio in bulgaria (2000-2019) 2007 25,0 2008 25,2 2009 25,4 2010 25,9 2011 27,8 2012 28,5 2013 29,3 2014 30,2 2015 31,1 2016 31,8 2017 32,5 2018 33,2 2019 33.8 source: national statistical institute in bulgaria (www.nsi.bg) the ratio between the number of pensioners and the number of those individuals who contribute to the system is also quite unfavourable. it is not a surprise that the share of pensioners constantly rises in relation to the whole population and to the insured individuals. table 2. number of pensioners, insured individuals and population in bulgaria (2007-2017) year number of pensioners (in thousands) number of insured individuals (in thousands) number of population (in thousands) relative share pensioners/insured individuals relative share pensioners/population 2007 2252 2863.5 7659.8 78.6% 29.4% 2008 2214.9 2851.2 7623.4 77.7% 29.1% 2009 2192.5 2829.8 7585.1 77.5% 28.9% 2010 2191.9 2831.5 7534.3 77.4% 29.1% 2011 2199.6 2765.7 7416.1 79.5% 29.7% 2012 2217.6 2770 7305.9 80.1% 30.4% 2013 2195.9 2729.8 7265.1 80.4% 30.2% 2014 2181.9 2735.1 7223.9 79.8% 30.2% 2015 2177.7 2755.9 7178.0 79.0% 30.3% 2016 2180.9 2765.1 7127.8 78.9% 30.6% 2017 2172.8 2779.8 7075.9 78.2% 30.7% 2018 2162.9 2790.2 7025.0 77.5% 30.8% source: national social security institute (www.nssi.bg) the numbers of the above table indicate that financing of the pay-as-you-go column of the pension system is not an easy process. the ratio between the contributing workers and pensioners is almost 1:1 which means that the sustainability of the future deficits of the state pension insurance system is out of question. this could easily be turned into a significant crisis of the pay-as-you-go part of the system. this gloomy perspective is a fundamental factor that presumably must force the government to introduce additional reforms into the funded part of the pension system in order to further strengthen it financially. the basic idea behind the reform made in the late 1990’s is still actual in 2020. however, after the financial crisis of 2008 the government stopped all of the reforms needed to support the funded part of the pension system (the envisaged gradual increase of the contribution rate, the multifund system, the detailed regulation of the pay-out phase). it even adopted a regulation change that allowed insured individuals to transfer their resources into the first pillar of the pension system. the basic factor that made possible behavior like this was the economic growth realized in the years after 2008. the unprecedented growth of the insurable income and the tax revenues lets government finance the pay-as-you-go part of the system and even increase the pension benefits of the current pensioners. the return to the pay-as-you-go part of jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 115 the system depends on two factors the growth rate of the average earnings (which determines the growth in total contributions) and the ratio between contributing workers and pensioners (dependency ratio). the return to the funded part of the system depends on the rate of return on accumulated assets and the “passivity” ratio (number of years in retirement relative to the working age) (aaron’s rule). many empirical studies (davis, 1995) show that under certain normal circumstances the return on financial assets exceeds the growth rate of average earnings which means that if equality is assumed between the dependency ratio and the passivity ratio, the return to the funded pension system must exceed that to the pay-as-you-go one. however, in bulgaria, the opposite is true for the period (2002-2019). table 3. insurable income and contributory rate for pension for the period 2002-2019 year average monthly contributory income (euro) rate of increase of average monthly contributory income yield realized by pension funds 2002 132.81 10.58% 2003 143.55 8.09% 10.99% 2004 157.89 9.99% 11.92% 2005 169.55 7.39% 7.86% 2006 181.25 6.90% 8.31% 2007 203.58 12.32% 15.67% 2008 255.93 25.72% -20.76% 2009 283.65 10.83% 7.22% 2010 291.61 2 .80% 5.18% 2011 303.78 4.18% -0.96% 2012 316.01 4.02% 7.49% 2013 331.69 4.96% 4.50% 2014 349.39 5.34% 5.70% 2015 371.40 6.3% 1.37% 2016 393.73 6.01% 4.01% 2017 416.70 6.68% 6.09% 2018 455.00 8.32% -4.15% 2019 504.40 10.86% 6.45% source: national social security institute, www.nssi.bg financial supervisory commission, www.fsc.bg – statistics, insurance market (value of 1 pension unit unidex for the last working day of each calendar year for the period 2005-2019) the basic reason behind the cited high growth rate of the average income is the existence of extremely low basis in the late 1990’s. in 1997, the average wage in the country equals $63.92. the growth rate of the average income is a result from the growth rate of the economy. table 4. gdp, growth of gdp and inflation rate in bulgaria (2000-2019) year gdp, mln. euro % growth inflation rate real growth 2000 14 380 2001 15 843 10,18% 4,82% 5,11% 2002 17 419 9,95% 3,81% 5,91% 2003 18 733 7,54% 5,64% 1,80% 2004 21 066 12,46% 3,98% 8,15% 2005 24 040 14,12% 6,45% 7,20% 2006 27 410 14,02% 6,49% 7,07% 2007 32 444 18,37% 12,48% 5,23% 2008 37 217 14,71% 7,76% 6,46% 2009 37 400 0,49% 0,56% -0,07% 2010 38 044 1,72% 4,53% -2,69% 2011 41 252 8,43% 2,75% 5,53% 2012 42 033 1,89% 4,25% -2,26% 2013 41 885 -0,35% -1,59% 1,26% 2014 42 875 2,37% -0,88% 3,27% jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 116 2015 45 675 6,53% -0,38% 6,93% 2016 48 620 6,45% 0,09% 6,35% 2017 52 309 7,59% 2,77% 4,69% 2018 56 086 7,22% 2,67% 4,43% 2019* 60 674 8,18% 3.82% 4,20% source: national statistical institute in bulgaria (www.nsi.bg). *2019 gdp data is a prognosis) if the size of the economy is measured by using data for the realized gdp for the period 2000 – 2019, the conclusion is that bulgarian economy almost tripled for that period. this is the basic reason why the government can finance the promised pension benefits and at the same time postpone reforms needed for strengthening the funded components of the pension system. however, the crises of the pay-as-you-go part of the system could be seen quite well if the budget of the state pension system is taken into consideration. table 5. budget of the state payg pension fund (thousands euro) year revenue expenses deficit year revenue expenses deficit 2002 1 053 438 1 507 915 -30,14% 2011 1 576 099 3 440 775 -54,19% 2003 1 236 585 1 600 872 -22,76% 2012 1 500 770 3 564 282 -57,89% 2004 1 285 491 1 763 583 -27,11% 2013 1 692 897 3 850 580 -56,04% 2005 1 236 399 1 946 351 -36,48% 2014 1 723 721 3 974 404 -56,63% 2006 1 187 306 2 129 118 -44,23% 2015 1 780 841 4 095 209 -56,51% 2007 1 317 640 2 293 997 -42,56% 2016 1 941 680 4 271 086 -54,54% 2008 1 560 631 2 597 717 -39,92% 2017 2 230 717 4 382 906 -49,10% 2009 1 716 268 3 216 613 -46,64% 2018 2 610 417 4 657 449 -43,95% 2010 1 333 735 3 448 400 -61,32% 2019 2 967 203 4 934 954 -39.87% source: national social security institute, www.nssi.bg the above numbers show that the deficit of the pension fund of the state social security system is enormous. there is a slight decrease in the last years mostly due to the growth of the average earnings and the new retirement conditions (higher pension age and length of service). in these circumstances the government is forced to use part of the revenues collected via general taxation to finance the pension benefits of the current retirees. in this sense one may assert that pensioners in bulgaria finance almost 50% of their pension benefit by paying their taxes. having in mind the extremely low pension benefits, the worsening demographic structure and the huge deficit of the state pension system, the implication is obvious pay-as-you-go part of the pension system in the country is not a sustainable social security structure in the long term. of course, its existence is out of question, but the amount of the pension benefit is not to be adequate to the preretirement income of the pensioner and the risk of poverty among individuals within this group of society is significant. from this point of view the government must continue making reforms that could strengthen financially the pension system. any delayed efforts now could cost more in the future. the fully funded pillar – could it efectively support the payg part of the pension system in bulgaria two basic arguments are stated by some officials as problems of the second pillar of the pension system: first, the accumulation of resources into individual accounts is small for a number of insured individuals and second, the stock exchange in bulgaria is still characterized by lack of instruments, low turnover and many possibilities for manipulation. so, could private pension funds in bulgaria raise the sustainability of the pension system in the country in the long term? why the accumulation of funds into individual accounts is considered as low? there is a special rule in bulgarian social security legislation, which specifies the reduction of the so called individual coefficient1 for those individuals who have right to pay contributions into the second pillar of the system (all persons born after 31.12.1959). the idea here is straightforward – those who make contributions into private pension fund receive part of their pension benefit by the second pillar, that’s why the pension amount obtained by the first pillar should be reduced. this approach seems fair since the contribution rate for the first pillar was lowered for those born after 31.12.1959 and the deduction was forward to the private 1 individual coefficient is a special ratio between the contributory income of the insured and the average national contributory income. the higher the coefficient is, the bigger the pension amount will be. http://www.nsi.bg/ jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 117 pension fund. in this way the second pillar of the system was supposed to support financially the pay-asyou-go column in the long term. the problem comes from the methodology applied for reducing the individual coefficient elaborated still at the beginning of the reform. it prescribes that the individual coefficient must be corrected with a ratio that roughly equals the contribution rate for the first pillar for those born before 01.01.1960 and the contribution rate for the second one for those born after 31.12.1959. this methodology could be valid only if the pay-as-you-go part of the system were able to finance the whole amount of pension benefits using money collected via pension contributions. the reality is somehow different almost 50% of the amount of the pension benefits is covered by subsidy from the state budget. the accumulated funds into individual accounts are not enough if they must compensate for a reduction that is not proportionate to the real contributions paid for both of the pillars. if one considers the strong subsidy that comes from the state budget, then the amount of the real contribution for the first pillar must be almost twice as much as its current figure. in other words, there is no clear implication just from the fact that universal pension funds could not compensate the insured individuals for the reduction of the first pillar pension benefit, that they haven’t been managed effectively. in theory it is even possible the government to equalize the contributions paid for the first and for the second pillar making them 5% (the percentage applied for the second pillar) and then to ask pension funds to bear 50% of the financial burden for the payment of the pension benefits. in addition, those individuals who first are going to receive pension benefits from the second pillar of the pension system were in their mid 40’s when they started effectively to accumulate money into their personal accounts. at that time almost half of their length of service had been passed. in reality, these individuals are not going to have enough money to finance pension benefit proportionate to the envisaged reduction but this have nothing in common with the management of the pension funds and their rule for the future of the bulgarian pension system. the second argument against the funded component of the pension system regards the illiquid and underdeveloped stock exchange in the country. the opponents of the private pension funds state that it is not possible to have financially strong funded pension system without well-developed and transparent capital market. as a matter of fact, this argument is a robust one. it is true that still pension funds cannot rely on the capital market in the country to trade actively financial instruments. the lack of deep and liquid market means that pension funds in the country do not have adequate market valuation for many of the instruments in their portfolios. the pay-out phase is coming closer and if the sale of a significant part of the portfolios is put under pressure, this could mean severe problems both for the pension companies and the insured individuals. due to a number of factors2 pension funds in bulgaria have not been able to contribute effectively for a significant development of the stock exchange – something that was observed, for example, in chile, after the initial start of the funded pension system in 1980’s. however, the significance of this argument should not be exaggerated. bulgaria is part of the eu and currently bulgarian pension funds have access to all european stock exchanges and to all instruments traded on them. the investment regulations do not differentiate between bulgarian corporate instruments and european union ones. the current portfolio structure of the bulgarian pension funds could be considered as a balanced one with many instruments traded abroad and evaluated correctly at the market. at the same time, the fact that bulgarian corporate instruments are not traded actively does not mean that they do not bear yield for their owners. currently many of the bonds issued by private companies are just held until maturity bringing an extra yield for the low liquidity they have. regarding the equities, possessed by the funds – the risk here is much higher but also their potential for growth and expected return. many shares, traded at the bulgarian stock exchange could be viewed as undervalued having price/book ratio at around one. pension funds can really benefit from their equity holdings, but they must well know the core business of the chosen companies and exert continuous control on them. both stated arguments against the funded component of the pension system are not of such scale to undermine the idea that funded elements could contribute to the sustainability of the pension system in the country. at the same time there are some additional reforms that must be done as soon as possible if funded component is seen as a long-term solution of the current systemic problems of the pension system. first, bulgarian pension insurance companies keep on managing just one portfolio of assets without considering the investment horizon of the insured individuals. the so called multi-fund system has been discussed for a decade and it is still not introduced in practice. second, the pay-out phase of the universal pension funds must be elaborated in detail in the next few months. the first insured individuals that have right to receive pension benefits by the second pillar pension funds are going to retire in 2021. there is still legislative vacuum on this very important and specific issue. third, if pension funds are to be used as an element of the long-term future of the bulgarian pension system, there is a clear need to reduce the political risk on which they are currently exposed. after almost two decades of operation it became 2 tough regulation rules, 2008 financial crises, the policy of zero interest rates promoted by the central banks in the last years. jeko nikolaev milev / finance, accounting and business analysis 2 (2) 2020 118 obvious that private pension companies are exposed to a significant political risk as well. the ruling political party can change the rules of the game in such a way that it can motivate insured individuals to replace their insurance from one pillar into the other and vice versa. the pension system in the country is exposed to a few risks but the political one seems to be the most important one. the wish for attracting voters in the short term makes politicians avoid important but sometimes painful reforms. if the above mentioned issues are effectively addressed, then funded component of the pension insurance could be seen more obviously as supplementary part of the payg system in the long term. and only if each of the pillars of the pension system in bulgaria continue to exist, the sustainability of the system is to be raised for the next generation retirees. conclusion bulgarian pension insurance system has a modern structure but at the same time its sustainability in the long term is problematic. the worsening demographic structure deteriorates the pay-as-you-go part of the system. at the same time, many delayed reforms regarding the pension funds in the country make them vulnerable on current market conditions and populist political decisions. if adequate pension amounts are set to be an important goal for the future generation retirees, then all pillars of the pension system are needed. current workers’ savings are going to be an important part of their future income. pension funds could be viewed as only one of the possible vehicles for saving, but currently they are among the most transparent financial institutions in the country and if policymakers manage to raise their efficiency by implementing some additional reforms, they could really turn into a crucial element of the future pension system in bulgaria. references blake, d. (2006). pension finance. uk: john willey & sons ltd, . daneva, i. (2018). insurance and insurance market, new bulgarian university davis, e.p. (1995). pension funds retirement income security and capital markets. an international perspective. uk: oxford university press. european commission (2018). pension adequacy report 2018, current and future income adequacy in old age in eu, volume 2 – country profiles, publications office of eu. gochev, g., manov, b. (2003). social security – theory and practice, trakia m, bulgaria orszag, p., stigliz, j. (2001) rethinking pension reform: ten myths about social security systems, the world bank szczepanski m (2015) barriers and drivers of development of occupational pension schemes in poland, poland, publishing house of put social security code, promulgated state gazette, no. 110/17.12.1999, effective 1.01.2000. world bank (1994) averting the old age crisis: policies to protect the old and promote growth. new york, n.y.: oxford university press 145 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg corporate entrepreneurship in improving company performance ahmad hadi fauzi, sam`un jaja raharja, rusdin tahir department of business administration, faculty of social and political sciences, padjadjaran university, indonesia info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: balance score card ; financial perspective; customer perspective; internal business process perspective; learning and growth. abstract ___________________________________________________________________ enterprise entrepreneurship in the study of entrepreneurial processes in which individuals in organizations can exploit and exploit opportunities without considering the resources within the company. this research method uses literature review using electronic journal data base sources, and research articles. this study develops concepts that introduce the concept of corporate entrepreneurship in improving company performance. innovation, technology-specific competencies, top management support, and organizational learning.  address correspondence: jl. raya bandung sumedang km 21, jatinangor 45363 ahmad hadi fauzi / finance, accounting and business analysis 1 (2) (2019) 146 introduction corporate entrepreneurship ce is the process by which individuals in an organization can explore and take advantage of opportunities without regard to resources within the company (stevenson, roberts and grousbeck, 1998). an entrepreneurial manager connects separate pieces of new technical knowledge that will provide solutions to existing problems in the company, and gather the resources and skills needed to take the business to the next stage. this process leads to the birth of new business and the transformation of companies through the renewal of their key ideas (guth & ginsberg, 1990). in the realm of existing companies, ce includes three types of phenomena that may or may not be interrelated (chua, chrisman, & sharma, 1999), namely the birth of a new business in an existing company, the transformation of an existing company through the renewal or reshaping of ideas the key to where they are built, and innovation. researchers have used various labels to describe the first two phenomena. the creation of new business by companies through this process has been called the company's internal business (zajac, golden, & shortell, 1991), intrapreneurship (pinchot iii, 1985) and so on. the process of transforming the company through renewal. the concept of the corporate entrepreneurship ce concept is innovation (schumpeter, 1934; drucker, 1985) which leads to wealth creation (khandwalla, 1987) and sustainable company growth (lumpkin & dess, 1996). the motive for entrepreneurship lies in the drive to identify existing and emerging sources of customer dissatisfaction and develop solutions to eliminate them (pandey et al., 2003). there are three main phases in the entrepreneurial process: perception and commitment to opportunities, the pursuit of opportunities, and de-commitment (burgelman & sayles, 1988). the first involves the process of identifying opportunities is the most difficult of all phases. although the last few years (zahra, 1996) have witnessed primary research interest in identifying opportunities, except for some frameworks developed by (kim & mauborgne, 2000), (ramachandran, devarajan, & ray, 2006), and (shane, 2004 ), research is basically limited in this area. based on the results of research conducted by martín-rojas, garcía-morales, & bolívarramos, (2013); yang, li-hua, zhang, & wang, 2007; yunis, el-kassar, & tarhini, (2017), this paper aims to find the role of ce in improving company performance. literature review corporate entrepreneurship has now become a concept that has attracted the attention of many experts, giving birth to various terms, but actually refers to the same concept. the terms included in corporate entrepreneurship include intrapreneurship, internal corporate entrepreneurship, venture management, corporate venturing, strategic renewal, and internal corporate venturing (zahra, jennings & kuratko, 1999; ferreira 2001). corporate entrepreneurship is seen as a process by individuals or groups to create new companies, revitalize, and renew organizations, or innovate in existing organizations (antoncic & hisrich 2001). zahra's opinion (1996) explains that corporate entrepreneurship is a formal or informal activity that aims to create new business in established companies through product innovation, process, and market development. zahra (1991) further notes that corporate entrepreneurship is the art of creating innovative ideas in a company and realizing them to generate profits. research in the field of entrepreneurship in the last decade has increasingly focused on corporate entrepreneurship. the majority of corporate entrepreneurship research focuses on issues such as diagnosing the benefits of the corporate entrepreneurship process (zahra & covin, 1995), defining the phenomenon of corporate entrepreneurship (sharma & chrisman 1999), identifying the attributes companies must have to promote corporate entrepreneurship (miller, 1983; covin & slevin, ahmad hadi fauzi / finance, accounting and business analysis 1 (2) (2019) 147 1989), defining the role of managers as a catalyst for corporate entrepreneurship (guth & ginsberg, 1990), measuring the results of corporate entrepreneurship programs (kuratko et al., 1990; zahra, 1991; covin & slevin, 1996), and examining the effects of mediation and moderation of latent variables in the conceptual model of corporate entrepreneurship (lumpkin & dess, 2001). however, there are still inconsistencies regarding the dynamics of the combined effects of various factors on the corporate entrepreneurship model, so the results cannot be explained adequately. nevertheless, corporate entrepreneurship is not a new topic in business administration research. peterson & berger (1971), for example, have studied the phenomenon of corporate entrepreneurship over the past five decades. the next section develops an understanding of entrepreneurship in the entrepreneurship intra-network network by outlining the basic forms of entrepreneurship at the corporate level and the relationship between entrepreneurship and corporate entrepreneurship. most of the corporate entrepreneurship research is on a special investigation. namely, innovation as a source of organizational sustainable competitive advantage (covin & slevin, 2002). for example, guth & ginsberg (1990) described corporate entrepreneurship as consisting of two phenomena of innovation, namely the creation of new businesses and strategic renewal. previous studies that attempted to conduct a literature review in the field of corporate entrepreneurship were conducted by sakhdari (2016). based on a literature review, sakhdari (2016) divides three major themes of scientific publications in the field of corporate entrepreneurship, namely articles that seek to conceptualize corporate entrepreneurship; articles that attempt to study the antecedents of corporate entrepreneurship; and articles that focus on corporate entrepreneurship outcomes. then, based on the results of his literature review, sakhdari, (2016) developed an antecedent and consequent model of corporate entrepreneurship with the input-process-output approach as presented in figure 2.1. based on sakhdari's opinion (2016), the output of corporate entrepreneurship can consist of growth, profitability, corporate entrepreneurship performance. figure 1. antecedent model and output of corporate entrepreneurship source: sahdari (2016). methods this study uses the literature review literature review method to discuss the topic being studied. literature study is intended to solve a problem which basically relies on critical and in-depth review of relevant library materials. literature review is done by collecting data or information from various sources of literature needed as a source of ideas to explore new ideas or ideas as a basis for deduction of existing knowledge, so that a new theoretical framework can be developed, or as a basis for problem solving. the literature review approach consists of 5 stages, namely: (1) find models, (2) problem formulation which topics are under consideration and what are the constituent issues, (3) literature search, (4) evaluation of findings, and (5) ) analysis and interpretation of literature. literature sources examined in the form of research results, journals and other scientific articles derived from electronic data bases. results and discussion the concept of entrepreneurship ahmad hadi fauzi / finance, accounting and business analysis 1 (2) (2019) 148 entrepreneurship is one important element in a country's economic development. researchers and practitioners have shown an interest in the concept of entrepreneurship since the 1960s, because of its positive effect on company performance (miller & frieson, 1972). in the 20th century, joseph schumpeter (18831950) focused his attention on how entrepreneurs encouraged to innovate in product development and manufacturing process changes to bring useful products at affordable prices. the term entrepreneur is used to describe someone who builds and manages their own business. it is also used to describe the organization's process of creating new business units or initiating updates within the organization (sharma & chrisman, 1999). entrepreneurship explains the process of value creation through the identification and exploitation of opportunities such as developing new products or finding new markets or both (shane & venkataraman, 2000; mccline et al., 2000). entrepreneurship focuses on innovation by identifying market opportunities, for which competitors have not been identified or utilized and the creation of a unique set of resources to exploit these opportunities (davidson et al., 2002). entrepreneurial opportunities arise from uncertainty. an appropriate set of resources is needed to take advantage of entrepreneurial opportunities (hitt et al, 2002). one of the main challenges for entrepreneurs is dealing with the strategy changes needed through the growth of their companies (thompson, 1999). in the lumpkin & dess study (1996) namely about entrepreneurial orientation (entrepreneurial orientation) is a firm-level strategic orientation which captures an organization's strategy-making practicecorporate entrepreneurships, managerial philosophies, and firm behaviors that are entrepreneurial in nature. lumpkin & dess (1996 ) noted that a company's strategy must be oriented to managerial philosophy, and entrepreneurial corporate behavior, where the nature or characteristics of entrepreneurial include innovation, proactivity, autonomy, competitive aggressiveness and dare to take risks. based on the definition of entrepreneurial orientation according to lumpkin & dess (1996), and the relationship of relations with the current phenomenon where companies in the era of the digital economy become turbulent, and faced by the uncertainty of global market changes. thus, companies highlight the important role that entrepreneurial concepts play by building entrepreneurial-oriented corporate character and maximizing resources for the survival and growth of the company (gulati, 1998; hite & hesterly, 2001). thus, the topic of entrepreneurial research emerged and the role of entrepreneurial orientation (covin, green, & slevin, 2006; lumpkin & dess, 1996) in the concept of entrepreneurial action in corporate entrepreneurship actions (sambamurthy, bharadwaj, & grover, 2003) has been widely studied in 10 years lastly. the concept of corporate entrepreneurship in improving company performance the concept of corporate entrepreneurship has now become a concept that attracts the attention of many experts so that it gives birth to various terms, but actually refers to the same concept. the terms included in corporate entrepreneurship include intrapreneurship, internal corporate entrepreneurship, venture management, corporate venturing, strategic renewal, and internal corporate venturing (zahra, jennings & kuratko, 1999; ferreira 2001). zahra (1995, 1996) states that corporate entrepreneurship can be seen as a collection of company activities in the form of innovation, renewal and venturing. innovation includes activities to create and introduce new products, renewal of production processes and organizational systems. renewal means revitalizing the company's operations by changing its business scope, competing, or both. it also means building or gaining new abilities and then creatively using them to add value. venturing means the company develops new businesses by expanding the scope of its existing market operations or entering new markets (1995: 227; 1996: 1715). ahmad hadi fauzi / finance, accounting and business analysis 1 (2) (2019) 149 corporate entrepreneurship is seen as a process undertaken by individuals or groups to create new companies, revitalize, and renew organizations, or innovate in existing organizations (antoncic & hisrich 2001). zahra's opinion (1996) explains that corporate entrepreneurship is a formal or informal activity that aims to create new business in established companies through product innovation, process, and market development. zahra (1991) further notes that corporate entrepreneurship is the art of creating innovative ideas in a company and realizing them to generate profits. earlier studies of martín-rojas et al., (2013) corporate entrepreneurship showed that corporate entrepreneurship can be supported by organizational learning, because the higher the new knowledge gained in the organization will increase the autonomy of various parts of the company, which allows it to adopt a more flexible structure for enhance corporate entrepreneurship and enable employees to be more creative (antoncic and hisrich, 2001; garcı'a-morales et al., 2006; knight, 1997). finally, the results show that corporate entrepreneurship will increase profits in the company, whether sales or market share (antoncic and prodan, 2008; lengnick-hall, 1992; murray and kotabe, 1999). corporate entrepreneurship is useful for the revitalization and performance of large companies, as well as small and medium-sized businesses (antoncic and hisrich, 2001). organizations involved in entrepreneurship activities achieve higher levels of growth and profitability than organizations that do not (antoncic and hisrich, 2001), thus obtaining higher performance (antoncic and prodan, 2008; zahra, 1993). the previous study of yunis et al., (2017) innovation in ict-performance relationships guarantees strategic steps in organizations to emphasize the mixing of icts with efforts aimed at realizing the company's strategic goals. this is consistent with previous research (lundvall and nielsen, 2007). the great role of innovation enables organizations to utilize ict, which is the innovative use of ict which distinguishes competitiveness from non-competitive organizations. this is evident in the myriad of potential innovations made possible by ict. business reengineering processes, new business models, timely supply chains that lack inventory, and new services, such as e-banking and e-health are just a few examples of the innovations made possible by the adoption and use of icts. early adopters of these icts can realize great benefits compared to those who are slow and who are not adopters. the main result is that ict contributions are enhanced when the use of icts and technological innovations are combined (hempell et al, 2004). corporate entrepreneurship was found to mediate a part of the relationship between ict and innovation and organizational performance. investing in ict-based innovations and using them to introduce new products, services and business models requires a business culture that promotes transformational, proactive, innovative, and risk-taking leadership (todd and javalgi, 2007). previous studies of rodrigo martín-rojas, garcía-morales, & mihi-ramírez, (2011) emphasize that corporate entrepreneurship in technology companies leads to higher performance (antoncic and prodan, 2008). corporate entrepreneurship enables recognition of organizational opportunities and innovations based on knowledge, increasing benefits for companies (andreu and ciborra, 1996; shane and venkataraman, 2000). in addition, with the knowledge gained and organizational innovation carried. conclusion this research discusses the concept of corporate entrepreneurship in improving company performance. in the practical field, the corporate entrepreneurship model can help companies position themselves better in the face of the current environmental changes and can improve company performance. from the results of several studies on the development of the corporate entrepreneurship model, it can be concluded that corporate entrepreneurship has a very important role, especially in company performance. by understanding more deeply the ahmad hadi fauzi / finance, accounting and business analysis 1 (2) (2019) 150 scope of corporate entrepreneurship, it is hoped that it can increase knowledge about the concept of corporate entrepreneurship and find ideas for further research. references burgelman, r. a., & sayles, l. r. 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(1996). the entrepreneurial clarifying it construct and linking orientation. academy of management review, 21(1), 135–172. https://doi.org/10.2307/258632 martín-rojas, r, garcía-morales, v. j., & bolívarramos, m. t. (2013). influence of technological support, skills and competencies, and learning on corporate entrepreneurship in european technology firms. technovation, 33(12), 417–430. https://doi.org/10.1016/j.technovation.2 013.08.002 martín-rojas, rodrigo, garcía-morales, v. j., & mihi-ramírez, a. (2011). how can we increase spanish technology firms’ performance? journal of knowledge management, 15(5), 759–778. https://doi.org/10.1108/136732711111 74311 pandey, i. m., nair, r., awasthi, d., mehta, k., varshney, v., rewari, r., & ramachandran, k. (2003). entrepreneurship and venture capital. vikalpa, 28(1), 99–112. pinchot iii, g. 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(2004). corporate entrepreneurship and market performance: an empirical study in china. journal of technology management in china, 2(2), 154–162. https://doi.org/10.1108/174687707107 56086 58 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg the effectiveness budget control government of ogan ilir regency: the impact on supervision and competence periansya1, sopiyan ar2, tria ajeng pratiwi3 politeknik negeri sriwijaya, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 purpose: this study carried out to examine and analyze the impact of supervision and competence on the effectiveness of ogan ilir district budget control. methodology approach: the population of this study was 26 regional apparatus organizations (opd). determination of the sample used by purposive sampling technique. after the questionnaire distributed to respondents, 102 samples met the criteria. the analysis used in this study is a multiple linear regression model. finding: the findings of this study note that preventive, defective supervision and competence of human resources both partially and simultaneously have a positive and significant relationship to the effectiveness of budget control with a coefficient of determination of 62.5%. practical implications: for the effectiveness of budget control to run effectively and efficiently, policymakers must focus 37.5% of other factors that can influence other than the variables in this study. keywords: supervision, budget control, effectiveness, competence address correspondence: e-mail : periansya@polsri.ac.id periansya et al. / finance, accounting and business analysis 2 (1) 2020 59 introduction since autonomy came into force in 1999, there have been several changes that have governed the running of the regional government. the current regulation is uu no.23/ 2014 with the consideration that the regional government directed to accelerate the realization of community welfare through improved services, empowerment, and community participation. the regional government in this law is encouraged to increase local and global competitiveness. besides, the principles of democracy, equity, justice, uniqueness of an area efficiency, the effectiveness of its administration are the responsibility of regional governments in the unity of the system of governance of the state. although the regulations on local government have changed, the regulations on regional finances still use uuno.33/2004. these rules are still relevant in the effective and efficient management of regional finances to achieve the targets set. the government issued regulation pp no.58/2005 on regional financial management, in addition to that it was also supported by the guidance and supervision of state administration pp no.17/2017 and pp no. 13/ 2019 regarding reports and evaluations of regional government implementation with the aim the creation of good governance. (egbide and agbude 2018) furthermore, the world bank in (mardiasmo 2009) stated that good governance requires management of government that can bring democratic principles, accountability, transparency, accountability, effectiveness and efficiency in governance. referring to the theory of regulation (baldwin et al, 2012), it is necessary to have a competent supervisory apparatus to carry out compliance with the rules besides guiding regional financial managers. supervision (mocanu, 2014 ; fajri, 2018) was intending as a guide in helping the implementation of the work program so that it can run according to the goals set. oversight of the budget ( puadi, 2013 ; suharyono, 2019 ) is the work program implementation activities that have been prepare to run effectively, efficiently and on target. supervision of this budget in practice is carried out by the state civil apparatus referred to as a form of accountability and transparency in ensuring that there is no deviation in the use of state funds. ( fajri, 2018 ) divides two supervision namely preventive and defective, where preventive supervision is carried out before the implementation of the activity while detective supervision after the implementation of the activity to oversee the running of the budget. the results of the bpk examination in 2017 found that there were weaknesses in the internal control system in the ogan ilir local government. in 2018 the regional development work plan (rkpd) that one of the significant challenges faced by ogan ilir district was "not an optimal performance of government apparatus services". in addition to the above problems also felt by the ogan ilir community such as slow service, less timely completion of development and limited human resources in compiling more effective budgets and the state civil apparatus is considered to be of poor performance. based on the identification of the problems above, this research focused on knowing whether supervision, the competence of the state civil apparatus has a beneficial effect on budget control in ogan ilir regency. preventive and defective supervision according to (horvath, 2006 ;baldwin et al., 2112; mocanu, 2014) provides a definition that control as a subsystem that supports company management starts from planning, coordinating and controlling and providing information under the objectives. while the purpose of supervision is as an effort to implement a plan that has been prepared previously, supervision according to baswir in (fajri 2018) can be grouped into two, such as preventive supervision, namely supervision carried out before the start of the implementation of an activity. then defective supervision is supervision activities carried out after the occurrence of state financial expenditure by examining and assessing accountability for financial performance. to anticipate collusion between executors and supervisors, are needed accountability and transparency in financial management. competence according to (dessler, 2015 ; sopian et al, 2020) competence is a human resource that has the ability of knowledge, skills and character. while the regulation of the national civil service agency (bkn)no. 8/2019 regarding guidelines and procedures and implementation of the measurement of the state civil service professionalism index (asn) there are standards and dimensions for measuring the asn professionalism index, namely qualification, competency, performance and discipline. another opinion of chapman 1999 in ( roeleejanto et al,2015) states that competency is a set of knowledge, skills and attitudes that must be possessed by a person in carrying out his work without leaving aspects of personality and ability of social skills in carrying out his duties. effectiveness of budget control the budget according to (bastian, 2017; surianti & dalimunthe, 2017) is a statement of estimated periansya et al. / finance, accounting and business analysis 2 (1) 2020 60 y = a + β₁ x1 + β2x2 + β2x3 + e future income and expenditure in the future or in a certain period, which is realized in financial form and used by the organization as a controller and appraiser of performance. (mardiasmo 2009) states that budgeting can be declared valid if the work program of a budget is running according to the goals and objectives of the program. so the effectiveness of a budget can be said to be useful if the costs incurred by the organization to achieve goals without looking at the number of costs incurred. control, according to (alim 2008) is an effort aimed at the implementation of the budget does not deviate from the goals and objectives set. whereas supervision according to (fajri 2018) divides supervision into 2 (two), namely preventive and defective, where preventive supervision is carried out before the implementation of activities while defective supervision carried out after the implementation of activities to oversee the running of the previously prepared budget. methods in this study, there are 3 (three) independent variables consisting of preventive supervision (x1), detective supervision (x2), and competency (x3) and 1 (one) dependent variable namely budget control effectiveness (y). population and sample (fauzi et al, 2019) states that a population is a group of people or individuals that are the objectives of the study, while (sugiono 2012) states that the sample is an element or characteristic that belongs to that population. the population and sample in this study are regional government organizations (opd) where from the number of questionnaires that have been distributed based on criteria, only 102 samples meet the standards for further testing. multiple linear regression analysis to find the relationship between two or more independent variables with one dependent variable, the multiple linear regression equation with the following formula: information : y = effectiveness of budget control a = constant β1, β2, β3 = regression coefficients x1, x2, x3 x1 = preventive monitoring x2 = detective oversight x3 = competency e = error after obtaining the results of multiple linear regression equations then look for the value of the coefficient of determination (r2), partial test (t-test) and simultaneous test (test f) results and discussion results of multiple linear regression analysis the results of the analysis using multiple linear regression models using the help of the statistical product and service solution version 24 program appear in the following table: table 1. results of multiple linear regression coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) ,177 2,110 ,084 ,933 x1 ,107 ,051 ,129 2,089 ,039 x2 ,524 ,052 ,629 10,151 ,000 x3 ,397 ,070 ,353 5,654 ,000 a. dependent variable: y source: data processed (2019) periansya et al. / finance, accounting and business analysis 2 (1) 2020 61 the results of data management in table 1 in the column unstandardized coefficient section b where the multiple linear regression equation model is as follows: y = a + b1x1 + b2x2 + b3x3 + b4x4 + e y = 0.177 + 0.129x1 + 0.629x2 + 0.353x3 + e information: y: effectiveness of budget control x1: preventive monitoring x2: detective oversight x3: competence the regression equation obtained can be explained that the constant value is 0.177, which means that if the value of preventive supervision and detective supervision and competence is assumed to be equal to 0, then the effectiveness of budget control will constantly be worth 0.177. furthermore, the regression coefficient value for the preventive controls variable (x1) of 0.129 means that preventive control has a positive effect on the effectiveness of budget control. furthermore, the regression coefficient level for the detective oversight variable (x2) is 0.629. means detective supervision has a positive effect on the effectiveness of budget control. then the regression coefficient level for the hr competency variable (x3) is 0.353. it means that competence has a positive effect on the effectiveness of budget control and standard errors indicating the level of confounding errors. hypothesis test results determination coefficient test (r 2) the coefficient of determination (r2) test is performing to determine the value of the correlation of the independent variable (x) with the dependent variable (y). the higher the coefficient of determination, the better the ability of the independent variable in explaining the dependent variable. table 2. determination coefficient test results (r 2) model summaryb model r r square adjusted r square std. error of the estimate durbin-watson 1 ,797a ,636 ,625 1,366 2,397 a. predictors: (constant), x3, x1, x2 b. dependent variable: y source: data processed (2019) based on the multiple regression test results obtained r of 0.797, which means that the correlation/relationship between preventive control, detective supervision, and competence has a relatively stable relationship of 79.7%. while the value of r square or the value of the coefficient of determination obtained by 0.636. it means that variable x has the effect of a contribution of 63.6% on the y variable. while the rest (100% 63.6% = 36.4%) is explain by other independent variables not included in this study. the adjusted r square value of 0.625 or 62.5% shows the size of the contribution of the influence of the independent variable on the dependent variable. test results of partial significance (t-test) partial test (t-test) of the independent variables conducted to determine the value of each independent variable, whether or not it significantly affected the dependent variable. following are the results of the partial significance test (t-test): table 3. results of partial significance tests (t test) coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) ,177 2,110 ,084 ,933 x1 ,107 ,051 ,129 2,089 ,039 x2 ,524 ,052 ,629 10,151 ,000 x3 ,397 ,070 ,353 5,654 ,000 a. dependent variable: y source: data processed (2019) periansya et al. / finance, accounting and business analysis 2 (1) 2020 62 t-test results show the value of t count and the significance of each independent variable, among others, preventive control variable (x1) t value of 2.089> t table 1.984 with a significance level of 0.039 <0.05, then ha is accepted, and ho rejected. so it was concluded that the variable x1 partially had a positive and significant effect on the variable y. then the detective oversight variable (x2) t count 10.151> t table 1.984 with a significance level of 0.000 <0.05 then ha was accepted, and ho rejected. so it was concluded that the variable x2 partially had a positive and significant effect on the variable y. competence variable (x3) t count value of 5.654> t table 1.984 with a significance level of 0.000 <0.05 then ha was accepted, and ho rejected. it concluded that the x3 variable partially had a positive and significant effect on the y variable. simultaneous significance test results (test f) simultaneous testing (f test) is a test on all independent variables in this study, as shown in the table below: table 4. simultaneous significance test results (f test) anovaa model sum of squares df mean square f sig. 1 regression 319,011 3 106,337 57,007 ,000b residual 182,803 98 1,865 total 501,814 101 a. dependent variable: y b. predictors: (constant), x3, x1, x2 source: data processed (2019) f test results show that the value of f count is 57,007, and the significance is 0,000. means that f count 57.007> f table 2.70, so it concluded that together or simultaneously variables x1, x2, and x3 affect the variable y. the significance value of 0,000 <0.05 or 5%, so it can conclude that overall independent variables namely preventive supervision (x1), detective supervision (x2), and competence (x3) have a significant influence on the dependent variable namely the effectiveness of budget control (y). effect of preventive supervision on the effectiveness of budget control based on hypothesis testing, the value of t for the preventive controls variable is 2.089> the value of the table is 1.984, and the significance value is 0.039 <0.05. so it can be concluded that the preventive oversight variable has a positive or significant effect on the budget control effectiveness. as the implementation of preventive supervision increases the effectiveness of budget control will also increase. means that ha was accepted or ho rejected. the results of this study are in line with this theory in line with the theory (baswir 1999) that the existence of both preventive supervisions can prevent budget misuse. besides, oversight of the use of the budget can lead to the effective and efficient implementation of the work program. this study is in line with the results of previous studies conducted by ( puadi, 2013;fajri, 2018; rigian & sari, 2019) that preventive supervision has a positive influence on the effectiveness of budget control. on the contrary, (peuranda and herdi 2014) stated in his research that there was no correlation between preventive supervision and the effectiveness of budget control. effects of detective oversight on the effectiveness of budget control based on the results of hypothesis testing, the t count for the detective oversight variable was 10.151> the t table value was 1.984 and the significance value was 0.000 <0.05. then it can be concluded that the detective oversight variable has a relationship or a positive and significant effect on the effectiveness of budget control. the detective supervision carried out, the effectiveness of budget control will also increase. means that ha was accepted or ho rejected. the results of this study are in line with the opinion (baswir 1999) that the existence of both defective supervisions, the supervisor can evaluate the accountability report documents. supervision and inspection are not only carried out by superiors on subordinates, preferably, and evaluations carried out to prevent budget misuse for the effectiveness of local government budgets. this research is in line with the results of previous research conducted by (puadi 2013) and (fajri 2018) which states that detective supervision has a positive effect on the effectiveness of budget control, thus meaning that increasing detective supervision will also increase the effectiveness of budget control. periansya et al. / finance, accounting and business analysis 2 (1) 2020 63 effect of competence of human resources on the effectiveness of budget control based on the results of hypothesis testing, the t count on the human resources competency variable was 5.654> the table value was 1.984, and the significance value was 0.000 <0.05. so that the competency variable has a positive or significant relationship or influence on the effectiveness of budget control, if the quality of human resource competencies is good, the control of the budget will be more effective. means that ha was accepted or ho rejected. according to (dessler, 2015; bulan et al, 2017) that the importance of human resource competence in a government so that it can carry out the main tasks that have been arranging. besides, in the financial management of state government apartments, the state must have competence following their fields so that the budget can adequately documented according to the principles of government accounting. this study is in line with the results of previous studies conducted ( arsyiati, darwanis, & djalil, 2008 ; arsyiati et al., 2008 ) which states that the quality of financial managers has a positive effect on the effectiveness of financial management, meaning that the quality of financial managers / human resources is increasing. will be more effective financial management in terms of budget control. effects of preventive oversight, detective oversight and human resources competence on the effectiveness of budget control based on the results of hypothesis testing, the calculated value for the variables preventive oversight, detective oversight and competence was 57.007> the f table value was 2.70, and the significance value was 0,000 <0.05. then it can be concluded that the variables preventive supervision, detective supervision and hr competence have a relationship or a positive and significant effect on the effectiveness of budget control. means that ha was accepted or ho rejected. the results of the analysis of the strength the relationship simultaneously to find out how much the independent variable explains the dependent variable, can be determined through the coefficient of determination r2 that is adjusted r square of 0.625 or 62.5%. in comparison, the remaining 37.5% is influenced by other variables that the researcher did not include in the study this is like the application of spi, implementation of performance-based budgeting and others. this study is in line with the results of previous studies conducted by ( puadi, 2013 ; fajri, 2018) but then researchers added the competency variable of human resources as an extension of previous researchers because of the 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“the implementation of performance based budgeting in public sector (indonesia case: a literature review).” international journal of developing and emerging economies 5 (2): 52–67. www.transparency.org. undang undang no.23 tahun 2014. n.d. tetang pemerintah daerah. undang undang no.33. 2004. tentang perimbangan keuangan. 138 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg the structure of euro plus pact. α path for measuring it's adoption marios psychalis university of peloponnese, greece info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: euro plus pact, reforms in eu, european integration abstract ___________________________________________________________________ the euro plus pact was established in march 2011 according to the open method of coordination (omc). more specifically, it was published as part of the 24-25 march summit conclusions, while the european council of 9/12/2011 proceeded to the specification of the program pillars for each country. its main objective was to strengthen the coordination of the european competitiveness and convergence economic policies. the euro plus pact is based on four key pillars of equal importance, which are specified in different indexes and means of achievement. the first strategic pillar is fostering competitiveness, the second one is fostering employment, the third one is contributing further to the sustainability of public finances and the fourth one is reinforcing financial stability. the scientific findings demonstrate that the eu has shown little interest in implementing the euro plus pact, while the literature about it is relatively poor with the only references being in relation to the first strategic pillar, which is promoting competitiveness by reducing unit labor costs. regarding this strategic pillar, the eu institutions have no oversight on its implementation. the present paper analyzes all the euro plus pact strategic pillars, the indexes and the means of achievement related to each strategic pillar and proposes a comprehensive scoreboard for the assessment of each country’s response rate to the pact objectives. the scoreboard consists of more than 30 indexes that reflect the progress of each country in comparison to the euro plus pact goals. the implementation of this scoreboard could be a useful tool for european policy-makers and decision-makers on economic governance issues both at national and eu level.  address correspondence: karaiskaki 70, tripoli 221 00, greece marios psychalis / finance, accounting and business analysis 1 (2) (2019) 139 introduction τhe euro plus pact, as well as the are reforms that are aiming to assist in the stabilisation and convergence of the eu member states’ economies (estella, 2018). since 2010 the economic governance within the eu has changed radically, and a multitude of new rules and reforms have been instituted (de grauwe, 2018). the set of measures introduced by the six pack, two pact, euro plus pact and the fiscal compact all introduce reforms in the preventive as well as the corrective aspect of the stability and growth pact (sgp) (commission, 2014). at the same time they introduce the macroeconomic instabilities process, the excessive macroeconomic instabilities process, the automatic fiscal stabiliser, debt-cutter, and the informal euro summit, while they increase significantly the role of the eu commission (becker, et al., 2016). all these reforms aim towards the coordination of the economic policies in order to avoid another potential economic crisis in the future (european commission, 2011). according to the author, the euro plus pact stands out from the rest of the reforms since it doesn’t introduce any regulation or directive, nor does it constitute a part of the reforms in any previous regulatory framework. the conclusions 11 and 12 of the euro summit 24/25 march 2011, that belong to the chapter titled “providing a new quality of economic policy coordination: the euro plus pact” state the following: “the euro plus pact as agreed by the euro area heads of state or government and joined by bulgaria, denmark, latvia, lithuania, poland, romania (see annex i) will further strengthen the economic pillar of emu and achieve a new quality of economic policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence reinforcing our social market economy. the pact remains open for other member states to join. the pact will fully respect the integrity of the single market. the member states that have signed up to the pact are committed, on the basis of the indicators and principles it contains, to announce a set of concrete actions to be achieved within the next twelve months. a number of member states have already announced first commitments. all participating member states will present their commitments as soon as possible and in any event on time for their inclusion in their stability or convergence programmes and national reform programmes to be submitted in april and for their assessment at the june european council.” essentially, they describe exactly the pact, while the pact itself is attached to the annex i of the conclusions. the pact was established in order to increase the coordination of the economic arm of the economic and monetary union (emu) and boost the competitiveness of the member states’ economies (european commission epsc, 2015). the goal of the emu is to reach a higher degree of economic convergence between the member states’ economies (gabrisch & staehr, 2014). despite the fact though that these policies fall under the surveillance of the national governments instead of the union, the policies that received the main focus during the period of economic adjustment are the ones that are not part of the strict core of the emu policies, such as labour laws and pension reforms (barnard, 2012). the problem then is that there is a lack of an evaluation control for the implementation of the goals and rules that are dictated by the pact. at the same time, if we examine the literature and the reports of the european regulatory bodies, it turns out that the pact does not comprise a part of the continuous evaluation of the european institutions neither is there a mention of its implementation. with this paper, we attempt to create a scoreboard with which we can measure the response to the euro plus pact with quantifiable and objective indexes. this paper has scientific value as there been no attempt so far to evaluate the response of the states to the goals of the pact, while it comprises a tool to policy making and setting of goals. the added value of this paper is the addition of indexes that measure the goals of the pact but are not captured within the pact itself. marios psychalis / finance, accounting and business analysis 1 (2) (2019) 140 first key pillar: fostering competitiveness the first key pillar of the pact is related to the improvement of competitiveness within the eu (collignon & esposito, 2013). with regards to this first goal, there is a great deal of emphasis given to the value of the index of unit labour cost (ulc)1, which must be evaluated in total, but it can also be done on a per sector basis2 (mertsina & jänes, 2012). this specific goal can be achieved by re-examining the method of determining the wage and the negotiation process, by taking care that the wage agreements in the public sector support the efforts undertaken in the private sector (taking also into account the psychological effect that the wages in the public sector have), the opening of sheltered sectors, specific efforts to improve education systems and promote r&d, innovation and infrastructure, as well as measures for improving the business environment. the basic indexes with which we can evaluate the improvement of competitiveness according to the euro plus pact is firstly the unit labour cost but also the wage cost index. of course, an additional but very important index is the ballance of payments (bop) (oecd, 2011a) and (comunale & hessel, 2014). the continuous deficits in bop, in conjunction with the deficits in the monetary result of the government lead to a loss of competitiveness (decramer, et al., 2014). an additional index is the yearly assessment that the world bank performs, as well as the global competitiveness report that is published yearly by the world economic 1 big and continuous increases in ulc can lead to loss of competitiveness (ark & monnikhof, 2000), (ark, stuivenwold, & ypma, unit labour costs, 2005). 2 the competitiveness of a product can be categorized in price competitiveness and structural competitiveness (non price competitiveness). according to general consensus, there is more emphasis given to structural competitiveness nowadays rather than the price competitiveness, at least with regards to developed economies. forum. the report titled “doing business annual report” scores the data in the following table. world bank criteria time required to start a business dealing with construction permits getting electricity registering property getting credit protecting minority investors paying taxes enforcing contracts trading across borders resolving insolvency an additional index for measuring competitiveness is the business confidence index (bci), which according to oecd “provides information on future developments and be used to monitor output growth and to anticipate turning points in economic activity”. besides the indexes previously mentioned, two additional indexes that can measure competitiveness of a country’s economy is r&d expenditures expressed as gdp percentage, as well as the economic growth measured as gdp percentage, but also the r&d expenditures in billions of dollars per year (matsumura, matsushima, & cato, 2013). some additional indexes are the size of the public investment program (oecd, 2014), but also the size of foreign direct investments in a country (gugler & brunner, 2007) and (anastassopoulos, 2007). finally, the international investment rank could be a criterion for measuring the competitiveness of each country. the following table presents a synopsis of the ten indexes with which the response of a country’s economy can be measured with regards to the first pillar of the pact. indexes with regards to competitiveness unitary labor cost wage cost index ballance of payments world bank report (doing business annual marios psychalis / finance, accounting and business analysis 1 (2) (2019) 141 report) bci index r&d expenditure as % gdp r&d expenditure in billions usd $ pubic investment program foreign direct investments international investment rank second pillar: fostering employment with regards to the second pillar, which is the promotion of employment, there are three indexes determined. these are: long term unemployment, youth unemployment and labor force participation rate. these indexes can be improved by the promotion of flexicurity in employment relations (wilthagen & tros, 2004), the promotion of lifelong learning (green, 2002) as well as reforms in the tax policies of labor, such as the reduction of tax rates so that work can become more attractive (european commission, 2018) (oecd, 2011b). the first three indexes with which we can measure the employment improvement have been mentioned previously. besides these, there are some additional indexes with which we can measure the response in this pillar. three additional indexes are the labor taxation (kalyva, et al., 2018) the index of youth unemployment (mroz & savage, 2006), and the total number of hours worked. for example, it’s very different to create 3 new part time job positions (3 positions x 4 hours = 12 total hours) with the creation of 2 full time job positions (2 positions x 8 hours = 16 total hours). indexes with regards to employment unemployment rate long term unemployment labor force participation rate labor taxation youth unemployment hours worked third pillar: enhance the sustainability of public finances the third pillar, the contributions to enhancing the sustainability of public finances can be monitored through indexes that examine the course of the sustainability of pension funds (barrell, et al., 2009), the healthcare and social benefits (merola & sutherland, 2013) but also with the institution of fiscal rules such as the “debt cutter” (darvas, et al., 2018). essentially the indexes in this pillar can be split in three groups. the first group relates to indexes that evaluate the course of pension programs’ sustainability. in this group we can include five indexes. the first one is the pension replacement rate, the second one is the net pension fund wealth, the third one is the ratio of workers to pensioners, the fourth one is the transfers of the general government to the social security funds and the fifth one is the public expenditure on pensions as a gpd percentage. the second group of indexes is concerned with the sustainability and the rationalization of expenditures with regards to healthcare and social services (lora & olivera, 2007). in this group belong the public expenditure for healthcare, parametrical public expenditure measured in usd, and the public social spending. finally, in the third group of indexes that are related to the establishment of national fiscal regulations we can make use of eight indexes in order to evaluate the named adjustment (shah, 2017), (sávai & kiss, 2018). the first one is the gross financing needs (gfn) (alcidi & gros, 2018a) and (aldici & gross, 2018b), the second one is the public debt as gdp percentage (imf, 2015), the third one is the fiscal result of the general government (koehler & könig , 2014), the fourth one is the public debt expressed in absolute numbers, such as e.g. billion usd, the fifth one is the interest rate of the 10-year bond (de grauwe & ji, 2012), the sixth one is the net current debt present value, the seventh one is the weighted average interest rate of public debt and the final one is the weighted-average maturity of public debt (andritzky, et al., 2019). the following table represents the 16 indexes of the third pillar of the pact. indexes related to sustainability of public finances percentage of pension recovery net pension fund wealth marios psychalis / finance, accounting and business analysis 1 (2) (2019) 142 tatio of workers to pensioners transfers of the general government to the social security providers public expenditure on pensions as a gpd percentage public expenditure for healthcare drug related public expenditure public social spending gross financing needs (gfn) public debt as gdp % fiscal result of the general government public debt in billions usd interest rate of 10-year bond debt net present value weighted average interest rate of public debt weighted average maturity of public debt fourth pillar: financial stability finally, with regards to the fourth pillar, despite the fact that there are no evaluation indexes mentioned, there are policies proposed: the adoption of banking sector resolution laws, performance of regular stress tests and the monitoring of the evolution of the private debt of banks, households and business outside the financial sector. the author, in the context of quantifying the evaluation, chose 8 indexes with which the response in the current pillar can be measured. the first one is the number of yearly stress tests performed, the second one is the percentage of non-performance loans (npl) in relation to total borrowing (ecb, 2017), the third one is the dependence of banks on the emergency liquidity assistance (ela) mechanism of the ecb, the fourth one is the rate of bank deposits, the fifth one is the rate of change of funding, the sixth one is the net volume of savings, the seventh one is the course of the bank stocks, which can be extracted from the stock market index of the sector and the last one is the volume of npl in billion dollars. indexes with regards to financial stability number of yearly stress tests performed npl % of total borrowing dependence on ela bank deposits in billions usd rate of change of funding (issuing of new loans) net savings bank stocks npl in billion dollars total assets of banks assessment the assessment of the response to the pact will be carried out with the following methodology. the response in each pillar is examined independently, this means that for every pillar there is a specific rating, and in the end all these ratings are added together, and a final result is then extracted. more specifically, if an index has an improvement over the last year then one unit is added, and conversely if a specific index has decreased over the last year a unit is subtracted. even more specifically, if the increase is within 0 – 3 % exactly 1 unit is added, if the increase if from 3 – 5% 1.2 units are added, and if the increase is more than 5% then 1.5 units are added. in the decrease the same number of units are subtracted respectively. then, since each pillar has a different number of indexes, the total sum of each pillar is divided by the number of indexes that evaluate the response in each pillar. finally, the four individual results are added together and comprise the final result. the limit values of the index can be from 6 till + 6. conclusion in conclusion, we can say that the euro plus pact does not focus in one economic aspect, but includes all of the economic activities, that is the public macroeconomic figures, the financial sector, the employment, but also the competitiveness of a country. so, the evaluation of the implementation of the pact’s goals, can comprise a complete index for the course of a state’s economy. the 40 indexes that are selected show a concrete image of the course of a state’s economy, while the comparative evaluation between each state can show the degree of convergence and economic integration of the eu. monitoring this indicator could help avoiding new budgetary or financial macroeconomic imbalances, while also highlighting progress in the competitiveness of marios psychalis / finance, accounting and business analysis 1 (2) (2019) 143 eu countries. it is therefore necessary for the eu to create an annual report on compliance with the objectives of the euro plus pact, with accountable results. references alcidi, c. & gros, d., 2018a. public debt and the risk premium: a dangerous doom loop, brussles: ceps. aldici, c. & gross, d., 2018b. debt sustainability assessments: the state of the art, brussles: european parliament. anastassopoulos, g., 2007. countries’ international competitiveness and fdi: an empirical analysis of selected eu membercountries and regions. journal ofeconomics and business, volume 10, pp. 3552. andritzky, j., christofzik, d., feld, l. & uwe, s., 2019. a mechanism to regulate sovereign debt restructuring in the euro 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sharia accounting, universitas islam negeri raden intan, bandar lampung, indonesia info articles abstract history article: submitted 14 january 2021 revised 9 march 2021 accepted 21 april 2021 measuring financial performance is important to do. it aims to evaluate the efficiency and effectiveness of the company in generating profits. basically, there are many factors that affect financial performance, but in this study it is only limited to the influence of environmental performance and company size on financial performance. this type of research is a causal associative quantitative research using secondary data sourced from the annual reports of mining sector companies listed on the indonesian sharia stock index (issi) for the 2014-2019 period. the population in this study was all mining companies registered on the issi. the sampling technique used purposive sampling technique and obtained a sample of 72. the data analysis method uses panel data regression with eviews 10. the results of this study indicate that environmental performance has no effect on financial performance, while firm size has an effect on financial performance. simultaneously environmental performance and company size affect financial performance. keywords: environmental performance, company size, financial performance *address correspondence: e-mail: nurwahyu@radenintan.ac.id nur wahyu ningsih et al. / finance, accounting and business analysis 3 (1) 2021 75 introduction measuring financial performance is important to do. this aims to evaluate the efficiency and effectiveness of the company in generating profits. by measuring financial performance, it can be seen the prospects for growth and financial development of the company. a company is said to be successful if the company has achieved a certain predetermined performance. the company's financial performance can be used as a means or indicator in order to improve the company's operational activities. with the improvement in operational performance, it is hoped that the company can experience better financial growth and be able to compete with other companies. many factors can affect the company's financial performance. therefore the company should be able to optimize these factors in order to further improve its financial performance. by knowing what factors affect financial performance, the company can establish an accurate strategy so that the targeted financial performance will be easier to achieve. however, this research is limited to examining the effect of environmental performance and company size on financial performance. environmental performance can be interpreted as steps to provide protection to the environment or ecosystem. the environment is one part of the company that cannot be ignored and must be an integral part of the company's business activities. therefore, the environment should be treated as any other stakeholder in the company. the survival of the company is very dependent on the safety and preservation of the environment. for now, the company's concern for the environment is one aspect that needs attention. this is in accordance with the minister of environment regulation number 03 of 2014 concerning the company performance rating program in environmental management or known as proper. one of the studies linking environmental performance with financial performance is research conducted by (ikhsan & muharam, 2016). the results of this study indicate that environmental performance partially and simultaneously has a significant effect on financial performance. this is different from research conducted by (putra, 2017) which states that environmental performance has no effect on financial performance. the next factor is the size of the company, while what is meant by company size is a scale where the size of the company can be categorized based on total assets, sales and so on. large-scale companies are generally better known by the wider community when compared to companies that are small in size and are usually able to survive for a long time. in addition, because it is better known, there is more information about large companies than small companies. if a lot of information is in the hands of investors, then the level of investor uncertainty about the future of the company can be known. the research that links company size to financial performance is research conducted by (tambunan & prabawani, 2018). the results of this study indicate that company size has no effect on financial performance. this is different from research conducted by wufron in 2017 which stated that company size has an influence on financial performance. in this research, it focuses on mining sector companies listed in issi since mining sector companies are more appropriate to use and more representative of the independent variables in this study, namely environmental performance and company size. the mining industry is an unsustainable industry because it depends on non-renewable resources. environmental management in mining operations should cover all phases of the mining activity, from the exploration phase to the production phase to post mine closure. the phenomenon that occurs in the mining industry in indonesia is that mining companies have the immunity to disobey environmental regulations and can pollute freely without fear of sanctions, such as violations committed by several mining companies that do not comply with environmental regulations, namely pt. . barisan tropical mining (owned by laverton gold auatralia) in south sumatra, pt. indo moro kencana (owned by aurora gold australia), pt. newmont minahasa raya (owned by newmont usa). and pt. kelian equatorial mining (owned by british-australian rio tinto). global issues such as environmental protection, responsible supply of materials and the welfare of communities around mining areas will be of particular concern to the government in the future. the government will seriously push for these agendas, while non-governmental organizations will be more critical of all forms of environmental damage. the government has a big task to reposition the mining industry as a lever of the local and regional economy, not just as an object of activity that generates state revenue. for this reason, the government will encourage mining and mineral companies to play a more strategic role in maximizing the development and empowerment of communities around the operating area. there are 27 mining sector companies listed on the indonesian sharia stock index (issi) consecutively in the 2014-2019 period. the companies are as follows: dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 76 table 1. mining companies listed on issi 2014-2019 name of company code adro energy tbk adro aneka tambang tbk antm atlas resources tbk arii ratu prabu energy tbk arti bumi resources minerals tbk brms barmulti sukses sarana tbk bssr bayan resources tbk byan citatah tbk ctth darma henwa tbk dewa dian swastatika sentosa tbk dssa elnusa tbk elsa alfa energi investama tbk fire golden energi mines tbk gems garda tujuh buana tbk gtbo harum energi tbk hrum vale indonesia tbk inco indo tambang raya megah tbk itmg resource alam indonesia tbk kkgi mitrabara adiperdana tbk mbap samindo resources tbk myoh bukit asam tbk ptba petrosea tbk ptro radiant utama interinsco tbk ruis golden eagle energy tbk smmt smr utama tbk smru toba bara sejahtra tbk toba kapuas prima coal tbk zinc source: processed data, 2021 the formulation of the problems in this study are: 1). does environmental performance affect financial performance?, 2). does company size affect financial performance? 3). do environmental performance and company size jointly affect financial performance? based on the formulation of the problem, the objectives of this study are: 1). to determine the effect of environmental performance on financial performance, 2). to determine the effect of company size on financial performance, 3). to determine the effect of environmental performance and company size together on financial performance. stakeholder theory according to (kriyantono, 2014) stakeholder theory pays attention to the concept of who is at risk of being influenced or potentially influencing organizational activities. stakeholders can be defined as individuals, groups, or organizations, directly or indirectly, who have the potential or possibility to influence the activities of the organization. this stakeholder theory reminds managers to pay attention to all people and groups who can be influenced or influence the goals of the company. legitimacy theory in accordance with (utomo, 2019), legitimacy theory is a theory that focuses more on the interaction of relationships between organizations and society. legitimacy is a management system that is oriented on taking the side of the company towards the community. legitimacy theory explains the social contract relationship between the company and the community, where the company must have integrity in implementing ethics in doing business and increase social and environmental responsibility, so that the company can be accepted by its existence in the community. legitimacy is considered important for the company because the community's legitimacy to the company is a strategic factor for the company's future development. sharia enteprise theory sharia enterprise theory states that accountability is carried out not only to the company, but also to wider stakeholders. sharia enterprise theory includes allah, humans and nature, where allah is the highest and the only goal of human life. humans are required to be responsible for all activities to allah dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 77 vertically, then continue in the form of horizontal accountability to other humans and the natural environment. the indonesian sharia stock index the indonesian sharia stock index (issi), which was launched on 12 may 2011, is a composite index of islamic stocks listed on the idx. issi is an indicator of the performance of the indonesian islamic stock market. issi constituents are all islamic shares listed on the idx and included in the list of sharia securities (des) issued by the ojk. this means that the idx does not select sharia stocks that are included in issi. the issi constituents are reselected twice a year, every may and november, following the des review schedule. therefore, every selection period there are always sharia stocks that leave or enter into issi constituents. the issi calculation method follows other idx stock index calculation methods, namely the weighted average of market capitalization using december 2017 as the base year for calculating the issi environmental performance based on (parmawati, 2018) the company's environmental performance is a company's performance in creating a good environment. the number of environmental issues that have developed has prompted the creation of a standard that regulates environmental disclosure issues, with the hope that companies have an obligation to convey more accurate information about their environmental performance. this standard has been applied in several countries in the world such as america and australia. meanwhile in indonesia, the indonesian accounting association has prepared a disclosure standard for environmental accounting in the statement of financial accounting standards (psak) no. 32 (forestry accounting) and 33 (general mining accounting), this will help as a basis and guidance in preparing environmental accounting reports. with the result that every company is required to have concern for the environment. h1 : there is a significant influence between environmental performance and financial performance company size by (sawir, 2004) the size of the company can determine the level of ease with which the company obtains funds from the capital market. small companies generally lack access to an organized capital market, for both bonds and stocks. if the issuance of securities can be made, the securities of small companies may not be marketable and require pricing in such a way as to allow investors to obtain higher returns. so basically the bigger a company is, the easier it will be for the company to get funding. h2: there is a significant influence between company size and financial performance financial performance in (kawatu, 2004), basically, financial performance can be interpreted as the ability of a company to earn a profit. financial performance can be reflected in the balance sheet financial statements, budget realization reports and cash flow reports. financial reports need to be analyzed in order to provide an overview of financial performance. financial statement analysis is an activity to interpret the numbers in financial statements in order to assess financial performance, where the results of the analysis will be used as a basis for economic, social or political decision making. financial statement analysis requires certain techniques so that the analysis is useful for decision making. there are several financial statement analysis techniques, including financial ratio analysis. methods research design return on asset measurement of the company's financial performance in this study uses the return on asset (roa) ratio. what is meant by return on assets is the comparison between net income and total assets. this ratio shows how much net profit the company gets when measured from the value of its assets. the return on asset ratio can be formulated as follows : environmental performance an environmentally friendly economy is a positive thing that can be felt by all parties or generations. so far there have been many criticisms stating that the existing economy is still not in favor of dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 78 the environment. even the production process has led to a lot of degradation of land in nature. this is because at first the economy did not talk about environmental problems because the environment was considered an external factor and as a free good. so that in the process we need an institution and an instrument that can maximize the use of natural resources in the economic process without destroying and reducing its quality for future generations. the environment is so important for now that the government issued a regulation, namely law no. 03 of 2014 concerning the company performance rating program in environmental management or what is known as proper. in this study, environmental performance is measured based on the proper assessment conducted by the ministry of environment. the environmental performance measurement in this study is according to the proper rating, which is as follows: tabel 2. rate of proper color note score gold excellent 5 green very good 4 blue good 3 red poor 2 black very poor 1 source: processed data, 2021 company size basically, the size of the company can be divided into three, namely small companies, medium companies and large companies. company size can be seen from total assets, total sales, total employees, and so on. the greater the total assets or total net sales, the greater the size of the company. the bigger the asset, the greater the invested capital. meanwhile in this study, to measure the size of the company seen from the total assets owned. the formula is as follows: ) sample selection the population of this research is the mining sector companies listed on the indonesian sharia stock index (issi) consecutively in the 2014-2019 period, totaling 27 companies. the research sample consisted of 12 companies in the 2014-2019 period. data analysis method this research uses normality test, classic assumption test, eviews 10 panel data regression test, and t test. result and discussion first hypothesis testing the results of the normality test are presented in table 3 below: table 3. result of normality test normality test sample 2014-2019 observations 72 probability 0.361141 source: data processed by eviews 10, 2021 based on table 3 above, it can be seen that the probability value is 0.361141. so based on these data it can be concluded that the model in this study is normally distributed, as the probability value of 0.361141 is greater than 0.05. the results of the normality test are presented in table 4: dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 79 table 4. result of partial test model fixed effect variable coefficient std. error t-statistic prob. c -79.86317 30.28824 -2.636772 0.0107 logkl 0.330017 0.822056 0.401453 0.6896 logup 26.07535 10.37895 2.512332 0.0148 source: data processed by eviews 10, 2021 based on the results of testing the first hypothesis (h1), it states that environmental performance variables have no influence on the financial performance of mining sector companies listed on the indonesian sharia stock index (issi) for the 2014-2019 period. this is indicated by the probability value of environmental performance amounting to 0.6896 with a t-statistic value of 0.401453. for the probability value is 0.6896> 0.05, the first hypothesis in this study is rejected, which means that the environmental performance of a mining sector company has no influence on its financial performance. second hypothesis testing based on the results of testing the second hypothesis (h2), it states that the company size variable has a positive and significant effect on the financial performance of mining sector companies listed on the indonesian sharia stock index (issi) for the 2014-2019 period. this is indicated by the probability value of the company size of 0.0148 with a t-statistic value of 2.512332. from these data, it can be concluded that the company size variable has a positive and significant effect on the financial performance of mining sector companies listed on the issi since the probability value is 0.0148 <0.05. first hypothesis discussion the relationship between the theory of legitimacy and environmental performance is that the company's operations must be in accordance with the expectations of the community and the environment so that there is no shift and mismatch between the company and the surrounding environment. the rationale for legitimacy theory is that companies will continue to exist if society realizes that the organization operates for a value system that is commensurate with the community's own value system. legitimacy theory suggests companies to ensure that their activities and performance can be accepted by society. companies can use their annual reports to illustrate the impression of environmental responsibility, so that they are accepted by the community. that way, even though the environmental performance of a company in the mining sector is getting better, it does not have an impact on its financial performance. the measurement used in assessing environmental performance in this study is to use proper ranking by giving a score according to the ranking obtained. based on the results of this study, although the company has the best proper rating, this does not have an impact on its financial performance. the results of this study are in line with previous research conducted by (setyaningsih, 2016), the results of this study also state that environmental performance has no influence on the company's financial performance. in addition, the results of this study are also in line with research conducted by (meiyana & aisyah, 2019), this study also states that environmental performance has no influence on financial performance. second hypothesis discussion stakeholder theory states that a company is systematically responsible for all parties involved in the company. based on this, it can be concluded that the bigger the company, the more parties involved in the company. companies with large sizes are more easily recognized by the public and relatively easier to obtain funding from the public compared to small-scale companies. therefore, the bigger the company, the greater the company's responsibility to the parties concerned. so based on these results it can be said that the bigger a company, the better its financial performance will be. when a company is categorized as a large company, its financial performance can also be said to be good, since basically the bigger a company is, the easier it will be for the company to obtain capital and trust from other parties such as investors and so on so that it can improve financial performance of a company. the results of this study are in line with previous research conducted by (castelia et al., 2013), the results of this study state that company size has an influence on financial performance. in addition, previous research which is also in line with the results of this study is research conducted by (setiawan, 2018), the results of this study state that company size has an influence on the company's financial performance. dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 80 conclusion based on the results of the analysis, the conclusions of this study are as follows: environmental performance has no effect on the financial performance of mining companies listed on the indonesian sharia stock index (issi) for the 2014-2019 period and company size has a positive and significant impact on the financial performance of mining companies listed on the indonesian sharia stock index (issi) for the 2014-2019 period. references castelia, y., arisadi, & djazuli, a. (2013). pengaruh ukuran perusahaan, umur perusahaan, current ratio, debt to equity ratio, dan fixed asset to total asset ratio terhadap kinerja keuangan pada perusahaan manufaktur di bursa efek indonesia. jurnal aplikasi manajemen, 11(4), 567–740. ikhsan, a. a. n., & muharam, h. (2016). pengaruh kinerja lingkungan terhadap kinerja keuangan: studi pada perusahaan yang terdaftar di kementerian lingkungan hidup dan listing di bei. diponegoro journal of management, 5(3), 11. kawatu, f. s. (2004). analisis laporan keuangan sektor publik. deepublish. kriyantono, r. (2014). teori-teori public relations perspektif barat dan lokal: aplikasi penelitian dan praktik. kencana. meiyana, a., & aisyah, m. n. (2019). pengaruh kinerja lingkungan, biaya lingkungan dan ukuran perusahaan terhadap kinerja keuangan dengan corporate social responsibility sebagai variabel intervening (studi empiris pada perusahaan manufaktur yang terdaftar di bursa efek indonesia tahun 2014 -. jurnal nominal, 7(1), 1–18. parmawati, r. (2018). ecology, economy, equity (sebuah upaya penyeimbang ekologi dan ekonomi). ub press. putra, y. p. (2017). pengaruh kinerja lingkungan terhadap kinerja keuangan dengan pengungkapan corporate social responsibility (csr) sebagai variabel intervening. jurnal ekonomi dan bisnis universitas muhammadiyah bengkulu, 2(2), 228. sawir, a. (2004). kebijakan pendanaan dan restrukturasi perusahaan. pt. gramedia pustaka. setiawan, w. (2018). pengaruh kinerja lingkungan, biaya lingkungan dan ukuran perusahaan terhadap kinerja keuangan dengan corporate social responsibility (csr) sebagai variabel intervening (studi kasus pada perusahaan manufaktur yang terdaftar di bursa efek indonesia tahun 20. journal of accounting, 1(1), 1–12. setyaningsih, r. d. (2016). pengaruh kinerja lingkungan terhadap kinerja keuangan dengan corporate social responsibility sebagai pemoderasi. jurnal ilmu dan riset akuntansi, 5(4), 1–15. tambunan, j. t. a., & prabawani, b. (2018). pengaruh ukuran perusahaan, leverage dan struktur modal terhadap kinerja keuangan perusahaan (studi pada perusahaan manufaktur sektor aneka industri tahun 2012-2016). diponegoro journal of social and politic, 2(2), 8. utomo, m. n. (2019). ramah lingkungan dan nilai perusahaan. cv. jakad publishing. 42 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg some observations of bank interest rates and the impact of negative interest rates diyana miteva department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 objective: the purpose of the paper is to investigate the impact of the negative interest rate policy of the central banks on bank interest rates tracing the trendlines of interest rates of deposits and loans in short and midterm in bulgaria and germany. the current work aims to trace the power of the correlation between deposit and loans interest rates and to analyze the future perspectives of the monetary policy of the central banks in a situation of zero to negative interest rates. methodology: the study examines 158 months data observations for interest rates on deposits with up to 1 and up to 2 year maturity and loans with maturity 1-5 years for households and for non-financial corporations in bulgaria and germany using descriptive statistics, correlation and regression analyses. also, the correlation between deposit rates and credit card rates is studied. results: it is found that there is a much stronger correlation between short term deposit interest rates and short to mid-term loans for non-financial corporations than for households in bulgaria and germany. zero lower bound for interest rates in deposits in bulgaria exists for deposits of households, where for a long period they stay on level of 0%. on the other hand, the zero lower bound breaks for non-financial corporations’ deposits in bulgaria just in the last year. the interest rates on deposits in both countries show rather low correlation impact on consumption loans for households. it is found that there is no or very weak correlation between deposit rates and credit card rates in. in general, the volume of deposits is not correlated to the interest rates. implication: the study’s results are beneficial indicator in terms of the existing negative interest rate policy and how it influences the nominal bank interest rates and how the deposit interest rates correlate to loans interest rates in a time of such policy. important conclusions are made on a basis of the analysis in regard the future of the monetary policy in the beginning of one of the biggest crises the society has faced. keywords: negative interest rates, deposit interest, loan interest rates address correspondence: e-mail : miteva_diyana@yahoo.com diyana miteva / finance, accounting and business analysis 2 (1) 2020 43 introduction following the financial crisis of 2007-2009 and measures taken by the central banks to help the economy, monetary policy rates crossed the zero-lower bound. ever since 2014 when the first negative interest rates appeared discussions have been on for the impact and role of this unprecedent policy. the core theoretical assumptions are no longer in place as the relationship of interest rates with savings, lending, investment, pensions, etc. is no longer active. the psychological effect of negative interest rates is also importantit is hard and unlogic to be understood by people and even harder to be analyzed and researchers. not only the appearance of negative interest rates is significant but nowadays it is rather the fact that they have been in place almost 6 years which means that living in a crisis conditions is a new normal. negative interest rates have various impact path. one of the strongest is the impact on savings. as stated in their report of swiss bank association (sba, 2019), swiss pension funds will probably achieve zero or negative returns on their bond holdings, since they scored roughly 2.5% in chf and 3% in foreign currencies between the beginning of 2009 and the end of 2018. moreover, in the rise of the next crisis (covid-19) it is important to know what the starting point is in which governments will have to apply new measures in order to smoother the impact of covid-19 on the economy and help it to recover. the difference now with the crisis of 2007-2009 is that the current level of interest rates is negative or zero – for deposits and most of the government bonds. that means central banks will not be able to go further in the negative territory and will have to introduce different measures. a variety of research has been done, and some of them achieve similar conclusions. a central bank decreases the policy interest rates when aiming to decrease the rates on the debt, to increase the liquidity and borrowing facilities and thus to stimulate the consumption and investments, to lower the unemployment and boost the economic growth. the ordinary transmission channel of central bank monetary policy when lowering the policy interest rates would result in a lower cost for lending. however, up to 2014 it was generally been contended that the zero-lower bound (zlb) of interest rate exists, e.g. that is the nominal interest rates down limit. they were not assumed to go into the negative area. that could be easily seen in all economic textbooks where all examples, formulas and theory is made through the assumption of a nonnegative rates. however, this myth is no longer actual. this phenomenon has appeared since 2014 by the actions of some central banks to decreases their policy interest rates below zero. now, six years later, it seems like no perspective is on the way for going back in the positive interest rates area, moreover the unprecedent covid-19 crisis that started in the beginning of 2020 is another reason for cbs to have expansionary policy. literature review there have been many discussion and doubts about the success of the negative interest rates policy (nirp). the research in the area of negative interest rates gives a picture of the impact of this policy for the economy, which is an important ground for its further use. the research articles of this kind are usually on a country perspective investigating the impact of negative interest rate policy for different bank interest rates and economic indicators. the main direction of investigation is to observed the impact of negative interest rate on deposits and credit, also to see if there is a straight correlation between interest rates on deposits and credits, how that impacts banks’ balance sheets and companies’ balance sheets, also to trace the behavior of depositors and finally to find the total effect for the economy. in their article eggertsson et al. (2019) analyze the effectiveness of nirp in stimulating the economy through the bank lending channel on the grounds of the swedish banks. some of the main conclusions that are made in that article argue that “deposit rates stopped responding to policy rates once they went negative and that bank lending rates in some cases increased rather than decreased in response to policy rate cuts.” another conclusion, that appears in other research, is that “once the policy rate turns negative, the usual transmission mechanism of monetary policy through the bank sector breaks down.” once the deposit rate reaches its effective lower bound however, reducing the policy rate further is no longer expansionary. this makes the monetary policy inefficient which triggers the necessity of undertaking other actions for the central bank to reach its objectives. ecb’s research on euro area banks outlines interesting results (altavila et al.,2019). some of the finding show that “well capitalized and big banks can pass easier negative rates on to their corporate depositors without experiencing a contraction in funding and that becomes stronger as policy rates move deeper into negative territory.” altavila et al. investigated the impact of negative interest rate policy on companies’ assets, which showed that these companies tend to decrease the amount of their current assets and to increase the one in tangible and intangible assets avoiding the costs. other important conclusions of this investigation could be indicated too – authors have reported that “a corporate finance channel of diyana miteva / finance, accounting and business analysis 2 (1) 2020 44 monetary policy also emerges below the zlb. firms that have relationships with banks that offer negative rates on deposits are more exposed to negative rates if they hold a lot of cash. these firms appear to lengthen the maturity of the assets to improve their profitability. thus, they decrease their short-term assets and cash and increase their fixed investment.” the same paper states that interest rates became negative for around 5% of total deposits in the euro area where the share for the corporate deposits was 20%, as in germany, these percentages are 15% and 50%, respectively. banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. the negative interest rate policy provides further stimulus to the economy through firms’ asset rebalancing. on the other hand, lengthening the term and increasing the leverage of the company’s assets is correlated with a higher risk. kay (2018) summarizes key impacts of the negative interest rate policy for the financial stability which is another approach towards better understanding of this policy. the more negative deposit rates stay lower, the stronger the substitution effect of deposits with cash will be. if this effect is large, then there may not be bills to satisfy the demand for cash. this may undermine confidence in financial institutions, which, though solvent, are unable to meet the demands for cash withdrawal (kay, 2018). kay argues that the longer or deeper the negative interest rates go the more adhere market participants will be to replace deposits with alternatives. there are also controversial discussions and announcements in the media by some top management experts in the financial sector in regard of the effect and use of the negative interest rate policy. negative interest rates could be a tax on banks, which in terns is paid by the business and individuals. on the controversary mr. mustier rather supports the nirp because of their contribution to the eurozone economy and positive effect on bank “provisions” (ft, 1.10.2019). some less immediately obvious problems stemming from very loose monetary policy is for example the huge build up in public and private debt across the developed world (the highest ever in peacetime) and the low quality of much of that debt (ft, 7.20.2019). hypotheses development and research methods the questions that negative interest rates trigger are quite broad as they impact all market participants – banks, households, companies, government authorities. in this paper more accent will be put on deposit and loan interest rates for households and non-financial corporations. the main observed set of interest rates is for bulgarian deposits and loans for the period of 1.1.2007 to 2.2.2020 and some observations for the germany’s interest rates on deposits and loans for the same period are done. germany is chosen therefore to an ecb article (altavilla c. et. al, 2019) where it is shown that impact of nirp in germany is rather stronger than in the other countries. in bulgaria on the other side no negative interest rates for deposits of households are in place, though they are stuck on the 0 level. the methodological approach is to test the correlation by multiple regression and to compare both countries, but not only comparative analysis is important, but a rather detailed analysis of the trendlines in bulgaria for the levels of interest rates, as comparative analysis to be reliable should include also other factors which catch the differences in the researched economies. data sets are taken from the websites of the bulgarian national bank and deutsche bundesbank. result altavilla c. et findings indicate in non-dependence of credit rates to deposit rates in some cases. this triggered interest to see what the correlation between deposit and loan interest rates is. as bulgaria is not part of the ecb’s survey a comparison is made about bulgaria and germany. of course, for best results and conclusions more comparative analysis for more countries could be done, but that is part of a bigger survey, whit larger volume than the present paper. here it is aimed to see what the interrelationships and characteristics of bank interest rates are and compare some of them with a sample country from the euro area. household deposits and loans interest rates on figure 1 and 2 information is given about deposit interest rates for households with maturity up to one year and household consumption loans interest rates with maturity from 1 to 5 years. for both deposits and loans is chosen a short to mid-term, where interest rates tend to be more sensitive to changes in market interest rates or policy interest rates also, they contain information on the events and shocks that diyana miteva / finance, accounting and business analysis 2 (1) 2020 45 appear through the time. the deposits and loans for bulgaria are in bgn currency on figure 2. for the period of 2007-2020 the ratio between deposits in bgn and foreign currency in bulgaria is approx. 57% to 43% as of all deposits (bnb statistics, self-calculations). the bulgarian currency is fixed to the eur with ratio 1,95583 bgn for 1 eur, as the country is in currency board since july 1997. fig. 1 source: self calculations, deutsche bundesbank statistics fig. 2 source: self calculations, bulgarian national bank statistics. from the figures above it could be clearly noticed that trendlines of german deposits and loans are similar as well as the net interest margin. also, after 2014 the decrease in the deposit interest rates due to the negative interest rate policy are obvious as well as in the loans rates. on the other side, the picture in bulgaria is slightly different. since 2009 continuous decreasing trendline of deposit rates is observed reaching close to zero values once the bulgarian national bank (bnb) introduced negative interest rates on excess reserves in january 2016. different trendline is observed about the household’s midterm loans rates which show rather no trendline. this is proven from the increasing net interest margin between the two types of bank products. as a result, the consumption loans rates decreased slightly in comparison to the period 2008-2010 showing no obvious connection with the deposit rates. for more reliable results a statics analysis is made (figure 3 and 4). fig. 3 fig. 4 diyana miteva / finance, accounting and business analysis 2 (1) 2020 46 source: self-calculations, deutsche bundesbank statistics, bulgarian national bank statistics. as of the figures above the determination coefficient shows that stronger relationship between deposit rates and loan rates is observed in bulgaria. however, it is evident that other factors are in place. such could be based on the economic situation in loans rates, also banks could include more reserves for a negative future perspective on loan repayment and other factors that are included in the interest rate structure. for example, in 2014 there was a banking crisis, although passed without significant impact for the financial and economic stability it reflected on the short term indicators and triggered some short term events as a result, like a decrease in deposits and increase of cash, increase of bank reserves. even though, it has cleared that banks are not in favor of decreasing the net interest margin which is straight correlated to their profit. on the other side, the lower decrease in loan interest rates in bulgaria, shows that the negative interest rate policy does not necessarily impact on a lower cost of borrowing. which means that regular monetary police transmission mechanism breaks. from the r2 indicator it can be observed that the correlation between interest rates on deposits and loans in bulgaria is stronger than the one in germany. one explanation is also the fact, that the starting point of the decrease in levels was different for the two countries, thus in germany 0 or negative levels were reached much earlier. on figures 5 and 6 is given information about interest rates on deposits up to 1 year and consumption loans 1-5 term in eur for households in bulgaria. fig. 5 fig. 6 source: self-calculations bulgarian national bank statistics. it is established that there is a strong correlation with high determination coefficient which explains the strong relationship between the dependent and independent variable. comparing figures 2 and 3 with figures 5 and 6, where the same data for the same period but in different currency is given, it can be concluded that deposit rates impact much stronger loan rates in eur, and also the net interest margin in eur is slightly lower. in most of the investigated period the interest rates on deposits and loans in euro are lower than those in bgn, except for the period of 1.2017-2.2020 when rates in euro deposits are higher than those in leva. a significant difference is observed between the rates of loans in leva and euro, as the trendline is the gap between them to increase as of the end of the investigated period. the impact of the negative interest rate policy could be observed in the sense that both euro and leva deposits rates in bulgaria fall to values close to zero, as no negative rates are observed. that could be explained that the psychological zero lower bound exist for households’ deposits, and, that banks could be afraid to cross that border on a country level. diyana miteva / finance, accounting and business analysis 2 (1) 2020 47 non-financial institutions deposits and loans interest rates as altavilla c. et. al. (2019) findings showed, in germany 50% of the number of corporate deposits have negative interest rate. for bulgaria, in comparison to the households, the interest rates on deposits for non-financial corporations also have scored on the negative side for several months, most of them close to the end of the researched period (end of 2019 and beginning of 2020), counting that is a weighted average percentage for all banks (bnb, 2020), which means that majority of them offer negative interest rates for deposits of non-financial corporations. on figures 7 and 8 a distribution of the weighted average interest rates on deposits and loans for non-financial corporation for the period 1.2007-2.2020 is presented. fig. 7 fig. 8 source: self-calculations bulgarian national bank statistics. if we compare it with the distribution and trendline for households it could be established that there is stronger correlation between the deposit rates and loan rates for non-financial corporations where the determination coefficient is 91,32%. also, the net interest margin tends do decrease more than the one for households. fig. 9 fig. 10 source: self-calculations, bulgarian national bank statistics. on figure 9 and 10 information about the trendline and correlation in deposit and loans interest rates in eur currency for non-financial corporation is given, where the determination coefficient show strong correlation. the following conclusion could be outlined in the view of the above analysis. zero lower bound for interest rates in deposits in bulgaria exists for deposits of households, where for a long period they stay on level of 0%. on the other hand, the zero lower bound breaks for non-financial corporations’ deposits in bulgaria just in the last year. there is much stronger correlation between short term deposit interest rates and short to mid-term loans for non-financial corporations than for households in bulgaria and germany. also, in terms of the currency of deposits and loans in bulgaria, the one denominated in local currency diyana miteva / finance, accounting and business analysis 2 (1) 2020 48 tend to have stronger correlation. on fig. 11 is given a correlation analysis of the relationships of deposit interest rates and credit cards interest rates for households in bulgaria in bgn. it is observed a very low coefficient of determination which describes that just 9,8% of the value of the interest rates on credit cards is caused by the independent variable interest rates on deposits. also, the data shows that there has been almost no change in the interest rates of credit cards which caused an increasing trendline in the net interest margin. fig. 11 source: self-calculations, bulgarian national bank statistics. it is important also to see not only the impact of the negative interest rate policy on the interest rates of deposits and loans, but also on the volume of the deposits. the traditional monetary policy would expect that lower interest rates will lead to lower savings and higher debt and investments. for a long time, deposit volumes stop responding to the decreases in interest rates and that is easy to be explained. cash funds are kept with banks as banks are now providing full monetary and payment services and are the main lending party on the market. they are the most regulated financial institutions with highest consumer credibility. today this makes people to use banks not so much for savings as for an intermediary agent who provides them with all types of financial services that they need. moreover, since most of the payment and transactions are now being done through electronic transfers or bank transfers this stipulates depositors to keep their funds in banks even if they do not receive any interest for that. that could be seen on the next figure 12. fig. 12 source: self-calculations, bulgarian national bank statistics. for the period of 2011-2.2020 the monthly growth rate of deposits in bulgaria has mostly been positive and the nominal amount of deposits keeps increasing from 45 billion. bgn in the beginning of the period to 85,7 billion. bgn as of the end of 2019. this proves that money is not flowing out of credit institutions because of low or zero interest rates. however, it could be said that the down limit is reached. banks could not further lower the interest rates on deposits and loans too if they could have done it already. another explanation for the increasing volume of deposits is the incentive to increase savings as a diyana miteva / finance, accounting and business analysis 2 (1) 2020 49 reaction of decreasing profitability of investments. empirical results the results of the regression analysis for the relation between interest rates on deposits and loans for non-financial corporations in bulgaria (in bgn) for 158 months starting from january 2007 is shown on table 1. the r2 value is 0.8555 meaning that 85.5 percent of the total variance in the loan interest rates can been explained. the significant f statistic in anova results indicate that the model is significant for our study. the relationship between deposit and loans interest rates can be noticed from table (1). the coefficients on independent variable (interest rates on deposits) is positive 1,24 and significant at 0.05 level. table 1. deposits and loans for non-financial corporations in bgn in bulgaria regression statistics multiple r 0.92495032 2 r square 0.85553309 8 adjusted r square 0.85460702 8 standard error 1.06573780 2 observations 158 anova df ss ms f significanc e f regression 1 1049.28 6 1049.28580 1 923.832 1 2e-67 residual 156 177.184 3 1.13579706 2 total 157 1226.47 coefficients standar d error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 4.14909496 6 0.13356 4 31.0645508 4 1.07e68 3.885268 4.41292 2 3.88526 8 4.41292 2 x variable 1 1.24037666 7 0.04080 9 30.3946066 6 2e-67 1.159767 1.32098 6 1.15976 7 1.32098 6 the results of the regression analysis for the relation between interest rates on deposits and loans for non-financial corporations in bulgaria (in eur) for 158 months starting from january 2007 is shown on table 2. the r2 value is 0.7349 meaning that 73,49 percent of the total variance in the loan interest rates can been explained. the significant f statistic in anova results indicate that the model is significant for our study. the relationship between deposit and loans interest rates can be noticed from table (2). the coefficients on independent variable (interest rates on deposits) is positive 1,27 and significant at 0.05 level. table 2. deposits and loans for non-financial corporations in eur in bulgaria regression statistics multiple r 0.857272 r square 0.734915 adjusted r square 0.733216 standard error 1.23346 observations 158 anova diyana miteva / finance, accounting and business analysis 2 (1) 2020 50 df ss ms f significanc e f regression 1 658.0006 658.00 06 432.49 7.84601e47 residual 156 237.3421 1.5214 24 total 157 895.3427 coefficie nts standard error t stat pvalue lower 95% upper 95% lower 95.0% upper 95.0% intercept 3.933894 0.162413 24.221 5 9.91e55 3.6130806 5 4.254706 3.613081 4.254706 x variable 1 1.272817 0.061204 20.796 39 7.85e47 1.1519220 4 1.393712 1.151922 1.393712 discussion and conclusions the global policy of low interest rates has also influenced the bulgarian banking market, and a continues decrease since 2009 was at place till the beginning of 2020. the monetary policy of the bnb to charge negative interest on excess reserves of banks since january 2016 has led to deposit rates of 0 % for households and even negative for non-financial institutions. the study shown that interest rates on deposits impact the interest rates on loans both in local and euro currency in bulgaria as shown by the numbers. it is concluded that joining the euro area lowers these interest rates (gechev, r., beev, i., hristozov, y.) however, zero lower bound exists for interest rates of household deposits and that one has still not been crossed. this could be explained by the fact that banks do not believe it is a right policy of crossing the zlb and may be afraid of depositor’s reaction and potential withdraw of deposits. the costs of negative interest rates are however compensated by banks through other channels like increasing fees on most of the bank services. banks in bulgaria have reported 1,6 billion leva net profit for 2019, besides the further decrease on excess reserves interest rates (abb,2020, p.2). bulgaria in comparison to germany has not crossed the zlb for household’s deposit rates but did do it for non-financial corporations. one of the reasons this could be explained is the fact that initially in 2007 and 2009 when the decreasing trendline started, the levels of interest rates in all products in bulgaria were much higher than those of germany, so that they had more value to lose until reaching the zlb. from 7,24% in 2010 they went to 1 percent to 2016 (for short term deposits in bgn for households). furthermore, after they reached 1 %, practically became zero for the last 2 years, they stayed at this level and no further changes are observed. contributions and future studies the main question is if this policy of keeping for many years interest rates in the zero area is a good one. as it was quoted in the introduction there are different views of experts. indeed, the low interest rate policy in the eu has led up to the end of 2019 to economic growth and low unemployment rates in most of the member states. but we must remember that this policy is a crisis policy and should be applied in a short time. now, the world has faced a crisis of a new scale – the covid-19 pandemic caused an unprecedent shut down of whole sectors and made many people to stay home for months. the currents suggestions are that this will be may be a bigger crisis than all of those seen so far. the question is how central banks will react to that in the context of the current nirp. they have voluntarily cut their further abilities to use the interest rates as a monetary tool as they have no more expansionary options when the rates are below zero. that will certainly make them think of other approaches of the monetary policy, but it will be difficult with the current interest rates. very high probability is to observe an increase in the interest rates on government bonds, as the countries will have to borrow more to cover the budget deficit they will face caused to the lower revenues. the worse situation of state finances for all countries, and especially for those that have faced more sever covid-19 crisis will lead to higher indebtedness and that will probably boost the interest rates up. in the next few years, the consequences of the nirp will show its result. diyana miteva / finance, accounting and business analysis 2 (1) 2020 51 references association of banks in bulgaria, the economy and banking sector in bulgaria in 2019 (in bulgarian ), abb series, 2020 https://abanksb.bg/downloads/annual-information/2019-review-bg.pdf (last visited on may, 3, 2020) altavilla c., burlon l., giannetti m., holton s., is there a zero-lower bound? the effects of negative policy rates on banks and firms, ecb wp series no 2289 / june 2019. gechev rumen, beev ivailo, hristozov yanko, 2020. "expected effects of the euro adoption in bulgaria," economic studies journal, bulgarian academy of sciences economic research institute, issue 2, pages 19-44. eggertsson g., juelsrud ragnar, summers l., wold e., negative nominal interest rates and the bank lending channel, nber working paper series, wp 25416, 2019. http://www.nber.org/papers/w25416 kay b., implications of central banks’ negative policy rates on financial stability, journal of financial economic policy vol.10, no.2, 2018. swiss bank associations, negative interest rates: from emergency measure to the “new normal” – and back? october 2019. data sources and media articles: bulgarian national bank, statistics, http://bnb.bg/statistics/stmonetaryinterestrate/stmonetarysurvey/index.htm?tolang=_en (last visited 2.5.2020). deutsche bundesbank statistics, https://www.bundesbank.de/dynamic/action/en/statistics/time-seriesdatabases/time-series-databases/759784/759784?listid=www_s510_ph2_neu (last visited on 30.04.2020). financial times, the dangers of negative interest rates, 07/10/2019, https://moneyweek.com/516133/the-dangers-of-negative-interest-rates/ (last visited on 1.11.2019) financial times, unicredit chief urges rethink on negative rates complaints, 1.10.2019 https://www.ft.com/content/6406e7a4-e399-11e9-9743-db5a370481bc (last visited on 1.11.2020) https://abanksb.bg/downloads/annual-information/2019-review-bg.pdf https://ideas.repec.org/a/bas/econst/y2020i2p19-44.html https://ideas.repec.org/a/bas/econst/y2020i2p19-44.html https://ideas.repec.org/s/bas/econst.html http://bnb.bg/statistics/stmonetaryinterestrate/stmonetarysurvey/index.htm?tolang=_en https://www.bundesbank.de/dynamic/action/en/statistics/time-series-databases/time-series-databases/759784/759784?listid=www_s510_ph2_neu https://www.bundesbank.de/dynamic/action/en/statistics/time-series-databases/time-series-databases/759784/759784?listid=www_s510_ph2_neu https://moneyweek.com/516133/the-dangers-of-negative-interest-rates/ https://www.ft.com/content/6406e7a4-e399-11e9-9743-db5a370481bc 17 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg modern world and economic interactions in the light of the science of economics as well as finances and accounting grażyna musiał university of economics in katowice, poland info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 purpose: the purpose of this paper is to present the complexity of the modern world and the multitude of economic interactions that occur in it. the aim is to show to what extent managers make decisions in conditions of uncertainty using the achievements of economics and related economic sciences, i.e. finance and accounting. methodology approach: the paper uses a hypothetical-deductive method. it starts with a hypothesis, regardless of whether it concerns a single fact or an event, whether it expresses a general law or an even more general belief. universal names (symbols, ideas) are used for the description. each statement is a theory or hypothesis. there is a certain role of induction. the induction rules serve as the principles for validating scientific truths. findings: the paper takes into account the latest achievements of the theory and the results of research conducted in recent years in the world in connection with changes taking place in the economy and society at the turn of the 20th and 21st centuries and still. changes in the modern economy are given at several levels, mainly at the theoretical level by the science of economics and at the practical level by the applied sciences which include finance and accounting. at the turn of the 20th and 21st century, a new group of managers is being shaped on a global scale. managers are hoped that they can agree on the interests of the company and other communities (local, national and regional), where these contradictions could lead to the crisis and all its negative consequences. the complexity of the modern world is expressed in the fact that capitalist economies are based on a foundation of debt. borrowing is a condition for economic growth. financial claims arising as a result of the interaction of consumers, producers, savers and investors in each economy are sustainable, provided that the expected future revenues are higher than the expected debt repayments. practical implications: expectations regarding future financial flows are uncertain. market conditions change unexpectedly. there are shocks in the economy and investors' expectations are changing. originality: even before 2020, the history of capitalism in the 20th and 21st centuries is marked by the sequence: debt, uncertainty, shocks. the deepening of financial connections brings inevitable problems, the solution of which requires collective and joint action by managers on a global scale. keywords: neoclassical theory, institutional economics, capital, capitalist economy, financial flows, market, investors' expectations. address correspondence: e-mail : grazyna.musial@interia.pl grażyna musiał / finance, accounting and business analysis 2 (1) 2020 18 introduction the issue of the complexity of the modern world and explaining the nature of transformations occurring in it is still one of the central problems of economic theory. these transformations are deeply embedded in the structure and dynamics of the economy, which marked the last two decades of the 20th century and the turn of the 21st century, generally called globalization [arrighi, giovanni, 1999]. in this study, two assumptions are made: one on the existence of an economic man and the other on the fact that man acts rationally. the economic human model homo oeconomicus appears in economic theory and social sciences. this approach is contained in the works of adam smith, john stuart mill, and vilfredo pareto. the latter wrote: "from the nature of man, i chose a certain element, namely greed, ignoring other aspects of human nature, for laboratory purposes" [pareto, 1994. pp. 277-278]. pareto deconstructed man by isolating some of his features. his predecessors did the same. the second assumption is about the rationality of human actions. for weber, the concepts of rationality and rationality motives are treated to a greater or lesser extent axiologically or instrumentally. irrational or irrational motives are also common. the problem being discussed is whether weber overestimated the social role of rational elements and underestimation of the role of irrational elements. (for example, v. pareto claimed). it is impossible to resolve this problem definitively because weber gave these two categories a relative character, and he thoroughly argued that what at one place and time was or at least could have been rational, at other seemed irrational. methods the considerations presented in this study are in line with the instrumentalist concept of the theory, which aims to generalize the data of experience and observation and allows making predictions [musiał 2018, pp. 19-41]. in this approach, theory performs functions mediating the study from facts to forecasts. the criteria that make this concept theory attractive are the effectiveness and usability of the results. managers mainly value instrumentalist theories of economics because of their usefulness in making decisions. theoretical framework for discussion according to most theoreticians from different schools of thought, modern capitalism can be better understood when its structure is tested according to specific criteria. classification of market structures figure 1. classification of market structures 0% 100% competition as a regulation mechanism grażyna musiał / finance, accounting and business analysis 2 (1) 2020 19 the main advantage of the cited figure 1 of the analysis is the proposal of four main segments of consideration. putting them together in the context of the functioning of the economy and showing mutual interactions and dependencies in the economic system can help generate detailed research that does not lose sight of the entire economic system. figure 1 distinguishes two types of models. they are idealistic and realistic models. the first type of economic models includes excellent competition and monopoly (pure monopoly). realistic models include oligopolistic competition (shortly: oligopoly) and monopolistic competition. contemporary economy is analyzed through the prism of these last two models. typical oligopoly market structures characterize the functioning and interactions within corporations (international, transnational) and they determine the direction of development of the modern world. in considering the complexity of the modern world and the nature of economic interactions, let us try to look from the point of view of two theoretical concepts offering different ways of interpreting economic patterns. neoclassical economics and institutional economics differ in the ways of economic reasoning, the categories adopted, and the scientific laws put forward by each of them. considering only general differences, it should be pointed out that neoclassical theory is based on the logic of economic choice and will consider the problem of allocation [robbins, 1932]. institutional theories study the economy in terms of exchange and coordination [coase, 1937]. it remains unknown whether both approaches can be integrated in a theoretical sense, it is known that both theoretical approaches help each other to keep in touch with reality and this happens at the price of some theoretical inconsistencies. it should be noted that in the neoclassical model its basic logic of equilibrium cannot be exposed to destruction. economic equilibrium is not only the equation supply (price) = demand (price), [s (p) = d (p)], but a complicated relation in which on both sides of the equal sign there are moments of forces expressing the structure of supply and the structure of demand. each component strength depends both on the resources and desirable resources, as well as on the expected rate of profit and the expected interest rate. thus, this relationship depends on the producer's sensitivity to the desire to maximize profit, the insensitivity of the consumer to the possibility of loss of income. economic equilibrium is a relationship dependent on both objective and subjective factors, on deterministic and random, on knowable and unknowable, and therefore always at a greater or lesser risk. the position of the elite in the structure of the state the term manager, the term used by james burnham, is commonly used to refer to people who manage businesses without having them. empirical research in the 500 largest us corporations conducted on a sample of 8,300 leading managers allowed to believe that there was a numerical increase and an increase in the role of groups of managers in 1962 compared to 1928. without going into details: in the post-war period, competition for candidates for managerial positions outside the possessing layers. the development of the higher education system and the extension of the recruitment base for studies, including business-school universities, increased the percentage of managers in large corporations whose fathers did not belong to the business elite. using the theory of the vilfredo pareto elite, one can distinguish, as he did, "(...) two layers in society: the lower layer, the non-elite class, the upper layer, which is divided into two: the ruling elite, the nongoverning elite" [pareto 1994 , p. 279.]. the criterion for including someone in the elite are not individual abilities or merits but belonging to the upper class and participation in governance. the issue of the elite is good to consider from two cognitive perspectives, adopting two criteria: the positional criterion, allows to isolate the upper layer; functional criterion, allows to analyze the elites due to their role in the political and economic system. gaetano mosca, the abovementioned vilfredo pareto, and james burnham are considered precursors of the elite theory. in the interpretation of the latter, the power elites replaced due to the direction of development of modern societies, managerial elites, selected based on education and expert knowledge. it was a concept announcing the takeover of power by a new layer managers managing the economy and state administration. the position of the elite in poland in the first decade of the 21st century is presented in table 1. tabel 1. the position of the elite in the structures of the state grażyna musiał / finance, accounting and business analysis 2 (1) 2020 20 source: jasiecki, krzysztof, 2013. kapitalizm po polsku. między modernizacją a peryferiami unii europejskiej. warszawa: wydawnictwo instytutu filozofii i socjologii polskiej akademii nauk, s. 131. presenting figure 2, an attempt was made to look at the process of forming elites in the structures of the state in poland in the first decade of the 21st century. the following types of elite categories within these structures were listed, namely: (1) politics, (2) economy, (3) judiciary, (4) army, (5) catholic church, (6) media, (7) organizations and associations social, (8) science. in the present study, the most important role is assigned to the elites in the sphere of economy. they are managers of 500 largest enterprises as well as banks and insurance companies. the classification presented in figure 2 could be developed by introducing further criteria of division, differentiating the elites according to education, income, wealth, the structure of consumption of luxury goods, functions performed in organizations, the way of professional promotion. institutional category positional elite policy office of the president the president and ministers of the chancellery of the president of the republic of poland government administration prime minister and members of the council of ministers and the management of major state agencies parliament marshal of parliament economy 500 largest production and trade enterprises. major shareholders major shareholders presidents and members of supervisory boards the largest banks and insurance companies managing staff {top management) judiciary supreme court (sc) presidents and judges of the sc, ct, sac constitutional tribunal (ct) supreme administrative court (sac) army general staff military commanders (generals) the catholic church leadership of the polish episcopate primate, bishops media tv stations owners, managers of tv stations with the highest viewership press owners, editors-in-chief of the most widely read titles radio owners, managers of the most-listened stations social organizations and associations trade unions leaders of the largest trade union headquarters business organizations leaders of major employers and entrepreneurs’ organizations science higher education institutions rectors of universities polish academy of sciences and other scientific institutions management of the polish academy of sciences and other scientific institutions grażyna musiał / finance, accounting and business analysis 2 (1) 2020 21 the new role of managers in the economy at the turn of the 20th and 21st centuries and until now in the 1940s, james burnham [burnham, 1941] introduced the concepts of managerial revolution. it was adopted as an announcement of the takeover of economic power for the economy by a relatively small group of top-level professional managers managing large listed companies. at the end of the twentieth century, the announcement and management of other people came true, and the decision to allocate economic resources and technical resources was made by managers. socio-economic transformations in central and eastern europe have expanded the area of uniform economic order and leveled the economic conditions in market structures. as a result of these trends, there was a numerical development of the group of managers. it can be stated that in the 1960s about 650,000 people held managerial functions. in the last decade of the twentieth century, this number increased to 2.5 million. they increasingly have almost identical qualifications around the world. in the united states, 250,000 people complete management studies annually and 70,000 2-year mba postgraduate studies. it is believed that they provide the highest level of managerial qualifications. tens of millions of people around the world participate in various courses and training in the field of management, accounting, finance, personnel management and others [banaszak 2006, p. 59.]. the process of dynamic development of the numerous groups of managers means that this social group is fuzzy, in which many individuals participate partially, to some extent. like all other groups of growing importance in the history, managers are the social layer. open recruitment, quickly involving representatives of other social and professional groups who are characterized by the strongest pursuit of success. although the educational forms of managerial courses and training are manifold. by contrast, managerial training and training programs around the world are almost identical. at harvard university, the following subdisciplines are taught within the discipline of economics: history of economic life, history of economic thought, history of finance, economic history, history of business, history of capitalism, history of political economy. at harvard university, professor emma georgina rothschild sen, director of the center for history and economics at this university and professor of history and economics at the university of cambridge has a large share in the development of the discipline of economics. following science in the modern world is reflected in implemented specializations. at the business management school, there are two aspects of the chinese economy: china in the global economy, chinese economic change and reforms. at that school of law, run for many years by aaron director (milton friedman's brother-in-law), who lived for 102 years, research into the legal system in china is underway. milton friedman is one of the leading experts in the history of monetary systems. in modern economics, the idea of money in economic theory is developed by professor nikolay nenovsky [nenovsky, 2009.]. the university of chicago business management school offers the following specialization subjects: introduction to future trade, international monetary relations, american economic and business history, economics of real estate, china in the global economy, chinese economic transformation and reforms, price creation and industrial organization. the university of chicago school of law offers managers the following: international and comparative employment law, international and comparative family law, international finance, international sales transactions, introduction to chinese law, prospects of law and justice, business and law, children's summer institute, international arbitration. stanford university (stanford, usa) broadened knowledge in the field of financial mathematics by four areas of economic inquiry. the field of financial mathematics covers the following scientific disciplines: mathematics, statistics, science management and engineering, economic analyzes and politics, including microeconomic analyzes, econometric methods, applied econometrics and economic research. economics includes the following scientific disciplines: introduction to financial accounting, international financial markets and monetary institutions, econometric time series, problems of dynamics in economics. it can be seen from the above that financial mathematics has been enriched by such areas of economic inquiry as: financial accounting, problems of international economic relations or econometric approach to time series and presentation of economic phenomena and processes in their dynamics. applications of economic knowledge of managers in the functioning of financial institutions the events of 1998 and 2007 put into question the optimistic forecasts of economic development to which a group of managers owes their expansion in recent years. the crisis on the financial markets of asia, russia and south america in 1998, followed by downward adjustments to the expected economic growth in the us, europe and poland, led to undermining the optimism of economic development, led by managers. a similar tone had the crisis of 2007 2008 focused on events on the us financial market, mainly on the so-called derivatives. robert merton and myron scholes received the nobel prize in economics in 1997 for their work on derivative valuation methods. they believed in valuation models that a year later led to the collapse of grażyna musiał / finance, accounting and business analysis 2 (1) 2020 22 their long-term capital management hedge fund. nassim n. taleb writes that merton and scholes used as he put it "(...) suspicious mathematics of the bell curve, they managed to convince themselves that this is a great science, and at the same time they did as he described suckers from the entire establishment financial ". [taleb, 2000 p. 44.]. managers are highly paid. grażyna must and mirosław lubszczyk say that managers in the us and great britain have particularly high income. they think so based on the reading of thomas piketta's book 'capital in the 21st century'. they point out that "the anglo-saxon phenomenon is an increase in the income of high managerial staff in the financial and non-financial sectors. the problem is different in sweden, germany, and japan. the above prompts to undertake research on the reasons for these differences and their justification” [musiał, and lubszczyk, 2019, pp. 96 97.]. krzysztof jajuga says in depth about the applications of economic knowledge in the functioning of financial institutions. he claims that "the main source of this situation is the lack of sufficient financial education. (...) managers lack quite elementary knowledge about financial instruments. (...) managers should constantly deepen their financial knowledge. these councils are rarely used, mainly due to excessive self-assessment of their skills by managers "[jajuga, 2016. p. 35.]. carefully studying the main author's studies, robert merton notes his participation in the discussion on the impact of mathematical models in finance when it comes to their practical applications in the past, now and in the future [merton, simons, wilkie 1994.]. this impact is quite limited since the complex real world is difficult to map in mathematical models. explaining the expansive role of money in monetary policy, as in a mirror, one can read actions taken without the owners of the means of production (owners of capital). the important reasons for the moves being made in the economy are not obvious. monetary policy reveals the effects, not the causes of what is happening in the deepest layers of economic life. the development of the credit system created cash surrogates in the form of timely means of payment. credit and non-cash transactions under specific legal provisions relieved the cash circulation, but at the same time opened channels for additional cash flow and the possibility of manipulation. unconventional monetary policy can increase inequalities in society, financial institutions become beneficiaries of the policy, but the rest of society does not use it. collateralized debt obligations (cdos) operate according to the principle proposed by wall street's financial "engineers". hedged debt financial instruments known as cdos have been split into parts depending on the risks involved. the simplest cdos have only three tranches: equity (equity), entresol (mezzanine), senior (senior). the senior tranche is considered the safest, properly risk free. holders of preference tranches were the first to receive money and the last to lose. this structured financing system is based on very shaky foundations. it depends on the idea of its creators: a group of uncertain low-quality mortgages were tied into a homogeneous package of mortgage-backed securities of the same rating and then the package was divided into tranches, with the senior tranche receiving the highest rating. from the 2020 perspective, it is not difficult to see the dangers of this type of financial innovation. sharing and shredding credit risk and transferring it to many entities scattered around the world have introduced complex and illiquid financial instruments to the system. these products became so complicated and fancy that their value could not be assessed by traditional methods. financial companies valued them based on mathematical models and not as they should market prices. the above mechanism is known. on the other hand, it is less said that fraud was particularly strong in the financial services industry due to the way employees are remunerated. the salary of brokers and bankers working in investment banks, hedge funds and other companies offering financial services was not based on a traditional salary, but on a system of annual bonuses, the amount of which depended on their results. the financial sector's contribution to the us gross domestic product increased from 2.5% in 1947 to 4.4% in 1977 and to 7.7% in 2005. today, finance companies generate over 40% of the revenues of the largest s&p 500 companies, and their share in total market capitalization doubled by around 25%. in 2008, at least every $ 13. paid in the us and as a salary was intended for employees from the financial sector, while after world war ii, only every $ 40 in total salary of all employees went to this industry. goodwill management creation of financial results by managers in the era of globalization, there is a new approach to capital in accounting science. in theory, monetarist views were adopted, and views based on labor-based theory of value were rejected. this theory holds that the source of value is work. according to monetarism, or more broadly, according to neoliberalism, money is a source of wealth. according to classical economics, the reason for the increase in the amount of money in circulation is the increase in the value of goods and services. money is the result of this process. the law of money grażyna musiał / finance, accounting and business analysis 2 (1) 2020 23 circulation explains this process. the monetary stance contradicts the law of money circulation. proponents of this position argue that the money supply is a factor that affects economic growth. so, they exchange cause and effect. recognition of the highlighted role of money protects the interests of managers in the banking sector and on financial markets. an outstanding american economist, paul a. samuelson (1915 2009) nobel prize 1970, wrote the following: "through the activities of banks, one can increase the money supply and sometimes lower it, more or less arbitrarily" [samuelson, and nordhaus 1995, p. 153. ]. banks influence by regulating the money supply the volatility of prices, interest rates and exchange rates. the monetary explanation of the expansive role of money in economic processes is characteristic of an international accounting system constructed for the purposes of globalization processes. these needs are expressed in the requirements that formulate international accounting standards for managers. these standards are designed to develop investor information. in the complex reality of the 21st century, making investment decisions requires extended information compared to that offered by the current accounting system. in the new accounting system, an enterprise is treated as a set of contracts between external parties, for example lenders and investors, between internal parties, such as managers and employees. accounting has become a reflection of the enterprise's activity expressing the contracted arrangement of economic forces. new tools have been introduced in accounting that more accurately reflect multidimensional economic processes in order to select and make the right decisions, mainly investment ones. the fair value category was introduced in the valuation of the company's assets, which may represent the current value, not the cost of acquiring assets. in the center of the accounting problem field is not the price at which the company's assets were purchased, but the price that can potentially be obtained when selling a given component. residual capital includes not only capitalized but also forecasts. the company's goal has been to maximize net assets, and value management has become paramount. managers create the company result, not read it. event management has been converted into value management [accounting act 2019 (journal of laws 2019, item 351)]. conclusion the issue of the complexity of the modern world and explaining the nature of transformations occurring in it is still one of the central problems of economic theory. these transformations are deeply embedded in the structure and dynamics of the economy. a fundamental theoretical and practical question arises about the limit of complexity of international economic relations due to possible interactions taking place in them. a rational answer to this question is not possible if the causes of the growing negative factors in the global economy of an economic and noneconomic nature are not considered. the turn to unregulated global markets leads to a crisis of the social legitimacy of modern capitalism. the financial system is a kind of oligopoly investment banks that benefit most from it. the opacity of financial operations helps them to collect money from investors who lack adequate economic knowledge. most of this money reaches bank employees, not their shareholders' accounts. extremely rapid development of the financial sector also had significant social costs: inventiveness and creativity moved from the manufacturing industry and other traditional industries on wall street. as the research of thomas piketta showed, from the 1970s the financial sector attracted an increasing number of intelligent, highly educated employees. as wages increased there, graduates of elite universities and mba studies went to wall street. of the students graduating from harvard university surveyed in 2007, 58% of men entering the labor market intended to work in financial or consulting companies. there are too many financial engineers in the united states, and too few mechanical and it engineers. innovations introduced to accounting science have changed the nature of rational management. rational resource management is no longer dominant. the new accounting approach is about the rationality of creating goodwill. games associated with manipulating the value of money have been introduced into economic processes. detachment of economic processes from real social processes can cause social conflicts and shocks in financial markets. references arrighi, giovani, and beverly j. silver (eds.). 1999. chaos and governance in the 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pchoby@gmail.com petar chobanov / finance, accounting and business analisys 54 introduction the 2009 global economic and financial crisis has shown the imbalances and unpreparedness of the economies of the cee countries. it has affected the trajectory of economic growth and has worsened the growth potential over the medium term. the bulgarian economy has been also affected by the global crisis, with real growth reaching its pre-crisis levels in 2013. the nearly nine years after the 2009 crisis allowed to analyze bulgaria's economic development and outline the main problems. in this study, we are addressing the period after the global crisis until the second quarter of 2018. comparison with the pre-crisis 2008 by some indicators was made. the bulgarian economy is also viewed in a comparative perspective with the other 12 cee countries, which are the last wave of eu enlargement. the sources of information are eurostat and the national statistical institute of bulgaria, data are available at the beginning of october 2018. the methodology used includes analysis of graphical and tabular data sets, comparative empirical analysis, revealing main trends, risk analysis of economic development. the study argues that the prospects for economic development are negative, economic growth slows down and there is a lag compared to the other 12 cee countries. the main research tasks aimed at proving the thesis are: examining economic growth in a comparative perspective, analysis of structure and value added growth, analysis of the structure and growth of gdp on demand, analysis of the productivity of labor and labor costs, revealing the main trends in inflation, employment analysis. these tasks define the main parts of the exhibition, which begins with a brief review of the literature on the subject. brief review of the literature economic growth in bulgaria and its relationship to the financial sector are addressed in the book by mihailova (2015)1. the author identifies major growth issues and opportunities to overcome them. the problems facing the financial sector at eu level as well as possible solutions for the economies of the cee countries are presented in miteva (2015)2. state aid can be a useful tool in pursuing investment policy and in support of growth, but there are a number of requirements for its implementation. in a series of publications, dimitar chobanov addresses the problems facing the economic development of bulgaria. chobanov (2014)3 examines the state of the bulgarian economy and its readiness to join the eurozone. chobanov (2015)4 analyzes economic growth. the author sets out the necessary conditions for achieving non-inflationary economic growth in bulgaria. hristozov (2018)5 presents the discussion on the preservation of the currency board arrangement in bulgaria. the author points out the importance of the currency board arrangement on economic development and looks at the possible outcomes of this monetary regime. dimitrova (2018)6 looks at the economic and fiscal developments of the cee countries. the author analyzes the fulfillment of the maastricht criteria and the readiness of the countries to join the eurozone. 1 see mihailova g. (2015), "banking efficiency and economic growth under the currency board in bulgaria", university of national and world economy, sofia, 151 pages. 2 see miteva d. (2015), "the state aid financing as an alternative to the eu financial sector," in "the postcrisis financial world stagnation or radical change," unwe, pp. 30-36. 3 see chobanov d. (2014), "the adoption of the euro in bulgaria current development" in "the economy of bulgaria and the european union contemporary challenges and approaches to solutions", unwe, sofia, pp. 191-198 4 see chobanov d. (2015), "money, inflation and economic activity is it possible non-inflationary growth of the bulgarian economy" in "demarage or slowdown in economy and finance. following the example of the eu and bulgaria ", unwe, sofia, pp. 85-90. 5 see hristozov y. (2018), “discussion on keeping or removal of the currency board in bulgaria for the past twenty years” in “monetary regimes. 20 years of currency board in bulgaria”, monetary research center, sofia, pp. 107-123 6 see dimitrova i. (2018), “the road to eurozone. comparative analysis of the maastricht criteria fulfillment by the cee countries” in “economic lessons, perspectives and challenges from the balkans”, monetary research center, sofia, pp. 77-87 petar chobanov / finance, accounting and business analisys 55 economic growth in a comparative perspective in this part of the survey we will compare economic growth in bulgaria and in the eu-12. growth opportunities in bulgaria are heavily degraded, especially on the part of production. negative trends are observed in both main factors labor and capital. employment declines as a number of people employed, and investment does not increase over a long period of time. this leads to the danger of overheating the economy even at current growth rates of 3%, with overheating as a major pro-inflationary factor. we are lagging behind rates of economic growth from our major competitors. looking at the thirteen countries that last joined the eu in the second quarter of 2018, our growth of 3.2% was higher than that of the czech republic and croatia. for comparison, just before the global crisis, we were second in growth in the second quarter of 2008, with romania alone ahead of us. figure 1 shows bulgaria's economic growth and the average for the other 12 newcomers, which we have dubbed the eu-12. on the basis of this data, we can say that since the beginning of 2017 our economic growth is consistently lower than the average growth of our competitors (the average growth of the other 12 cee countries). and since the beginning of 2011, from 30 quarters in 23 of them we have had a lower growth than the average of our competitors. for comparison, immediately before and in the first quarters of the global crisis there is a period of 8 consecutive quarters, in which we have a higher growth than the average of our competitors. figure 1. economic growth of bulgaria and eu-127 source: eurostat, own calculations looking at annual growth, from 2011 to 2017, with the only exception of 2016, our economic growth is lower than our competitors' average, with the cumulative lag behind for 2011-2017 of this average amount to 4%. our average annual growth rate is 2.2%, surpassing only croatia, cyprus and slovenia by this indicator. average growth for the remaining 12 countries is 2.7%. therefore, we are lagging behind in gdp growth by the countries with which we have to compete over the last 7 years. we also lag behind the growth of production (supply, gross value added). although before the crisis we were second, after romania, in the second quarter of 2018 we are growing by 2.9%, outpacing only the czech republic and croatia. production growth in the second quarter of 2018 is the lowest in the last 10 quarters. looking at the annual value-added data, the cumulative abandonment of our competitors' average is 3.6% over the period 20112017. 7 growth is compared to the same quarter of previous year, non-seasonaly adjusted 10,0 8,0 6,0 4,0 2,0 0,0 2,0 4,0 6,0 8,0 10,0 0 7 q 1 0 7 q 3 0 8 q 1 0 8 q 3 0 9 q 1 0 9 q 3 1 0 q 1 1 0 q 3 1 1 q 1 1 1 q 3 1 2 q 1 1 2 q 3 1 3 q 1 1 3 q 3 1 4 q 1 1 4 q 3 1 5 q 1 1 5 q 3 1 6 q 1 1 6 q 3 1 7 q 1 1 7 q 3 1 8 q 1 bulgaria eu-12 average petar chobanov / finance, accounting and business analisys 56 structure and growth of value added (supply) in this part of the study, we will deepen the value added analysis. table 1 structure of value added at constant prices in 2010 (% of gva) year agriculture, forestry and fishing industry construction trade, transport, hotels and restaurants information and telecommunic ations financial and insurance activities real estate 2008 5,7 22,2 8,3 19,0 5,1 6,4 11,6 2013 4,5 22,0 6,5 21,1 5,4 7,6 11,9 2014 4,7 21,9 6,2 21,0 5,4 7,5 11,8 2015 4,2 22,2 6,2 21,6 5,3 7,1 11,9 2016 4,3 22,7 5,6 21,3 6,0 7,4 12,2 2017 4,1 22,5 5,7 21,2 5,7 7,5 12,9 source: nsi comparison at constant prices makes it possible to highlight structural changes. the share of agriculture falls, regardless of the considerable funds allocated to it. before the crisis, it held 5.7% of the value added, while in 2017, this share falls to 4.1%. a decline has also been seen in construction in comparison to the years before the crisis from 8.3 to 5.7%. the share of trade, transport and hospitality, financial and insurance activities and real estate operations is growing. the share of industry remained relatively constant, with a slight increase compared to the year before the crisis. if we conditionally define the as manufacturing/material sectors of agriculture, industry and construction, their share in 2008 was 36.2%, while in 2017 it decreased to 32.3%. table 2 real sector growth year agricult ure, forestry and fishing industry constructi on trade, transport, hotels and restaurants information and telecommunicati ons financial and insurance activities real estate 2011 0,6 6,7 -3,4 2,9 12,4 -3,6 -0,2 2012 -7,4 1,3 -6,0 -0,6 -3,1 -4,5 2,7 2013 3,3 2,2 1,3 4,2 2,0 -7,2 -2,0 2014 4,8 1,1 -3,1 0,9 0,8 -0,4 0,5 2015 -6,8 4,4 2,8 6,1 1,3 -1,5 4,0 2016 5,3 5,9 -6,8 2,2 16,7 7,4 5,7 2017 -0,1 3,0 5,9 3,0 -0,9 5,0 9,4 average -0,2 3,5 -1,4 2,7 4,0 -0,8 2,8 standard deviation 4,8 2,0 4,4 2,0 6,8 4,8 3,6 source: nsi growth by sector is unstable after 2011. and most of them are characterized by high fluctuations measured with the standard deviation. this high volatility indicates that growth is unsustainable and can easily turn to the negative part of the scale, i.e. in decline. some exception is the industry, which has a growth rate of 3.5% on average over the period 2011-2017. this favorable trend for the industry is about to break in 2018, and for the first two quarters it is showing low and declining growth rates respectively from 1.9% and 0.5%. in three of the reviewed sectors there were negative average rates of change: agriculture, construction and financial and insurance activities (in which the growth rate was relatively high in the last two years, as opposed to the beginning of the period). highest growth has the "creation and dissemination of information, creative services and telecommunications" sector, which is relatively low as a share, and can not play a role as a driver of growth. petar chobanov / finance, accounting and business analisys 57 structure and growth of demand (gdp on the expenditures method) after analyzing the value added, which presents the development in terms of supply, we will also focus on gdp on the demand side. table 3 structure of demand at constant prices in 2010 (% of gdp) final consumption households consumption gross fixed capital formation exports imports 2008 81,2 64,1 32,0 50,0 66,6 2011 80,4 63,5 20,8 55,4 57,2 2012 81,9 65,3 21,2 56,5 60,4 2013 79,7 63,1 21,1 61,5 62,4 2014 80,4 64,0 21,5 62,5 64,8 2015 80,5 64,4 21,3 63,8 65,9 2016 80,0 64,1 19,1 66,4 66,3 2017 80,7 64,9 19,2 66,7 68,6 source: nsi and own calculations a relatively constant share is seen in final consumption, household consumption, and to a certain extent in imports, despite a slight increase in 2017. the largest decrease is recorded in investments, which from 32% in 2008 to 19.2% in 2017. this is one of the main unfavorable factors regarding the growth potential in the medium and long term as the capital formation process encounters difficulties. the highest increase is recorded in exports, which from 50% of gdp in 2008 to 66.7% in 2017. this is also the result of the large accumulated investments before the 2009 crisis, which allow to increase the competitiveness of the economy, hence the export. table 4 real gdp growth and its main demand-side components gdp consumption households consumption gross fixed capital formation exports imports 2011 1,9 2,0 2,0 -4,4 12,6 9,9 2012 0,0 2,0 2,9 1,8 2,0 5,5 2013 0,9 -1,9 -2,5 0,3 9,6 4,3 2014 1,3 2,2 2,7 3,4 3,1 5,2 2015 3,6 3,8 4,3 2,7 5,7 5,4 2016 3,9 3,3 3,5 -6,6 8,1 4,5 2017 3,8 4,3 4,5 3,2 5,8 7,5 average 2,2 2,2 2,5 0,1 6,7 6,0 standard deviation 1,5 1,9 2,2 3,7 3,4 1,8 source: nsi and own calculations the lowest fluctuation, measured by standard deviation, and with relatively high growth rates for the period 2011-2017, has the imports. exports show the highest average growth rates over the period, but there is a greater fluctuation, making it more unstable. this is also reflected in the real decline of 2.3% in the second quarter of 2018, when the trade balance was negative at bgn 422 million, with a positive trade balance of bgn 654 million in the same quarter of the previous year . trade balance has been negative over the past three quarters. if such values are also observed over the coming quarters, they will be a sign of unfavorable balance of payments and economic development. the dynamics of investments is the most unfavorable. their growth is characterized by the highest fluctuations, with its average value being the lowest and practically zero. over the past two quarters, there has been higher investment growth, which is a favorable trend, but has to be in place for several years to petar chobanov / finance, accounting and business analisys 58 catch up and overcome decapitalisation in the economy. households consumption has accelerated over the past 3 years and is one of the factors contributing the most to growth. in the last two quarters its growth is 7.1% and 8.6%, which is a signal of overheating the economy. this development is combined with high import growth and a drop in exports, which is an adverse signal for the competitiveness of the economy. labor and productivity costs in this part of the analysis we will use eurostat data on compensation of employees, unit labor costs and labor productivity. their comparison is important for assessing the competitiveness of the economy. figure 2. growth of compensation of employees for bulgaria and eu-12 source: eurostat, own calculations the annual growth of compensation of employees exceeds the average for other countries during the whole period 2011-2017. the cumulative increase in the indicator in bulgaria is 58.9%, which is the highest for all countries concerned and may lead to a deterioration in competitiveness. the cumulative increase in the average for other countries is 25%. the average annual growth rate in bulgaria is 6.8%, while for the other countries it is 3.2%. two countries report an annual average decline cyprus by 1% and croatia by 0.2%. in the last year of the period we are fifth in this indicator (7.5%), the highest in romania 13.8%. compensation of employees, as a measure of wages, is growing at our highest rates compared to our competitors, which is in contrast to the relatively lower gdp growth and can aggravate competitiveness. additional indicators need to be considered to deepen the analysis. figure 3. growth of real labor productivity for bulgaria and eu-12 source: eurostat, own calculations the dynamics of the indicator growth rate of real labor productivity per employee is relatively 0 1 2 3 4 5 6 7 8 9 2011 2012 2013 2014 2015 2016 2017 bulgaria eu-12 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 2011 2012 2013 2014 2015 2016 2017 bulgaria eu-12 petar chobanov / finance, accounting and business analisys 59 favorable. for most of the period, growth in bulgaria exceeds the average for the other countries under review. the cumulative increase in the indicator in bulgaria is 18.8%, lagging behind in comparison to romania with 36% and latvia with 20.1%. the cumulative increase in the eu-12 average was 12.8%. bulgaria's average annual growth rate is 2.5%, lagging behind romania with 4.5% and latvia with 2.6%. very close to us are poland and lithuania with 2.4%. the eu-12 average is 1.7%. it is worth noting the fact that in 2017 we are showing relatively low on this indicator, with only 1.7% growth, which is below the average of 2.3%, ranking us 9th in the 13 countries. lithuania recorded the highest growth of 4.4%, followed by romania by 4.2%. data for 2017 is preliminary and subject to revision, but if confirmed, it will be a negative signal for the development of the economy and competitiveness. table 5: labor productivity (eur thousand) 2011 2012 2013 2014 2015 2016 bulgaria 9,3 9,7 10,1 10,5 12,0 12,6 czech republic 24,6 23,9 23,8 23,9 25,2 25,7 estonia 23,0 23,7 24,7 25,7 25,6 27,4 croatia 19,8 19,1 20,0 20,4 21,4 22,1 cyprus 34,5 34,3 33,8 33,6 33,6 34,2 latvia 15,1 16,2 16,5 16,3 16,7 17,4 lithuania 14,2 14,5 14,4 16,0 16,8 17,7 hungary 19,9 19,1 20,2 20,7 21,4 21,2 malta 28,1 29,8 31,7 33,1 38,1 38,7 poland 21,1 20,6 20,6 21,5 21,7 21,5 romania 12,6 12,6 13,9 14,6 14,0 15,2 slovenia 30,6 29,8 30,2 32,1 32,7 34,1 slovakia 22,3 23,2 21,9 21,5 22,6 23,1 eu-12 22,2 22,2 22,6 23,3 24,2 24,9 source: eurostat, own calculations labor productivity is measured as the gross added value of an employee in thousands of eur. it refers to enterprises from the whole economy without those from the financial sector. bulgaria ranks last with 12.6 thousand euros per employee, with an average of 24.9 thousand euros. the index for us at the beginning of the period is 42% of the average, reaching 50.7% in 2016. this is an average value for countries with which we compete most and the gap with other eu countries is even more significant. expected last but one for this indicator is romania, with the difference to its level of productivity being slightly reduced from € 3.3 thousand in 2011 to € 2.6 thousand in 2016. figure 4 growth of unit labor costs source: eurostat, own calculation labor costs increased significantly over the period considered. the indicator for bulgaria is above the eu-12 average over the whole period. the cumulative increase in the indicator in bulgaria is highest for all the countries under consideration, it is 33.7%, while for the eu-12 it is 10.7%. the average annual labor 0 2 4 6 8 2011 2012 2013 2014 2015 2016 2017 bulgaria eu-12 petar chobanov / finance, accounting and business analisys 60 cost increase is 4.2%, followed by latvia with 3.9%, estonia with 3.6% and lithuania with 3.5%. the eu12 average is 1.5%. with an average negative change in labor costs, croatia has -1.6% and cyprus -1.3%. inflation it is also necessary to look at the dynamics of inflation as it accelerated and questioned the implementation of the maastricht criterion for price stability in 2018. figure 5: harmonized index of consumer prices source: eurostat we are considering the change in the harmonized index of consumer prices compared to the same month of the previous year, ie. annual inflation. inflation accelerates sharply this year, with the harmonized index of consumer prices, which is used for international comparisons, in august, annual inflation is 3.7%, with only romania having higher inflation than we within the eu. by comparison, in january 2018, we were ranked 10th in terms of inflation from the 13 countries concerned, with lower inflation than we had only cyprus, croatia and malta. after may 2018, inflation outpaced the average for the other 12 countries, with the gap gradually increasing. we also need to look at some components of inflation in a comparative perspective. annual food inflation in august was 2.5%, with only 4 of the countries under review reported higher inflation. january inflation is 0.6%, with only two countries having lower inflation in our country. therefore, the food trend is also deteriorating. the annual inflation rate for transport services in august 2018 is 5.2%, with only slovakia having higher inflation of 10.2%. in january 2018, the indicator was 1.7% and ranked fourth in the highest inflation rate in the countries concerned. the communications sector is generally with negative inflation, as this situation has been observed throughout 2017 and january this year. inflation is then positive and reaches 1.8% in august 2018, ranking us first with romania. in january 2018, there was a negative inflation of -0.6%, with 6 countries having higher inflation than us. inflation in the "restaurants and hotels" sector in august 2018 was 12.2%, which ranks us first in the countries under review. the second is lithuania with 5.4%. at the beginning of the year, inflation is 2.4% and 9 countries have higher inflation than we are. inflation in the energy group is 9.7% in august, with 4 countries with higher inflation than we are, but the indicator will further increase with the october 1 rallies. at the beginning of the year, inflation was 4.6%, with 3 countries having higher inflation than ours. service inflation by mid-2017 is negative, but then accelerated, averaging 5.9% this august 2018, which ranks first among the highest inflation. at the beginning of the year inflation was 1.8% and there are 8 countries with higher inflation than we are. overall inflation of 3.7% did not account for higher bread prices, which will continue to grow. in view of the imminent rise in gas, steam and water prices, in the coming months inflation will exceed 5%. this significantly increases the social cost, especially for the most vulnerable groups, and requires urgent government measures to offset them. other factors for rising inflation are the structural problems of the labor market and the pressure to raise wages that lead to a rise in the cost of production. value added, which reflects supply in the economy, slows down its growth, while consumption and imports that reflect demand are growing at a higher pace. higher demand also leads to rising inflation. employment there are also some negative employment trends that will be addressed in this part of the analysis. table 6: employment in bulgaria and eu-12 0 0,5 1 1,5 2 2,5 3 3,5 4 18_01 18_02 18_03 18_04 18_05 18_06 18_07 18_08 bulgaria eu-12 petar chobanov / finance, accounting and business analisys 61 2008q2 (ths.) 2017q2 (ths.) 2018q2 (ths.) 18/17 (%) 18/08 (%) 18/08 (ths.) bulgaria 3 372 3 172 3 157 -0,5 -6,4 -215 czech republic 5 003 5 197 5 289 1,8 5,7 286 estonia 655 654 667 2,0 1,7 11 croatia 1 777 1 633 1 671 2,4 -5,9 -106 cyprus 384 381 402 5,7 4,8 18 latvia 1 074 892 910 2,0 -15,3 -164 lithuania 1 432 1 363 1 371 0,6 -4,3 -61 hungary 3 843 4 420 4 475 1,2 16,4 632 malta 156 206 217 5,7 39,0 61 poland 15 689 16 496 16 566 0,4 5,6 876 romania 9 119 8 323 8 477 1,8 -7,0 -642 slovenia 990 955 984 3,0 -0,6 -6 slovakia 2 405 2 527 2 556 1,2 6,3 151 source: eurostat, own calculations note: data for romania and malta are for the first quarter of the respective years due to a lack of data for the second quarter of 2018. the employment trends are unfavorable. there are not enough people to work for. in the second quarter of 2018 there was a negative signal regarding the number of employed, decreasing by 0.5% (15 thousand) compared to the same quarter of the previous year, while in all other countries there was an increase. the number of people employed on a yearly basis is steadily rising in the period from the beginning of 2014 (the only exceptions are the third and fourth quarters of 2016), and if this trend is constantly changed, this will lead to additional labor market tensions. the comparison with pre-crisis 2008 (second quarter) shows a drastic drop in employment by 215,000 (6.4%), which greatly reduces the growth potential. in seven countries there is an increase in employment compared to 2008. a larger decrease in the number of employed compared to 2008 is observed only in romania, and in percentage terms the decrease is higher in latvia and romania. table 7: youth employment (15-24 years) in bulgaria and eu-12 2008q2 (ths.) 2017q2 (ths.) 2018q2 (ths.) 18/17 (%) 18/08 (%) 18/08 (ths.) bulgaria 266 151 130 -14,2 -51,1 -136 czech republic 372 285 268 -5,8 -28,0 -104 estonia 65 50 56 13,3 -13,5 -9 croatia 143 132 115 -12,6 -19,5 -28 cyprus 35 26 31 15,9 -11,8 -4 latvia 129 65 59 -8,7 -54,1 -70 lithuania 126 103 95 -8,2 -24,8 -31 hungary 242 303 296 -2,3 22,4 54 malta 26 23 25 10,0 -1,2 0 poland 1 450 1 148 1 162 1,2 -19,8 -288 romania 734 461 497 7,6 -32,3 -237 slovenia 95 70 74 5,3 -22,2 -21 slovakia 218 165 162 -1,5 -25,7 -56 source: eurostat, own calculations petar chobanov / finance, accounting and business analisys 62 note: data for romania and malta are for the first quarter of the respective years due to a lack of data for the second quarter of 2018. in the second quarter of 2018 the decline in youth employment deepened and the number of employed decreased by 22,000 compared to the same period of the previous year, which is the highest decrease compared to the countries we are considering. in percentage terms, the decrease is also the highest and is by 14.2%. this is the second consecutive quarter of decline and may be the beginning of a negative trend in this indicator. comparison with pre-crisis 2008 (second quarter) shows a drastic drop in the number of employees by 136 thousand (51.1%), which greatly reduces the growth potential. the number of young people employed is twice as low as pre-crisis 2008, which is the result of discouragement and emigration, but is a very worrying signal for future development. this trend is also characteristic for the other countries under consideration, with hungary only showing an increase compared to pre-crisis 2008. the decline of youth employment in bulgaria is one of the highest. a larger decrease in the number of employed youth compared to 2008 is observed only in poland and romania, and in percentage terms, the decrease is higher only in latvia. conclusions the detailed overview of key economic indicators conducted in this study allows to highlight a number of problems facing the bulgarian economy. comparison of growth in a similar group of countries is one of the main indicators used in an investment decision. this is a measure of the return on the economy. the bulgarian economy fails to achieve high growth rates that will contribute to sustainable convergence towards the eu averages. our lagging behind our major competitors is evidence of problems with the business environment further discouraging foreign investment, which is at critically low levels. conclusions on the structure and behavior of key sectors that create added value are unfavorable. they have unstable dynamics, and we can not distinguish any of them as a sustainable growth driver in the post-2011 period. an exception is the industry, but in 2018 there is an unfavorable development and the growth rates are approaching 0. drivers of demand growth are consumption and exports, but negative signals are seen in recent quarters. exports declined in the second quarter of 2018, while household consumption grew by 8.6%, indicating imbalances and jeopardizing the competitiveness of the economy as it also combines with high growth in imports. unstable dynamics and subdued investment growth limit potential growth over the medium term, requiring higher growth in recent quarters to stay for several years to catch up and overcome decapitalisation in the economy. the competitiveness of the bulgarian economy deteriorates in two main directions. first, we seriously abandon labor productivity and last but not least with 50% of the average productivity of the rest. second, the compensation of the employees and the unit labor costs are increasing in our country at the highest pace than all the countries concerned. in the positive direction of competitiveness, real labor productivity, which is growing at a relatively high rate in comparison with other countries, is acting in a positive direction, but on this indicator we fall back on romania and latvia. in 2017, real labor productivity growth slowed down to 1.7%, while unit labor cost growth accelerated to 5.7%. keeping such a trend can be seen as a sign of worsening competitiveness. inflation has a pronounced upward trend, and the value of 3.7% in august will be exceeded, and it is hard to predict how much, but in the coming months we could see more than 5% inflation rates not seen before the crisis. in some of the examined sectors and commodity groups we have the highest inflation from the countries we compare services, communications, restaurants and hotels. inflation is a result of the convergence process, but also from emerging and existing imbalances structural labor market problems, higher demand growth than supply, and lack of real competition in certain market segments. if inflation exceeds 5%, inflationary momentum and pressure for indexation of wages, pensions, social payments to compensate for the loss of purchasing power will be created. severely unfavorable employment trends are observed, as is the case for all employed but, to a greater extent, for young people. in the second quarter of the year there was a drop in total employment compared to the same period in 2017 by 0.5% or 15 thousand, with an increase in all other countries. compared to 2008, we are experiencing a significant decline in employment (by 215,000), being again at the top of this negative ranking. in the second quarter of 2018, the decline in youth employment increased, and the number of employed fell by 22,000 (14%) over the same period of the previous year, which is the highest decline compared to the countries we are considering. compared to pre-crisis 2008, the number of employed youths decreased by 2 times, which is a very worrying trend for the future development, with one of the highest decreases compared to the other newcomers to the eu. petar chobanov / finance, accounting and business analisys 63 references chobanov d. (2014), "the adoption of the euro in bulgaria current development" in "the economy of bulgaria and the european union contemporary challenges and approaches to solutions", unwe, sofia, pp. 191-198 chobanov d. (2015), "money, inflation and economic activity is it possible non-inflationary growth of the bulgarian economy" in "demarage or slowdown in economy and finance. following the example of the eu and bulgaria ", unwe, sofia, pp. 85-90 dimitrova i. (2018), “the road to eurozone. comparative analysis of the maastricht criteria fulfillment by the cee countries” in “economic lessons, perspectives and challenges from the balkans”, monetary research center, sofia, pp. 77-87 hristozov y. (2018), “discussion on keeping or removal of the currency board in bulgaria for the past twenty years” in “monetary regimes. 20 years of currency board in bulgaria”, monetary research center, sofia, pp. 107-123 mihailova g. (2015), "banking efficiency and economic growth under the currency board in bulgaria", university of national and world economy, sofia, 151 pages miteva d. (2015), "the state aid financing as an alternative to the eu financial sector," in "the postcrisis financial world stagnation or radical change," unwe, pp. 30-36 22 finance, accounting and business analysis volume 1 issue 1, 2019 the influence of the performance evaluation on salary dhiaa shamki1, aisha al shehemi2 department of accounting, komar university of science and technology, sulaymaniyah-kurdistan region-iraq1 ministry of social development in the sultanate of oman, muscat2 info articles abstract history article: received 30 may 2018 accepted 4 december 2018 published 29 january 2019 objective: the purpose of the study is to indicate whether salary and the extra amount are influenced by performance evaluation linked collectively and simultaneously with position, gender, education and experience. it is found that the employee’s salary could be significantly and negatively influenced by performance evaluation, gender, education and performance evaluation moderated by gender, while the position, experience, performance evaluation moderated by position, education and experience have no effect on the salary. methodology: the study examines 27,522 observation and 11 variables for 417 governmental employees in ministry of social developments in the sultanate of oman within 2011-2016 using descriptive statistics, correlation and regression analyses results: it is found that the employee’s salary could be significantly and negatively influenced by performance evaluation, gender, education and performance evaluation moderated by gender, while the position, experience, performance evaluation moderated by position, education and experience have no effect on the salary. significantly, the extra amount has been positively influenced by position, gender, and performance evaluation moderated by position and gender and negatively by experience and performance evaluation moderated by experience. other variables have insignificant effect on the extra. implication: the study’s results are beneficial indicator in improving the performance of employees based on their salaries and designing a guide on how to evaluate this performance related to position, gender, education and experience. . keywords : employee’s salary, extra amount, performance evaluation, the sultanate of oman. address correspondence: e-mail : dhiaa.shamki@komar.edu.iq1, rafef.alro7@gmail.com2 mailto:dhiaa.shamki@komar.edu.iq1 dhiaa and aisha / finance, accounting and business analisys 23 1. introduction previous studies examined the relationship between employees’ salary and their performance and demonstrated that it is influenced by many factors. these factors include position and gender (ohlott et al., 1994; bateman and snell, 2004; shrum, 2007; nazrul, 2009; mphil et al., 2014; ufuophu-biri and iwu, 2014) and education (caruth and john, 2008; surina et al, 2015). there is a limited research on the relationship between the employee’s salary and performance evaluation and to what extent that the salary and rewards will be influenced by the performance evaluation in presence of different factors such as position, gender, education and experience. the current study examines the influence of performance evaluation alone and linked collectively and simultaneously with position, gender, education and experience on salaries and extra amounts received by employees in ministry of social developments. the study attempts to answer questions of; does employees’ performance evaluation influence their salaries and the extra amount? could this evaluation regarding employees’ position, gender, education and experience influence their salaries and the extra amount? the objectives of the study are to indicate whether the employees’ salaries and the extra amount in public sector are influenced by their performance evaluation linked collectively and simultaneously with position, gender, education and experience. the study’s results will be useful in examining the influence of performance evaluation on their salaries that is not well examined before. this will assist to improve the performance of employees based on their salaries. also, this study provides an empirical evidence on how to increase employees’ salaries in the public sector based on their performance evaluation. consequently, this might be assistant in presenting a guide to strengthen the performance evaluation form and its contents to be different according to the position and experience of the employee in public sector. in addition to this introduction, prior research reviewing the relationships among study variables will be in the second section. the third section presents the hypotheses and methods employed in the study while the fourth section reveals the finding. finally, discussion, contributions and calling for future research are stated in the last section. 2. literature review 2.1. salary and performance evaluation performance is the implementation of the work in a manner and at a certain level of quality to achieve the desired goals. changes in the public sector require attention to job performance and how employees perform the required work. the employee performance is a process of understanding the workforce indicating what needs to fulfill the organizational objectives based on measures of employees’ skills, competency requests, employees’ enhancement steps and delivering the best outcomes. therefore, a job evaluation process has been developed to improve the performance of employees in the public sector (dart, 2004; igbojekwe and ugo-okoro, 2015; mollel et al. 2017). the most efficient employees are like to be motivated to perform their duties since they will receive the rewards and bonus (mphil et al., 2014). the highly motivated employees obtain advantages for achieving their organizations objectives (rizwan and ali, 2010). according to mphil et al., (2014), the job satisfaction influences the employee performance level. one of main issues that drives the job satisfaction is the suitable and sufficient compensations and incentives of employees which supports the organization objective. since salaries for their expected efforts are allocated to fixed rate, employees’ performance related to bounces is to improve the productivity. many organizations use bounces pay as monetary reward giving to employees in addition to their fix compensation as the extra amount (heneman and warner, 2005). commonly, this pay plan is frequently employed in evaluating employee performance (mphil et al., 2014). the relationship of pay and performance is directly associated since employees receive a constant salary in a time period and in addition to bonus as reward for the ideal performance or additional efforts (bandiera et al., 2007). when the employees receive unsuitable salaries, their dissatisfaction will be occurred and achieving goals will be minimized and deteriorated (mphil et al. 2014). it is hard to decide that the approach of pay-related-performance is completely assisting the enhancement of employees’ performance and their stimulation in the public sector (cardona, 2006). performance in prior research has been contradictorily affected by paying salary and extra amount for performance. they have a positive influence on the performance in study of lazear (2000), while a negative one is found by frey and jegen (2001). the marks of the annual reports for performance evaluation will be used as proxy for that evaluation in this study. consistent with previous studies (rizwan and ali, 2010; mphil et al., 2014), it is expected for this study that performance evaluation has a positive influence on the salary. dhiaa and aisha / finance, accounting and business analisys 24 2.2 salary, performance evaluation, position and gender the employee’s position is the key motivational rewards to influence performance (mphil et al., 2014). it is familiar for employees to take higher positions with same organization or with different ones for many reasons especially if this position leads to maximized the salaries and benefits (bateman and snell, 2004). it is found that women are fewer than men in developing job opportunities during their profession. this issue is examined by ohlott et al. (1994) who found that men experience is greater task-related developmental challenges than women who have experience greater developmental challenges that stem from hurdles appearing in their jobs. this is the cause that indicating why senior management positions are promoted for few women. consistent with previous studies (bateman and snell, 2004; mphil et al., 2014), it is expected for this study that employees’ performance evaluation moderated by their position (hereafter perf-post) influence the salary positively. some jobs look to be more suitable for females, while others for male (ufuophu-biri and iwu, 2014). it means that the gender has an important role in employees’ performance and their motivation. positions associated with the gender factor may lead the organization’s outcomes at its different levels. (ufuophu-biri and iwu, 2014). in this study, managers forms 38.1 percent of the sample. managers for department and above level will be measured as a position for the purpose of the study. indicating whether that employee’s gender associated to his/her performance in the public sector could enhance employees’ performance and productivity that will help organization’s staff to attain satisfaction in the workplace (ufuophu-biri and iwu, 2014). it is found in previous research that that employee’s gender has a significant influence on employees’ performance in some professions (shrum, 2007; nazrul, 2009). burleson and samter (1992) found that this factor is a significant determinant for employee’s performance in their organization. they concluded that a specific gender could be the best for a performance in particular professions than the other gender. aremu and adeyoju (2003) found that gender has a significant effect on employee’s performance in nigeria, while it is found that there is insignificant relationship between employees’ performance and their gender in that country (ufuophu-biri and iwu, 2014). determining whether that employee’s performance evaluation moderated by gender (hereafter perf-gndr) influences their salaries and extra in the public sector in oman will be examined in this study. the women in this study form 29.3 percent of the sample, while the rest percentage is for men. this study examines the employee’s gender as the state of being male or female. consistent with previous studies (burleson and samter, 1992; aremu and adeyoju, 2003; shrum, 2007; nazrul, 2009), it is expected that the employee’s gender linked with performance evaluation has a positive significant influence on the employees’ salary and the extra amounts. 2.2. salary, performance evaluation and education. there is a certain need to improve evaluation process of employee performance based on their education levels in an organization. performance evaluation has influence on the job satisfaction and the trend of employees’ performance based on education level (caruth, and john, 2008). different benefits and compensation packages are designed to attract employees with higher education as possible. it is right that most employees with higher education believe that when they perform best abilities, their salaries can be maximized (surina et al, 2015). examining the education level in this study is determined based on the education degree of an employee. the study sample is divided into different education levels. those levels are middle school, high school, general education diploma, bachelor, higher diploma, master’s and doctorate certificate forming 2.6%, 69.9%, 2.9%, 12.9%, 0.5%, 9.1%, and 2.2% of the study sample respectively. consistent with previous studies (caruth, and john, 2008; surina et al, 2015), the study expects that the performance evaluation moderated by education (hereafter perf-edct) has a positive significant influence on the salary and extra amounts. 2.3. salary, performance and experience changes in the abilities of employees are possible with continued work within similar conditions and lead to use different criteria to determine their salaries (schuldes, 2006). indeed, in the public sector, experiences and salary as pay-related-performance schemes are differently researched. certainly, results of examining the relationship between experiences and salary are not proved. this pay approach can effectively assisted in improving motivation and performance evaluation based on experience in the public sector (cardona, 2006). paying for performance could significantly support employee’s works and tasks that request minimal investments for experts (milkovich and wigdor, 1991). in public sector, employees with low experience dhiaa and aisha / finance, accounting and business analisys 25 have greater opportunities in getting job less interesting than managers and consequently might be good candidates for pay-related-performance. the cause for this situation is that those tasks are not well rewarded (buelens and van den broeck (2007). the results of these tasks are not difficult to be gauged than composite tasks that have less important role (weibel et al., 2009). in accordance with wright, 1990), the employee’s experience will be measured for this study as employment length (in years). the study sample is divided into different ranges for employees’ experience in years. the experience ranges in years are 1 – 5, 6 – 10, 11 – 15, 16 – 20, 21 – 25 and 26 years and above forming 25.1%, 6.7%, 14.1%, 20.1%, 13.2 and 20.89% of the study sample respectively. although pay for performance is the key determination, experience rewards still are more complex and difficult to be measured (mphil et al., 2014). therefore, the study has no expectation for the influence of employee’s performance evaluation moderated by experience (hereafter perf-expr) on the salary and the extra amounts. 2.5. theoretical framework stewardship theory is developed in line with agency theory. it presents a different view that the managers are motivated rather than employees since managers interests are with the owners of organization (davis et al., 1997). ouchi (1980) proposes that organization can proactively manage their selection and socialization practices so that employee interests are aligned with the firms not been based on the assumption that the goals of employer and employee diverge as in agency theory. taylor’s theory has supported transform hourly jobs into positions where employees are received the suitable compensations for their skill or their performance (schuldes, 2006). in opposite of pay for performance scheme, its opponents proved that agency and stewardship theories as self-interest approaches have no sufficient explanation for the employees motivation especially for who work in the public sector (moynihan and pandey, 2007). whether pay-for-performance theory is built on controlling employees’ behavior related to their outputs, the purpose of this approach is to motivate those employees to maximize their individual performance (deckop et al., 1999). referring to perry et al. (2006) who identify type of task as a moderator of the pay and performance link, this study associates the salary and the extra amount with their performance evaluation linked with position, gender, education and experience in the public sector. as theoretical framework, the links among employee’s salary, extra as depending variables (hereafter dvs), performance evaluation, position, gender, education and experience as independent variables (hereafter ivs) and performance evaluation linked with position, gender, education and experience as moderator variables (hereafter mvs) are illustrated in figure 1. 3. hypotheses development and research methods according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: hypotheses (1): the influence of employees’ performance evaluation on salaries is moderated by employees’ position, gender, education and experience such that the increase in salaries is greater for; performance evaluation with administrative position more than this without one; male more than this for female; high education more than this with low ones; and long experience period more than this with short ones. hypotheses (2): the influence of employees’ performance evaluation on extra amounts is moderated by employees’ position, gender, education and experience such that this extra is greater for; performance evaluation with administrative position more than this without one; male more than this for female; high education more than this with low ones; and long experience period more than this with short ones. dhiaa and aisha / finance, accounting and business analisys 26 independent variables moderator variables dependent variables figure 1. conceptual framework note: extra is the additional amount received by the employees for ideal performance and distinguished efforts. perf-post, perf-gndr, perf-edct and perf-expr are mvs reflecting the correlated performance evaluation with position, gender, education and experience respectively. the study examines the influence of performance evaluation, position, gender, education and experience as ivs, performance evaluation linked collectively and simultaneously with position, gender, education and experience as mv on the employee’s salary and the extra amounts as dv. the strategy of the study is collecting archival data for period 2011-2016 from the systems and records of the ministry of social developments (mosd) in the sultanate of oman. to conduct the results, this study employed observations about 417 persons (managers and employees), 11 variables for each person (2 dvs, 5 ivs, and 4 mvs). the number of observations for a year is 4,587 and 27,522 observations for the period 2011 – 2016 as illustrated in table (1). table 1 size for study’s sample, variables and observations within 2011-2016 # term no. 1 sample size 417 persons 2 dvs per person 2 variables 3 ivs per person 5 variables 4 mvs per person 4 variables 5 total variables (2 + 3 + 4) 11 variables 6 observations per year (1* 5) 4,587 observations 7 observations within research’s period (6* 6 years) 27,522 observations 8 pooled observations 27,522 observations via spss outputs, anova presents values for sum of squares, f, and significance. the significance with f indicate the significant values of study’s model (pallant, 2010). from the regression analysis of the study, the betas values show the power of each ivs (and mvs) to explain the dv variance. the t-test and pvalues indicate whether a resulted coefficient is significantly different from zero. they will be used to accept or reject our hypotheses. dhiaa and aisha / finance, accounting and business analisys 27 4. findings the examining for the assumptions of regression analysis is required to indicate the suitability of this analysis. these assumptions are correlation, linearity, multicollinearity, and homoscedasticity (pallant, 2010). it is found that salary, extra and performance evaluation have non-normal distribution. therefore, they are transformed to new variables by adopting square root, inverse and logarithm processes respectively. 4.1 descriptive statistics as appeared in table (2) and after transformation process, salary is the highest value (150) and performance evaluation is the lowest one (0) among salary, extra and performance evaluation. the means of position, gender, education and experience are 38%, 71%, 24% and 54% indicate that 38% of study’s sample is managers, 71% male, 24% graduates and 54% experience with more than 16 years. table 2 descriptive statistics n minimum maximum mean std. deviation skewness kurtosis statistic statistic statistic statistic statistic statistic std. error statistic std. error salary 2502 59 150 104.06 18.976 .197 .049 -.660 .098 extra 1041 1 3 2.07 .386 -.065 .076 -.473 .151 performance evaluation 2502 0 2 .97 .240 -.079 .049 .418 .098 position 2502 0 1 .38 .486 -.489 .049 -1.762 .098 gender 2502 0 1 .71 .455 .912 .049 -1.168 .098 education 2501 0 1 .24 .430 -1.188 .049 -.588 .098 experience 2502 0 1 .54 .489 .427 .049 -1.819 .098 valid n (listwise) 1041 in descriptive statistics, standard deviation is used to measure the deviation of a data values from its mean. its values have to be not more than 3 to guarantee that the data has no outliers which could significantly influence the regression analysis and its results. as it shown in table (2), standards deviation values are less than 3 except salary after transformation process. skewness and kurtosis scores have to be between ±2. it means that it is acceptable for normal distribution of study’s data. values above or below the majority of other observations are outliers and extremes. the skewness and kurtosis scores for our study data are between ±2, then they are acceptable since this data has the normal distribution and the regression analysis can be operated. 4.2. correlation analysis the correlation test after transformation process indicates that the type and sign of the relationships among the study variables. according to table (3), there are significant positive and negative relationships at .01, .05 and .10 levels among the study’s variables except education with extra. table 3 correlation analysis results salary pearson correlation 1 sig. (2-tailed) n 2502 extra pearson correlation -.131** 1 sig. (2-tailed) .000 n 1041 1041 performance evaluation pearson correlation -.142** -.067* 1 sig. (2-tailed) .000 .030 n 2502 1041 2502 position pearson correlation -.475** .110** .229** 1 sig. (2-tailed) .000 .000 .000 n 2502 1041 2502 2502 gender pearson correlation -.160** -.100** .074** .201** 1 sig. (2-tailed) .000 .001 .000 .000 n 2502 1041 2502 2502 2502 education pearson correlation -.338** .018 .113** .254** .035 1 sig. (2-tailed) .000 .554 .000 .000 .084 n 2501 1041 2501 2501 2501 2501 experience pearson correlation -.605** .115** .110** .430** .229** .042* 1 sig. (2-tailed) .000 .000 .000 .000 .000 .036 n 2502 1041 2502 2502 2502 2501 2502 dhiaa and aisha / finance, accounting and business analisys 28 4.3. empirical results based on what our first hypothesis stated, table (4) shows that salary, performance evaluation, position, perf-post, gender, perf-gndr, education, perf-edct, experience and perf-expr variables entered the regression analysis and no variable has been removed. the total variation in salary has been accounted via the model summary. the information from table (4) is about the ability of regression line. the r2 value is 0.535 meaning that 53.5 percent of the total variance in the salary can been explained. the significant f statistic in anova results indicate that the model is significant as a whole for our study. the relationship between salary, performance evaluation, position and perf-post can be noticed from table (4). the coefficients on performance evaluation (β1 = -.114 and t-test = -4.193), gender (β4 = -.864 and t-test = -4.550), perf-gndr (β5 = -.862 and t-test = -4.488) and education (β6 = -.505 and t-test = -2.437) are negative and significant at .05 level, while the coefficients on position, perf-post, perf-edct, experience and perf-expr are insignificant. the coefficients β1, β4, β5, and β6 demonstrate that performance evaluation, gender, perf-gndr and education could significantly and negatively influenced their salary. other variables have insignificant effect on the salary. table 4 regression analysis results for salary model / variable regression outputs values model r .731 r square .535 adjusted r square .532 f sig. 219.857 .000 variables beta t-test sig. (constant) 11.946 .000 performance β1 = -.114 -4.193 .000 position β2 = .092 .379 .705 perf-post β3 = .263 1.074 .283 gender β4 = -.864 -4.550 .000 perf-gndr β5 = -.862 -4.488 .000 education β6 = -.505 -2.437 .015 perf-edct β7 = -.240 -1.156 .248 experience β10 = -.147 -.419 .675 perf-expr β11 = .147 .418 .676 note: dv: salary ivs: performance evaluation, position, perf-post, gender, perf-gndr, education, perf-edct, experience, perf-expr. perf-post: the influence of employees’ performance evaluation moderated by position on salaries. perf-gndr: the influence of employees’ performance evaluation moderated by gender on salaries. perf-edct: the influence of employees’ performance evaluation moderated by education on salaries. perf-expr: the influence of employees’ performance evaluation moderated by experience on salaries. based on what the second hypothesis stated, table (5) shows that extra, performance evaluation, position, perf-post, gender, perf-gndr, education, perf-edct, experience and perf-expr variables entered the regression analysis and no variable has been removed. the total variation in extra has been accounted via the model summary. the information from table (5) is about the ability of regression line. the r2 value is .090 indicating that 9.0 percent of the total variance in the extra can been explained. the significant f statistic in anova results indicate that the model is significant as a whole for our study. dhiaa and aisha / finance, accounting and business analisys 29 table 5 regression analysis results for extra amount model / variable regression outputs values model r .246 r square .090 adjusted r square .049 f sig. 5.079 .000 variables beta t-test sig. (constant) 1.297 .195 performance γ1 = .010 .168 .866 position γ2 = 1.460 2.227 .026 perf-post γ3 = 1.382 2.085 .037 gender γ4 = .781 1.657 .098 perf-gndr γ5 = .938 1.969 .049 education γ6 = -.711 -1.180 .238 perf-edct γ7 = -.725 -1.202 .230 experience γ8 = -2.186 -2.817 .005 perf-expr γ9 = -2.314 -2.964 .003 note: dv: extra other variables are defined before. the relationship between extra, performance evaluation, position, perf-post, gender, perf-gndr, education, perf-edct, experience and perf-expr can be noticed from table (5). the coefficients on position (γ2 = 1.460 and t-test = 2.227), perf-post (γ3 = 1.382 and t-test = 2.058), gender (γ4 =.781 and ttest =1,657), perf-gndr (γ5 = .938 and t-test = 1.969) are positive and significant at .05 level except on gender at .1 level, while the coefficients on experience (γ8 = -2.186 and t-test = -2.817) and perf-expr (γ9 = -2.314 and t-test = -2.964) are negative and significant at .05 level. the coefficients γ2, γ3, γ4 and γ5 demonstrate that position, perf-post, gender and perf-gndr could significantly and positively influenced their extra, while experience and perf-expr could significantly and negatively influenced their extra. other variables have insignificant effect on the extra. 5. discussion and conclusions 5.1. salary and performance evaluation according to hypothesis (1), the study result is consistent with the previous studies of (frey and jegen, 2001), while it is inconsistent with others that found positive relationship between performance evaluation and salary (lazear, 2000). the result is not completely supported by mphil et al. (2014) who concluded that pay plan is commonly employed to evaluate employee performance. the insignificant results of position and perf-post are inconsistent with previous studies (bateman and snell, 2004; mphil et al., 2014). this means that determining salary is not influenced by the position. despite the gender and perfgndr have significant influence on the salary, the results are inconsistent with burleson and samter (1992), shrum (2007) and nazrul (2009) because of the negative sign and others who concluded that this influence is insignificant (ufuophu-biri and iwu, 2014). accordingly, the perf-gndr is not indicator for his/her salary. this might be explained by the small percentage of women in our sample. despite that the influence of education and perf-edct is significant results, it is inconsistent with previous studies (caruth, and john, 2008; surina et al, 2015) because of the negative sign. the insignificant results of those variables are not conformed by previous studies (buelens and van den broeck, 2007). this might be explained by lacking of conclusive empirical evidence for effect of performance evaluation based on experience in the public sector (cardona, 2006). based on the study’s results, hypotheses (1) has been rejected for all factor except the experience. 5.2. extra and performance evaluation from testing hypothesis (2), the result of the study is conformed to cardona (2006) who resulted that no conclusive empirical evidence that proved the influence of performance pay approach on the performance evaluation. this is occurred in line of lacking the employee dissatisfaction with the compensation leads to achieving lower objectives of the organization (mphil et al. 2014). since the position dhiaa and aisha / finance, accounting and business analisys 30 and perf-post have positive influence on extra, they are consistent with previous studies (bateman and snell, 2004; mphil et al., 2014). also, the result of the study regarding the gender and perf-gndr are consistent with previous studies (burleson and samter, 1992; shrum, 2007; nazrul (2009), while it is inconsistent with ufuophu-biri and iwu (2014). the insignificant results of education and perf-gndr are not conformed by previous studies (caruth, and john, 2008; surina et al, 2015). despite the experience and perf-expr have significant influence on the extra, the results is inconsistent with buelens and van den broeck (2007) because of the negative sign. this might be explained by lacking of conclusive empirical evidence for effect of performance evaluation based on experience in the public sector (cardona, 2006). based on the study’s results, hypotheses (2) has been accepted for the influence of position, gender, experience and performance evaluation moderated by those factors, while it is rejected for performance evaluation, education and perfedct. 6. contributions and future studies the contributions of the study can be noticed in different ways. firstly, in indicating the influence of employees’ performance evaluation on their salaries that is not well researched before. secondly, in improving the performance evaluation of employees by linking it with salaries. thirdly, in providing new evidence on how to improve the employees’ performance by increasing salaries in the public sector. fourthly, in presenting a guide for public sector on how to strengthen the evaluation form to be different according to the position and experience of the employee. consistently with previous studies that examined data from other countries, our results will be strengthened and generalized. accordingly, these results can be added to the materials of performance and performance evaluation courses theoretically and practically. we suggest that next studies may extend this study by employing different factors such as employee’s age and sectors in addition to our study’s factors. future studies are called to use larger sample size or long periods to exam same variables or different ones. future studies are encouraged to compare our findings with other for organizations in the sultanate of oman, or those from gulf cooperation council, middle east or different regions. dhiaa and aisha / finance, accounting and business analisys 31 references aremu, a.and adeyoju, c. 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(1990). monetary incentives and task experience as determinants of spontaneous goal setting, strategy development, and performance. human performance, 3:237–58. 175 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg the effect of talent management on job satisfaction in lebanese universitiesnabatieh ghadeer jaffal, malak aoun, abbas issa school of business, lebanese international university, lebanon info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: talent management; job satisfaction abstract ___________________________________________________________________ talent management is the key operational system of a company. it is related to human resource planning that improves workers ' effective performance. efforts have been created to attract, develop, encourage and retain workers to make them part of talent management and strategic planning. talent management contributes to better work results and employee satisfaction rather than recruitment, reinforcement and evaluation of aptitude. the aim of the research is to assess the effect of talent management in lebanese universities in south lebanon on job satisfaction. a study was conducted among three universities in south lebanon using a quantitative method. a sample of 217 employees was designated and primary data was randomly collected using two techniques, mainly online and self-administered questionnaires. only 105 complete questionnaires were returned and results were analyzed using spss software. through pearson correlation and regression analysis tools, research hypotheses were confirmed. the findings indicated that talent management generally has a significant and positive impact on job satisfaction. the limitations of this study include a narrow geographical area and a restricted sample size. future studies are advised to empirically extend research and to study a variety of efficient methods for talent management.  address correspondence: e-mail: malak.aoun@liu.edu.lb ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 176 introduction to win the war for talent, companies must raise talent management to a burning corporate priority (chambers et al., 1998). but first of all, what does talented employees means? stahl et al. (2007) reported that talented workers are a group of employees who are at the peak in aspects of their capacity and performance and are therefore regarded as prospective leaders either now or in the future. competitive enterprises must adjust to technologies in many areas to sustain and maintain their growth in a continuously shifting modern company environment. talent management, which has grown gradually over latest years, can be used along with other methods such as job planning, career development, and coaching in order to find talented employees. it can offer a significant and profitable competitive benefit, generating operational and functional benefits for companies (al-ariss et al., 2014). the word talent, which is frequently used, can be described academically as defining an individual's ability to provide innovative solutions, promote other people, and facilitate achievement even in time limits. talents have gained strategic significance and importance for organizations throughout the 21st century. the increase in the satisfaction and loyalty of companies and their workers leads to a significant value and benefit. talent management may generally be stated that it is one of the efficient factors in job satisfaction which can be used to improve the recruitment process and to apply highly skilled and capable people to the organization of the process. job satisfaction is therefore a concept that is difficult to identify and to classify. in the 1920s the idea was used mainly. it was also recognized in the 1930s and 1940s that the attitudes of employees to their jobs impacted the value of their work. the significance of satisfying their employees were increased (çabukel 2008). the employee satisfaction idea can be described in aspects of the satisfaction level and is reflected in the employees ' favorable attitudes towards jobs. the extent to which employees’ requirements is encountered with material and spiritual advantages are also significant variable in employee satisfaction (erken, 2013). employees also identify job satisfaction and employee satisfaction with their work and work settings (pekdemir et al., 2006). according to çabukel (2008), satisfaction defines how personal needs and organizational requirements are harmonized. in other terms, employee satisfaction is developed to the extent that workers' material and emotional requirements are upgraded. consequently, this research studies the effect of talent management on employees’ job satisfaction empirically through conducting a survey among employees of the lebanese universities in nabatieh. research hypothesis h1: there is a positive and significant effect of talent management on job satisfaction. h2: there is a positive and significant effect of motivating outstanding performance on job satisfaction. h3: there is a positive and significant effect of training and development on job satisfaction. h4: there is a positive and significant effect of job enrichment on job satisfaction. literature review definition of talent management as described by the society of human resources management talent management is the execution of incorporated strategies or systems intended to boost productivity in the workplace by creating enhanced procedures to attract, develop, retain and utilize individuals with the necessary skills and abilities to convene existing and future company requirements (hejase, et al., 2016). according to vinod, et al. (2014), the theory of talent management was formally born in 1997 when mckinsey ordered studies on the global war for talent (war for talent), which investigated processes for the us businesses to hire the finest employees. the above study ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 177 showed that organizations, in the framework of a favorable economy, compete for skilled individuals aggressively, and that a key element in leader’s profound faith that hiring the best skilled employees is a competitive advantage. managing effective talent and adopting strategies for talent management is considered a challenge. furthermore, lawler (2010) informed that companies in a broad range of businesses are rapidly realizing that employees can be their main cause of competitive advantage. but directors cannot just state that employees are valuable, or to highlight problems on their to-dolist mind. the united nations development program, defined talent management as “an organizational capacity to identify the right person for the right job and at the right time”. collective human resource systems and instruments to plan, create, assess and develop demand and employees and to match qualified employees to the appropriate positions are described as talent management systems (hejase, et al., 2016). often interchangeably use terms talent management, talent strategy, building management, and human resources planning. to develop and integrate new employees, expand and retain existing employees and attract qualified employees to be employed by your business, relates to talent management. development of strategies, identification of talent gaps, planning, recruitment, choosing, training, motivation and retention of skilled employees through various projects is at the core of talent management (guthridge, komm, & lawson, 2008). talent management can be described as a result in order to make sure that the correct person is in the correct position and to guarantee consistency of leadership in important roles, promote employee progress and to decide to handle natural resources production, request and talent flows. this talent management process includes acknowledging and engaging the main fields of talent in the organization, defining the individuals who represent the main knowledge of the organization and managing development operations for the talent pool (jantan et al., 2009). baum et al. (2008) assumed that talent management is an organizational mentality to ensure that t supply of talent is accessible to align the correct employees with the correct job on the basis of strategic business objectives at the correct moment. the talent consists of those who, through an instant contribution or in the long term, can make a difference in organizational performance, showing the best potential. talent management is largely recognized as an important variable in the development of effective organizations (davies, & davies, 2010). dimensions of talent management the following approaches have been chosen as the most relevant and efficient dimensions of talent management based on a comprehensive literature review. motivating outstanding performance initially the term motivation is imitative from the latin term movere; which it means moving. guay et al. (2010) argued that motivation is behind vital behavior. gouws (1995) conveyed that motivation is the inner feeling or desire, which intentionally or nonintentionally leads people to perform the job in an excellent way because it is funny and not mandatory for what is supposed in their arrival period. motivation of workers is one of the finest strategies for the organization to enhance the efficient working environment of the company and workers. in order to enjoy the way of encouraging employee’s motivation is very important for leadership. when staff understands that their points of view are appreciated, they provide the staff with the understanding of belonging that can motivate them. the motivation always fulfills employees ' demands and specifications and repays them by hard work and honesty. the organization's primary goal is to identify and answer the requirements of the most basic technique of all organizations in order to attain employees ' commitment (sofat, 2012). ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 178 training and development companies that provide their employees with training and development programs achieve a high degree of employee satisfaction and a lower turnover (wagner, 2000). the training and development programs for employees bring a great many benefits (jehanzeb & bashir, 2013). the significance of the training program is recognized by many employees who in turn try to increase their salaries (nixon & helms, 2002). training of employees continues to be one of the main drivers of job satisfaction (batool & batool , 2012). job enrichment job enrichment is a leadership idea that includes redesigning positions to challenge the worker and to reduce the number of repeated employment. herzberg (1968) has stated that (diminishing) achievements, acknowledgement, job itself, responsibilities, development, and growth are the most important motivational factor employees based on many inquiries. job changes should be made to boost the motivators visible for the worker to enhance worker motive and productivity. job satisfaction definitions job satisfaction is described as the set of feelings and views that workers have about their present work (aziri, 2011). job satisfaction is how well you feel about the work. it's the nature of your work with respect to your feelings or mental state. in other words, job satisfaction means to do a job that you love, doing very well, making you happy and enthusiastic about the job. each defines job satisfaction as meeting one's expectations. it differs between individuals and institutions, and even within male and female contexts. simply stated, it means job satisfaction when someone is happy with his work. job satisfaction as a satisfying positive emotional condition derived from the assessment of one's work or work experiences. this outcomes from the view that one's work fulfills or enables the satisfaction of the significant principles of one's work, offering and to the extent that these choices conform to our requirements (locke, 1970). job satisfaction is thus a phenomenon which comes not only of work but also of the individual, cultural, educational and administrative situation. figure 1. research framework methods the purpose of this research was to determine the effect of talent management on job satisfaction in lebanese universities. for this purpose, a quantitative methodology was employed to test the proposed hypotheses and measure these relationships through different statistical techniques including spss. this study was split into three stages (1) preliminary consideration, (2) methodology and empirical research and (3) data analysis and interpretation. the preliminary consideration stage included identification of the research purpose, literature review, and research framework and hypotheses development. the second stage included the methodology and empirical research which compromised the research design, methods, questionnaire, sampling design and statistical tools for the data analysis of the study. then, the survey was conducted for data collection within the sample of the study. the third stage includes data analysis and interpretation. study limitations there were some constraints during the entire process of preparing the study which makes it difficult to complete the project. the ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 179 most obvious of this research was the specified time span. because the time allowed for the project wasn't enough, in addition to the large sample size the complete analysis of the data obtained was difficult. the second limitation appears in the data collection process, where it is confined in nabatieh area. so the results shown do not include all lebanese universities. also the sample size is limited to 217 employees; hence the sample size may not adequately represent the whole lebanese universities. also the information given by the respondents may be biased due to various reasons. results and discussion table 1. demographic data the universities respondents of the study are most of young and middle ages. most of the employees have master’s degree in their education, which relatively have experienced for about 5 years and above. most of them are from academic and part timers. table 2. reliability statistics jb cronbach's alpha n of items 0.777 10 tm cronbach's alpha n of items 0.784 10 total cronbach's alpha n of items 0.859 20 ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 180 reliability in statistics is the overall consistency of a measure. here, we show the results of cronbach’s alpha which it’s good if the result is greater than (0.7). the cronbach’s alpha of job satisfaction (dependent variable) is 0.777, and for talent management (independent variable) is 0.784, and for both the dependent and independent variable the cronbach’s alpha is 0.859. the results showed that this study was highly reliable. table 1. kmo and bartlett's test for talent management kaiser-meyer-olkin measure of sampling adequacy. .606 bartlett's test of sphericity approx. chi-square 628.373 df 45 sig. .000 table 2. kmo and bartlett's test for job satisfaction kaiser-meyer-olkin measure of sampling adequacy. .510 bartlett's test of sphericity approx. chi-square 547.859 df 45 sig. .000 similarly, table 4 shows that (kaisermeyer-olkin measure of sampling adequacy) of job satisfaction is 0.510 which is greater than 0.5, this indicates that the factor analysis is useful. and the sig. is nearly 0.001 which is less than 0.05, this means it is significant. table 3. total correlation between research variables correlations talent_management job_satisfaction talent_management pearson correlation 1 sig. (2-tailed) n 105 job_satisfaction pearson correlation .614** 1 sig. (2-tailed) .000 n 105 105 **. correlation is significant at the 0.01 level (2-tailed). table 6 below translates the correlation of this test; it shows that all the results are <0.05 which indicates a significant and positive correlation among research variables. table 4. correlation of variables motivating_outstanding_performance job_satisfaction pearson correlation .580** ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 181 sig. (2-tailed) .000 n 105 job_enrichment job_satisfaction pearson correlation .302** sig. (2-tailed) .002 n 105 training_and_development job_satisfaction pearson correlation .563** sig. (2-tailed) .000 n 105 regression analysis after validating the data and determining the correlation among the research variables, now it is time to measure the effect of talent management on job satisfaction in lebanese universities. regression analysis results are presented in terms of the multiple correlation coefficients (r) and the coefficient of multiple determinations r2. job enrichment for r square=0.3 then there is a medium effect of job enrichment on job satisfaction for t=13.825 and sig=0.00<0.001, the latent variables that are related to job enrichment are actually measuring the construct. for df=103, sig=0.02<0.05 the hypothesis is accepted table 5. job enrichment regression analysis anovaa model sum of squares df mean square r square f sig. 1 regression 2.507 1 2.507 0.316 10.320 .002b residual 25.026 103 .243 total 27.533 104 coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 2.963 .214 13.825 .000 job_enrichment .205 .064 .302 3.212 .002 a. dependent variable: job_satisfaction training and development for r square=0.31 then there is a medium effect of training and development on job satisfaction for t=6.809 and sig=0.00<0.001, the latent variables that are related to training and ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 182 development are actually measuring the construct. for df=103, sig=0.00<0.01 the hypothesis is accepted table 6. training and development regression analysis anovaa model sum of squares df mean square r square f sig. 1 regression 8.726 1 8.726 0.310 47.791 .000b residual 18.807 103 .183 total 27.533 104 coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.814 .266 6.809 .000 training_and_develpment .501 .072 .563 6.913 .000 motivating outstanding performance for r square=0.337 then there is a medium effect of motivating outstanding performance on job satisfaction for t=11.212 and sig=0.00<0.001, the latent variables that are related to motivating outstanding performance are actually measuring the construct. for df=103, sig=0.00<0.01 the hypothesis is accepted table 7. motivating outstanding performance regression analysis anovaa model sum of square s df mean square r squar e f sig. 1 regression 9.278 1 9.278 0.337 52.34 9 .000b residual 1 8.255 1 03 .177 total 2 7.533 1 04 ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 183 coefficientsa model unstandardize d coefficients standardize d coefficients t sig. b std. erro r beta 1 (constant) 2.227 .199 11.21 2 .000 motivating_outstanding_performa nce .424 .059 .580 7.235 .000 talent management for r square=0.337 then there is a medium effect of talent management on job satisfaction for t=5.905 and sig=0.00<0.001, the latent variables that are related to talent management are actually measuring the construct. for df=103, sig=0.00<0.01 the hypothesis is accepted table 8. talent management regression analysis anovaa model sum of squares df mean square r square f sig. 1 regression 10.375 1 10.375 0.377 62.282 .000b residual 17.158 103 .167 total 27.533 104 coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.565 .265 5.905 .000 talent_management .603 .076 .614 7.892 .000 chi-square tests chi-square test is used to determine whether there is a significant association between the two research variables. the results are shown in table 8. table 9. chi-square tests chi-square tests ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 184 mop value df asymp. sig. (2sided) symmetric measures pearson chisquare 522.375a 91 .000 value approx. sig. likelihood ratio 321.373 91 .000 nominal by nominal phi 2.103 .000 linear-bylinear association 35.046 1 .000 cramer's v .843 .000 n of valid cases 105 n of valid cases 105 t&d value df asymp. sig. (2sided) symmetric measures pearson chisquare 560.000a 91 .000 value approx. sig. likelihood ratio 334.365 91 .000 nominal by nominal phi 2.309 .000 linear-bylinear association 32.961 1 .000 cramer's v .873 .000 n of valid cases 105 n of valid cases 105 je value df asymp. sig. (2sided) symmetric measures pearson chisquare 501.375a 91 .000 value approx. sig. likelihood ratio 321.373 91 .000 nominal by nominal phi 2.185 .000 linear-bylinear association 9.471 1 .002 cramer's v .826 .000 n of valid cases 105 n of valid cases 105 tm value df asymp. sig. (2sided) symmetric measures pearson chisquare 931.875a 169 .000 value approx. sig. likelihood ratio 431.406 169 .000 nominal by nominal phi 2.979 .000 linear-bylinear association 39.189 1 .000 cramer's v .826 .000 n of valid 105 n of valid cases 105 ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 185 according to motivating outstanding performance, the probability of the chi-square test statistic (chi-square=522.375) was p=0.000< 0.001, the research hypothesis that differences in “motivating outstanding performance" are related to differences in “job satisfaction" is supported by this analysis. therefore, strength of association between the "motivating outstanding" and "job satisfaction" is high (2.103, 0.843). similarly, for training and development, the probability of the chi-square test statistic (chi-square=560) was p=0.000 < 0.001. thus, the strength of association between the “training and development" and "job satisfaction" is high (2.309, 0.873). according to job enrichment, the probability of the chi-square test statistic (chi-square=501.375) was p=0.000 < 0.001, and the table shows that the strength of association between the “job enrichment" and "job satisfaction" is high (2.185, 0.826). finally, according to talent management, the probability of the chi-square test statistic (chisquare=931.875) was p=0.000 < 0.001, the table shows that the strength of association between the “talent management" and "job satisfaction" is high (2.979, 0.826). hence, all research hypotheses are accepted and there is a positive and significant effect on talent management on job satisfaction through its three dimensions; motivating outstanding performance, training and development, and job enrichment. conclusions the main purpose of this research was to determine the impact of talent management on job satisfaction in the lebanese university in nabatieh. the idea of this research was essentially created by finding a gap in the literature concerning lack of data, since very few studies have been researched in middle eastern nations such as lebanon in terms of talent management practices. however, while talent management is a high priority in departments of human resources in companies, this practice still needs to migrate completely into the university environment to establish future administrative leaders. this research only gathered data from colleges in the city of nabatieh. the results may not constitute a full situation for the lebanese university sector, so the results should be taken into account prior to this limitation. future study may focus on all universities in lebanon to achieve a conclusive situation on the impact of talent management on job satisfaction. a correlation analysis was conducted following regression assessment in attempt to establish to what level the dependent factors were influenced by the other independent factors. the most interesting results of the correlation analysis related to the highly positive effect on dependent variables on talent management. this indicates that coherent and effective performance systems obviously occur in organizations with high levels of talent management which positively affecting employee satisfaction empirically and on the basis of the survey findings of this study, all research goals can be found to be accomplished. with regard to the first goal of determining the relationship between talent management and job satisfaction among lebanese universities, these general relationship findings from the pearson correlation have been confirmed. with regards to the second aim of the research, it is possible to conclude that talent management is highly applied in universities. furthermore a regression analysis evaluated the effect of talent management on employee performance and the beneficial impact was cases a. 196 cells (100.0%) have expected count less than 5. the minimum expected count is .24. a. not assuming the null hypothesis. b. using the asymptotic standard error assuming the null hypothesis. ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 186 determined by explaining the variability in job satisfaction to talent management of 33.7%. this research found that a fair, reliable system of performance improves workers ' feelings of trust and belonging and has a positive effect on job satisfaction when managers provide their workers with feedback and motivation. by using a fair and reliable performance system, all firms who bind significance to the talent management system are making their employees feel more positive about their firms and more loyally. this is why the determination of talent management and the employing people in favorably relevant positions positively impacts company's citizenship. if organizations ' vision and mission are determined and work descriptions are clear, employee satisfaction with performance assessment systems will increase. in addition, if department executives remove all barriers associated with work and provide feedback on a regular basis, workers can do their best. when senior managers offer organizational feedback for workers who work for them and maintain current values in their organizations alive, this will increase job satisfaction. references chambers, e., foulon, m., handfield-jones, h. and hankin, s., 1998. andedward michaels,". the war for talent," mckinsey quarterly, 3, pp.44-57. stahl, g.k., björkman, i., farndale, e., morris, s.s., paauwe, j., stiles, p., trevor, j. and wright, p.m., 2007. global talent management: how leading multinationals build and sustain their talent pipeline. insead faculty and research working papers, 24, p.o8. al ariss, a., cascio, w.f. and paauwe, j., 2014. talent management: current theories and future research directions. journal of world business, 49(2), pp.173-179. çabukel, r., 2008. çalışan memnuniyeti analizleri. i̇stanbul üniversitesi sosyal bilimler enstitüsü çalışma ekonomisi ve endüstri i̇lişkileri anabilim dalı yüksek lisans tezi, i̇stanbul. erken, m., 2013. çalışan memnuniyeti üzerine sağlık sektöründe bir araştırma. a study on employee satisfaction in the health sector), unpublished graduate thesis, marmara üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, i̇stanbul. pekdemi̇r, i., özçeli̇k, o., karabulut, e. and arslantaş, c.c., personel güçlendi̇rme, i̇ş tatmi̇ni̇ ve örgütsel bağlilik arasindaki̇ i̇li̇şki̇leri̇ beli̇rlemeye yöneli̇k bi̇r çalişma. verimlilik dergisi, (4). hejase, h.j., hejase, a.j., mikdashi, g. and bazeih, z.f., 2016. talent management challenges: an exploratory assessment from lebanon. international journal of business management & economic research, 7(1). vinod, s., sudhakar, b., mihir, h., varghese, a.m. and bobby, m., 2014. talent management among uae national women. journal of emerging trends in economics and management sciences, 5(5), pp.474-479. lawler iii, e.e., 2010. talent: making people your competitive advantage. john wiley & sons. guthridge, m., komm, a.b. and lawson, e., 2008. making talent a strategic priority. mckinsey quarterly, 1, p.48. jantan, h., hamdan, a.r. and othman, z.a., 2009, august. classification techniques for talent forecasting in human resource management. in international conference on advanced data mining and applications (pp. 496-503). springer, berlin, heidelberg. davies, b. and davies, b.j., 2010. talent management in academies. international journal of educational management, 24(5), pp.418-426. guay, f., chanal, j., ratelle, c.f., marsh, h.w., larose, s. and boivin, m., 2010. intrinsic, identified, and controlled types of motivation for school subjects in young elementary school children. british journal of educational psychology, 80(4), pp.711-735. gouws, a., 1995. die verwantskap tussen motivering en werkstevredenheid van'n groep inligtingspesialiste (doctoral dissertation, university of johannesburg). sofat, s., 2012. effect of motivation on employee performance and organizational productivity. journal of applied management & computer science, 1(1), pp.1-11. wagner, s., 2000. retention: finders, keepers. training & development, 54(8), pp.64-64. ghadeer jaffal et al. / finance, accounting and business analysis 1 (2) (2019) 187 jehanzeb, k. and bashir, n.a., 2013. training and development program and its benefits to employee and organization: a conceptual study. european journal of business and management, 5(2). nixon, j.c. and helms, m.m., 2002. corporate universities vs higher education institutions. industrial and commercial training, 34(4), pp.144-150. batool, a. and batool, b., 2012. effects of employees training on the organizational competitive advantage: empirical study of private sector of islamabad, pakistan. far east journal of psychology and business, 6(5), pp.59-72. herzberg, f., 1968. one more time: how do you motivate employees? aziri, b., 2011. job satisfaction: a literature review. management research & practice, 3(4). locke, e.a., 1970. job satisfaction and job performance: a theoretical analysis. organizational behavior and human performance, 5(5), pp.484-500. d'annunzio‐green, n., maxwell, g., watson, s. and baum, t., 2008. implications of hospitality and tourism labour markets for talent management strategies. international journal of contemporary hospitality management. 72 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg trends and determinants of municipal fiscal disparities in bulgaria nenkova presiana department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 30 may 2020 revised 27 june 2020 accepted 27 june 2020 the purpose of this paper is to examine the trends of municipal fiscal disparities in bulgaria and to analyze the causes of the existing inequalities. one of the most challenging issues of fiscal decentralization process is the choice of proper policy response to the existing fiscal disparities among local governments. the identification of fiscal inequalities at local level and its determinants is a starting point in developing an equalizing mechanism that has a potential to reduce these inequalities. hence, with this study we aim to contribute to a better understanding about horizontal fiscal imbalance in bulgaria. municipal fiscal disparities are measured in terms of differences in municipal own revenue, i.e. local tax revenue, user fees and charges, and other non-tax revenue. the analysis of horizontal fiscal imbalance covers the period 2007-2018 and uses several statistics measures to yield a complete picture of the trend of municipal fiscal disparities. the main findings suggest that disparities among municipalities in terms of own-source revenue were smaller at the end of the period than those at the beginning of the period as measured by the maximum-to-minimum ratio and the coefficient of variation. regardless, municipal fiscal disparities are still considerable with very few rich municipalities which level of own-source revenue per capita is in sharp contrast to the rest of the municipalities. keywords: fiscal decentralization, fiscal disparities, inequity address correspondence: e-mail : pnenkova@unwe.bg nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 73 introduction until 1990 bulgarian public sector operated within a centralized financial and administrative structure. following the collapse of the old system, decentralization has become a key part of the country’s transformation thrust. despite the increasing pressure to decentralize public finance, the implementation of fiscal reforms in the vertical public sector and the designation of fiscal roles among the various levels of governance were not seen as central on the agenda in the early years of transition. as in the case to other economies in transition, in the period following the political transformation, the priority was to shift away from an administrative command system to a free market economy, focusing on setting up a legislative and an institutional framework necessary to ensure the proper functioning of the new economic system, dismantle state ownership, restructure the financial system, liberate prices, etc. in the late 1990s, several different policies were implemented, for the purpose of promoting local autonomy and increasing local governments financial capacity. a second wave of reforms emerged in midand late 2000, when local tax administrations were set up and local government authorities were delegated discretionary powers to set local tax rates, within a range established by law. alongside such ongoing reforms in the area of local finance, bulgaria has seen an upsurge in the number of analyses examining the development and effects of the fiscal decentralization process. these studies explored and discussed opportunities to achieve sound financial management, the development of municipal debt capacity and the possibilities to expand the financial autonomy of local government authorities, and subsequent steps towards fiscal decentralization (stoilova 2009, kalcheva 2017; zahariev 2017). interpreting issues related to the horizontal fiscal imbalance does not have an ample track-record in bulgaria and more research is needed to systematically examine the distributional effects of fiscal decentralization reforms, since they could result “in different regions having differing abilities to provide given levels of public goods and services”(boadway 2004). the heavy persistence of central government grants in municipal budgets in bulgaria shows that the expenditure assignment was not supported by an adequate revenue assignment between levels of governments, meaning also high levels of vertical fiscal imbalance. at the same time, the transfer scheme applied throughout the years with the aim to reduce differences in local governments fiscal capacity and expenditure needs had a rather mild disparity reducing effect (nenkova, 2019). if not properly addressed, municipal fiscal disparities will continue to lead to an unequal access of citizens to main local public services. moreover, the existing inequalities could also be deepened by the growing concentration of population and economic activity in few local territorial units. not at least, the sudden and extensive economic impacts of coronavirus pandemic could also contribute to municipal divergence. the purpose of this study is to analyze the trends of municipal fiscal disparities in bulgaria and to identify the causes of those disparities. the identification of the determinants of fiscal inequality at local level is important since it would suggest the right direction in equalization policy design. therefore, the current paper aims at contributing to a better understanding about municipal fiscal disparities in bulgaria – did they narrowed or widened during the period under review, and what factors cause the inequality at local level. the analysis of the horizontal fiscal imbalance in bulgaria covers the period 2007-2018 and fiscal disparities among local governments are measured in terms of differences in municipal own revenue per capita. municipal own-source revenue is in fact an appropriate disparity measure of municipal fiscal differences, since its level reflects objective factors such as population size, economic base and fiscal effort of local governments. the trends in municipal fiscal disparities is traced and illustrated with descriptive statistics including minimum, maximum, mean, the range, coefficient of variation and maximum to minimum rate. the article is organized as follows. the next section presents in brief municipal finance and municipal revenue structure in bulgaria for the period 2007-2018. section 3 traces and explains the trends of fiscal disparities among local governments. determinants of municipal fiscal disparities are studied in section 4. the final section summarizes the findings and addresses policy implications. bulgarian municipalities and their finances municipalities are the only level of subnational government in bulgaria’s two–tier public sector vertical structure. the administrative and territorial reform of 1998 set up 264 municipalities, with one more autonomous municipality established in 2015, bringing their total number to 265. local governments are in charge of providing a wide range of services: administrative services, local transport, public parks and amenities, street lighting and cleaning, child and elderly care, garbage collection and disposal, heating, water supply and sewerage. besides provision of these services, municipalities are also in charge of investments at the local level, including both local government activities and state delegated activities financed through municipal budgets. municipal spending is funded by own-source revenue, as well as central government grants. a major nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 74 reform in the area of local finance aimed to expand the revenue base at the local level and the financial autonomy of local government authorities was implemented in 2003, enabling local government authorities to decide autonomously what services are to be provided against payment, set fees and service charges, offer reduced rates to certain users, and collect revenues from fees and service charges. in fact, that change marked the onset of revenue decentralization in bulgaria, and user fees became a major own source of revenue for local governments for quite some time. later on, the powers of local government authorities were further extended, and municipal tax administrations were set up in 2006, to collect receipts from local taxes and fees. the conferral of taxation powers to municipalities at the beginning of 2008 is one of the most significant steps towards strengthening the financial autonomy of local government authorities – local governments were granted the power to set local tax rates at their own discretion, within a certain range, with the floor and ceiling defined by law. the only tax revenue in the municipal budgets is that generated through local taxes. about 95% of municipal tax revenue is accumulated through property tax, property transactions tax and vehicle tax. in 2008 the package of measures for expanding the revenue base at the local level was further enlarged by transferring the powers to levy the patent tax to municipalities. that tax is an alternative to personal income tax; it is levied as a lumpsum and is payable by individuals, including sole proprietors engaging in any of the business activities taxable on the territory of the respective municipality and having a turnover of up to bgn 50 000 in the previous year. another tax that was new to municipalities was adopted in 2010, tourist tax. despite that new source of revenue, the volume of tax revenue at the local level as a whole did not see any significant change, the reason being that only about very few of the municipalities in bulgaria have a well-developed tourism sector. the fiscal weight of the local tax on taxi business, introduced in 2017, has also been negligible. the actions taken to increase the fiscal autonomy of municipalities and the gradual empowerment of local government authorities by granting new revenue powers enabled them to grow their own-source income post-2003. nevertheless, throughout the period under examination (between 2007 and 2018), municipal revenue did not register any structural change: central government transfers remained a core component of the municipal revenue, accounting for about 57% of municipal budgets on the average, followed by non-tax revenue (fees and other non-tax revenue) and proceeds from taxation. it took until 2014 before the total amount of local tax collected managed to exceed revenue from fees, and that trend persisted until 2018. another interesting development is the long-term upward trend in local tax revenue after 2009, when local government authorities managed to double it up by 83%, while revenue from fees grew at much lower rates and achieved an increase of just 20%. since no significant changes were made in terms of local taxation after 2008, the reasons behind the increase in tax proceeds in municipal budgets should be sought in improved collection rates and increased local tax rates. figure 1. municipal budget revenue (in bgn millions) source: own calculations based on consolidated fiscal program data and annual reports on state budget execution (2007-2018), ministry of finance of the republic of bulgaria. trends of municipal fiscal disparities this part of the study examines the trends in fiscal disparities among local governments in bulgaria by using own municipal revenue per capita. table 1 shows maximums, minimums and means for municipal own-source revenue per capita during the period 2007-2018. the minimum values of own-source revenue per capita, i.e. those for the poorest municipality, grew throughout the whole period, except for the years 0 1000 2000 3000 4000 5000 6000 7000 2007 2009 2011 2013 2015 2017 local tax revenue charges and fees other non-tax revenue transfers nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 75 of the last economic and financial crisis, unlike the developments of the maximum values which exhibited both ups and downs. at the end of the period, own-source revenue per capita of the poorest municipality exceeded 3.5 times the own resources accumulated by the poorest municipality at the beginning of the period, while that ratio was 2.3 for the richest municipality. means also went up in most of the years, with a decrease occurring, again, only during the crisis years. table 1. own municipal revenue per capita (in bgn) min мax mean 2007 23.3 1978.2 179.2 2008 36.6 1860.1 185.1 2009 28 1510.4 158.3 2010 27 1379.1 154.8 2011 39.6 2944.5 194.1 2012 46.2 4305.6 219.9 2013 51.6 3979.3 236.1 2014 57.1 3629 243.1 2015 45.2 5012.6 254 2016 68.9 3728.6 266.5 2017 82.7 4939.8 283.5 2018 82.8 4480 294.8 source: own calculations based on namrb internet platform for local finance. http://www.namrb.obuchi-se.org/norway/bg-bg.aspx there are different measures applied in empirical literature to study and analyze horizontal fiscal imbalances (bird and tarasov,2004; shankar and shah,2003; kowalik, 2015). we calculate three measures of municipal fiscal disparities for the indicator chosen to capture the fiscal differences among local governments, including: range (r), maximum-to-minimum ratio (max/min) and coefficient of variation (cov). during the period under review, the change in the difference between the maximum and the minimum values of own-source revenue per capita, i.e. the range, is presented in figure 2. while in 2007 the difference in own-source revenue per capita of the richest and the poorest municipality, respectively, was bgn 1955, in 2018 that difference went up to bgn 4399. and while the minimum values of own-source revenue increased gradually from bgn 23.3 per capita to bgn 80.8 per capita, with the exception of 2009 and 2010, the situation is different in terms of the maximum revenue per capita: maximum values fluctuated between bgn 1379.1 to bgn 5012.6, and increased and decreased at a much dramatic rate. during the period 2007-2010, and especially in the last two years, there was a decrease in own-source revenue of the municipalities at the top of the ranking, which lead to a decrease in the absolute difference between the maximum and the minimum value. after 2010, own-source revenue per capita for the municipalities with the highest amounts went up again, and significantly so, which resulted in an increase in the absolute difference between the maximum and the minimum value. in the next period, 2012-2018, the values of the range registered both upward and downward changes. the gap between the maximum and minimum values of own revenue per capita was largest in 2015 and 2017 respectively. the reason behind the value fluctuations of the range after 2010 lies in the maximum values of the indicator, or those for the richest municipalities. while up to 2010, the ranking in terms of own-source revenue per capita accrued was headed by the municipality of nesebar, in 2011 it was replaced by the municipality of chelopech which retained the lead until the end of the period, with chavdar as the runnerup in most years. the top values of the indicator own revenue per capita for chelopech and chavdar, which outpaced by far the rest of the municipalities, were due to the fact that both of these are small municipalities, with about 1500 inhabitants, but with very high revenues from concession fees. in 2015, the own-source revenue per capita of the municipality of chelopech (bgn 5012.65) was more than double the figure for the second richest municipality, chavdar (bgn 2117.26) and triple that of the third in the ranking, the municipality of primorsko (bgn 1538.36). nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 76 figure 2. range (2007-2018) source: own calculations based on namrb internet platform for local finance. http://www.namrb.obuchi-se.org/norway/bg-bg.aspx as regards the two municipalities of chelopech and chavdar, the values of their own-source revenue per capita differ significantly when compared to the rest of the municipalities. and while for those two municipalities the magnitude of the indicator clearly stands out, there could be other atypical, higher values of own-source revenue per capita that deviate significantly from those of the predominant number of municipalities. the histograms for the years of 2007, 2012 and 2018 (appendix 1) show the number of municipalities (on the y-axis) with the level of own revenue per person that fall within a specified interval (on the x-axis). the distribution is positively skewed, i.e. most values concentrate on the left, with spreadout yet significant values in the right-hand side of the distribution. the richest municipalities are very few and the level of their own-source revenues is in sharp contrast to the rest of the municipalities. in 2007 most municipalities fall within the first, second or third interval, or within the range of up to bgn 150 per capita; that includes 68% of all municipalities, given that the highest value of the indicator own revenue per capita reaches bgn 1987.27. in 2012 87% of municipalities are distributed within the first, second or third interval and show own-source revenue per capita of up to bgn 300, against a maximum value of the parameter at bgn 4305. the situation is similar in 2018 as well: the maximum value of the indicator stands at bgn 4480, but 75% of all municipalities have own-source revenues falling within the range of up bgn 300 per capita or below the mean value. in order to identify the values of per capita own municipal revenue that are far removed from the rest we use a boxplot analysis (dawson 2011). typically, the boxplot includes a mark of the median; the 25th percentile value and 75th percentile values, and a box extended between, and whiskers extending from the 25th percentile value to the minimum, and from the 75th percentile values to the maximum. we accept that extreme values or extreme outliers are all the values lower than q25–3(q75-q25) and bigger than q75+3(q75-q25), where q75 и q25 presents 75th percentile value and 25th percentile values. extreme values of the indicator own revenue per capita are observed at the upper end only (appendix 2). based on this, and in order to illustrate an accurate picture of fiscal of disparities among local governments in bulgaria, municipalities are divided into three groups – the first group includes all municipalities (denoted all), the second group consists of all municipalities without chelopech and chirpan (denoted allw/o ch.ch.), and the third group of municipalities excludes local territorial units with extreme values of per capita own revenue (denoted all w/o extremes). the information shown in figure 3. demonstrates clearly that the movements of the range over the years are very different as regard the observed three groups of the municipalities. while the differences inbetween the maximum and the minimum value within the group that includes all municipalities are significant and vary largely over the years, showing a sharp increase after 2010 and registering both decreses and increases in the subsequent years, in the group of municipalities with no extreme values, on the other hand, fiscal disparities in terms of own-source revenue per capita measured as the difference between the maximum and the minimum value do not change significantly over the years. 0,00 1000,00 2000,00 3000,00 4000,00 5000,00 6000,00 2007 2009 2011 2013 2015 2017 nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 77 figure 3. range (2007-2018) source: own calculations based on namrb internet platform for local finance. http://www.namrb.obuchi-se.org/norway/bg-bg.aspx the movements of the coefficient of variation indicates a clear downward trend with regard to the second and third grouping: in the third group, it remains relatively stable and declines slightly from 0.58 to 0.42, which shows that there is no significant change in the disparities among the municipalities in that group over the years (fig.4). if only the municipalities of chavdar and chelopech are excluded, there is again a reduction in the disparities among municipalities in the period 2007-2012, and such reduction is also more significant than that in the group which excludes the extreme outliers, i.e. the values of the coefficient of variation at the end of the period have dropped almost two-fold in comparison to those at the beginning of the period. on the contrary, as regards the group made up of all the municipalities, the coefficient of variation exhibits the highest values in 2007 and 2012 1.54 and 1.53, respectively, indicating larger disparities and declines to 1.19 in 2018. measured by the coefficient of variation the own revenue disparities decreased on average within the group including all the municipalities, although with high volatility. figure 4. coefficient of variation (2007-2018) source: own calculations based on namrb internet platform for local finance. http://www.namrb.obuchi-se.org/norway/bg-bg.aspx in the period 2007-2018, for the group including all the municipalities, the values of the maximum-tominimum value ratio changed dramatically (fig. 5.). thus, in 2015, the ratio between the own-source revenue per capita of the richest municipality and that of the poorest municipality increased almost twofold in comparison to 2014 and reached a value of 110, and then decreased over the subsequent years, reaching a value of 55 in 2018, which is exactly two times lower than the highest value for the period that occurred in 2015. despite those fluctuations, disparities among municipalities in terms of own-source revenues were smaller at the end of the period than those at the beginning of the period. while in 2007 own-source revenue per capita for the richest municipality were 85 times higher than for the poorest one, 0,00 1000,00 2000,00 3000,00 4000,00 5000,00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 r (all) r (all w/o ch.ch.) r (all w/o extremes). 0 0,5 1 1,5 2 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 cov (all) cov (all w/o ch.ch.) cov (all w/o extremes) nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 78 in 2018 the richest municipality was only 55 times richer than the poorest one. as for the other two groups, the trend of declining fiscal disparities among municipalities as measured by the maximum-tominimum value ratio is clear-cut. in the third group, the one without extreme outliers in 2018 own revenue per capita for the richest municipality in the group was only 8.7 times higher than for the poorest one. figure 5. maximum-to-minimum ratio (2007-2018) source: own calculations based on namrb internet platform for local finance. http://www.namrb.obuchi-se.org/norway/bg-bg.aspx causes of municipal fiscal disparities decentralization of public sector revenue combined with differences in endowments of local territorial units could result in fiscal disparities across local governments. different kinds of revenue sources existing on the territory of the respective municipality could be considered a major factor determining the existence of horizontal fiscal imbalance. unequal distribution of natural resources, sources of revenue specific for only certain municipalities, such as resort municipalities, or the concentration of a considerable amount of buildings that are taxable by property tax can translate into differences in local governments revenue raising capacity. specific characteristics and endowments of municipalities as drivers of disparities in terms of their revenue-earning capacity are particularly manifest in local territorial units in bulgaria that exhibit outliers in own-source local revenue per capita. the group of the municipalities with extreme values of own revenue per capita (see appendix 2), or the richest municipalities in bulgaria includes primarily resort municipalities and few small municipalities with high revenues from concession fees. and while until 2010 the lead in ranking in accordance to own revenue per capita was held by resort municipalities, since 2011 the top place has been occupied by small municipalities such as chavdar and chelopech. over the years, the group of those municipalities was joined by other small municipalities, such as mirkovo, radnevo and galabovo, where other non-tax revenues account for most of their local budgets. their specific features, such as deposits of natural resources located in their territories, define their high revenueearning capacity. thus, the municipalities of chelopech, chavdar, zlatitsa, etropole and mirkovo receive 50% of the concession fee paid by the elatsite med ad, which is then apportioned among them on a pro rata basis depending on what portion of the elatsite gold filed falls within their respective territory. in addition, the chelopech and chavdar municipalities have on their territory europe’s largest deposit of copper, gold and pyrite which is also operated on the basis of a concession agreement. as regards resort municipalities with high values of own-source revenue per capita, their individual characteristics again stand out as a key factor for their high own-source revenue per capita in comparison to the core group of municipalities. what makes them special is that, unlike the small municipalities generating high revenues from concession fees discussed above, the predominant share of their own-source revenues come from local taxes. resort municipalities register a considerable share of own-source revenues, sometimes exceeding that for the capital city. this is largely due to the profile of municipal proceeds, which are linked primarily with property value and property transactions. in locations with intensive property development and high demand, and high property value, respectively, own-source revenues of municipalities are higher. however, even in those local territorial units, tax revenue accounts for 20 to 30% of the municipality’s total budget revenue. there are also certain ancillary factors for the existing horizontal fiscal imbalance at local level. these include the large differences among local territorial units in terms of size of population and economic base. ceteris paribus, the larger the population of a municipality, the higher its revenue-earning potential, with 0 20 40 60 80 100 120 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 max/min (all) max/min (all w/o ch.ch.) max/min (all w/o extremes) nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 79 revenues from service charges and tax revenue, and vice versa. in 2018, there was only one municipality in bulgaria with a population exceeding 1 million inhabitants, 8 municipalities with over 100 000 inhabitants, 14 municipalities with populations ranging from 50 000 to 100 000, 19 municipalities between 30 000 and 50 000, 90 municipalities between 10 000 and 30 000, and 60 municipalities with 6 000 to 10 000 inhabitants. in 2018, a major part of bulgarian municipalities – 73 municipalities, or more than a quarter of all municipalities, reported populations of less than 6 000, which is in fact one of the eligibility criteria for setting up a new municipality required under the bulgarian law on administrative and territorial planning. the negative population growth rate paired with on-going internal and external emigration processes lead to a persistent decline in the population size, which in turn has a negative effect on the economic and social environment, particularly in municipalities in underdeveloped rural or mountainous areas. in smaller territorial units own revenue barely exceed 15 percent of total budget revenue, with local tax revenue being negligible. in fact, the existing inequalities induce people to migrate to jurisdictions with better economic prospects which in turn exacerbate the existing municipal disparities. the concentration of economic activities in certain areas of the country also contributes considerably to disparities among municipalities in terms of own-source revenues. according to the institute for market economy the 20 largest economic centers in bulgaria cover about 1/3 of the national territory and generate 86% of the national output, employ 75% of the workers in the economy and have over 1/3 of the population in bulgaria (ime, 2018). a higher concentration of countries population and economic activity to one or few large cities and certain metropolitan areas leads to unproportionally distribution of revenue base. revenue patterns tend to be different in large metropolitan regions compared with smaller cities, reflecting their greater ability to levy taxes. to the extent that cities rely on property tax revenues, for example, larger, more densely populated cities have a larger per-capita tax base than smaller cities or rural areas because of generally higher property values. on the other hand, since commercial and industrial properties are taxed at a higher rate than residential properties larger cities have a greater ability to accumulate property tax revenue. a study of the role and fiscal significance of property tax receipts in local budgets in bulgaria found out that the most significant revenues from that tax are generated in very few municipalities – 19 local territorial units, or 7% of all municipalities (kalcheva and nenkova, 2018). in addition to resort municipalities such as bansko, nessebar, pomorie, primorsko, sozopol, tsarevo where the real estate value and quantity are the highest and consequently the opportunities to generate higher revenue from property taxation (property tax and property transactions tax), that group includes also the largest municipalities that are major urban centers and have well-developed economies such as varna and sofia, which implies a considerable tax base. the fiscal significance of property tax is also high in certain small municipalities with well-developed manufacturing, where revenue from taxing the real property of businesses operating on their territory is a major budget contributor. the municipalities from that group stand out with values of the indicators for the revenue significance of real property taxation that are many times higher than in the rest of municipalities. the group of the municipalities where property tax has negligible fiscal significance, is the largest but also the most homogeneous, with indicator values that are extremely close, and includes more than half of the bulgarian municipalities. a considerable number of municipalities in that group are small and medium-sized ones, have a rural profile and are local territorial units identified as underdeveloped rural or mountainous areas. conclusion the data on local governments own revenue per capita during 2007-2018 reveal the following observation about municipal fiscal disparities. fiscal differences in own revenue at local level in bulgaria are considerable. excluding outliers reduced municipal fiscal disparities significantly in any year during the period under review. while the differences in-between the maximum and the minimum value within the group that includes all municipalities are significant and vary largely over the years, in the group of municipalities with no extreme values, on the other hand, fiscal disparities in terms of own-source revenue per capita measured as the difference between the maximum and the minimum value remained basically unchanged over the period of 12 years. if extreme outliers excluded the values of the maximum-tominimum ratio and the coefficient of variation point to a clear-cut decrease in the disparities in terms of own-source revenue per capita in the period under review. specific characteristics and endowments of municipalities as drivers of disparities in terms of their revenue-earning capacity are particularly manifest in local territorial units in bulgaria that exhibit outliers in own-source local revenue per capita. in designing state equalization transfers as a fiscal instrument intent to reduce municipal fiscal disparities the grant allocation formula should take in account the major force behind the fiscal differences in revenue potential of local governments. it has to be noted that the revenue component of general equalization grant formula applied in bulgaria during the period under nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 80 review was targeted at addressing disparities only in local tax base, thus undermining other local sources of revenue such as charges and concession fees. its aim was to reduce the differences in tax receipts across municipalities, which was done by giving more resources to those municipalities with lower tax revenue per capita and excluding from benefits those municipalities for which tax revenue per capita was higher than the national average. as a consequence, all municipalities extreme outliers in terms of their own revenue per capita having low tax revenue per capita but high per capita revenue from concession fees were included in the group of grant beneficiaries. what does emerge clearly from current analysis is that rich municipalities are very few and the level of their own source revenue is in sharp contrast to the rest of the municipalities, which comes to show that only local territorial units comprising the latter group or those with low revenue capacity could be treated as potential beneficiaries to an equalization scheme. references chandra, t. (2008). development of theory of capital structure: from modigliani-miller, myers, to jensen. journal of information technology and management, 6 (4), 840–850. bird, r.m., tarasov, a.v.2004. closing the gap: fiscal imbalances and intergovernmental transfers in developed federations. environment and planning c: government and policy. volume 22:77-102. boadway,r. 2004. the theory and practice of equalization. cesifo economic studies. volume 50, 1/2004: 211–254. dawson, r.2012. how significant is a boxplot outlier? journal of statistics education. volume 19, number 2. ime institute for market economy. 2018. regional profiles. available at: https://www.regionalprofiles.bg/var/economic-centres-bg-2018.pdf . kalcheva, d. 2017. access to debt financing opportunities for improvement of the investment capacity of bulgarian municipalities (for the period 2003-2015). economic alternatives. issue 3: 390-404, november. kalcheva, d., nenkova,p., fiskalna rolya i znachenie na danaka varhu nedvizhimite imoti v bulgaria sravnitelen analiz na 265 obshtini. biznes posoki. issue 2: 95-110. kowalik, p. 2015. horizontal fiscal imbalance in germany. beh-business and economic horizons. volume 11 issue 1:1-13. nenkova, p. 2019.an analysis of equalizing capacity of state transfers for local government activities in bulgaria. economic alternatives.issue 4: 627-640, december. shankar, r., shah, a.2003. bridging the economic divide within countries: a scorecard on the performance of regional policies in reducing regional income disparities. world development. volume 31, no. 8: 1421–1441. stoilova,d. 2009. financial decentralization in bulgaria: which are the most important achievements of the transition period and how to move forward?. analele stiintifice ale universitatii "alexandru ioan cuza" din iasi stiinte economice, vol. 56: 166-177, november. zahariev, a. 2017. fiscal decentralization and financial management of municipalities in bulgaria. tsenov academic publishing house. available at ssrn: https://ssrn.com/abstract=2915415 or http://dx.doi.org/10.2139/ssrn.2915415 https://www.regionalprofiles.bg/var/economic-centres-bg-2018.pdf https://ideas.repec.org/a/nwe/eajour/y2019i4p627-640.html https://ideas.repec.org/a/nwe/eajour/y2019i4p627-640.html https://ideas.repec.org/s/nwe/eajour.html https://ideas.repec.org/a/aic/journl/y2009v56p166-177.html https://ideas.repec.org/a/aic/journl/y2009v56p166-177.html https://ideas.repec.org/s/aic/journl.html https://ideas.repec.org/s/aic/journl.html https://ssrn.com/abstract=2915415 https://dx.doi.org/10.2139/ssrn.2915415 nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 81 appendix 1. municipalities distribution according to their own revenue per capita 2007 2012 2018 26 109 45 33 1412 5 2 1 1 5 1 1 1 2 1 1 1 1 1 1 0 20 40 60 80 100 120 050 10 11 50 20 12 50 30 13 50 40 14 50 50 15 50 60 16 50 70 17 50 80 18 50 90 19 50 10 01 -1 05 0 11 01 -1 15 0 12 01 -1 25 0 13 01 -1 35 0 14 01 -1 45 0 15 01 -1 55 0 16 01 -1 65 0 17 01 -1 75 0 18 01 -1 85 0 19 01 -1 95 0 n u m b e r o f m u n ic ip al it ie s own revenue per capita 46 146 40 127 2 2 2 0 0 2 1 0 0 1 0 0 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 20 40 60 80 100 120 140 160 n u m b er o f m u n ic ip al it ie s own revenue per capita 7 89 105 34 12 5 1 2 2 1 1 1 0 0 1 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 20 40 60 80 100 120 010 0 20 13 00 40 15 00 60 17 00 80 19 00 10 01 -1 10 0 12 01 -1 30 0 14 01 -1 50 0 16 01 -1 70 0 18 01 -1 90 0 20 01 -2 10 0 22 01 -2 30 0 24 01 -2 50 0 26 01 -2 70 0 28 01 -2 90 0 30 01 -3 10 0 32 01 -3 30 0 34 01 -3 50 0 36 01 -3 70 0 38 01 -3 90 0 40 01 -4 10 0 42 01 -4 30 0 44 01 -4 50 0 n u m b e r o f m u n ic ip al it ie s own revenue per capita nenkova presiana et al. / finance, accounting and business analysis 2 (2) 2020 82 appendix 2 results of boxplot analysis q1 25th percentile point iqr q3 75th percentile point q3 + 3.iqr extreme values per capita own revenue > (q3 + 3.iqr) 2007 66,4 102,5 168,9 476,4 nesebar, primorsko, bansko, sapareva banya, tsarevo, samokov, byalavarna, kavarna, shabla, chavdar, koprivshtitsa, chelopech, sozopol, razlog, malko tarnovo, balchik 2008 83,6 99,3 182,9 480,5 nesebar, primorsko, bansko, byalavarna, kuklen, tsarevo, kavarna, sozopol, pomorie, chavdar, sapareva banya, bozhurishte, chelopech, koprivshtitsa, balchik, razlog 2009 77,4 88,7 166,1 432,2 nesebar, bansko, byala-varna, chelopech, primorsko, chavdar, tsarevo, sozopol, kavarna, balchik, malko tarnovo 2010 81,3 77,6 158,9 391,7 nesebar, chelopech, primorsko, byala-varna, chavdar, tsarevo, bansko, sozopol, balchik, koprivshtitsa, kavarna, malko tarnovo 2011 98,0 89,8 187,8 457,2 chelopech, chavdar, nesebar, primorsko, byala-varna, bansko, sozopol, tsarevo, balchik, beloslav, malko tarnovo 2012 108,4 102,1 210,5 516,8 chelopech, chavdar, nesebar, primorsko, byala-varna, shabla, sozopol, tsarevo, bansko, balchik, koprivshtitsa, mirkovo, galabovo 2013 127,6 103,8 231,4 542,8 chelopech, chavdar, nesebar, primorsko,sozopol, byala-varna, tsarevo, bansko, balchik, bolyarovo, pomorie, mirkovo, borino 2014 132,8 94,9 227,7 512,4 chelopech, chavdar, primorsko, nesebar, byala-varna, sozopol, hitrino, tsarevo, koprivshtitsa, bansko, borino, galabovo, bolyarovo, mirkovo 2015 140,9 114,3 255,3 598,2 chelopech, chavdar, primorsko, nesebar, sozopol, koprivshtitsa, tsarevo, byala-varna, bansko, mirkovo, georgi damyanovo 2016 155,5 107,8 263,3 586,7 chelopech, primorsko, chavdar, nesebar, sozopol, galabovo, radnevo, tsarevo, byala-varna, koprivshtitsa, stolichna obshtina, bansko, mirkovo 2017 161,3 115,6 277,0 623,8 chelopech, chavdar, primorsko, nesebar, sozopol, koprivshtitsa, byala-varna, tsarevo, mirkovo, bansko, balchik, galabovo 2018 168,1 130,3 298,4 688,4 chelopech, chavdar, primorsko, nesebar, mirkovo, tsarevo, sozopol, koprivshtitsa, byala-varna, bansko, devnya, galabovo dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 56 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg us stock market at the background of the covid-19 pandemic: implication for valuation dimiter nenkov department of finance, university of national and world economy, sofia info articles abstract history article: submitted 8 january 2021 revised 19 march 2021 accepted 6 april 2021 the main objective of this study is to discuss the forces driving today’s us stock market levels, in an attempt of assessing their reasonability. this is not the first research of this kind of the author, but the approach now is a little bit different. some important issues are raised regarding the different types of players on the stock market and their potential influence on its dynamics. the s&p 500 pe ratios are analyzed in historic plan and subsequently used for deriving the implied capitalization rate and cost of equity for different sub-periods. the results indicate for atypically high current pe ratios, and unreasonably low cost of equity. one of the conclusions is that to a great extent this is caused by the policy of low interest rates and quantitative easing, and is an important factor driving high price levels in the short run. it is not logical to accept this as a normal cost of equity level, meaning that it could not be sustainable in the long run. the implication for valuation of stocks is that fundamental analysts and investors would better avoid the temptation of using the current cost of equity as it is not representative for the purpose of fundamental models. keywords: stock markets, investing, speculating, pe ratios, fundamentals, stock market bubble. *address correspondence: e-mail: dnenkov@unwe.eu dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 57 introduction the us stock market indexes ended the turbulent 2020 at new record-high levels, regardless of the suffering economy all over the globe, due to the covid-19 pandemic. this does not seem quite logical, since the stock market is believed to be the showcase of the economy as a whole, the indicator about the state of the aggregate business. this fact, combined with some dramatic moves in 2020, are two important reasons why processes on the stock markets currently attract additional attention. in such periods the discussions about the validity and reasonableness of current market levels become even more intense. one reason for the never ending debate whether the stock market is undervalued, overvalued or fairly valued, may be explained by the simple fact that many of the market players do not care at all about the true value of stocks under their consideration. according to many of the strategies, theories and approaches for selection of stocks in the capital markets, determining the value of these stocks is not necessary and is not done. today’s market is driven, among other factors, also by forces that have little in common with the dynamics of the intrinsic value of stocks. the concerns whether the market is overvalued, undervalued or fairly valued are predominantly from the point of view of long-term investors, which are usually interested to know the fundamental value of stocks. the deviation of stock prices from their intrinsic value is normally not an issue for most traders and speculators in the market. in order to make a good judgement about stock-market levels at any point in time, it is not enough to simply apply a couple of valuation methods. there are a number of other important issues that need to be considered for explaining the driving forces of the market. this study starts with raising certain fundamental issues, which are closely related to the above debate. among them are: what is buying shares in the stock market – investment or speculation, investment or gambling? which approach leads to better financial outcome – investing or trading with shares of stock? what determines financial success in the stock market – good investment skills or luck? are we pricing or valuing stocks in the market? what are today’s players, putting money in the market during the covid-19 pandemic – investors or speculators (traders)? what predominantly drives today’s stock market in the conditions of the covid-19 pandemic –investing or trading (speculating)? what are the implications of the above issues on the valuation of stocks in the markets? some of these questions are quite difficult and it is not possible to give the answers in one short study. the current research paper is expected to eventually provide some partial answers, and most of the discussion is foreseen to continue further in other studies. some fundamental issues concerning investors in the stock market in the current study the issues are discussed mainly from the point of view of the investor, rather than the speculator. according to benjamin graham and david dodd, one of the first things that need clarification in connection with capital markets, is the meaning of investor or investing. they choose to use the term “investor” as the opposite to “speculator” (graham, dodd, 2009). in the first edition of their book “security analysis” of 1934, they try to give a precise definition of the difference between the two categories. it is as follows: “an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. operations not meeting these requirements are speculative” (graham, 2006). in other words, an investor determines the value of a share of stock based on the value of its businesses. at the same time, the speculator bets that the share price will rise because someone else is willing to pay even more for it. as graham notes “investors judge the market price by established standards of value, while speculators base their standards of value upon the market price” (graham, b., 2006). this explains the statement regarding capital market players: “value is a better measure for investors, but price matters more to traders” (little, k., 2020). in this sense, for the speculator, the constant flow of quotations on the stock exchange is like oxygen. if you cut it off, he dies. at the same time, for investors, these stock quotes mean almost nothing (graham, b., 2006). moreover, warren buffett likes to say that when he has to determine the actual value of a stock, he tries to exclude himself from any information about its market price, so that it doesn’t affect the valuation process (brush, 2010). it is a fact, however, that the term “investor” has been used too loosely in and out of wall street, including anyone who is in the stock market. in other words, “anybody who buys and sells securities has become an investor, no matter what he buys, for what purpose, at what price, in cash or on margin” (graham, 2006). there are factors which contribute for more active speculation and trading in the stock market dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 58 nowadays. during the covid-19 pandemic among the many restrictions there were those who affected a number of gambling activities as well. such are, for example, the temporarily closures of horse races and casinos. according to some observers, part of the regular participants in these activities redirected their attention to the stock market, where they could gamble practically without such restrictions. on the other hand, an increasing number of players put money in the stock market quickly and very conveniently, facilitated by different electronic platforms designed for this purpose. in the third place, the dynamic situation and the dramatic moves in the markets during the pandemic 2020 additionally attracted the attention of new potential players, predominantly inexperienced speculators and traders. the question which strategies are more successful in the stock market – the investment type of strategies, involving thorough analysis and valuation, or the trading-based strategies, involving continuous buying and selling of stocks, will continue to be of high interest in the future. the reason is that numerous studies have been made in historical terms on the successes and failures of the different approaches, but most of them have arrived at ambiguous conclusions (malkiel, b., 2015). this kind of studies continue nowadays, and obviously they will continue in the future. since the emergence of capital markets, one of the most recurring topics of debate has been the financial success of one or another player. when commenting on the impressive achievements of investors such as warren buffett and other well-known fund managers, some people say that they are mostly (or even entirely) due to luck, while others say that they are the results of the exceptional skills of these individuals. one interesting study, made by michael mauboussin (mauboussin, m., 2012), attempts to explain the role of skills and luck in the final outcomes for different activities, predominantly sports. the findings of the study place investing immediately next to gambling activities, such as roulettes and slot machines (mauboussin, m., 2012). in other words, provided that the conclusions of mauboussin’s study are right, the financial success from investing in the stock markets should be explained almost entirely with good luck. this looks very discouraging for investors, who try to beat the market, relying upon their own skills, or the skills of their consulting analysts. it may be quite demotivating for people investing much efforts while striving for excellence in valuation. still, the question remains whether there are strategies that can consistently beat the market, not by chance (luck), but as a result of players’ skills. another reason for the debate whether the stock market is undervalued, overvalued or fairly valued, is that the true value of each stock is hidden, invisible, intangible. the market determines the price of an asset, which is supposed to be representative of its value, but price and value are different most of the time. according to one widely accepted definition, the value of a company (and its stocks) in general, is the price recognized in an arm’s-length transaction by a free market, in the conditions of equilibrium between supply and demand, when buyer and seller have the necessary information for this company, when buyer and seller act rationally, when buyer and seller act without coercion. in other words, it is the job of the market to determine the value of stocks. however, the definition clearly implies that the price awarded by the market to a common stock is supposed to represent its true value only if a number of conditions are met. these include: a free market; equilibrium between supply and demand; buyer and seller have the necessary information; buyer and seller act rationally; buyer and seller act without coercion; … (the list of conditions could eventually be continued). if one or more of the above conditions are not met, this is a prerequisite for the market price of a stock to deviate from its actual value. most people, involved in the activities and processes of the stock market, would agree that in reality these conditions are almost never met at 100%, even in the most efficient capital markets. the less these conditions are met, the higher would be the difference between price and value (the value gap). this explains why the market itself also periodically fails in determining the true value of stocks. this is why significant efforts and costs are made by many analysts and investors for parallel, independent valuation of stocks. performance of some major us indexes during the last two decades something which makes impression to people following the commentaries and analyses about the stock market, as presented by different media, is that almost all talks are focused on short-term events and perspectives. respectively, the short-term factors are mainly commented on in an attempt to predict the immediate future moves of stocks. for example, since the beginning of the covid-19 pandemic, the focus has been mainly on factors such as the outlooks for rapid vaccine development and approval, the dynamics of new covid-19 infections, another rescue package by the government, another step in the fed’s quantitative easing policy, and others of this kind. dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 59 the fundamental, long-term factors are kind of left in the background, and are rarely addressed indeed. if the assumption is that the fundamentals determining the value of stocks have been entirely and correctly incorporated by the market prior to the covid-19 pandemic, then such attitude is understandable. but in reality, it is exactly this assumption that can be questioned. many market players and observers do not agree that today’s market prices of stocks are adequate in terms of fundamentals. that is why us stock-market indexes should be frequently considered and analyzed more broadly, over a longer period. figure 1 illustrates the dynamics of the s&p 500 during the first two decades of the 21st century. the turbulent first decade started with the bear market of 2000-2003, triggered by the burst of the internet bubble. the index fell by more than 40% until the first quarter of 2003. then a new rise started for about 4 to 5 years until october 2007, followed by a new crash during the global financial crisis. the second decade was characterized by a continuous uptrend, which will be commented below. figure 1. dynamics of the s&p 500 in the period 2000-2021 source: https://www.multpl.com/s-p-500-historical-prices table 1 shows the levels of two major us stock indexes – djia and s&p 500, on certain significant dates of their history. these are the date of their record-high level preceding the global financial crisis, the date of their bottom level during the same crisis and then the date of their record-high level preceding the covid-19 pandemic crash of 2020. both djia and s&p 500 reached their pre-crisis record highs on 8 october 2007 – 14 093.08 points for djia and 1561.80 points for s&p 500. there followed a prolonged downward trend of about a year and a half, accelerated by the burst of the global financial crisis, and the two indexes reached the bottom on 9 march, 2009 – at 6 626.94 points for djia, and at 683.38 points for s&p 500. table 1 also indicates the loss of market capitalization in percent. by reaching the bottom, djia lost 52.98%, and s&p 500 lost 56.24% of their top market-capitalization values from october 2007. despite the protracted recession, the us stock market went up again, and it took him about 5 and a half years to beat the pre-crisis peaks. this happened on 4 march, 2013 with the djia, when it closed at 14 127.82. the s&p 500 did the same on 26 march, 2013, by closing at 1 563.77% (nenkov, d., 2017). table 1. key values of djia and s&p 500 – 2007, 2009 and 2020 index date peak value before the crisis bottom (trough) value value as of 12 feb, 2020 djia 8.10.2007 14,093.08 9.03.2009 6,626.94 12.02.2020 29,551.42 % of peak value 100.00% 47.02% 209.69% difference (%) -52.98% 109.69% index date peak value before the crisis bottom (trough) value value as of 19 feb, 2020 0.00 500.00 1,000.00 1,500.00 2,000.00 2,500.00 3,000.00 3,500.00 4,000.00 4,500.00 0 1 -j a n -0 0 0 1 -j a n -0 1 0 1 -j a n -0 2 0 1 -j a n -0 3 0 1 -j a n -0 4 0 1 -j a n -0 5 0 1 -j a n -0 6 0 1 -j a n -0 7 0 1 -j a n -0 8 0 1 -j a n -0 9 0 1 -j a n -1 0 0 1 -j a n -1 1 0 1 -j a n -1 2 0 1 -j a n -1 3 0 1 -j a n -1 4 0 1 -j a n -1 5 0 1 -j a n -1 6 0 1 -j a n -1 7 0 1 -j a n -1 8 0 1 -j a n -1 9 0 1 -j a n -2 0 0 1 -j a n -2 1 s&p 500 level https://www.multpl.com/s-p-500-historical-prices dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 60 s&p 500 8.10.2007 1,561.80 9.03.2009 683.38 19.02.2020 3,386.15 % of peak value 100.00% 43.76% 216.81% difference (%) -56.24% 116.81% source: http://finance.yahoo.com/q?s=%5edji (accessed 4 march, 2021) http://finance.yahoo.com/echarts?s=%5egspc+interactive (accessed 4 march, 2021) calculations of the author the us stock-market surge continued, with short interruptions, until february 2020. this is perceived by some analysts as the longest bull market in history (9 march 2009 – 12 february 2020). it surpassed the previous record-long bull market that ran from october 1990 to march 2000 (other analysts disagree, however) (wigglesworth, r., 2020). on 12 feb, 2020 the djia hit 29,551.42 points, which is an increase of 109.69% compared to the pre-crisis record-high level from 2007. the s&p 500 respectively hit 3,386.15 points – an increase of 116.81% compared to its october 2007 highest level. table 2. key values of djia for the period 12 feb, 2020 – 1 march, 2021 index date peak value before the covid19 pandemic bottom (trough) value value as of 1 march, 2021 djia 12.02.2020 29,551.42 23.03.2020 18,591.93 1.03.2021 31,501.59 % of peak value 100.00% 62.91% 106.60% difference (%) -37.09% 6.60% % of bottom value 100.00% 169.44% difference (%) 69.44% source: http://finance.yahoo.com/q?s=%5edji (accessed 4 march, 2021) http://finance.yahoo.com/echarts?s=%5egspc+interactive (accessed 4 march, 2021) calculations of the author table 2 covers the dynamics of djia during the turbulent year 2020. there was a sharp decline in the index of 37.09% just within 40 days – until 23 march. this included the largest single-day drop by points in the history of the djia of -2,997.1 (on march 16, 2020). by 1 march, 2021, despite the ongoing pandemic, djia surged again to 106.60% of the record high level from 12 feb, 2020, or surpassed it by 6.60%. this corresponded to an increase of 69.44%, compared to the bottom value of 23 march, 2020. table 3. key values of s&p 500 for the period 19 feb, 2020 – 1 march, 2021 index date peak value before the covid-19 pandemic bottom (trough) value value as of 1 march, 2021 s&p 500 19.02.2020 3,386.15 23.03.2020 2,237.40 1.03.2021 3,901.84 % of peak value 100.00% 66.08% 115.23% difference (%) -33.92% 15.23% % of bottom value 100.00% 174.39% difference (%) 74.39% source: http://finance.yahoo.com/q?s=%5edji (accessed 4 march, 2021) http://finance.yahoo.com/echarts?s=%5egspc+interactive (accessed 4 march, 2021) calculations of the author the most dramatic moves of the s&p 500 index during 2020 can be seen in table 3. there was a sharp decline by 33.92% between 19 feb and 23 march, 2020. it was followed by a rise and by 1 march, 2021 the s&p 500 surpassed the feb 19, 2020 record by 15.23%. this was the equivalent of a rise of 74.39% compared to the bottom of 23 march, 2020. http://finance.yahoo.com/q?s=%5edji http://finance.yahoo.com/echarts?s=%5egspc+interactive http://finance.yahoo.com/q?s=%5edji http://finance.yahoo.com/echarts?s=%5egspc+interactive http://finance.yahoo.com/q?s=%5edji http://finance.yahoo.com/echarts?s=%5egspc+interactive dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 61 as it is evident from the above numbers, there has been surge of the broad benchmark index s&p 500 by 15.23% (for the period 19 feb, 2020 – 1 march, 2021), while the economy has been down by 3.5% (as measured by the gross domestic product – gdp) in 2020 (popov, b. 2021). this discrepancy is usually explained by optimistic expectations about the future development of the covid-19 pandemic, and about the economy in 2021 and following years. it is true that the stock market sells expectations, but it is still hard for most serious analysts and investors to accept such discrepancy as being normal. to find a truly satisfactory explanation of this situation, it is necessary to dig deeper into the fundamental issues, related to the driving forces of the stock market. dynamics of the price-earnings ratios on the us stock market one of the first market performance indicators of stocks, which is addressed for the purpose of discussing the validity of stock-market levels, is the price-earnings ratio (pe). figure 2 illustrates the dynamics of the pe ratio of the s&p 500 during the long-term period between jan 1, 1871 march 4, 2021 (by years). the numbers are at the beginning of each year. the ratios used are trailing pes, based on companies’ trailing 12-month earnings per share (eps). the arithmetic average for the entire period is 15.95 and the median is 14.89. the graph shows that from the beginning of the period until the end of the 1980-ies the ratio fluctuates mainly around 15 times earnings, within the range between 5 and 25. the average pe for this sub-period is 13.73 and the median is 13.43. since the 1990-ies however, the lower border of the interval has risen to about 15, and the pe has been mainly within the range between 15 and 30 times earnings. respectively, the arithmetic average pe for this more recent sub-period is quite higher – 24.96, and the median is 21.82. the volatility of the pe is also much higher during this sub-period. figure 2. dynamics of the s&p 500 pe ratio for the period 1871-2021 source: https://www.multpl.com/s-p-500-pe-ratio/table/by-year the calculated above average pe ratios by sub-periods are compared in table 4. the average pe level for the period 1991-2021 is significantly higher than that for the preceding longer period (1871-1990). the arithmetic average for the last three decades is by 81.79% higher, and the median is by 62.47% higher. these are the three decades during which there has been a lot of talk on the stock market about the so called “new era”, “new economy”, “new normality”, etc., with their major features being low cost of capital and high pe ratios. table 4. historic pe ratios of the s&p 500 – comparing by sub-periods period difference indicator 1871-1990 1991-2021 in absolute terms (k.3-k.2) difference in % (k.4/k2) k.1 k.2 k.3 k.4 k.5 arithmetic average pe 13.73 24.96 11.23 81.79% median pe 13.43 21.82 8.39 62.47% 5 15 25 35 45 55 0 4 -m a r2 1 0 1 -j a n -1 7 0 1 -j a n -1 2 0 1 -j a n -0 7 0 1 -j a n -0 2 0 1 -j a n -9 7 0 1 -j a n -9 2 0 1 -j a n -8 7 0 1 -j a n -8 2 0 1 -j a n -7 7 0 1 -j a n -7 2 0 1 -j a n -6 7 0 1 -j a n -6 2 0 1 -j a n -5 7 0 1 -j a n -5 2 0 1 -j a n -4 7 0 1 -j a n -4 2 0 1 -j a n -3 7 0 1 -j a n -3 2 0 1 -j a n -2 7 0 1 -j a n -2 2 0 1 -j a n -1 7 0 1 -j a n -1 2 0 1 -j a n -0 7 0 1 -j a n -0 2 ja n 1 , 1 8 9 7 ja n 1 , 1 8 9 2 ja n 1 , 1 8 8 7 ja n 1 , 1 8 8 2 ja n 1 , 1 8 7 7 ja n 1 , 1 8 7 2 s&p500 pe ratio 1871-2021 by year https://www.multpl.com/s-p-500-pe-ratio/table/by-year dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 62 source: https://www.multpl.com/s-p-500-pe-ratio/table/by-year calculations of the author figure 3 illustrates the dynamics of the pe ratio of the s&p 500 only for the last two decades, covering the period jan 1, 1999 – march 4, 2021. the graph is built on monthly pe ratios. the arithmetic mean is 26.23, and the median is 22.33. there are some extremely high values, which are not due to extremely high prices, but to extremely low eps during years of heavy recession. such is, for example, the record-high pe of 123.73 times earnings from 1 may, 2009. these are very good illustrations of the counter movement rule for pe ratios, as identified and analyzed by nicholas molodovski (molodovski, 1953). figure 3 confirms the uptrend for the pe, identified in figure 2. during the years after the global financial crisis the pe ratios has been gradually rising from about 15 to about 25. in 2020 the pe ratio rose even further and was above 30 each month, ending at 38.37 on march 4, 2021. figure 3. dynamics of the s&p 500 pe ratio between 1999 and 2021 source: https://www.multpl.com/s-p-500-pe-ratio/table/by-month table 5 shows another comparison of s&p 500 pe ratios – the current pe with the average pe for the entire period 1871-2021. the current pe is represented by an average of the last 6 months (as of the time of this research) – from oct 2020 until march 2021. they are still calculated on the basis of preliminary eps estimates. the average pe ratio for the longest period 1871–2021 is as follows: arithmetic mean of 15.95 and median of 14.89. as noticed in the graphs above, the current pe level (for the last 6 months) is more than twice higher than the historic average: the arithmetic average pe is by 134.61% higher, and the median is by 155.20% higher. this is an even more pronounced excess over the average historical values than the one shown in the previous table 4. table 5. comparing s&p 500 current pe with historic average pe period difference indicator 1871-2021 last 6 months /oct 20 march 21/ in absolute terms (k.3-k.2) difference in % (k.4/k2) k.1 k.2 k.3 k.4 k.5 arithmetic average pe 15.95 37.42 21.47 134.61% median pe 14.89 38.00 23.11 155.20% source: https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-year calculations of the author one possible explanation of this excessively high current pe level of s&p 500 can be the counter movement principle of pe of molodovski, which was mentioned above. the temporary lower eps of the index, due to the covid-19 pandemic limitations, lockdowns, etc., lead to a lower denominator, and 5 15 25 35 45 55 0 1 -j a n -9 9 0 1 -o ct -9 9 0 1 -j u l0 0 0 1 -a p r0 1 0 1 -j a n -0 2 0 1 -o ct -0 2 0 1 -j u l0 3 0 1 -a p r0 4 0 1 -j a n -0 5 0 1 -o ct -0 5 0 1 -j u l0 6 0 1 -a p r0 7 0 1 -j a n -0 8 0 1 -o ct -0 8 0 1 -j u l0 9 0 1 -a p r1 0 0 1 -j a n -1 1 0 1 -o ct -1 1 0 1 -j u l1 2 0 1 -a p r1 3 0 1 -j a n -1 4 0 1 -o ct -1 4 0 1 -j u l1 5 0 1 -a p r1 6 0 1 -j a n -1 7 0 1 -o ct -1 7 0 1 -j u l1 8 0 1 -a p r1 9 0 1 -j a n -2 0 0 1 -o ct -2 0 s&p500 pe ratio 1999-2021 by month https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-year dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 63 respectively, to a higher pe. in order to determine to what extent the lower current earnings explain the higher ratios, a look at the eps dynamics for the last year or so would help. however, the situation now is quite different, since the current market prices have been going up for several months. in the previous periods of depression or crisis, when the pes used to reach their highest levels, the prices had gone sharply down, following a crash, as is the case with the above-mentioned s&p 500 pe of 123.73 on 1 may, 2009. the stock market at that time was still close to the bottom. implication for the valuation of stocks the analysis in the previous section outlined some clear differences between pe levels over time. there is understanding among a part of the investors that historic average pes from older times are not representative about what today’s pes should be. such understanding is mainly shared by supporters of the “new normality” perception. with regard to this, an important question arises: what is the normal pe level to be used as the benchmark for future times? is it the historical average pe for the whole long period (1871-2021)? is it the average pe for the latest two or three decades? is it the current pe level (as of the end of 2020 and beginning of 2021)? one very logical approach to answering this question is by looking at fundamentals. more specifically, it is important to explore how the above actual pe levels comply with fundamentals. the latter are also called the value drivers for companies and stocks (copeland, et. all., 2000). these are: the earnings potential (cash flow potential); the expected growth of earnings (cash flows); the level of risk. for the purpose of the analysis of stocks, these three fundamentals are normally represented by the following three indicators (damodaran, 2012): roe (return on equity); g (eps growth); re (cost of equity). in previous studies of the author, the fundamental pe ratios used to be calculated on the basis of the above fundamentals and later compared to the actual pe ratios (nenkov, bathala, 2008). this time the reverse approach is applied. the actual pes are used in order to determine the implied cost of equity. the analysis is demonstrated in table 6. a similar analysis was performed by massasuke ide for the us and japanese stock markets in the 1990-s, covering the years preceding the burst of the largest bubble in the japanese stock market at the end of 1989 (massasuke ide, 1996). table 6 shows the arithmetic mean and median pe of the s&p 500 by sub-periods, as analyzed above in tables 4 and 5. the other input variables include the s&p 500 payout ratios (1-b), and the s&p 500 return on equity roe. table 6. deriving implied cost of equity from s&p 500 pe ratios, roe, and g period indicator 1872-2021 1991-2021 oct 2020 march 2021 s&p 500 ре ratio arithmetic mean 15.95 24.96 37.42 s&p 500 ре ratio – median 14.89 21.82 38.00 payout ratio /modified/ – (1b) 0.61 0.86 0.93 return on equity – roe 14.00% 15.81% 13.98% internal growth rate – g 5.46% 2.21% 0.98% implied capitalization rate (re g) : based on arithmetic mean ре 4.03% 3.52% 2.51% based on median ре 4.32% 4.03% 2.47% implied cost of equity re : based on arithmetic mean ре 9.49% 5.74% 3.49% based on median ре 9.78% 6.24% 3.45% source: https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-earnings http://pages.stern.nyu.edu/~adamodar/ calculations of the author https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-earnings http://pages.stern.nyu.edu/~adamodar/ dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 64 one of the aspects in which the fundamental pe model can be useful, is the opportunity to derive the implied capitalization rate (re – g), and the implied cost of equity (expected rate of return on common stocks) re. for this purpose, the actual market pe ratios are needed. the reversed models are: ( ) ( ) ( ) and ( ) ( ) where: (re – g) = implied capitalization rate, re = implied cost of equity, g = internal growth rate, (1 – b) = payout ratio, pe = actual market pe ratio. (all variables are for the s&p 500). the actual average and median pe were introduced and discussed in the previous section. they are for the periods: 1871-2021, 1991-2021, and oct 2020-march 2021. the average payout ratios for these periods are respectively: 0.61, 0.86, 0.93. a kind of modified payout ratios are used for the last two periods, which include not only dividend payments, but also cash flows in the form of stock buybacks. it is more representative, since the policy of share repurchases have been very intensively applied by the s&p 500 companies during the last two or three decades. this explains the extremely high payout ratio for these two periods. the return on equity has been with more stable levels throughout the period, respectively: 14.00%, 15.81%, 13.98%. the internal growth rates (g) have been obtained for each of the periods on the basis of the retention ratios (1 – payout ratios) and the return on equity, as follows: g = 5.46% (1871-1990), g = 2.21% (1991-2021), g = 0.98% (oct 20-march 21). the capitalization rate is derived in two variants – on the basis of mean pe and median pe. the median-based values are: 4.32%, 4.03%, and 2.47%. the derived implied cost equity (again median-based) is respectively: 9.78%, 6.24%, and 3.45%. the results indicate that the estimated capitalization rate declines significantly with the rise of the actual pe ratios. the implied cost of equity also goes down as a result of rising market pe ratios. the implied cost of equity for the longest period (1871-2021) of 9.78% corresponds to the historic cost of equity, calculated as a geometric average for the same period. the implied cost of equity for the latest three decades is quite lower – 6.24%. the current implied cost of equity (last 6 months) of only 3.45% doesn’t seem quite normal. there is, however, one more factor with direct impact on the implied cost of equity – this is the growth rate. this may give reason for some to disagree with the received cost of equity if they doubt the correctness of the calculated growth rate. the big debate, after all, comes down to whether the cost of equity over the last decade can be considered normal or not. among the five important indicators of a bubble in the stock market henry blodgett includes the huge leverage in the system, the waves of capital that flood the market (blodget, 2011). this is actually the current situation in the stock market. there has been a policy of maintaining extremely low interest rates (close to zero) everywhere since the global financial crisis until nowadays. in the period of the covid-19 pandemic this policy has been further enhanced through a number of rescue fiscal packages to help the economy, as well as “quantitative easing” and other similar incentives by the fed and other central banks. the economy certainly needs such incentives. but most of this additional capital is designed to reach the real economy via the capital and money markets. the issue, however, is that channeling funds to the real economy in a way that has a real effect is not simple. the path of investing in real assets is much longer and uneven than directing funds to financial markets. with regard to this, it is worth making a research about what proportion of all these “rescue” funds do indeed reach the real economy, and what proportion is only poured in the financial markets, just to be directed into stocks, bitcoin, other crypto currencies, etc. it may turn out that most of this additional and low-cost capital do not reach at all the real economy. why put efforts in investing in real assets in a struggling economy, while buying stocks or other financial assets in a rising market, would bring at least satisfactory return with no efforts. all the above incentives are at the expense of huge consumer and government debt and increased inflation potential. according to all fiscal and monetary theories the above policies should lead to higher inflation sooner or later. since this policy was started more than a decade ago, the question is why inflation rates have been so low throughout all this period. one possible explanation, which is worth to be dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 65 considered, is that much, if not most, of this inflation potential is absorbed by financial markets. a lot of these extra funds are simply dumped on the capital markets and remain there. in this way most of the inflation potential is absorbed by financial markets. this is one possible explanation why pumping money by fed and the government still have not lead to higher inflation. the inflation is only in the stock markets and other financial markets. shortly said, highly increased public expenditures and loose monetary policy fuel a bubble in the stock market. this outcome is good for politicians as well, given that “they are focused on stock markets as indicators of how they are performing”. when the market is up, they point to this as their next success. this creates excessive pressure to fiscaland monetary-policymakers to support markets” (elliott, d., 2020). according to michael harnett, chief investment strategist at the bank of america's research unit, "stock prices are rising not because of optimism about the economy, but in fact because the future looks relatively bleak." (sokolova, c., 2020). this leads to the biggest paradox in the current stock market. it turns out that the worse the economy, the better for stock market growth. conclusion investors are divided over whether today’s us stock market is overvalued, undervalued or fairly valued, as it has always been the case during prolonged periods of upward market, as well as in periods of market turmoil. investors have actually been divided for at least the last 5 or 6 years, but they are even more uncertain now, after a year of covid-19 pandemic crisis. the us stock market has been driven by the activity of both long-term investors on the one hand and speculators and traders on the other. the latter group is not very interested in the true value of the market. driven by these forces, the recent us stock market dynamics have demonstrated further continuation of the trend from the last decade towards higher and higher pe ratios. by linking these levels of pes to fundamentals, it becomes evident that they are mainly due to the low cost of equity during this period. for some market players this is “the new normality”. for others this simply does not make sense in the long run. normalcy implies long-term sustainability of the system, lack of serious external intervention on the capital market. the extremely low implied cost of equity nowadays calls into question the extent to which this fundamental variable is indeed fundamental. the grounds of doubt are serious, given the artificially maintained low interest rates and the outpouring of huge amount of capital on the stock market. references copeland, t, koller, t., murrin, j., 2000. valuation – measuring and managing the value of companies, john wiley & sons, new york damodaran, a., 2012. investment valuation – tools and techniques for determining the value of any asset, john wiley & sons, new york graham, b. 2006. the intelligent investor – revised edition, first collins business essentials edition (harpercollins publishers), (preface to the fourth edition by warren e. buffett, updated with new commentary by jason zweig) graham, b., dodd, d., l. 2009. security analysis – principles and technique”, 6th ed., the mcgrawhill companies, inc. (foreword by warren buffett, updated with new commentary by seth. a. klarman, james grant, bruce greenwald, and others) malkiel, b. g., 2015. a random walk down wall street, w.w. norton & company, inc., new york greenwald, b.c.n., j. kahn, p. sonkin, m. biema, 2001. value investing – from graham to buffett and beyond, john wiley & sons inc., new jersey massasuke ide – “corporate profitability and stock valuation in japan”, financial analysts journal, march/april, 1996, p.45 malkiel, b. g., 2015. a random walk down wall street, w.w. norton & company, inc., new york mauboussin, m. j. 2012. the success equation – untangling skill and luck in business, sports, and investing, harvard business review press molodovsky, n., 1953. a theory of price-earnings ratios, financial analysts journal, january/february 1995 (reprinted from “the analyst journal”, november 1953) nenkov, d. 2017. relative valuation and stock-market bubbles, economic alternatives, issue 3, 2017, pp. 363-378 nenkov, d., 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https://www.mediapool.bg/zashto-tsenite-na-aktsiite-belezhat-rekordi-v-covid-retsesiyata-news311194.html https://www.ft.com/content/6b987f46-644f-11ea-b3f3-fe4680ea68b5 65 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg political connections and characteristics of the lq-45 index companies in indonesia kamilia syaputra, ernie hendrawaty faculty of economics and business, lampung university, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 objective: political activity relates to the activities of a state. political activities also can influence decision-making and power. companies often use politics in executing corporate strategies. the corporate is indicted for having political affiliation or engaging in political activity if one or more of its board of directors, commissioners, or shareholders is involved in political activity. this study aimed to seem at the political connections and characteristics of companies that are politically connected and without political connections within the indonesia lq-45 index. methodology: the samples during this study were 21 political-connected companies and five companies with no political connections within the indonesian stock market for 2014-2018. the statistical model wont to test the hypothesis is the ordinary least squares regression (ols) method. results: the results show that the difference between politically connected and non-politically connected companies is apparent within the company's leverage, but does not show any significant impact on the tax and profitability of the lq-45 index companies during the amount 20142018. political connections can only support the financing of enterprise debt. implication: characteristics of politically connected and non-politically connected companies are only reflected in leverage corporate but have no effect on tax and profitability payments to the lq-45 index companies during the period 2014-2018. political connections can only support the financing of enterprise debt. keywords: political connection, leverage, tax, profitability. address correspondence: e-mail : kamiliasyaputra.ks@gmail.com kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 66 introduction political activities influence decision-making and power. the economic performance of state-owned companies is related to the progress and development of the existing business. companies often use politics in executing company strategies to achieve specific goals. according to wulandari (2012), businesses can support a country's political activities through funding. politically connected companies have easier access to corporate operating regulations. built-in political connections can impact investment decisions and the company's activities. most companies in indonesia, especially the lq-45 index companies, are politically connected companies. politically connected companies have more privileges in their business activities than companies without political connections. politically connected companies have easy access to government-related projects. the closer the company has to the relationship, the more profitable it is to the company, whether it is in the business of obtaining funding or from its policy side. faccio (2010) states that politically connected companies have leverage higher, pay lower taxes, and have higher market power; however, they have worse accounting performance than unrelated companies. research in indonesia by kamaludin (2010) on political support for leverage. kamaludin (2010) found that there is a link between political support for leverage, the case in indonesia is increasing the size of the company (size) amount of leverage only for informal political support (spi). political connections are considered to have a lower tax payment on companies with political connections. politically connected companies enjoy lower tax rates of 29.67% for politically connected companies and 32.7% for non-politically connected companies (faccio, 2010). the difference reached 3.03% between politically connected and non-politically connected companies. through the political cycle, it is predicted that tax evasion is concentrated among soes, especially those closely related to the government (chen et al., 2015). the papers show that there is a close link between political connections to the reduction of corporate tax payments. political connections are considered to provide equal benefits to corporations and political actors. government-related projects such as state infrastructure development are more likely to be dealt with by political connections. having a political connection will affect the profits the company generates due to increased sales. however, would the profits made by the company be comparable to the political investment the company produces? so it is indicated that companies with political connections have lower performance than companies without political connections. the results of the wulandari (2018) study show that politically connected companies have lower corporate performance than non-politically connected companies where roa measures corporate performance. this study also uses roa as a measure of company performance. selling price factors are thought to play a more significant role in determining the performance of the company. political connections to the board of commissioners have a significant negative impact on the performance of the wulandari company (2018). in contrast to the wulandari (2018), study results of the study of osamwonyi et al. (2013) found that the composition of the board of commissioners and the political connection does not affect corporate performance had. this study will look at the political connections and company characteristics of the politically connected and non-politically connected companies from the side of the leverage, tax, and corporate profitability of lq45 index companies. literature review theory of agency the managerial and institutional ownership can help to reduce jensen and meckling (1976) agency conflict. these are the two main mechanisms in corporate governance. the opportunity for institutional owners to own company shares also needs to be considered by the company owner. in the event of a compromise made by a majority of institutional investors with the management of vulnerable companies neglecting the interests of minority shareholders. the political connections that companies use to get special treatment compared to others will eventually make their business more accessible. besides, political connections can also harm the company or even loss. losses arise when politicians use their influence on corporate decisions for their political gain. it violated the application of good corporate governance and led to the practice of agency theory. political connections and leverage the study conducted by khwaja and mian (2005) show that connected companies in pakistan enjoy greater access to debt financing, despite showing a higher default rate, and they do not pay higher interest rates than their counterparts. nevertheless, those who are not politically connected. research from kamaludin kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 67 (2010) also shows the impact of political connections on leverage corporate during the new era until 2010 in indonesia. kamaludin (2010) also found that there is a link between political support for leverage. the case in indonesia is that the size of the company's amount leverages greater just for informal political support. political connections and taxes taxes are obligations that citizens must pay to be counted as state income. the company is required to pay taxes on the results of its operations. the higher the profit earned by the company, the higher the taxes that must be paid to the state. although only a small percentage of corporate income is used to pay taxes, many companies are thinking of lowering or reducing their tax payments by using political connections. companies with political connections are considered to be able to minimize tax payments due to their proximity to the state apparatus. also, tax deductions are obtained by the company by increasing the company's debt. debt inflation will, therefore, reduce the tax rate as interest payments arising from debt activities can reduce taxable income and thus increase tax savings and increase corporate value (chandra, 2008). faccio (2010) explains that companies that are politically connected tend to pay lower taxes than companies that are not politically connected. political connections and profitability the role of political connections in the company in generating profits due to increased sales can also play a role in the performance of the company. faccio (2010) and wulandari (2018) show that political connections have a significant negative impact on corporate performance. in habibah's (2018) study, the positive and significant political connections to corporate performance were measured through roa and roe. while the results of ligita and muazaroh's (2019) study found that there was no effect of political connections on firm performance measured using roa and roe. political connections allow for lower corporate performance. hypotheses development and research methods according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: hypotheses (1): companies with political connections have leveraged higher than non-political companies in the indonesian stock exchange lq-45 index for the period 2014-2018. hypotheses (2): politically connected companies make lower tax payments than non-politically connected companies in the indonesian stock exchange lq-45 index for the period 2014-2018. hypotheses (3): politically connected return on assets companies have lower than non-politically connected companies in the indonesian stock exchange lq-45 index company for the period 2014-2018. data in this study are financial statements and company ownership reports obtained from the annual report of companies listed on the indonesian stock exchange (bei) index lq45 from 2014 to 2018. samples at this study was a company that was listed on the lq-45 index for the period 2014-2018 and never exited the lq-45 index (consistent). the total sample of this study was 26 companies, with 21 politically connected companies and five companies with no political connections. the political connection criteria are divided into three sps for government support, sf for formal support, and si for informal support. the sp criterion is a corporation owned by the government, the sf corporation with its board of directors or its commissioner is either directly involved in the political party or holding office in the government, and the si is the criterion with political connections seen from the board of directors or commissioners having proximity to the state or politicians like family ties. this study uses ordinary least squares regression (ols). the study was conducted in four regression models to detect better the impact of political connections on the company's leverage, tax, and profitability. the first model of political connections was made in a variable dummy with a sample of all politically connected firms through sp, sf, and si of 1 and 0 for non-politically connected companies. in model two, political connections are seen from government support (sp), model three political connections seen from formal support (sf), and model four political support seen from informal support (si). the way to detect a company by having a political connection is to list the names of the board of directors and board of directors listed on each company, and then search for that name individually in google search engines. google's search engine can help to find an individual's electronic track record, especially a ruler or someone who has been in power before. if one or more names in the ranks of the board of commissioners and directors are involved in political relations or are presently serving as state leaders and are active in political party activities, then this political connection belongs to formal political support. when it is found that one or more ranks of the board of commissioners and or directors have served as heads of government, have been active in a political party, and have close ties to such authorities as family relations or have previously provided (supportive) leadership currently in office. when a company has one of these criteria, it is said to be politically connected. this study uses debt to asset ratio (dar) as a measure of leverage corporate by dividing total corporate kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 68 debt by total assets. company tax payments are calculated by dividing the company's earnings by taxable income. moreover, the company's profitability is calculated using return on asset ratio (roa) is the division of a company's net profit by its total assets. size is used as a control variable calculated using the log of total assets. the regression equation is as follows: model 1 leverage/tax/ profitability = α + β1dconnected + β2size + ε model 2 leverage/tax/ profitability = α + β1dsp + β2size + ε model 3 leverage/tax/ profitability = α + β1dsf + β2size + ε model 4 leverage/tax/ profitability = α + β1dsi + β2size + ε discussion the focus of this study was to impact of political connections on leverage corporate, tax payments, and profitability. the descriptive statistics table shows the leverage of that the political companies connected with political connections are 56.57% for companies with political connections and 42.48% of companies without political connections. on corporate tax payments, it shows that companies with no political connections pay lower taxes than those with political connections of 23.92% and 25.89% of companies with political connections. corporate roa indicates that politically connected companies have lower profitability than firms without political connections of 0.81 and 0.89 owned by companies without political connections. table 1. descriptive statistics connected parties without political connections mean median mean median leverage 0.530000 0.424810 0.370000 0.564725 tax 0.258970 0.243740 0.239241 0.252736 roa 0.047200 0.089560 0.098900 0.081542 size 8.083356 7.659762 7.885201 7.790394 samples are grouped according to the criteria of political connections that support the government (sp), formal support (sf), and informal support (si) and companies with no political connection. companies that have been politically connected with governmental support will dissolve political connections with formal support and informal support. the rest of the sample is then grouped for formal and informal support political connections. when it is found that the sample has formal support, it will dissolve informal support, though it is implied that formal support will also have informal support, and the rest is political connections with informal support. table 1 shows the average leverage of companies with higher political connections than those without political connections. average corporate tax payments indicate that companies with political connections have a higher average payout than companies without political connections, but the differences between them are not significantly different. the average company roa indicates that companies with political connections have lower roas and larger company sizes than companies without political connections. kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 69 table 2. regression results of corporate characteristics leverage tax profitability panel a. political connection across criteria (model 1) variable coefficient t-statistic coefficient t-statistic coefficient t-statistic c 0.001 0.164 0.159 2.932 *** -0.389 -1.129 d(dpol) 0.286 2.209 ** d(size) 0.019 3.071 *** dpol 0.005 0.310 -0.098 -0.737 size -0.005 -1.031 -0.063 -1.505 tax (-1) 0.532 7.061 *** logroa(-1) 0.653 9.616 *** observasi 130 129 130 r-squared 0.140 0.326 0.491 adjusted r-squared 0.126 0.309 0.479 f-statistic 10.27 20.014 40.315 prob. (f-statistic) 0.000 0.000 0.000 panel b. government support (model 2) variable coefficient t-statistic coefficient t-statistic coefficient t-statistic c -0.025 -0.305 0.235 3.363 *** -0.429 -1.276 dsp 0.085 1.531 0.009 0.293 -0.253 -1.202 d(size) 0.017 1.693 * -0.012 -1.693 * -0.043 -1.026 dar(-1) 0.729 9.819 *** tax (-1) 0.426 4.343 *** logroa(-1) 0.698 8.437 *** observasi 85 84 85 r-squared 0.696 0.270 0.601 adjusted r-squared 0.684 0.242 0.586 f-statistic 61.153 9.756 40.238 prob. (f-statistic) 0.000 0.000 0.000 panel c. formal support (model 3) variable coefficient t-statistic coefficient t-statistic coefficient t-statistic c -0.260 -1.192454 0.134 1.454 0.436 0.601 dsf 0.009 0.291291 -0.005 -0.460 0.156 1.116 size 0.047 1.472015 -0.002 -0.231 -0.167 -1.703 * dar(-1) 0.772 8.595050 *** tax (-1) 0.519 3.444 *** logroa(-1) 0.664190 5.896017 *** observasi 45 42 45 r-squared 0.671 0.303 0.624 adjusted r-squared 0.646 0.249 0.595 f-statistic 27.262 5.532 22.137 prob. (f-statistic) 0.000 0.002 0.000 panel d. informal support (model 4) variable coefficient t-statistic coefficient t-statistic coefficient t-statistic c -0.063 -0.418 0.156 1.704 0.058 1.218 dsi -0.009 -0.288 0.024 1.138 -0.005 -0.523 size 0.020 1.070 -0.003 -0.323 -0.003 -0.538 dar(-1) 0.796 8.082 *** tax (-1) 0.464 3.573 *** roa(-1) 0.620 5.343 *** observasi 50 50 50 r-squared 0.609 0.323 0.408 adjusted r-squared 0.583 0.277 0.368 f-statistic 23.456 7.157 10.355 prob. (f-statistic) 0.000 0.000 0.000 *** significant at level 1%; **significant at level 5%; significant at level 10% kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 70 the company with political connections in a research sample of 21 companies and five companies with no political connections. the political support of the government in the research sample of 12 companies, including the three financial institutions, namely bank negara indonesia tbk, bank rakyat indonesia tbk, and bank mandiri persero tbk, formal support of four companies, informal support of five companies and companies without the political support of five company. panel a is the result of a political connection with all the criteria using a single model. the results in panel a show that political connections have a significant influence on leverage but do not show significant results on tax and roa. panel b, c, and d results show no significant relationship between political connections and specific criteria for leverage, tax, and roa. the positive coefficient indicates that the leverage of politically connected companies has leverage higher than the non-politically connected companies on the indonesian stock exchange lq-45 index. the result supports the findings of kamaludin (2010) and (faccio, 2010) that firms that are politically connected tend to have easier access to debt. judging by the amount of leverage owned by the company, bank rakyat indonesia tbk holds the highest value. companies are considered good when they can capitalize on their potential debt. if the total amount of capital-funded assets is too large, then the company is also considered to be wasting potential debt to support the company, but if the debt amount is too much, it will put the financial burden on the company. the assumption in this study is that the higher the value of leverage, then the easier it is to access debt. the results obtained concerning taxpayer-funded corporate tax returns without any political connection showed insignificant results. these results contradict ferdiawan and firmansyah (2017) and faccio (2010), who state that politically connected companies utilize their political connections to obtain lower tax payments. taxes are an obligation to be paid to the state. tax violations will be actionable and subject to sanctions, from both tax administration sanctions to tax evasion sanctions. so there is no bargaining in terms of tax payments for even politically connected companies. the results show that there is no difference in the roa of politically connected and non-politically connected companies. this result is in line with the study of ligita and muazaroh (2019), who found no effect on political connection to corporate performance (roa). any effects of political connection to the company do not give a significant result to the profitability of the company. so there is no difference in corporate profitability between politically connected and non-politically connected. these results are contrary to faccio (2010) and wulandari (2018). faccio (2010) found that connected companies had lower productivity than unrelated companies in four of the seven countries, the connected firms showed lower roa in all countries except japan; the difference is significant in indonesia, italy, russia, and thailand. similar results from the wulandari (2018) study suggest that political connection within the structure of the board of commissioners harms corporate performance. although the regression results show a negative impact on the roa of a politically connected company, the result cannot be used due to insignificant probability conclusions characteristics of politically connected and non-politically connected companies are only reflected in leverage corporate but have no effect on tax and profitability payments to the lq-45 index companies during the period 2014-2018. political connections can only support the financing of enterprise debt. after conducting further analysis and review of the findings, the researchers noted that there are some weaknesses in this study that could be further studied. first, this research focuses only on the indonesian stock exchange lq-45 index and has not done a comprehensive study on the entire company on the indonesian stock exchange. second, the results of this study have not seen the impact of corporate earnings and have not yet compared inter-industry companies on the indonesian stock exchange. further research is recommended to look at the effect of political connections on corporate earnings and to compare differences between companies that are politically connected and not, in order to see the difference between corporate and non-politically connected corporate earnings and to add independent variables or controls other than political connections. references chandra, t. (2008). development of theory of capital structure: from modigliani-miller, myers, to jensen. journal of information technology and management, 6 (4), 840–850. chen, h., tang, s., wu, d., & yang, d. (2015). the political dynamics of corporate tax avoidance: the chinese experience. ssrn (social science research network). faccio, m., 2010. differences between politically connected and non-connected firms: a cross country analysis. financial management. vol.39 (3): 905-927. kamilia syaputra et al. / finance, accounting and business analysis 2 (2) 2020 71 faccio, m., 2006. politically connected firms. american economic review 96, 369-386. ferdinand and firmansyah. 2017. the effect of political connection, foreign activity, and real earning management on tax avoidance. journal of accounting and financial research, 5 (3), 2017, 93-116. jensen and meckling. 1976. the theory of firm: managerial behavior, agency cost, and ownership structure. journal of financial and economics, 3: 305-360 kamaludin. 2010. political support and leverage: the case of indonesia. journal of business economics no. 2, volume 15, august 2010. khwaja, ai, and a. mian. 2005. do lenders favor politically connected firms? rent provision in an emerging financial market. quarterly journal of economics. vol.120 (4): 1371-1411 ligita, elviga cintha, and muazaroh. 2019. the effect of political connections on market performance with financial performance as a variable mediation for companies listed on indonesia stock exchange (period 2014-2017). eprints banking. osamwonyi et al., 2013. firm performance and board political connection: evidence from nigeria. european journal of business and management, vol. 5, no. 26, issn 2222-1905. wulandari, laela. 2018. effect of political connection on the board of commissioners and the board of directors on the performance of the mining sector companies registered on the indonesian stock exchange (bei) for the period 2010-2014. university of surabaya student scientific journal vol. no. 7 1. wulandari, tri, and raharja. 2013. the impact of political connection and ownership structure on corporate performance. diponegoro journal of accounting 2 (1): 1-12. wulandari, tri. 2012. analysis of the influence of political connection and ownership structure on company performance (empirical studies on companies listed on the indonesian stock exchange). diponegoro university. 188 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg on the role of information technology micro, small and medium enterprises in kota blitar anna widayani, ika rachmawati, rani arifah normawati akademi komunitas negeri putra sang fajar blitar, indonesia info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: adoption of information technology, msmes abstract ___________________________________________________________________ this research was conducted to find out information technology adoption in msmes in blitar city. data collection was carried out through distributing questionnaires to 56 msme respondents in blitar city. the results of this study indicate that msmes enough in blitar city have adopted information technology, especially for promotional activities. however, the use of technology for administrative, financial management and production activities is still not optimal. the potential for information technology adoption in increasing the competitiveness of msmes in blitar city is very large. msmes can utilize social media and online stores for promotion and marketing, software for financial records, and applications for msme development. this research was collected through in-depth interviews (indept interviews) and distributing questionnaires to msme entrepreneurs.  address correspondence: e-mail: annawidayani@akb.ac.id 189 introduction the current economic development priorities are directed to efforts to accelerate economic recovery, overcoming poverty and unemployment increased, and efforts to increase the competitiveness of small and medium scale enterprises. micro, small and medium enterprises (smes) constitute the largest group of economic actors that can contribute significantly to the national economy and has been proved to be a buffer (buffer) in the economy that is instrumental in improving the gross domestic product (gdp). the success in the development of smes will be able to strengthen the economic foundation of the people, as long as it is done by smes is generally based on local resources, not to rely on imports, the flagship product of smes in the regions have export opportunities are very large because it has a unique of its own which is characteristic of these products. wahid (2007) states that a lack of understanding of the strategic role played by information technology (it) related to the new approach to marketing, consumer relations, and development of products and services because of the alleged lack of it adoption by smes. there are interesting facts that occurred in indonesia, according to a survey conducted by the association of internet networks (apjii) the number of internet users in indonesia reached 132, 7 million people, this means that more than half of indonesia's population has used the internet (widiartanto, 2016). this is expected to be an indication of the willingness of business people and the government to encourage the growth of electronic commerce (e-commerce), particularly in smes. the empowerment of smes in globalization and high competition make smes must be able to face the global challenges, such as improving product and service innovation, development of human resources and technology, as well as the expansion of the marketing area. this needs to be done to increase the selling value of smes itself, especially to compete with foreign products flooded the industrial and manufacturing centers in indonesia, considering that smes are the economic sectors that could absorb the largest labor force in indonesia (sudaryanto, 2011). sme's strategic role and proven as a driver of economic growth of the people would need to be to develop more comprehensive and competitive. the competitiveness of smes can be achieved either by the use of it to enhance business transformation, accuracy and efficiency of information exchange (rahmana 2009), expand the marketing network and expanding market share. the use of information technology by the micro, small and puffy (smes) is an interesting thing to note. the use of information technology in support of information systems had an impact on almost all aspects of business management, and provide added value if it is designed to be an effective information system. functions and a very important new concept of the information system as a strategic information system emerged in the early 1990s. in this concept, it is becoming a very important component in the process of business products and services to gain a competitive advantage in the global marketplace and gain a strategic competitive which is superior to its competitors. literature review information technology information technology is part of the development of the terms in the world of information systems. the term refers to the information technology used in conveying technology and processing information, but basically still a part of the information system itself (supriyanto, 2005). the definition of information technology by suyanto (2005) is a form of technology used to create, save, modify, and use of information in all its forms. while the oxford english dictionary defines as information technology hardware (hardware) and software (software), including networking and telecommunications which is usually in the context of a business or business (supriyanto, 2005). 190 utilization of information technology in business in the business field of both trade in goods and services, the computer has a very important role to perform routine transactions, periodic and incidental, and the computer can provide information quickly and accurately. management information system (mis) is an information system that has been widely applied to companies engaged in the trade of goods and services both on the large enterprises, medium and small enterprises (supriyanto, 2005). a simple example can be seen is the use of a calculating machine or cash register at the supermarket cashier, the use of a simple computer application is very easy for employees to do their work more quickly and accurately. suyanto (2005) found through the utilization of information technology, micro, small and medium can enter the global market. for a business or businesses, the use of information technology can be applied in various ways (rulhudana, 2015), among others: planning; organizing; actuating; controlling discussion utilization of information technology in smes the use of information technology by the micro, small, and medium enterprises in blitar city is quite large. it can be seen from 48 respondents stated that the use of information technology in managing their business. only two respondents stated not to use information technology. figure 1. number of respondents who use of information technology in the run for those respondents who stated the use of information technology in business, information technology devices are the most widely used smartphone. there is also a respondent who use printers, telephones, and photocopiers to support his efforts. table 1. device information technology device information technology percentage computer 16 notebook / laptop 22 mobile / smartphone 59 others (telephone, copier, printer) 3 the information technology devices, mostly used for marketing and promotional activities, as well as communicating with customers and suppliers. there are still very few respondents who use the devices for the administration, financial management, and production processes. table 2. activity in business management using information technology use of information technology percentage administration 11 finance 9 production process 6 marketing and advertising 37 communication 37 benefits perceived by respondents to use quite a lot of information technology, including ease of administration activities, facilitate financial management activities, improve product quality, expand markets and increase sales, and support communication with suppliers and customers. table 2. use of information technology benefits obtained by respondents benefits use of information technology percent age facilitate administrative activities 11 facilitate the financial management 8 96% 4% 191 activities improve product quality 10 expand markets and increase sales 37 assist communication with suppliers and customers 35 from some 46 respondents who have used information technology, 40 of which are also utilizing the internet to support the business, while 6 respondents still do not use the internet. the majority of respondents use the internet for browsing, use the internet to send emails, manage websites, banking (mobile banking and internet banking), as well as online marketing (12 respondents). table 3. activities undertaken by respondents using internet use of the internet percentage browsing 34 e-mail 20 website 16 transaction banking 18 online marketing 12 factors inhibiting the use of information technology in smes in kota blitar although the use of information technology by smes in kota blitar has been quite a lot, but still not optimal. one possible cause is still a lack of training on the use of technology provided to smes in the city of blitar. a total of 24 respondents (50%) state that had not received training on the use of information technology. for 50% of respondents had ever received training, 12 respondents (37%) receive training from colleges/universities, 9 respondents (27%) received training from the department of cooperatives and micro kota blitar, and 2 respondents (6%) gain the training of the association of micro. some 10 respondents (30%) received training from the department of agriculture, community msmes, the training materials are given to smes is the use of the internet (20 respondents), other than that most smes also receive training on website creation (11 respondents) and microsoft office (4 respondents). some 6 respondents said that they had received training in online marketing. the potential use of information technology in improving the competitiveness of smes in kota blitar the potential use of information technology in improving the competitiveness of smes in kota blitar very large. from the research results can be seen that not all respondents optimal use of information technology. only some businesses are utilizing information technology in various aspects of business management, such as: administration, financialnrecords, marketing, and promotion, as well as communicate with suppliers and customers. and if business owners pay great attention to the use of information technology, it will increase the productivity of our operations, as demonstrated by the results of a survey on business predictions 2017 conducted by swa magazine and pt. deka marketing research. the use of information technology by smes can be applied in marketing, finance, production, and development of smes. in marketing activities, smes in kota blitar can utilize information technology to marketing activities online or digital marketing. based on the research that has been done, of 46 respondents still 8 respondents who do not use information technology to market their products, and of the 38 respondents who market their products online, not entirely know how to conduct online marketing well. according to agus muharram, sekeretaris ministry of cooperatives and smes (www.depkop.go.id, 2017), some things should be owned smes in using social media, namely:keeping attitudes and behaviors in using social media, for example, do not lie on the product sold; being able to create a business network or network through social media; can utilize social media to see the business opportunity; having the ability to do business, such as marketing, product quality, and so on, to attract consumers; being able to create a brand 192 and brand products that are easy to remember; able to maintain consumer confidence. the potential increase of msme product sales through online marketing in the digital age is very large, this is because there is a change in consumer behavior that is very significant. currently, 84% of consumers buy goods through social media, like facebook, instagram, twitter, youtube, and line. thus, it would be very unfortunate if smes do not take advantage of social media to increase sales of its products (www.depkop.go.id, 2017). billy boen, founder and ceo of young on top and gdilab explained that in marketing their products through social media, smes must consider the following things: knowing what she likes and swordfish preferably prospective customers, including also when the prospect opens social media; knowing the opinion of potential consumers to the brand owned (brand perspective); knowing what should be posted in social media, including when to do a soft sell and when to do a hard sell; able to manage the expectations of potential consumers to the brand owned products. in addition to using social media, smes in kota blitar also be able to market their products through an online store, such as: tokopedia, lazada, open stalls, shopee, and others. to face global competition and improve the well-being of smes in kota blitar, blitar center, sedulur smes blitar and bank jatim also have collaborated to provide android-based mobile applications that can be a means of buying and selling for smes in the city of blitar. if all smes in blitar can access and utilize this application properly, it will greatly assist the growth and development of smes in the city of blitar. figure 2. application blitar smes as sme product purchase forum blitar the potential use of information technology can also be optimized by smes to support its business is in the field of administration and financial management. based on the results of the study, only 20 respondents who use information technology for administration and financial management. this amount is very little and very need to be upgraded as one cause of the development of a business is difficult because the owners still do not know how to manage your finances well. through the utilization of information technology, financial transaction records activity becomes easier to do. in the digital age, there are a lot of computer software and applications on smartphones for accounting and financial management. if previously smes are reluctant to do the bookkeeping for cumbersome and lazy to count, then by utilizing the accounting application on a smartphone, recording transactions of the financial can be done anytime and anywhere, as well as being easier because the application has been made such that it is easy to use and comes similarly, the financial statements. with better financial management, businesses will know the financial condition of their business. the financial statements can also be a reference in business planning, as well as help as one of the requirements to obtain loans from financial institutions or third parties. 193 figure 3. simple accounting applications for smes on android-based smartphone in addition to marketing and financial management, smes also can both utilize information technology for business development, by expanding the network so that information to be obtained is also growing. ministry of cooperatives and smes have launched the app center for integrated services of smesco or integrated business service center of the national kukm (cis-plut-kumkm). with this application is expected that the plutkukm facilitation consultant can actively input data that accompanied the development of smes, making it easier for stakeholders such as the ministry of cooperative and smes, as well as other stakeholders in accessing the data (www.depkop.go.id, 2017). figure 4. applications cis-plut of the ministry of cooperatives and smes the smes can consult directly with the consultant closest companion through smartphones owned. smes can also do promotional products through market information services available in the application. the application also provides an online database service that is useful for access to finance and credit rating (www.depkop.go.id, 2017). by utilizing these applications, smes in kota blitar can connect with smes throughout indonesia so that it will widen the business network. for young entrepreneurs, the ministry of cooperatives and smes have a variety of programs that use information technology to get the digital economy, including: (www.depkop.go.id, 2017): online registration of legal entities; kukm human resources and student training (vocational training) as techno; program for the financial technology start-up business; registration smes as a merchant in the market place smesco; digital village to accommodate products of smes. the number of young entrepreneurs in the city of blitar has increased from year to year, it can be seen from the number of young entrepreneurs who are members of the communities of entrepreneurs in the local and national levels. the young entrepreneur has advantages in terms of the procurement of technology when compared with older businesses. it becomes its potential to optimize the use of information technology in business development. the government is targeting indonesia into the digital energy of asia in 2020. with the increasing number of young entrepreneurs who are proficient in the use of technology, the target to achieve the number of smes that have gone online as much as eight million units, it is possible to achieve. references badan pusat statistik kota blitar, 2016, blitar dalam angka 2016, badan pusat statistik: kota blitar. fakultas ekonomi universitas surabaya dan forum daerah ukm jawa timur, 2007, kewirausahaan ukm: pemikiran dan pengalaman, graha ilmu: yogyakarta. humas kementerian koperasi dan ukm, 2017, kemenkop dan ukm ajak generasi muda kembangkan bisnis berbasis digital, kementerian koperasi dan ukm: jakarta <http://www.depkop.go.id/content/rea 194 d/kemenkop-dan-ukm-ajak-generasimuda-kembangkan-bisnis-berbasisdigital/> diakses tanggal 27 oktober 2017. humas kementerian koperasi dan ukm, 2017, kemenkop dan ukm targetkan 37.463 ukm masuk aplikasi plut kumkm berbasis android , kementerian koperasi dan ukm: jakarta <http://www.depkop.go.id/content/rea d/kemenkop-dan-ukm-targetkan-37463ukm-masuk-aplikasi-plut-kumkmberbasis-android/> diakses tanggal 27 oktober 2017. humas kementerian koperasi dan ukm, 2017, ukm harus mampu memanfaatkan media sosial, kementerian koperasi dan ukm: jakarta <http://www.depkop.go.id/content/rea d/ukm-harus-mampu-manfaatkan-mediasosial/> diakses tanggal 27 oktober 2017. kadir, abdul dan terra ch. triwahyuni, 2005, pengenalan teknologi informasi, penerbit andi: yogyakarta. partomo, tiktik sartika dan abd. rachman soejoedono, 2002, ekonomi skala kecil/menengah dan koperasi, ghalia indonesia: jakarta. rahmana, a. peranan teknologi informasi dalam peningkatan daya saing usaha kecil menengah. seminar nasional aplikasi teknologi informasi (snati), issn: 1907-5022, yogyakarta, 2009. rulhudana, fajar, 2015. pola penggunaan tik di manajemen bisnis ukm (studi pada ukm buana property di propinsi bali), jurnal penelitian komunikasi dan opini publik vol. 19 no. 2, agustus 2015: 113126. sudaryanto dan hanim,anifatul. 2002. evaluasi kesiapan ukm menyongsong pasar bebas asean (afta) : analisis perspektif dan tinjauan teoritis. jurnal ekonomi akuntansi dan manajemen, vol 1 no 2, desember 2002 supriyanto, aji, 2005, pengantar teknologi informasi, penerbit salemba infotek: jakarta. wahid, f., iswari, l. adopsi teknologi informasi oleh usaha kecil dan menengah di indonesia. seminar nasional aplikasi teknologi informasi (snati), issn: 1907-5022, yogyakarta, 2007. 52 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg managing risk in a crisis situation in the company galina kurteva faculty of business studies, burgas free university, burgas, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 modern business organizations cannot rely on guaranteed development in an uncertain external and internal environment, generating a variety of dangers and threats, each of which requires a specific approach and a specific model of behavior. adapting to the requirements of the external environment requires effective management of the “input-process-output” cycle. this management goes through different phases of recovery, stagnation, or crisis, requiring risk perception as an objective and permanent asset in the organization. that implies focusing of the management’s efforts on the detection of the determinants of individual types of risk, a research on possible adjustments of these determinants as well as establishment of a system allowing elimination of the existing risks. it is very important for the managers to diversify the risks which come out of the crisis. they should identify, measure, and assess the potential risks by priority, to develop program measures guaranteeing the company conditions where it could continue fulfilling its aims and tasks. the article presents the most common problems in a company’s management during crisis and focuses on the possible responses to risk, intended to minimize the consequences of events with negative effects or respectively to maximize those with positive effects. keywords: crisis; risk response; risk management address correspondence: e-mail : galia.kurteva@gmail.com galina kurteva / finance, accounting and business analysis 2 (1) 2020 53 introduction the survival of an organization depends on its ability to adapt to the requirements of the external environment. the termination of the predominantly continuous process of adaptation is a kind of a crisis in each organization. from the system approach point of view, the factors that could provoke a crisis in the organizations, are all elements of either the external or the internal company environment. in the same context we can classify the reasons that cause the crisis as “external” (ones that do not depend on the company activity) and “internal” (ones that depend on the company activity). the influence of the external environment factors (both at the input and at the output) could enhance or limit the company activity. each unfavorable influence is a potential prerequisite for a crisis to occur. for example, sometimes it is the competitors who cause the crisis. their actions should be constantly analyzed by the company management. thus, it should be possible to outline their strategic and tactical intentions and to forecast the changes it desires. competitors’ targets would specify the alternative for changes in the company and the relevant stage of the crisis development. the crisis situations become more concrete and are mainly influenced by the conditions of the macroeconomic stability or destabilization. in a situation of a public destabilization, the possibilities for crisis situations in a company are many more. changes in demand of a certain product or service or the changes in the structure of the demand to which the company does not react, could be important reasons for the appearance of a crisis. changes in customer’s behavior towards products and services, offered by the company could be treated as an indication for a future unfavorable tendency for the sales revenue. the movement towards an unfavorable direction of the raw materials prices could lead to a change in the distribution policy, search for new distributors and other actions, whose realization is connected to shorter or longer crisis in the company. the desire to change the production technology. the introduction of a new production technology sometimes requires organizational changes, increasing the performers’ qualification, as well as new professional requirements. the process of adaptation towards these requirements quite often causes tension among the employees which could also be a prerequisite for a crisis. changes of leaders’ targets e.g. company owners. every company in its development follows the personal and professional development of its managers by showing their weak and strong sides. this could be easily seen in small and medium size enterprises which are managed by their owners. in that connection the change in owners’ targets could cause a change in the organization which would lead to a crisis. finally, a change in the personnel's targets, being part of a system-formation element, could also lead to a crisis in the organization. therefore, we should define the concept of crisis and a crisis in an organization. a review of the economic literature about that problem did not show one single fixed, straightforward, and invariable definition of a crisis. as a concept which accompanies the development of not only the different economic structures, the crisis is also an intellectual, human, technological and natural phenomenon where there is a collapse of the adaptation opportunities of a certain system (an organism, an individual, a group, a community) with two possible outcomes: the first one is fatal, leading to the system destruction and death and the second one is positive, related to a successful, relevant reaction to the challenges where a new type of structure is built, together with a changed model of behavior. each crisis is characterized with a total influence upon the human social systems and diversity effects, some of which are with positive results (маринов 2004, р.106). from a practical point of view, the knowledge of a proper definition about crisis is not useful. on the contrary, it could prevent and not allow a certain situation to be identified as a crisis because in many cases these definitions depend on the specific conditions where a crisis situation undergoes a crisis development or on the crisis targets, defined by a certain public group. the number of situations, depending on the different criteria, which are used to be defined as a crisis are quite limited. hence, knowing the different types of crisis definitions could be used as a vital identification and an adequate orientation in a company crisis. that is why it is very important to have a general approach and techniques for defining a situation as a crisis. if we accept that crisis is a counterpart of stability in an organization development, we could say that stability of an organization is breached, when there is a diversion from the desired company results and actions and the incapability of the management to rebuild the normal working rhythm depending on its experience and organizational potential. in other words, when due to any other reason like lack of means, information and bad management, the aachievement of the company targets is blocked, a crisis situation arises. the first symptoms of a crisis situation show that it is time when the decisions about the problems that galina kurteva / finance, accounting and business analysis 2 (1) 2020 54 had occurred could lead to turning point in the company development e.g. towards improvement or deterioration (христов 2002, р.18). the result from the changes, related to these decisions, could be either extremely unfavorable or positive. the best indicator for the development of a crisis as well as for its separate stages is the availability of conflicts either in the group or between the groups in a single organization. crisis situations influence the activity of different groups of people in a company. in most of the cases these groups are known and undergo a rational management. the bigger the number of conflicts is, the quicker the changes are. the stronger the conflicts are, the most radical the changes are. the longer and the bigger in range the conflicts are, the more influential they are on the market and on the separate market players. after every conflict, a momentum result follows. it can predict the future development of crisis or its separate phases. we could say, of course as a joke, that the easiest way to overcome the crisis is companies to stop working therefore the economics would disappear, and with it the crisis itself. the truth is that even in a time of crisis most of the companies would not stop working and therefore their managers would not stop managing. in such difficult times, it is the role of management that becomes even more important. the crisis in a company could be invisible and could continue for a long time, diverting big resources. it could pass extremely fast, especially if the managers have assessed the available resources and have defined which ones of them (financial, human, production, distributional, etc.) should be changed or added for the successful overcoming of the crisis. a company exit from crisis is in fact its management during the crisis. this kind of management requires methods and approaches which significantly differ from managing the company in a normal situation. the so called anti-crisis management aims to avoid or remove the unfavorable phenomena for the business by using the potential of the contemporary management and to develop and realize the specific strategic program of the company e.g. which will allow the elimination of the temporary difficulties by using mainly its own resources. in these conditions the company behavior is new (христов 2002, р.25). the outcome of a crisis could not be completely forecasted. the diversity of the output result (no matter whether positive or negative) creates a risky situation itself. in this context, a significant role for limiting the effects of the crisis plays the successful risk management. the important role of risk management in the business management in times of crisis has been successfully characterized by kloman: “… its challenge is to teach us how to live with the insecurity, therefore, to turn the risk into a motive rather than into an unacceptable threat. in the organization itself the risk management should turn into an integral part of the technology and management, where the assessment, control and financing against risks, costs and benefits would be in a constant process of rational sagacity and thought.”( kloman 1992, р.92) it is usually accepted that the risk has a negative side only, hence, the management strategy is a prevention and limit to the potential damages. recently, however, the risk management is treated more as an activity, trying to study and manage both the positive and the negative side of a certain event. it is very important for the managers to diversify the risks which come out of the crisis. they should identify, measure, and assess the potential risks by priority, to develop program measures guaranteeing the company conditions where it could continue fulfilling its aims and tasks. risk identification is the first step in the risk management process. a prerequisite to risk identification is exploration of the risk circumstances which adversely affect the normal operation of the organization. the results of the risk identification are correct if the risk sources (internal and external) are correctly identified. most common amongst them are: the position of the owners of the organization is wrong regarding the development, expansion or change in the business. bad natural and/or climatic conditions preventing or restricting the implementation of the organizational goals. unforeseen changes in the domestic or the international political and economic situation. insufficient qualification of the personnel to deal with embedded new technologies and associated risks in the production process or services, etc. it is necessary to be identified the effects of these detected risks, which in most of the cases relates to loss of capital, fixed assets, ready production, major suppliers, regular customers, qualified employees, illegally exported and supplied to the competitors confidential information. in most of the cases in the previous step in the risk management process is identified extremely large number of diverse risks. therefore, the so identified risks need to be analyzed to be determined which of them have a distinct impact on the business or could cause the greatest negative consequences. in this context, the risk analysis is based on the combination of the possible effects of the risk and the likelihood of its occurring (stavrev, 1991, p.14). for more convenience could be used the formula p = e x b which determines the level of risk (p) as a product of the presumed consequences/effects of the risk (e) and the likelihood the risk actually to occur (b). galina kurteva / finance, accounting and business analysis 2 (1) 2020 55 the analysed risks could be measured, i.e. the frequency and the effects of their occurrence to be assessed. the purpose of the assessment is to answer the following two questions: are these risks acceptable, and if not, what means of protection must be used. from a great importance is a predevelopment of criteria for measuring the risk, its impact, and consequences and, accordingly, adoption of adequate measures for restricting or even overcoming the risk. very important are also the results about the level of the risk effects and the risk frequency. according to those results could be defined if the risk is tolerable, acceptable, or not. if the risk is unacceptable, it is subject to special monitoring. risks with measured low level of effects or rare frequency are acceptable to the organization. the organization accepts them as they are, without interfering. another important criterion for measuring the risk is whether the cost of the risk treatment is justified or not. if it exceeds the benefits from the treatment such should not be made. the third criterion is for distinguishing between the acceptable risk and other risks. any risk is acceptable and, therefore, is not subjected to a risk treatment when:  the level of influence and the effects of the risk are low enough and does not require special attention;  the favourable opportunities for profit-making are greater than the chances of loss;  the risk sources are external factors where the business cannot intervene (e.g. natural disasters, unforeseen economic and political transformations, etc.). it can be concluded that the risk assessment is a prerequisite for making a decision on how the risk to be controlled and what influence should be exerted on them, i.e. whether the risk is or is not subjected to a treatment and what exactly to be this treatment. clearly, the risks cannot be eliminated completely, but they can be significantly minimized by taking the appropriate actions. once the identified risks are analysed and assessed, the managers of the organization need to consider an appropriate response. despite the taken specific measures and actions in most of the cases continues to exist the so-called residual risk. this proves that the risk intrinsic for the organization activities cannot be removed completely. it is managers’ responsibility to assess whether the level of residual risk is acceptable or further actions for its reducing need to be taken. the possible alternative responses, intended to minimize the consequences of events with negative effects or respectively to maximize those with positive effects, are the following:  reduce (mitigate) the risk. this is the most frequently used response to the risk because the risk can rarely be entirely avoided or transferred. it is therefore necessary to be conducted periodical monitoring and analysing of the risk areas within the organization activity. this will allow, depending upon the extent of the risk and the cost which need to be done, promptly acting in order the risk to be limited within acceptable parameters.  transfer the risk. this response is undertaken when the managers consider that the risk is too high, and it is better to be "transferred" to a third party. the classic way to transfer risk is the insurance. in this case extra costs are incurred, but on the other hand the indicator "risk impact" is significantly reduced. another possibility is an agreement with another organization under which by mutual consensus the carrying out a activity is transferred together with its risks. it is important to emphasize that the risk cannot be completely transferred to another party. therefore, the risk-sharing is a way of taking some of the potential consequences in accordance with the terms of the obligations under the signed contract for this purpose.  accept the risk. such reaction is possible only if certain risks have limited (minor) impact on the achievement of organization goals or if their avoidance would costs more than just taking them. such risks are a normal part of the business activity, but they must be continuously monitored because various external or internal factors could have an impact on their occurrence and future influence, and so to shift them to another higher category.  avoid the risk. some risks can be reduced or limited to an acceptable level only through the suspension or avoidance of activities accompanied by huge negative and unsolvable problems for the organization. however, in a hasty or reckless termination or avoidance of an activity is very likely to be omitted benefits and subsequently new threats to arise. on the other hand, the inactivity of the management board can be also risky because it could prevent achieving the goals pursued by the organization. the selected actions for risk response should be analysed in terms of costs and the effects thereof, i.e. it has to be assessed the effectiveness of the chosen response, its duration, the cost of implementation and the level of residual risk after the implementation phase. ensuring the efficiency of the process of risk management requires ongoing monitoring at every stage and periodically reporting on the identified risks and the taken actions (responses). monitoring activities are undertaken via daily ongoing operational activities or via separate periodic evaluations of the risk management process. it is also possible both forms to apply jointly. galina kurteva / finance, accounting and business analysis 2 (1) 2020 56 the daily ongoing monitoring should be integrated into normal routine (operational) activities of the organization, to be performed in real time to react to the changing conditions. therefore, it is more effective than the separate periodic evaluations because they are obtained after the risk event. separate periodic evaluations vary in scope and frequency, depending on the degree of influence of the risks and the importance of the responses to them. the high-risk areas and responses are usually measured more frequently. it is not uncommon the evaluations to take the form of self-assessment when the person responsible for a unit or function, establish the effectiveness of the process of risk management in terms of his own activities. the aim of the monitoring and reporting process is to observe the changes in the risk profile of the organization (the probability and the impact of identified risks) in order to create confidence in the management board that the risk management process remains effective over time and the necessary actions to reduce the risk to an acceptable level are taken. for the successful implementation of this process it is necessary to be developed internal rules/procedures as part of the overall strategy for risk management in the organization. these internal rules/procedures need to describe:  the communication and exchange of information (regarding the identified risks) between all levels and employees within the organization;  the procedure and terms for conducting regular reviews of the risk register;  the procedure and terms for reporting all significant risks, the undertaken actions, and their effects, as well as informing about the newly arisen events;  the responsible departments and employees for the implementation of the necessary actions. the ways in which the management board will apply these rules and procedures and organize the process of risk management depends on the particular circumstances relateed to the organization (whether its administration has a high degree of self-government, or is centralized; what activities are carried out and from what nature are the risks which the administration faces). conclusion the development of each organization goes through several stages formation, boom, stagnation, decline. the transition from one stage into another is accompanied by a crisis which requires restructuring, change of targets and so on. the decisions in that process of organization development demonstrate the strong and weak sides of its managers. in that respect, the crisis, and the potential risks it creates put the managerial team of the organization to a test. the alternatives for organization actions in the time of crises are rather limited. they should not conflict with the organization capacity (either resourceful or managerial) and also with the new conditions created by the external factors. the choice of these actions must be pursuant with the risk assessment they bring to the company. in this context, risk management as a process that accompanies crisis situations in the development of a company should become a priority for its top management. for the successful implementation of this process it is necessary to be developed internal rules/procedures as part of the overall strategy for risk management in the organization: the communication and exchange of information (regarding the identified risks) between all levels and employees within the organization; the procedure and terms for conducting regular reviews of the risk register; the procedure and terms for reporting all significant risks, the undertaken actions and their effects, as well as informing about the newly arisen events; the responsible departments and employees for the implementation of the necessary actions. references маринов, р. 2004. комуникационни стратегии. софия: изд. нбу. ставрев, св. 1991. власт, управление, риск. софия: изд. п.к.яворов христов, ч. 2002. как да победим кризата. софия: сиела. грязнова, а. г. 1999. антикризисны менеджмънт. москва: экмос ярных, в.и. 2007. управление в условиях кризиса: hr – технологии. софия: софтпрес, kloman h. f. 1992. rethinking of rick management. the geneva papers on rick and insurance. no 64. harvard business assentials, управление на кризи: прогнозиране и преодоляване, класика и стил, 2006. office of government commerce, london, 2001. successful guidelines on managing risk, what are the 5 risk management steps in a sound risk management process? https://continuingprofessionaldevelopment.org/risk-management-steps-in-risk-management-process/ galina kurteva / finance, accounting and business analysis 2 (1) 2020 57 (5 april 2020) 7 critical steps to crisis management https://www.inc.com/bruce-condit/7-critical-steps-to-crisismanagement.html (30 march 2020) 25 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg influence analysis of the active part of human resources on the gdp of the level 2 regions in bulgaria tanakow nikola*, tsolov georgi department of regional development, university of national and word economy, sofia, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 this report focuses on the impact of human resources on the gdp of level 2 regions in bulgaria. the problems of unemployment and economically active population in bulgaria are developing a centralized policy by the ministry of labor and social policy (mlsp). however, we believe the increase in gdp per capita is crucial for the development of regions and requires a comprehensive approach in its analysis. the report aims to analyze the problems of gdp per capita, some of them can be addressed regionally through forms of competitive advantage for economically active people. the report presents the spatial characteristics of the peculiarities of the regions. the author's team outlines the relevant positive aspects of the development of the regions in bulgaria and their advantages and disadvantages. keywords: regional development, gdp per capita, unemployment, economically active persons, regional economy, region. address correspondence: e-mail : nikolatanakov@gmail.com tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 26 introduction in the context of the second eu membership program for our country, the 6 nuts 2 regions in bulgaria face several new challenges. they build competitive industries and structures that will strengthen regional markets and will create opportunities for the sale of local products and services. in the process of achieving the europe 2020 strategy goals and objectives, countries with a well-developed regional economy demonstrate good practices and models based on state involvement in building viable local industries and innovative business associations (nikolov, 2016). that is how we need to take the concept of the role of the economically active population as part of national human resources to an entirely new level. the management practice in bulgaria has established the regional policy as one of the most dynamically developing areas in the last few years. following the country's accession to the eu, a regulatory framework and an institutional structure were created, which gained experience in the process of planning and coordination across sectors. we have created real prerequisites for conducting a modern regional development policy by adopting and gradually supplementing the regional development act and the related by-laws. the administrative approach, of pan-european importance, applied in our country to this complex matter, has led to the development of many strategies and plans for expansion at different levels. they were originally summarized in the national development plan (2007-2013), and today they are being upgraded through the current national development program "bulgaria 2020". however, by applying a systematic and functional approach, we will recognize that the need for regional development policy is conditioned by the fact that the principle of territorial solidarity and cohesion requires the creation of relatively sustainable and equitable living conditions in different parts of the country. the availability of a unified strategic documents does not automatically lead to overcoming existing disparities and differences within and between regions. their specific problems create social and economic confusion that can quickly affect the national economy to which they are closely linked. on the other hand, a well-known fact is that market forces alone cannot ensure balanced regional development. regional development is a new concept that aims to stimulate and diversify economic activities, incite investment in the private sector, contribute to reducing unemployment, and, last but not least, is a concept that should lead to an increase in the standard of living of the population. scientific interest and practical results show that contemporary regional development can only be realized through conscious action and active participation of society. efforts should be directed to coordinating and regulating the processes taking place in each territory in order to harmonize them and create sustainable conditions for work, life, and recovery of the population (nikolov et al., 2019). the development of public well-being is mostly a result of the qualitative characteristics of the workers and is realized by increasing the efficiency of social production. therefore, in a market economy the managers of an enterprise should strive to run efficiently the flow of material and financial resources; the deliveries and distribute properly the working capital (hristozov, 2017). theoretical statement of the study official economic and social data1 clearly show that in the current socio-economic situation we can recognize an urgent need for state economic policy in bulgaria to further focus on more active and directed support for the development of the regions. this gives us a reason to analyze the relationship between the centrally conducted socio-economic policy in the country and the economic performance of the individual regions represented by the gdp per capita indicator. the authors of the report aim to enrich the research toolkit and methodology of evaluations to support the introduction of effective measures and guidelines for raising gdp per capita in the six regions in bulgaria. the subject of this analysis is the impact of two main categories of human resources the "active population" and the "unemployment rate" on gdp per capita. the impact was verified in the six nuts 2 regions of the country northwest, north-central, northeast, southeast, southwest and south-central. the relationship between the variables is examined by analyzing data from official national statistics for 12 years (2007 to 2018), that we initially processed on a multiple regression model: where: – gdp per capita for the i-th region; – active population in the i-th region; – unemployment rate in the i-th region; – random component. 1 only official data from the national statistical institute (nsi) was used in the report. tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 27 this model allows us to evaluate what is the impact of each factor (x) on the outcome (y). after correct examination of the models in the different regions, it turned out that in none of them the factor “unemployment rate” shows statistical significance. the authors have removed this factor from the analysis, and we based it on the following single-factor model: where: – gdp per capita for the i-th region; – active population in the i-th region; – random component; the research task of the authors of the report under these objective conditions is to identify the main problems marked by the negative or positive processes in the dynamics of the active population in the regions and their effects on the gdp per capita indicator.. an empirical statement of the study our original intention was to clarify the impact of the factors "unemployment rate" and "active population" on a key regional policy indicator the gdp of the region. it was dictated by the ability to make several policy evaluations in the respective territorial community. the correct statistical processing of the data led to the need for the authors of the report to analyze in particular the data on the regional economic activity of the population and its impact on gdp per capita. the empirical study covers the dynamics of activity in different periods of economic booms and crises of regional development and the national economy. the results for the different regions are examined separately: north-central region the best model here is the quadratic model (rsquare = 0.702). however, to ensure the adequacy of the estimated relationships, the authors choose to apply the linear model, according to the rule that the best model exceeds the linear model by more than 10% explanatory ability (bozev et al., 2019) should be selected (rsquare = 0.664). the linear model is adequate (sig. = 0.001) and has the following graphic image and estimated form: table 1. baseline data for the north-central region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 10,7 50,3 5 848 2008 8,5 50,2 6 577 2009 8,4 49,3 6 523 2010 11,6 49 6 435 2011 12,8 49 7 416 2012 14,3 50,1 7 779 2013 15,3 50,5 7 925 2014 13,2 50,6 8 336 2015 10,6 51,2 8 635 2016 9,3 51 9 129 2017 6,9 51,5 9 865 2018 6,7 51,9 10 654 source: nsi, 2020 tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 28 figure 1. dynamics of the active population in the region estimated form: the constant (sig. = 0.003) and the parameter (sig. = 0.001) are statistically significant and can be interpreted. the estimated model shows that with one percent increase in the active population, gdp per capita in this region would increase by bgn 1 275. north-east region the best models here are the cubic, quadratic, logarithmic, and linear models (rsquare = 0.406). however, for the reasons outlined above, the linear model (rsquare = 0.406) will again be applied to the selected model. the linear model is adequate (sig. = 0.026) and has the following graphic image and estimated form: table 2. baseline data for the north-east region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 10,8 54,5 7 110 2008 8,6 55,3 8 259 2009 10,4 53,9 7 943 2010 14,6 54,4 7 971 2011 15,4 53,5 8 951 2012 18,2 54,3 9 323 2013 16,8 54,6 9 316 2014 12,6 54,8 9 778 2015 10,3 55,9 10 246 2016 9,7 55,1 10 717 2017 9,4 57 11 525 2018 7,4 55,4 12 506 source: nsi, 2020 0 2000 4000 6000 8000 10000 12000 48.5 49 49.5 50 50.5 51 51.5 52 52.5 north-central region tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 29 figure 2. dynamics of the active population in the region estimated form: the constant (sig. = 0.053) is not significant, but more importantly, the parameter before the factor variable is significant (sig. = 0.026) and can be interpreted. the estimated model shows that with a one percent increase in the active population, gdp per capita in this region would increase by 1,076 bgn. south-east region the best models here are the cubic and quadratic models (rsquare = 0.691). however, for a selected model to evaluate the relationship, the linear model will again be applied according to the rule that the best model exceeds the linear model with more than 10% explanatory power to be selected (r square = 0.690). the linear model is adequate (sig. = 0.001) and has the following graphic image and estimated form: table 3. baseline data for the south-east region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 6,5 50,5 6 735 2008 5,8 51,9 7 864 2009 6,6 51 8 019 2010 10,5 53 8 115 2011 11,5 52,3 8 931 2012 11,9 52,9 9 400 2013 13 52,3 9 509 2014 11,9 51,9 10 012 2015 10,4 52,7 10 312 2016 7,9 52,5 11 755 2017 7 54,8 12 655 2018 5,4 54,7 12 787 source: nsi, 2020 0 2000 4000 6000 8000 10000 12000 14000 53 53.5 54 54.5 55 55.5 56 56.5 57 57.5 northeast region tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 30 figure 3. dynamics of the active population in the region estimated form: the constant (sig. = 0.002) and the parameter (sig. = 0.001) are significant and can be interpreted. the estimated model shows that with a one percent increase in the active population, gdp per capita in this region would increase by bgn 1,270. south-central region the best models here are the power, exponential, s-shaped, compound, and growth models (rsquare = 0.390). again, to evaluate the relationship, the authors choose the linear model according to the rule that the best model exceeds the linear model by more than 10% explanatory power to be selected (rsquare = 0.387). the linear model is adequate (sig. = 0.031) and has the following graphic image and estimated form: table 4. baseline data for south-central region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 5,6 51 5 943 2008 5,1 52,7 6 646 2009 7,3 51,8 6 754 2010 11,5 51,8 6 892 2011 12,9 50,7 7 665 2012 13,8 52,1 7 979 2013 13,5 54 7 940 2014 12 54,9 7 874 2015 9,2 53,1 8 756 2016 7,1 52 9 290 2017 5,2 55,3 10 076 2018 4,2 54,3 10 988 source: nsi, 2020 0 2000 4000 6000 8000 10000 12000 14000 50 50.5 51 51.5 52 52.5 53 53.5 54 54.5 55 55.5 south-east region tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 31 figure 4. dynamics of the active population in the region estimated form: the constant (sig. = 0.089) is not significant, but more importantly, the parameter before the factor variable is significant (sig. = 0.031) and can be interpreted. the estimated model shows that with a one percent increase in the active population, gdp per capita in this region would increase by bgn 612. north-west and south-west in these two regions, the authors found no statistically direct correlation between the "active population" factor and the gdp per capita indicator. none of the 11 models tested proved adequate to describe their relationship. graphic expressions also do not show a clear link between them: table 5. baseline data for the northwest region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 9 46,4 5 551 2008 7,1 47,9 6 224 2009 8 46,6 6 087 2010 11,2 46,4 6 060 2011 12,8 45,7 6 941 2012 12,3 45,1 7 019 2013 14 46,7 7 034 2014 14,2 46,9 7 415 2015 12,1 46,6 7 599 2016 10,6 44,5 8 078 2017 11,3 47 9 048 2018 11,2 47,8 10 244 source: nsi, 2020 0 2000 4000 6000 8000 10000 12000 50 51 52 53 54 55 56 south-central region tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 32 figure 5. dynamics of the active population in the region table 6. baseline data for the southwest region of nuts 2 of bulgaria years unemployment rate (%) active population (%) gdp per capita (in bgn) 2007 3,9 57,7 13 665 2008 2,9 59,1 15 919 2009 4,1 59 16 284 2010 6,9 58,9 16 933 2011 7,5 57,5 18 253 2012 8,2 57,6 18 341 2013 9,8 58,4 18 277 2014 8,9 58,5 18 634 2015 6,7 58,4 20 268 2016 5,4 58 21 572 2017 3,3 59,5 23 295 2018 2,6 60,3 25 261 source: nsi, 2020 figure 6. dynamics of the active population in the region 0 2000 4000 6000 8000 10000 12000 44 44.5 45 45.5 46 46.5 47 47.5 48 48.5 north-west 0 5000 10000 15000 20000 25000 30000 57 57.5 58 58.5 59 59.5 60 60.5 south-west tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 33 comparing the empirical results obtained, it can be reasonably concluded that, at a regional level, the active population exerts the greatest effect on gdp per capita in the north-central region, and the least effective in the south-central region. however, it is not these data that cause the greatest interest in the present analysis. the authors are puzzled by the fact that the southwestern region, which is the richest region in the country (including the capital sofia), cannot express the much sought after a statistical link between the active population and gdp. the result is the same in the northwestern region, although it is the poorest and lagging region in economic and social terms. the mere fact that the statistical models used in the survey did not work in the two regions located at the extremes of the socio-economic pendulum (the richest and the poorest)2 make us accept that the chosen approach is adequate. cross-regional comparisons to build sustainable regional production systems to enhance the competitiveness of our national economy in the european and global markets, we need a detailed analysis of regional gdp and a clear idea of how different factors affect it. logically, after trying to evaluate the correlation between the factors "unemployment rate" (for which we have not found statistically significant relationships) and "active population" (statistical estimates are presented above) by individual regions, we also need to make some cross-regional comparisons: within the eu, bulgaria has long-term gdp, which is the lowest indicator of gdp in the other member states. the pace of development shows that it will take more than 15 years for us to catch up with the average eu gdp standard. therefore, the authors of the report compare gdp per capita by region from before bulgaria joined the eu and after 12 years of eu membership. figure 7. gdp per capita by region in the country comparison between 2007 and 2018 (in bgn) the results are obtained after processing the data with the spss statistical program and it is noticed in fig. 7 that the 6 regions of nuts 2 in bulgaria have increased their gdp almost twice during the period of eu membership. this is undoubtedly due to market opportunities offered by the union, the impact of the european structural funds on socio-economic development, attracting foreign direct investment, the gradual formation of the national capital, and the increase in entrepreneurial activity among bulgarians. in the same way, we should look at and compare the status of the economically active population by region in the country, again setting the 2007 figures as a baseline. figure 8. state of the economically active population by region in the country comparison between 2007 and 2018 (in%) 2 www.nsi.bg – nsi official website. see the regional statistics section. 5551 10244 5848 10654 7110 12506 6735 12787 13665 25261 5943 10988 0 10000 20000 30000 2007 2018 north-west north-central north-east south-east south-west south-central 46.4 47.8 50.3 51.9 54.5 55.4 50.5 54.7 57.7 60.3 51 54.3 0 20 40 60 80 2007 2018 north-west north-central north-east south-east south-west south-central http://www.nsi.bg/ tanakow nikola, tsolov georgi / finance, accounting and business analysis 2 (1) 2020 34 the picture presented in figure 8 also shows the percentage increase of the active population in the 6 regions of nuts 2 in bulgaria. in both cases, the northwest region has the lowest index (1.4% growth for 12 years) and the southwestern region has the best indicator (2.6% growth for the period). the highest change was observed in the values of the south-east region (4.25%), and the lowest change was observed in the values of the north-east region (0.9%). conclusion without claiming absolute exhaustiveness and comprehensiveness, the above estimates of the effect of the dynamics of the active population on gdp per capita in the individual regions and the inter-regional comparisons allow us to conclude the necessary state measures supporting regional development in bulgaria. since the report was written in the context of the crisis caused by covid-19, that will undoubtedly lead to a restructuring of the economy on a regional, national, european and global scale, the authors of the report recommend that the following conclusions be taken into account: shortly, regions will develop their economic potential without much link to their unemployment rate. this is due to the widespread introduction of new technologies in the production of goods and services for final consumption and the replacement of human labor by machine. this condition can be offset by the targeted involvement of people in developing local resources by seeking new approaches to them. social capital in the regions will be judged the most by its quality indicators education, skills, competences, creativity and innovation. the use of these personality features in the economic system gives businesses a chance to survive in the fast-changing environment and they will build their localization strategies according to the availability of such capital. knowledge acquisition and development systems need to be deployed extensively regionally. the management of spatial and territorial processes can only be effective if it also engages the public's attention. people determine the needs and priorities of the region, and the state creates the conditions to accumulate the necessary resources to meet them. a regional policy cannot be budget based but should stimulate the creation of effective self-developing instruments regional funds, free industrial zones, guaranteed municipal and district loans, bond issuance, and more. achieving sustainable employment in the regions should be a top priority. the approach used by the authors shows that, despite the contingencies in the analysis, it can be argued that there is a relationship between the percentage of the active population in the regions and the amount of gdp in them. in the future, many other factors affecting gdp per capita in the territorial units of the country will be subjected to statistical analysis, but cross-regional comparisons suggest that long-term growth in the active population is achieved by expanding entrepreneurship and creating new forms and business organization. references goev, v., boshnakov, v., tosheva, ek., haralampiev, k., bozev, v. (2019). statisticheski analiz v sociologicheski, ikonomicheski i biznes izsledvaniq. publishing house – unwe. sofia. pp. 181 nikolov, g. (2016). durjavni politiki i strategii za regionalno razvitie. publishing house – unwe. sofia. pp. 7-9, (94) nikolov, g. et. al, (2019). regionalno i prostranstveno razvitie na gradovete ot severozapaden rayon, severen centralen i yujen centralen rayon. publishing house – unwe. sofia. pp. 3-5, (196-198), (432434) hristozov, yanko. how to manage the liquidity and fight the firm debt. international business and accounting research journal 2.1 (2018), pp. 23-33. suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 67 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg fundamental and technical factors on stock prices in pharmaceutical and cosmetic companies suyanto suyanto, julia safitri, arif prasetya adji sekolah tinggi ilmu ekonomi ipwi jakarta, indonesia info articles abstract history article: submitted 30 january 2021 revised 29 march 2021 accepted 16 april 2021 in investing in the capital market, investors need accuracy in making decisions related to stocks. accurate stock valuation can minimize the risk of being wrong in decision-making. therefore, investors need to analyze conditions corporate finance for decision making in investing stock. to evaluate the company's financial condition, investors can do it by calculating the company's financial ratio, namely earning per share (eps), debt to equity ratio (der), and return on equity (roe) and for determining the appropriate timing of the investor's transactions will also be considering technical factors such as the rupiah exchange rate against the us dollar, inflation and bank indonesia interest rates. this study aims to determine the effect. earnings per share, debt to equity ratio, return on equity, exchange rates, inflation, and bank interest rates indonesia to stock prices. the population in this study are go-public companies from the pharmaceutical subsector and the cosmetics sub-sector household goods, which are listed on the indonesia stock exchange as long as 2014-2019 period. the sample selection technique in this study is purposive sampling. thirty-six companies were acquired which complied research sample criteria. this study uses secondary data analyzed by descriptive method and multiple linear regression tested with classical assumption experiments, t-test and f-test. the results showed that the test results: eps had an effect significant and partially affect the share price., der is not has a significant and partial effect on stock prices., roe has a significant effect simultaneously and partially share price., exchange rate has no significant effect simultaneously and partially has no effect on stock prices, inflation has no significant effect simultaneously and partially it has no effect on stock prices. tribe interest has no significant effect simultaneously and partially not take effect. keywords: earnings per share, agency theory, debt to equity ratio *address correspondence: e-mail: suyanto.ipwija1993@gmail.com suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 68 introduction capital market (capital market) is a market for various long-term financial instruments that can be traded, both debt securities (bonds), equities (stocks), mutual funds, derivative instruments and other instruments. the capital market is a means of funding for companies and other institutions (such as the government) and as a means for investing activities. thus, the capital market facilitates various facilities and infrastructure for buying and selling activities and other related activities (stern, 2012). the capital market law no. 8 of 1995 concerning capital market defines the capital market as "activities related to public offerings and securities trading, public companies related to the securities they issue, as well as institutions and professions related to securities". the capital market has an important role for the economy of a country because the capital market carries out two functions, namely first as a means for business funding or as a means for companies to obtain funds from the investor community, where these funds can be used for business development, expansion, addition working capital and others, both capital markets are a means for the public to invest in financial instruments such as stocks, bonds, mutual funds and others, so that the public can place their funds according to the characteristics of the advantages and risks of each instrument. investing requires caution because there are risks that must be calculated (kumar, 2009). stock risks as an investment instrument are: capital loss, and liquidation risk, so investors must be observant before deciding on a transaction, where there is a price in stock transactions (nassirzadeh et al., 2012). share prices increase and decrease depending on various factors, including company and economic fundamentals. fundamental factors (company internal factors) consist of financial performance itself, including: earning per share (eps), debt to equity ratio (der), return on equity (roe) while technical factors (company external factors) include: value exchange, inflation and interest rates. this study examines the company's fundamental factors, for the market price ratio, namely eps (earning per share) as variable x1, for the solvency ratio der (debt equity ratio) as variable x2, and the profitability ratio roe (return on equity) as variable x3. based on research conducted by chang & chen (2008), eps (earning per share) partially affects stock prices, in contrast to manoppo's research (2015) where eps (earning per share) partially has no effect on stock prices. according to kamar (2017) roe (return on equity) partially affects stock prices, and is different from utami & darmawan's research (2019) where roe (return on equity) has no effect on stock prices. whereas in akbar & afiezan's (2019) research, der (debt to equity ratio) partially affects stock prices, in contrast to research (pangemanan2, 2014) where der (debt to equity ratio) has no effect on stock prices. agency theory (agency theory) developed by jensen, m. c, and w. h. meckling (1976). according to eisenhardt (1989) agency theory is the theoretical basis that underlies the company's business practices during this time. the theory is rooted in the synergy of economic theory, decision theory, sociology, and organizational theory. the main principle of this theory states that there is a working relationship between the party giving the authority, namely the investor, and the party receiving the authority (agency), namely the manager. the separation of owner and management in the accounting literature is called agency theory. morris & morris (2012) signaling theory is an action taken by the management of a company that provides guidance to investors on how management views the company's prospects. companies with favorable prospects will try to avoid selling shares and seek any new capital needed by other means, including the use of debt. signaling theory suggests how a company should provide signals to users of financial statements. this signal is in the form of information about what management has done to realize the owner's wishes. signals can be in the form of promotions or other information stating that the company is better than other companies. signal theory explains that signaling is done by managers to reduce information asymmetry. managers provide information through financial reports that they apply conservatism accounting policies that produce higher quality profits because this principle prevents companies from exaggerating profits and helps users of financial reports by presenting quality earnings and assets. the development of this research hypothesis can be defined as a temporary answer to the problem under study, it still needs to be verified through the research concerned. in principle, this hypothesis is useful to help make research more focused. based on the description above, the authors can draw temporary conclusions through research hypotheses based on problem identification, namely: 1. eps has a significant effect on stock prices 2. der has a significant effect on stock prices 3. roe has a significant effect on stock prices 4. exchange value has a significant effect on stock prices 5 inflation has no significant effect on stock prices 6. interest rates have a significant effect on stock prices. suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 69 methods the research was conducted at pharmaceutical and cosmetics & household supplies companies listed on the indonesia stock exchange for 6 (six) years from 2014 to 2019 with a sample population of 13 companies. the population used in this study were 17 companies from the consumer goods industry sector, the pharmaceutical and cosmetics & household supplies sub-sector which were listed on the indonesia stock exchange from 2014 to 2019. sampling used purposive sampling technique, namely the sample selection method using some criteria. operational variable variable y the share price is the price on the real market, and is the easiest price to determine because it is the price of a share in the ongoing market or if the market is closed, the market price is the closing price (manoppo, 2015). variable x according to hanifah (2019) earnings per share (eps) is a "ratio to measure the success of management in achieving benefits for shareholders." the higher the eps value, of course the shareholders are happy because the greater the profit provided to the shareholders. the earnings ratio shows the combined impact of liquidity and asset and liability management on a company's ability to generate profits. so, it can be concluded that eps is a ratio that shows the amount of profit earned from each existing share. eps = debt to equity ratio is a ratio used to determine the ratio between total debt and capital (utami & darmawan, 2019). der = roe is a ratio used to measure net income after using own capital (manoppo, 2015). roe = exchange rate is the price of a currency relative to the currencies of other countries. the exchange rate plays an important role in spending decisions (weske & benuto, 2015). kurs = inflation is the tendency to increase the price of goods and services. inf = ihkn-ihkn-1) ihkn-1 x100% ratio in general and continuously (alhogbi, 2017). inflasi = central bank interest rate, in this case bank indonesia or bi rate, is a policy interest rate that reflects the monetary policy stance or stance set by bank indonesia and announced to the public. according to (safitri et al., 2020) data on interest rates and rates of return provide information for financial managers to be able to determine the opportunity cost of investment. result and discussion descriptive statistics table 1. deskriptive statistics source: processed data of spss output, 2021 from the table above, the lowest value of earning per share (eps) is -106.66 and the highest suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 70 value is 162.060. eps is an important measuring tool, especially for investors who have the motivation to invest in pursuing dividends. because logically, the greater the eps value, the greater the chance of getting dividends. furthermore, the lowest value of debt to equity ratio (der) is 0.02 and the highest value is 2.9. the higher the der value a company has, the greater the company's debt to the company's capital. conversely, if the lower the der value, the lower the company's debt. the table above states that, the lowest value of return on equity (roe) is -37.98 and the highest value is 224.46. roe (return on equity) can also be used as an indicator, to assess how effectively a company manages to use equity financing to fund operations at the company in the success of the company. return on equity (roe) is also used as a real return on the capital invested by investors. the lowest value of the rupiah exchange rate against the us dollar is 12,440 and the highest value is 14,481. the standard deviation value of 620.42 is smaller than the mean value of 13,600, so it shows that the data deviation is good and the mean value can represent the research data. the lowest inflation rate is 0.16% and the highest is 8.36%. the standard deviation value of 2.73 is smaller than the mean value of 3.05, so it shows that the deviation of the data is good and the mean value can represent the research data. bank indonesia interest rate the lowest bank indonesia interest rate is 4% and the lowest value is 7.54. the standard deviation value of 1.27 is smaller than the mean value of 5.98, thus indicating that the data deviation is good and the mean value can represent the research data. share price the lowest value of the share price is 100 and the highest is 55,900. normality test normality test aims to test whether the dependent variable and independent variable have a normal distribution. (ghozali, 2011). a good distribution model is if the data is normally distributed or close to normal. the results of the normality test are shown in the image below. figure 1. normalitas test source: processed data of spss output, 2021 it can be seen from the chart normal p-p plot of regression standardized residual showing the points spread around the diagonal line, and the distribution follows the direction of the diagonal line. then the regression model fulfills the normality assumption and is fit for use. to further test the level of normality of the data, the normality test was added using the kolmogorov smirnov test using spss version 16 software to determine whether the data was normally distributed or not seen on the asymp basis. sig (2-tailed). the basis for decision making is if asymp. sig (2tailed) is more than 0.05 or 5%, then the data is said to be normally distributed, and vice versa if asymp. sig (2-tailed) is less than 0.05 or 5%, then the data are not normally distributed. if the data is not normally distributed, then steps can be taken to eliminate extreme data or what is known as data outliers. however, there are some experts who disagree with how to delete extreme data, another way that can be taken is by transforming data. data transformation is done by changing the data with certain formulas depending on the shape of the graph. before transforming the data, the shape of the graph must be known to determine the formula. suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 71 kolmogorov smirnov test table 2. kolmogorov smirnov test source: processed data of spss output, 2021 based on the results of the normality test above, the kolmogorov smirnov test value for the dependent variable (y) is 1.144 and the significance value is 0.146, it can be concluded that the data is normally distributed (0.146> 0.05). heteroscedasticity test figure 2. heteroscedasticity test source: processed data of spss output, 2021 based on the scatterplot pattern above, it can be seen that the points spread randomly, do not form a certain clear pattern, and are spread either above or below the number 0 on the y axis. so it can be concluded that there is no heteroscedasticity problem in this regression model. simultaneously test (test f) table 3. simultaneously test (test f) source: processed data of spss output, 2021 suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 72 from the table 3 shows that the value of f count = 29.883 with a probability of sig = 0.000. because the probability of sig is smaller than the level of the research test (sig 0.000 <0.005), thus simultaneously the independent variable affects the dependent variable. or independent variables (eps, der, roe, exchange rates, inflation and interest rates) have a simultaneous significant effect on the dependent variable (stock price). tabel 4. summary of test results f variable f test results result eps 0,000 significant der 0.009 not significant roe 0,000 significant kurs 0.997 not significant inflasi 0,929 not significant bi interest rate -0,416 not significant source: processed data of spss output, 2021 from table 4 above shows that there is a significant effect of the eps and roe variables and there is no significant effect of the der, exchange rate, inflation and bi interest rate variables. goodness of fit test table 5. goodness of fit test index criteria size cut of value *) result information chi square close to zero 0,431 fit probability >0,05 0,753 fit cmin/df <2,00 1,819 fit gfi >0,90 0,971 fit agfi >0,90 1,019 fit tli >0,90 1,35 fit cfi 0-1,0 0,897 fit rmsea 0,05-0,08 0,124 marginal source: processed data of spss output, 2021 these results indicate that the model used is acceptable. the values of chi square, probability, cmin / df, gfi, agfi, tli, cfi show a good structural equation model. although rmsea is accepted on a marginal basis. conclusion the purpose of this study is to prove and explain the variables earning per share, debt to equity ratio, return on equity which is the company's fundamental factor and the rupiah exchange rate against the us dollar, inflation, and bi interest rates which are economic fundamental factors on stock prices of pharmaceutical sub-sector companies. and the cosmetics and household supplies sub-sector listed on the indonesia stock exchange with a research period from 2014 to 2019. by using statistical analysis tools using statistical product and service solutions (spss) version 16 software. from the results of hypothesis testing it is concluded that simultaneously eps and roe has a significant effect while der, exchange rate, inflation and interest rates do not have a significant effect on stock prices. and from the partial test results, it is concluded that eps, der and roe have a significant effect on stock prices, while exchange rates, inflation and interest rates do not have a significant effect. references akbar, t., & afiezan, a. (2019). determination of sharia stock price through analysis of determination of sharia stock price through analysis of fundamental factors and macro economic factors. account and financial management journal e-issn:, 3(10), 1739–1745. https://doi.org/10.31142/afmj/v3i10.01 alhogbi, b. g. (2017). glamour, value and anchoring on the changing p/e. journal of chemical information and modeling, 53(9), 21–25. http://www.elsevier.com/locate/scp chang, h., & chen, y. (2008). the relationship between stock price and eps: evidence based on taiwan panel data. economics bulletin, 3(30), 1–12. eisenhardt, k. m. (1989). agency theory.pdf. the academy of management review, 14(1), 57–74. suyanto suyanto / finance, accounting and business analysis 3 (1) 2021 73 ghozali, imam. 2013. aplikasi analisis multivariate dengan program ibm spss 21 update pls regresi. semarang: badan penerbit universitas diponegoro hanifah, a. (2019). the effect of earning per share (eps), price earnings ratio (per) and price book value (pbv) against the stock price of telecommunications sector company included in the indonesian islamic stock index (issi). kne social sciences, 2019, 711–726. https://doi.org/10.18502/kss.v3i26.5410 kamar, k. (2017). analysis of the effect of return on equity (roe) and debt to equity ratio (der) on stock price on cement industry listed in indonesia stock exchange (idx) in the year of 2011-2015. iosr journal of business and management (iosr-jbm), 19(5), 66–76. https://doi.org/10.9790/487x1905036676 kumar, s. (2009). parametric determinants of price-earnings ratio in indian capital markets. journal of applied finance, 15(9), 63–82. manoppo, c. p. (2015). the influence of roa, roe, ros, and eps on stock price jurnal emba, 3(4), 691–697. morris, r. d., & morris, r. d. (2012). signalling, agency theory and accounting policy choice. accounting and business research, 18(69), 37–41. https://doi.org/10.1080/00014788.1987.9729347 nassirzadeh, f., salehi, m., & alaei, s. m. (2012). a study of the factors affecting earnings management: iranian overview. science series data report vol, 4(2), 22–27. pangemanan2, m. r. t. s. s. (2014). the effect of earnings per share (eps) & return on equity (roe) on stock price of banking company listed in indonesia stock exchange (idx) 2010-2014. jurnal emba, 3(2), 2010–2014. safitri, j., taolin, m. l., & prasilowati, s. l. (2020). inclusion of interest rate risk in credit risk on bank performance: evidence in indonesia. jurnal riset akuntansi dan perpajakan, 7(1), 13–26. stern, j. m. (2012). pershr earnings don ’t coun. financial analysts journal, 30(4), 39–40. utami, m. r., & darmawan, a. (2019). effect of der, roa, roe, eps and mva on stock prices in sharia indonesian stock index. journal of applied accounting and taxation, 4(1), 15–22. weske, j., & benuto, l. (2015). share prices and price/earnings ratios as predictors of fraud prior to a fraud announcement. academy of accounting and financial studies journal, 19(2), 281–298. 33 finance, accounting and business analysis volume 1 issue 1, 2019 bulgarian sofix levels in 2017 according to the “price-to-sales” and “enterprise value-to-sales” ratios dimiter nenkov university of national and world economy, sofia info articles abstract history article: received 2 june 2018 accepted 8 december 2018 published 29 january 2019 this paper is focused on the “price-to-sales ratio” (p/s) and the “enterprise value-to-sales ratio” (ev/s), which can be used in relative valuation, in the analysis of companies’ performance, as well as in the analysis of different sectors and of the market as a whole. the advantages and drawbacks of the market ratios are analyzed in brief. the derivation of the fundamental “price-to-sales” (p/s) and the “enterprise value-to-sales”(ev/s) ratios is discussed in detail. the two fundamental p/s and ev/s ratios for the bulgarian stock market are calculated and compared with the corresponding actual p/s and ev/s. the results of the study indicate that the current levels of the actual p/s and ev/s are much higher than the levels suggested by fundamentals, which is an indicator for an overpriced bulgarian stock market in 2017. keywords : stock markets, relative valuation, market ratios, p/s ratio, ev/s ratio, fundamentals . address correspondence: e-mail : dnenkov@unwe.eu dimitir nenkov / finance, accounting, and business analisys 34 introduction market ratios, also called ratios of market performance, are one important group out of the several groups of ratios for financial analysis of public companies.1 the feature which distinguishes this group of ratios is that the numerator of each of them is the market price per share (p0), or, alternatively the enterprise value of the company (ev). this is why they are called market ratios. this specific feature of market ratios provides the opportunity to use them in several aspects: for the analysis of the performance of companies, whose shares are publicly traded; for the analysis of the market as a whole and of different sectors, including for comparing among different markets and sectors; in the relative valuation of other companies, which is also popular as multiples valuation, etc. another specific feature of market ratios makes them especially useful in the above three aspects. this is the fact that they are a kind of “standardized prices” of stocks, which make different companies, sectors and markets comparable with each other.2 according to a. damodaran, there are a few reasons for the popularity of relative valuation methods: that they are quick, easy to implement, easy to explain, they normally yield results, which are close to current market prices. the truth, however, is that the above advantages also contain the prerequisites for the disadvantages of relative valuation methods. quite often, applying relative valuation, analysts and appraisers arrive at totally wrong price, because of ignoring key variables. the stocks are normally overpriced when the market overprices the comparable companies and vice versa. the lack of transparency with regard to key variables makes relative valuation very sensitive to manipulation.3 these are a part of the reasons why relative valuation methods are very convenient and very much wanted during bull markets. in such conditions most stock market players, such as investment bankers, consultants, and others, are interested in valuation results, which are close to market prices, thus justifying the respective transactions. commissions are earned only if deals are finalized. given the expectations for continuously rising stock prices, most players seem satisfied with such results (until the moment when the bubble bursts out). this copes perfectly with multiples valuation, which yields overpriced stocks in the conditions of an overpriced market. the relatively neutral dcf valuation models are often neglected in such situations. in this way the stock bubble is kind of “legalized” in the eyes of the public. 4 in this connection some valuation experts say that the most important question when reviewing a valuation is not which methods are used, but who paid for the valuation5. many analysts contend that the multiples valuation methods are easy to implement, but according to koller, goedhart and wessels, in reality it is just the opposite.6 a well elaborated multiples analysis requires a lot of the same efforts and adjustments as with the traditional dcf analysis. the disadvantages of the market ratios, which were discussed in terms of relative valuation, need to be accounted for when used in the other two directions as well – for company analysis and for the analysis of the sectors and of the stock market as a whole. 1 brigham, eugene f., louis gapenski – “financial management – theory and practice”, the dryden press, 1994 2 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002, p. 453 3 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002, p. 454 4 ненков, д. – “финансовият мениджмънт и уроците от финансовата криза”, доклад, международна научна конференция “световната финансова криза и поуките за финансовия сектор на българия”, равда, 24-26 септември 2010 г., стр. 19-26 5 damodaran, a. – „september 12 to october 16 – five weeks from hell and the lessons we have learned”, http://pages.stern.nyu.edu/~adamodar/ 6 koller, t., goedhart, m., wessels, d. – “valuation – measuring and managing the value of companies”, (mckinsey & company ), published by john weley & sons, new york, 2015, p. 371 http://pages.stern.nyu.edu/~adamodar/ dimitir nenkov / finance, accounting, and business analisys 35 “price-to-sales” (p/s) and “enterprise value-to-sales” (ev/s) ratios james o’shaughnessy qualifies the price-to-sales (p/s) ratio as the best of all market ratios.7 ken fisher calls it “almost perfect measure of popularity”.8 the p/s is a measure of the value of company’s equity, relative to its sales. as there are many investors who like high p/s ratios, there are also investors, who buy at low p/s ratios, since they believe they have a bargain.9 the price-earnings (p/e) and the price-to-book (p/bv) ratios continue to be very popular as they used to be in the past, but during the latest two or three decades the analysts extended the circle of ratios used, including the p/s ratios. it is very attractive to investors and analysts for several reasons: in the first place, while p/e ratios are often negative, the p/s ratio is available even for the worst-performing companies, as well as for the start-up companies. there is virtually no bias of average p/s, resulting from the exclusion of loss making companies. in the second place, p/s is quite independent of the alternative accounting practices, unlike p/e and p/bv. 10 in the third place, p/s ratios are normally more sustainable in time than p/es.11 the latter are very volatile because of the effects of the operating and financial leverage, and the resulting serious volatility of earnings per share by year.12 the main disadvantage of the p/s and ev/s ratios is that they may lead to determining high value of a company with growing revenues, even if this company works at loss. in order to have high intrinsic value, the company should generate high profits and cash flows. in this connection, it is extremely important to ensure that the comparable companies have similar profitability ratios and cash flows with the valued company. the p/s is the ratio between the market price per share and the sales per share: 𝑷 𝑺 = 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 𝑺𝒂𝒍𝒆𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 alternatively, the p/s can also be presented as the ratio between market value of equity (market capitalization) and sales: 𝑷 𝑺 = 𝑴𝒂𝒓𝒌𝒆𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 (𝒎𝒂𝒓𝒌𝒆𝒕 𝒄𝒂𝒑𝒊𝒕𝒂𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏) 𝑺𝒂𝒍𝒆𝒔 another drawback of the p/s is that it is incorrectly defined – there is no compliance between numerator and denominator. the denominator is an enterprise indicator, which depends only on company’s operations and is not influenced by financial leverage. the numerator is an equity indicator, which is a function of both of operations and capital structure. this way, when comparing companies with different capital structure, the p/s can lead to the wrong conclusions. in order to overcome this drawback of p/s, an alternative sales-based market ratio is recommended – the enterprise value-to sales ratio (ev/s). it is the ratio between enterprise value and sales: 𝑬𝑽/𝑺 = 𝑬𝒏𝒕𝒆𝒓𝒑𝒓𝒊𝒔𝒆 𝒗𝒂𝒍𝒖𝒆 𝑺𝒂𝒍𝒆𝒔 7 o’shaughnessy, j. p. – “what works on wall street”, mcgraw-hill, 2005, p. 127 8 fisher, kenneth l., 2008, super stocks, mcgraw-hill, reissued ed., 2008, p…… 9 o’shaughnessy, j. p. – “what works on wall street”, mcgraw-hill, 2005, p. 127 10 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002, p. 543 11 reed, j.p. – “five fisher super stocks”, march 2011, https://www.forbes.com/sites/investor/2011/03/07/fivefisher-super-stocks/#33070f3752fb (accessed 1 aug, 2017) 12 molodovsky, nickolas – “a theory of price-earnings ratios”, financial analysts journal, january/february 1995 (reprinted from “the analyst journal”, november 1953), p. 33 https://www.forbes.com/sites/investor/2011/03/07/five-fisher-super-stocks/#33070f3752fb https://www.forbes.com/sites/investor/2011/03/07/five-fisher-super-stocks/#33070f3752fb dimitir nenkov / finance, accounting, and business analisys 36 according to aswath damodaran (damodaran, a. 2002), the enterprise value (ev) is equal to:13 𝐄𝐕 = 𝐌𝐚𝐫𝐤𝐞𝐭 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐞𝐪𝐮𝐢𝐭𝐲 + 𝐌𝐚𝐫𝐤𝐞𝐭 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐝𝐞𝐛𝐭 − 𝐂𝐚𝐬𝐡 this should correspond to the market value of the operating assets of the company. by definition, it does not include financial and other non-operating assets. the above formula reflects the earlier definition provided by damodaran.14 in more recent publications15 the same author gives a little bit different definition, as follows: 𝐄𝐕 = 𝐌𝐚𝐫𝐤𝐞𝐭 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐞𝐪𝐮𝐢𝐭𝐲 + 𝐁𝐨𝐨𝐤 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐝𝐞𝐛𝐭 − 𝐂𝐚𝐬𝐡 this second definition should be accepted as more sustained. the main argument for this is that when calculating equity market value, it is normal to deduct the book value of debt from enterprise value. this is the amount due to creditors. for example, when the company has high default risk, the market value of bonds goes down significantly below their face value. if we deduct this low market value of debt, we arrive at equity value, which is overpriced. the market value of debt is connected with bond holders and potential buyers of debt on the secondary bond markets. this is the value at which bondholders could sell their bonds. but the principle due by a company to its bondholders should equal their book value, regardless of the current market value of bonds. finally, it makes sense to use book value of debt in the formula for ev. another important issue related to the above definition of ev concerns the scope of “cash”. in our view this should not be limited to cash in banks, but should also include investments in different financial and other non-operating assets. the ev, defined in this way, is indeed the equivalent of the operating value of the company. the interpretation of ev is not unanimous by different authors. koller, goedhart and wessels16 have a little bit different understanding about enterprise value. they define it in an alternative way, as the function of certain positions in the asset side of the balance sheet, as follows: operating value (value of operations) + value of financial assets + value of non consolidated interest in other companies + excess cash = enterprise value (ev) obviously, these authors have in mind the value of the company as a whole, including both operating and non operating assets. for this value damodaran uses the term firm value.17 identifying ev with operating value is more justified in terms of ensuring comparability between the numerator and denominator of the ev/s. the sales (s) in the denominator are the function predominantly of the operating assets of the company. they do not include revenue from financial and other non operating assets. in this connection, it is sustained that the numerator is equal to the value of operating assets only, which corresponds to the definition of enterprise value, given by a. damodaran. further in this study we stick to this interpretation of enterprise value (ev). 13 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002, p. 544 14 same source 15 http://pages.stern.nyu.edu/~adamodar/ 16 koller, t., goedhart, m., wessels, d. – “valuation – measuring and managing the value of companies”, (mckinsey & company ), published by john weley & sons, new york, 2015, p. 107 17 http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/ dimitir nenkov / finance, accounting, and business analisys 37 actual p/s and ev/s ratios on the bulgarian capital market table 1 presents the market ratios p/s and ev/s of the companies included in the leading index on the bulgarian stock exchange sofix. the net margin and the operating margin, influencing the levels of the two market ratios, are also shown in the table. there are two things which make impression: in the first place, there is no data about these indicators for four of the companies in the index in the infostock database: eurohold bulgaria, ccb, advance terafond adsic, and real estate fund bg adsic; in the second place, for four other companies in the index, the indicators are obviously abnormally high and have no economic sense. these are: chimimport, holding varna ad, stara planina hold ad and industrial capital holding ad. the holdings most likely have a problem with some incorrect interpretation of input data, which does not allow for compatibility between numerator and denominator of the ratios. it is quite possible that the denominators of each of the indicators of the four companies expresses only the sales, respectively the profits, of the mother companies, rather than of the whole holding. table 1: p/s and ev/s ratios of companies in the sofix as of july 2017 company ps evs net margin operating margin /pretax / sopharma ad 3.60 4.20 20.88% 23.11% fibank 0.75 3.66% 4.08% monbat ad 1.34 1.62 4.38% 4.88% chimimport 29.51 47.89 278.30% 257.54% m+s hidravlik ad 3.76 3.75 12.31% 13.67% alkomet ad 0.97 1.27 7.23% 8.03% albena 3.28 4.34 32.17% 33.98% eurohold bulgaria ccbank advance terra fund adsic holding varna ad 172.85 240.02 150.43% 150.43% stara planina hold ad 2288.46 2226.88 6594.87% 6594.87% neohim ad 0.70 0.82 11.01% 11.89% industrial capital holding ad 12354.48 15233.88 28860.00% 28860.00% real estate fund bg adsic mean (average) 1350.88 1776.47 3270.48% 3269.32% median 3.60 4.27 20.88% 23.11% minimum 0.7 0.82 3.66% 4.08% maximum 12354.48 15233.88 28860.00% 28860.00% source: infostock: http://www.infostock.bg/infostock/control/trading/index/quotes/sofix (28 july, 2017) this is a typical example about the commented in previous items of this study bias of average (mean) ratios, as a result of individual extremely high ratios of some companies. this shouldn’t be allowed or left as it is. it is more than clear that average market ratios of more than 1000 and average profit margins above 3000% are not normal, especially for mature companies. the positions of these four holdings are marked in yellow, in order to indicate that their indicators will be excluded from the database in the next table (table 2). in this way much more realistic average p/s and ev/s ratios and profit margins for the sofix are calculated. http://www.infostock.bg/infostock/control/trading/index/quotes/sofix dimitir nenkov / finance, accounting, and business analisys 38 table 2: corrected p/s and ev/s ratios of companies in the sofix as of july 2017 company ps evs net margin operating margin /pretax / sopharma ad 3.60 4.20 20.88% 23.11% fibank 0.75 3.66% 4.08% monbat ad 1.34 1.62 4.38% 4.88% chimimport m+s hidravlik ad 3.76 3.75 12.31% 13.67% alkomet ad 0.97 1.27 7.23% 8.03% albena 3.28 4.34 32.17% 33.98% eurohold bulgaria ccbank advance terra fund adsic holding varna ad stara planina hold ad neohim ad 0.70 0.82 11.01% 11.89% industrial capital holding ad real estate fund bg adsic mean (average) 2.06 2.67 13.09% 14.23% median 1.34 2.69 11.01% 11.89% minimum 0.7 0.82 3.66% 4.08% maximum 3.76 4.34 32.17% 33.98% source: infostock: http://www.infostock.bg/infostock/control/trading/index/quotes/sofix (28 july, 2017) in this way, the average sofix indicators in table 2 are calculated on the basis of 7 companies (and for the ev/s on the basis of only 6 companies) out of 15 included in the index. this is a much better variant, since the average indicators for the index are calculated only on the basis of individual indicators that are within a reasonable range of values. and still, the representativeness of the above averages is not good enough, given the fact that 4 holding companies, the adsic companies and one bank are out of the database. unfortunately, this happens quite often with most databases. the calculated mean for the p/s is 2.06, and the median is 1.34. when the difference between the mean and the median is significant, as it is in this case, the recommendation is to use the median. the mean is very susceptible to upward distortion when there are individual very high ratios in the database, especially for small databases. the mean for the ev/s of 2.67 is almost equal to the median of 2.69 and this problem does not exist here. the net margin is with a mean of 3.09% and a median of 14.23%. the operating margin respectively is with a mean of 14.23% and a median of 11.89%. it is logical to ask the question what is the purpose of the above review of the p/s and ev/s ratios. this is done with a reason. an important prerequisite for the correct use of market ratios is to find out which values are low or high, and which are normal for the market. the analysts should know the typical levels of market ratios on different stock markets both at present and from historical perspective. this requires that analysts are familiar to what extent the average values themselves might be distorted by individual extremely high or low ratios of certain companies in the samples. 18 this can cause significant distortion of the average, when the samples contains a small number of companies, as is the case with the bulgarian capital market, 18 stickney, clyde p. – “financial reporting and statement analysis”, the dryden press, 1996, p. 614 http://www.infostock.bg/infostock/control/trading/index/quotes/sofix dimitir nenkov / finance, accounting, and business analisys 39 for example. there are too many such cases in reality.19 it is also curious to ask why net margin and operating margin are included as important data in the table. both indicators measure the profitability of sales. the net margin is the so called companion variable for the p/s ratio, which pretty much explains the changes in its values. respectively, the operating margin is the companion variable for the ev/s ratio has the most serious impact on its values. 20 this will be explained further in the course of the study. fundamental model of the p/s ratio the correct use of the p/s ratio goes through serious analysis of the average ratios from a sample, before they are applied as multiples for valuation or as indicators for assessment of the performance of companies, sectors and markets. this analysis includes, among other things, comparing current average p/s of a sample with the average p/s in other sectors or markets for the same period, as well as comparing them with historic average p/s. another perspective of the analysis of the actual market ratios, including p/s, is the comparison with their corresponding fundamental ratios, which are derived directly from fundamentals. while actual market ratios indicate the price at which a company’s stocks are traded, fundamental ratios indicate the price at which a company’s stocks should be traded. unfortunately, this perspective of the analysis is preformed quite rarely in reality, which is a serious prerequisite for the distortion of many valuations and analyses. only after the above aspects of the analysis we could know whether the respective market ratios of the comparable companies (peer companies), or of any sample, are normal, representative, and have economic sense, in order to be used in a specific valuation or analysis. in order to find out which variables drive the fundamental p/s, we have to get familiar with its theoretical or fundamental model. it is derived as follows: 𝑷𝟎 = 𝑫𝑰𝑽𝟏 𝒓 − 𝒈 = 𝑬𝑷𝑺𝟏 × (𝟏 − 𝒃) 𝒓 − 𝒈 = 𝑬𝑷𝑺𝟎 × (𝟏 − 𝒃) × (𝟏 + 𝒈) 𝒓 − 𝒈 (𝟏) where: p0 = current price per share of stock, div1 = expected dividend per share for next year (year 1), eps1 = expected earnings per share for next year (year 1), eps0 = earnings per share for the current year, b = foreseen plowback ratio, (1–b) = foreseen payout ratio, r = cost of equity, g = expected growth rate of dividends per share. the net margin is equal to the net profit divided by sales (ni/sales). it can also be presented as the ratio of earnings per share to sales per share (eps/sales per share). this makes possible to express eps as a function of the net margin and sales per share, as follows: 19 nenkov, d., bathala, c. – “price-earnings ratios on the bulgarian capital market: an analytical approach to comparing actual vs. fundamental p/e ratios”, in “globalization: opportunities & challenges”, wisdom publications, delhi, 2008, p. 351 20 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002, p. 462 dimitir nenkov / finance, accounting, and business analisys 40 𝑬𝑷𝑺𝟎 = 𝑵𝒆𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 × 𝑺𝟎 where: s0 = current sales per share given the above, equation (1) becomes:21 𝑷𝟎 = 𝑺𝟎 × 𝑵𝒆𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 × (𝟏 − 𝒃) × (𝟏 + 𝒈) 𝒓 − 𝒈 (𝟐) dividing both sides by the sales per share (s0) we come at the fundamental model of the p/s – equation (3): 𝑷 𝑺 = 𝑵𝒆𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 × (𝟏 − 𝒃) × (𝟏 + 𝒈) 𝒓 − 𝒈 (𝟑) as seen from the equation, the price-to-sales ratio is a function of: the net margin, the plowback ratio (or alternatively the payout ratio), the cost of equity, and the growth rate of eps g. if we express the plowback ratio b as a function of the return on equity (roe) and the expected growth rate (g), the model becomes as follows – equation (4): 𝑷 𝑺 = net margin × (𝟏 − 𝒈/𝑹𝑶𝑬) × (𝟏 + 𝒈) 𝒓 − 𝒈 (𝟒) one of the advantages of this variant of the model is that it can be used to determine the p/s of non public (closed) companies, which do not pay dividends. it also becomes clear from the model that the priceto-sales ratio of a company with a very low or zero growth rate is actually determined by the differential between net margin and cost of capital. if the net margin is higher than the cost of equity, the price per share should be higher than the sales per share. and vice versa, if the net margin is lower than the cost of equity, the price per share should be lower than the sales per share. the fundamental p/s ratio of a company with temporarily high growth can be derived from the twostage dividend discount model. under this model future dividends are grouped in two sub-periods: high growth period and stable (sustainable) growth period. one way to present the two-stage dividend discount model is as follows:22 𝑷𝟎 = 𝑬𝑷𝑺𝟎 × (𝟏 − 𝒃𝟏) × (𝟏 + 𝒈𝟏) × [𝟏 − (𝟏 + 𝒈𝟏)𝒏 (𝟏 + 𝒓𝟏)𝒏 ] 𝒓𝟏 − 𝒈𝟏 + + 𝑬𝑷𝑺𝟎 × (𝟏 − 𝒃𝟐) × (𝟏 + 𝒈𝟏)𝒏 × (𝟏 + 𝒈𝟐) (𝒓𝟐 − 𝒈𝟐) × (𝟏 + 𝒓𝟏)𝒏 (𝟏) 21 damodaran, a. – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2012, p. 546 22 same source dimitir nenkov / finance, accounting, and business analisys 41 where: p0 = price per share of stock, eps0 = net income (profit) per share for current year, (1–b1) = payout dividend during high-growth period, (1–b2) = payout dividend during stable-growth period, g1 = expected growth rate of eps during high-growth period, g2 = expected growth rate of eps during stable-growth period, r1 = cost of capital during high-growth period, r2 = cost of capital during stable-growth period, n = number of years of high-growth period. the first collectible at the right side of the equation is the present value of a growing perpetuity, in which the annual cash flows are the dividends for the respective years of the high-growth period. the second collectible presents the present value of the future price pn, which is the equivalent of the future dividends during the stable-growth period. the eps0 can be expressed as the function of sales per share (s0) and net margin, after which both sides of the equation are divided by the sales per share, as a result of which we arrive at the two-stage fundamental model of p/s: 𝑷 𝑺 = net margin × (𝟏 − 𝒃𝟏) × (𝟏 + 𝒈𝟏) × [𝟏 − (𝟏 + 𝒈𝟏)𝒏 (𝟏 + 𝒓𝟏)𝒏 ] 𝒓𝟏 − 𝒈𝟏 + + net margin × (𝟏 − 𝒃𝟐) × (𝟏 + 𝒈𝟏)𝒏 × (𝟏 + 𝒈𝟐) (𝒓𝟐 − 𝒈𝟐) × (𝟏 + 𝒓𝟏)𝒏 (𝟐) fundamental model of the ev/s ratio taking into account that the numerator of the ev/s is the operating value of the company, the dcf enterprise valuation model is the most appropriate for deriving the fundamental model of this ratio. if the case is about a mature company, with assumed stable growth rate until infinity, its enterprise value can be determined as follows: 𝑬𝑽 = 𝑵𝑶𝑷𝑳𝑨𝑻𝟏 × (𝟏 − 𝒃) 𝑾𝑨𝑪𝑪 − 𝒈 = 𝑵𝑶𝑷𝑳𝑨𝑻𝟎 × (𝟏 + 𝒈) × (𝟏 − 𝒃) 𝑾𝑨𝑪𝑪 − 𝒈 (𝟏) where: noplat = net operating profit after tax, b = retention (reinvestment) ratio, wacc = weighted average cost of capital, g = expected growth rate of noplat. dimitir nenkov / finance, accounting, and business analisys 42 dividing both sides by the sales from current year (s0), we arrive at: 𝑬𝑽 𝑺 = 𝑵𝑶𝑷𝑳𝑨𝑻𝟎/𝑺𝟎 × (𝟏 + 𝒈) × (𝟏 − 𝒃) 𝑾𝑨𝑪𝑪 − 𝒈 (𝟐) the net operating margin is equal to the ratio between net operating profit after tax (noplat) and sales (noplat0/s0). after substituting, the above equation transforms into the one-stage fundamental model of ev/s: 𝑬𝑽 𝑺 = net operating margin × (𝟏 + 𝒈) × (𝟏 − 𝒃) 𝑾𝑨𝑪𝑪 − 𝒈 (𝟑) in this case the net operating margin is calculated as the ratio of current noplat to current sales. from equation (3) we see that the enterprise value-to-sales ratio is a growing function of the net operating margin and the growth rate (g) and a decreasing function of the reinvestment rate (b) and the weighted average cost of capital (wacc). after expressing the reinvestment rate (b) as a function of the return on invested capital (roic) and the growth rate (g), the fundamental model acquires the following shape: 𝑬𝑽 𝑺 = net operating margin × (𝟏 + 𝒈) × (𝟏 − 𝒈/𝑹𝑶𝑰𝑪) 𝑾𝑨𝑪𝑪 − 𝒈 (𝟒) it becomes clear from the model that for a company with a growth rate close to or equal to zero, the ev/s should be determined by the differential between net operating margin and wacc. the model also shows that for a given level of the growth rate (g), the higher the roic, the higher is the ev/s. the two-stage fundamental model of ev/s can be derived from the two-stage dcf enterprise valuation model, where the future is divided into two sub-periods an explicit forecast period and after it. from the dcf model we know that, other things being equal, the free cash flow to investors (fcfi) for each year is equal to that part of noplat, which is not retained and reinvested, and can be expressed as follows: fcfi = noplat × (1-b) if we assume that there is one and the same growth rate for the years of the explicit growth period g1, and another constant growth rate after the explicit forecast period g2, then the model can be presented in the following way: 𝑬𝑽 = 𝑵𝑶𝑷𝑳𝑨𝑻𝟎 × (𝟏 − 𝒃𝟏) × (𝟏 + 𝒈𝟏) × [𝟏 − (𝟏 + 𝒈𝟏)𝒏 (𝟏 + 𝑾𝑨𝑪𝑪𝟏)𝒏] 𝑾𝑨𝑪𝑪𝟏 − 𝒈𝟏 + + 𝑵𝑶𝑷𝑳𝑨𝑻𝟎 × (𝟏 − 𝒃𝟐) × (𝟏 + 𝒈𝟏)𝒏 × (𝟏 + 𝒈𝟐) (𝑾𝑨𝑪𝑪𝟐 − 𝒈𝟐) × (𝟏 + 𝑾𝑨𝑪𝑪𝟏)𝒏 (𝟏) where: noplat0 = net operating profit for current year, b1 = reinvestment rate for noplat during the explicit forecast period, b2 = reinvestment rate for noplat after the explicit forecast period, g1 = expected growth rate of noplat during the explicit forecast period, g2 = expected growth rate of noplat after the explicit forecast period, wacc1 = weighted average cost of capital during the explicit forecast period, wacc2 = weighted average cost of capital after the explicit forecast period, n = number of years of the explicit forecast period. the first collectible at the right side of the equation is the sum of the present values of annual free cash dimitir nenkov / finance, accounting, and business analisys 43 flows to the firm (fcfi) during the explicit forecast period. the second collectible is the present value of the continuing or terminal value (cv, tv). cv is the equivalent of future fcfi after the end of the explicit forecast period. after expressing noplat0 as a function of sales and the net operating margin and dividing both sides of the equation by (s0), we arrive at the two-stage fundamental model of the ev/s: 𝑬𝑽 𝑺 = net operating margin × (𝟏 − 𝒃𝟏) × (𝟏 + 𝒈𝟏) × [𝟏 − (𝟏 + 𝒈𝟏)𝒏 (𝟏 + 𝑾𝑨𝑪𝑪𝟏)𝒏] 𝑾𝑨𝑪𝑪𝟏 − 𝒈𝟏 + + net operating margin × (𝟏 − 𝒃𝟐) × (𝟏 + 𝒈𝟏)𝒏 × (𝟏 + 𝒈𝟐) (𝑾𝑨𝑪𝑪𝟐 − 𝒈𝟐) × (𝟏 + 𝑾𝑨𝑪𝑪𝟏)𝒏 (𝟐) the sales-based market ratios, even though a function of several variables, are mostly influenced by the profit margins – the net margin for p/s and the net operating margin for ev/s. different sectors and businesses have different profit margins, which suggests different p/s and ev/s for these businesses. companies in businesses with high margin should have high sales-based ratios and vice versa. a low profit margin directly leads to lower p/s and ev/s, but it has also indirect effect in the same direction, because it reduces the growth rate (g). however, this does not necessarily mean that all companies with low net margin or net operating margin would be with poor financial results and not creating value. many companies rely on high turnover, which very often is at the expense of low operating margin. they bet on being the leaders in the market by volume of sales. others bet on high margin, trying to be the price leaders. not always the latter are better off than the first. this depends on the effect which the selected strategy has over the value creation process. value creation itself depends on the spread between the return on invested capital (roic) and the cost of capital (wacc), at the enterprise level, and respectively on the spread between the return on equity (roe) and the cost of equity (r), at the equity level. this is the moment to note that each of the two sales-based market ratios is influenced also by another variable, which does not show up in the above fundamental models of p/s and ev/s. in this connection it is useful to express roic and roe in the following way: 𝑹𝑶𝑰𝑪 = 𝑵𝑶𝑷𝑳𝑨𝑻 𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑵𝑶𝑷𝑳𝑨𝑻 𝑺𝒂𝒍𝒆𝒔 × 𝑺𝒂𝒍𝒆𝒔 𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 = = 𝑵𝒆𝒕 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 × 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝑶𝑬 = 𝑵𝑰 𝑬𝒒𝒖𝒊𝒕𝒚 = 𝑵𝑰 𝑺𝒂𝒍𝒆𝒔 × 𝑺𝒂𝒍𝒆𝒔 𝑬𝒒𝒖𝒊𝒕𝒚 = = 𝑵𝒆𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 × 𝑬𝒒𝒖𝒊𝒕𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 the two equations indicate that the variable in question at the enterprise level is capital turnover ratio and at the equity level it is equity turnover ratio. normally businesses with low margin have higher turnover of both invested capital and equity. this compensates the low profit margin, leading to roic and roe which are high enough. this explains how companies with low profit margins can also create economic value added. the fact that the net margin is the leading (companion) variable, which has significant impact on the values of the p/s ratio is confirmed by different studies. for example, one very simplified regression of p/s against net margin for companies in sector “production of machines and equipment” on the bulgarian stock exchange in 2006 establishes strong positive correlation and a relatively high determination ratio (r2) of 0.68. the same strong positive correlation is established between ev/s and the operating margin, with dimitir nenkov / finance, accounting, and business analisys 44 coefficient of determination (r2) of 0.78 23. in other words, in this case both margins explain the changes in the two market ratios to a very high extent. damodaran makes annual regressions for each of the main market ratios against a group of independent variables. they also confirm the high weight of the profit margins in explaining the changes of p/s and ev/s.24 fundamental p/s and ev/s for the bulgarian capital market for 2017 fundamental р/s ratio for sofix for the calculation of the average fundamental p/s for the sofix we can use average values of the key variables which determine it. we can start with the one-stage model, as a more simple one. besides the average net margin (table 2), some other input variables for the usa are also needed, such as: cost of equity (r), return on equity (roe) and retention rate (b). the last two variables are necessary for determining forecasted growth rate (g). these indicators are shown in table 3. table 3: average roe, roa, roce, payout ratios and retention ratios for sofix as of july 2017 sofix payout ratio retention ratio roe roa roce mean 0.41 0.59 9.98% 7.31% 8.70% median 0.34 0.66 8.49% 6.06% 7.06% minimum 0.07 0.19 1.02% 0.69% 0.47% maximum 0.81 0.93 22.81% 15.04% 19.57% source: infostock: http://www.infostock.bg/infostock/control/trading/index/quotes/sofix (28 july, 2017) the difference between the mean and the median very significant and we can use each of them or the average between them. in this case, for determining the growth rate (g) we use the mean for the roe of 9.98, which is slightly more optimistic, as well as the retention ratio of 0.59. another important input variable is the average cost of equity for the companies on the bulgarian market. we can take it from other studies. according to the prevailing opinion, there should be a country risk premium for emerging markets, such as the bulgarian stock market.25,26 the arguments in favor of this vision can be seen in many publications,27, 28 but they are not the subject of this research. in this case we use a cost of equity, determined on the basis of the geometric average risk-free rate and the geometric average risk premium for the us stock market, plus a risk premium for bulgaria. the latter is determined using the combined approach: the default spread of bulgarian government bonds, multiplied by an adjustment coefficient. thus, the cost of equity is: 23 nenkov. d. – “opredelyane na stoynostta na kompaniite”, sofia, 2015, p. 286 24 source: http://pages.stern.nyu.edu/~adamodar/ 25 reilly, frank k., keith c. brown – “investment analysis – portfolio management”, thomson learning, usa, 2003 26 fishman, pratt, wislon, griffith, meltzer – “guide to business valuations” 27 damodaran, aswath – “investment valuation – tools and techniques for determining the value of any asset”, john wiley & sons, new york, 2002 28 copeland, tom, tim koller, jack murrin –“valuation – measuring and managing the value of companies”, john wiley & sons, new york, 2000 http://www.infostock.bg/infostock/control/trading/index/quotes/sofix dimitir nenkov / finance, accounting, and business analisys 45 rе (rrrе) = risk-free rate (usa) + beta × risk premium (сащ) + + country risk premium (default spread on bg bonds × 1.23) = 4.91% + 1.0 × 4.62% + 2.20% × 1.23 = = 9.53% + 2.71% = = 12.24% source: http://pages.stern.nyu.edu/~adamodar/ (value line, bloomberg и capital iq) it is usually recommended to add also a specific risk premium, because of the smaller average size of bulgarian companies, but in this case we ignore it, in order to avoid accumulating too many different risk premiums. this gives us the opportunity to find out what the results will be when we are not that conservative. finally, the input variables for applying the one-stage model are: net margin = 13.09% plowback (retention) ratio b = 0.59 cost of equity r (rrre) = 12.24% growth rate g = 5.89% (roe × b = 9.98% × 0.59 = 5.89%) table 4 shows the calculated by the model average fundamental p/s ratio. it is equal to 0.89 and is considerably lower than the actual arithmetic average p/s for sofix of 2.06, and the median of 1.34, as shown in table 2. the low value of the fundamental (theoretical) p/s should be explained with the fact that regardless of the good net margin of 13.09%, roe is much lower than the cost of equity (r). this fundamental p/s, which is much lower than the actual average p/s, indicates that the current sofix level is unjustifiably high. table 4: average fundamental p/s for sofix for 2017 (one-stage model) pace of change of net margin (in %): 10% pace of change of "r" (in %): 10% values values of net margin of 6.5% 7.9% 9.2% 10.5% 11.8% 13.1% 14.4% 15.7% 17.0% 18.3% 19.6% "r" р/s р/s р/s р/s р/s р/s р/s р/s р/s р/s р/s 6.1% 12.26 14.71 17.16 19.61 22.06 24.52 26.97 29.42 31.87 34.32 36.77 7.3% 1.95 2.34 2.73 3.12 3.51 3.90 4.29 4.68 5.07 5.47 5.86 8.6% 1.06 1.27 1.48 1.70 1.91 2.12 2.33 2.54 2.76 2.97 3.18 9.8% 0.73 0.87 1.02 1.16 1.31 1.46 1.60 1.75 1.89 2.04 2.18 11.0% 0.55 0.66 0.78 0.89 1.00 1.11 1.22 1.33 1.44 1.55 1.66 12.2% 0.45 0.54 0.63 0.72 0.81 0.89 0.98 1.07 1.16 1.25 1.34 13.5% 0.38 0.45 0.53 0.60 0.68 0.75 0.83 0.90 0.98 1.05 1.13 14.7% 0.32 0.39 0.45 0.52 0.58 0.65 0.71 0.77 0.84 0.90 0.97 15.9% 0.28 0.34 0.40 0.45 0.51 0.57 0.62 0.68 0.74 0.79 0.85 17.1% 0.25 0.30 0.35 0.40 0.45 0.51 0.56 0.61 0.66 0.71 0.76 18.4% 0.23 0.27 0.32 0.36 0.41 0.46 0.50 0.55 0.59 0.64 0.68 source: calculations of the author the values in the table also illustrate the high sensitivity of the fundamental p/s to the combination between net margin and r. they vary within a broad range from 0.23 at the bottom left corner of the table to 36.77 at the upper right corner of the table (under a combination of 6.1% cost of equity and a net margin of 19.6%). this is mainly due to the application of the one-stage model. the extreme values received under this model usually do not have economic sense and are not recommended for use. http://pages.stern.nyu.edu/~adamodar/ dimitir nenkov / finance, accounting, and business analisys 46 the one-stage models for determining the fundamental ratios reproduce the drawbacks of the capitalization models, from which they were derived, such as the gordon dividend model and its analogues. because of this, one-stage models easily yield illogical and misleading results for the fundamental ratios. this is why, it is recommended in most cases to apply the two-stage fundamental models. from the models above it became clear that the two-stage model divides the future into two sub-periods: high growth period and stable growth period. more conservative values for the growth rate g2 should normally be used for the stable growth period. the retention ratio b2 should be with some moderate value, such as 0.50. other things being equal, the average roe in the long run would most likely be equal to the average cost of equity r. this is why, in this case we assume that roe during the stable growth period will be equal to the cost of capital of 12.24%. we also use the calculated average net margin for sofix of 13.09%, assuming that it will stay the same during the stable-growth period. thus, the input variables for the two-stage model are as follows: net margin for the first sub-period (first 5 years) = 13.09% retention ratio for the first sub-period b1 = 0.59 cost of equity for the first sub-period r1 = 12.24% growth rate for the first sub-period g1 = 5.89% (roe × b = 9.98% × 0.59 = 5.89%) continuance of the first sub-period n = 5 years net margin for the stable growth period = 13.09% (remains the same) retention ratio during the stable growth period b2 = 0.5 cost of equity during the stable growth period r2 = 12.24% growth rate during the stable growth period g2 = 6.12% (roe × b = 12.24% × 0.5 = 6.12%) the specifics in this case is that it is not correct to talk about a high growth period at the beginning. the input assumptions and variables are such, that forecasted growth rate during the first sub-period is actually somewhat lower than growth rate during the stable growth period. table 5: average fundamental p/s for sofix for 2017 (two-stage model) pace of change of net margin (in %): 10% pace of change of "r" (in %): 10% values values of net margin of 6.5% 7.9% 9.2% 10.5% 11.8% 13.1% 14.4% 15.7% 17.0% 18.3% 19.6% "r" р/s р/s р/s р/s р/s р/s р/s р/s р/s р/s р/s 6.1% 1.26 1.28 1.31 1.34 1.36 1.39 1.42 1.44 1.47 1.50 1.52 7.3% 1.19 1.21 1.24 1.27 1.29 1.32 1.34 1.37 1.39 1.42 1.45 8.6% 1.13 1.15 1.18 1.20 1.23 1.25 1.28 1.30 1.33 1.35 1.38 9.8% 1.07 1.09 1.12 1.14 1.16 1.19 1.21 1.24 1.26 1.28 1.31 11.0% 1.01 1.04 1.06 1.08 1.11 1.13 1.15 1.18 1.20 1.22 1.25 12.2% 0.96 0.98 1.01 1.03 1.05 1.07 1.10 1.12 1.14 1.16 1.19 13.5% 0.91 0.93 0.96 0.98 1.00 1.02 1.04 1.07 1.09 1.11 1.13 14.7% 0.87 0.89 0.91 0.93 0.95 0.97 1.00 1.02 1.04 1.06 1.08 15.9% 0.83 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 1.01 1.03 17.1% 0.79 0.81 0.83 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 18.4% 0.75 0.77 0.79 0.81 0.83 0.84 0.86 0.88 0.90 0.92 0.94 source: calculations of the author the calculated average p/s ratios is only 1.07 (table 5). the p/s ratios, which are determined by using the two-stage model are much more precise. and is not sufficiently different from the fundamental p/s calculated through the one-stage model. as a rule, the results received under the two-stage model are much dimitir nenkov / finance, accounting, and business analisys 47 more precise. by forecasting the return on equity (roe) for the stable growth period to be equal to the cost of equity on average, we come up with a combination, suggesting moderate levels of the fundamental p/s. under the two-stage model, given a duration of the first period of 5 years, the weight of the cash flows from the stable growth period (the so called “continuing value”) is decisive for the present value of stocks. in the applied here two-stage model the net margin and the cost of equity (r) change only during the first subperiod, and remain constant during the stable growth period. this is why the values in table 5 are not very sensitive to the different combinations between net margin and cost of equity. they vary within a narrow range between 0.75 and 1.52. this fundamental average p/s of 1.07 is higher than the one calculated under the one-stage model (0.89), but again…. it is almost two times lower than the average actual p/s for sofix of 2.06. it is quite lower than the median actual p/s of 1.34, too. we should bear in mind that we have made somewhat optimistic assumptions about net margin and roe during the stable-growth period. in other words, the fundamental p/s of 1.07 could be regarded to as relatively optimistic. if we assume that the mean and the median of the actual average p/s are representative, we should conclude that the sofix index is overpriced against its fundamental value. fundamental ev/s ratio for sofix the input variables for the fundamental ev/s are indicators at the enterprise level (or invested capital level), including: net operating margin, weighted average cost of capital (wacc), return on invested capital (roic), growth rate of net operating profit (g). in order to calculate wacc, we need the debt-to-capital ratio (d/c). for this purpose we use the closest to it indicator, available in the infostock database for sofix companies – total debt-to-total assets. on 28 of july, 2017, its mean is 0.2555 and its median is 0.2400. 29 we use the mean of 0.2555 in this case. the cost of debt is determined on the basis of debt on a mature capital market (us market in this case), plus a premium, equal to the average default spread on bulgarian government bonds, plus spread for companies with “aa” ratings, according to standard & poors ratings services: rd = risk-free rate (usa) + default spread on bg government bonds + spread for companies with rating „аа“ according to s&p = 4.91% + 2.20% + 0.80% = = 7.91% source: http://pages.stern.nyu.edu/~adamodar/ the corporate-tax rate (t) is 10%. thus, the weighted average cost of capital is: wacc = e/c × re + d/c × rd × (1-t) = = 0.7445 × 12.24% + 0.2555 × 7.81% × (1-0.10) = = 10.93% the rest of the input variables are taken from the mean (average) values in table 1 and table 2. in the place of roic (return on invested capital) we use the closest to it, available in infostock – return on capital employed (roce). 29 infostock: http://www.infostock.bg/infostock/control/trading/index/quotes/sofix (28 july, 2017) http://pages.stern.nyu.edu/~adamodar/ http://www.infostock.bg/infostock/control/trading/index/quotes/sofix dimitir nenkov / finance, accounting, and business analisys 48 thus, the input variables for the one-stage model for calculating the fundamental ev/s are as follows: net operating margin = 14.23% reinvestment rate b = 0.59 weighted average cost of capital wacc = 10.93% growth rate g = 5.13% (roce × b = 8.70% × 0.59 = 5.13%) the results of the application of the one-stage model are in table 6. the calculated fundamental ev/s ratio for sofix is 1.06, about two and a half times lower than the mean of the actual ev/s of 2.67 and the median of 2.69. the conclusion is that this actual ratio for sofix also looks unjustifiably elevated. the values in the table show very high sensitivity to the combination between the operating margin and wacc. this has to be explained again with the usage of the one-stage model. table 6: average fundamental ev/s for sofix for 2017 (one-stage model) pace of change of net operating margin (in %): 10% pace of change of "wacc" (in %): 10% values values of net operating margin of 7.1% 8.5% 10.0% 11.4% 12.8% 14.2% 15.7% 17.1% 18.5% 19.9% 21.3% wacc ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s 5.5% 9.24 11.09 12.93 14.78 16.63 18.48 20.32 22.17 24.02 25.87 27.71 6.6% 2.15 2.58 3.01 3.44 3.87 4.30 4.73 5.17 5.60 6.03 6.46 7.7% 1.22 1.46 1.71 1.95 2.19 2.44 2.68 2.92 3.17 3.41 3.65 8.7% 0.85 1.02 1.19 1.36 1.53 1.70 1.87 2.04 2.21 2.38 2.55 9.8% 0.65 0.78 0.91 1.04 1.17 1.30 1.43 1.56 1.70 1.83 1.96 10.9% 0.53 0.63 0.74 0.85 0.95 1.06 1.16 1.27 1.38 1.48 1.59 12.0% 0.45 0.53 0.62 0.71 0.80 0.89 0.98 1.07 1.16 1.25 1.34 13.1% 0.38 0.46 0.54 0.61 0.69 0.77 0.85 0.92 1.00 1.08 1.15 14.2% 0.34 0.41 0.47 0.54 0.61 0.68 0.74 0.81 0.88 0.95 1.01 15.3% 0.30 0.36 0.42 0.48 0.54 0.60 0.66 0.72 0.78 0.84 0.90 16.4% 0.27 0.33 0.38 0.44 0.49 0.54 0.60 0.65 0.71 0.76 0.82 source: calculations of the author the input variables for the two-stage model are determined, following the same logic as for the twostage fundamental p/s model. we assume that the net operating margin during the stable growth period will remain the same as for the explicit forecast period. for determining the expected growth rate g2 we assume that the return on capital (roc) in the long term will be about the same as the weighted average cost of capital (wacc), and the reinvestment rate of the net operating profit (noplat) is with a moderate value of 0.5. dimitir nenkov / finance, accounting, and business analisys 49 thus, the input variable for the model are as follows: net operating margin during the explicit forecast period = 14.23% retention (reinvestment) rate during the explicit forecast period b1 = 0.59 weighted average cost of capital during the explicit forecast period wacc1 = 10.93% growth rate during the explicit forecast period g1 = 5.13% (roce × b = 8.70% × 0.59 = 5.13%) continuance of the explicit forecast period n = 5 years net operating margin after the explicit forecast period = 14.23% (remains the same) retention (reinvestment) rate after the explicit forecast period b2 = 0.5 weighted average cost of capital after the explicit forecast period wacc2 = 10.93% growth rate after the explicit forecast period g2 = 5.46% (roce × b = 10.93% × 0.5 = 5.46%) table 7: average fundamental ev/s for sofix for 2017 (two-stage model) pace of change of net operating margin (in %): 10% pace of change of "wacc" (in %): 10% values values of net operating margin of 7.1% 8.5% 10.0% 11.4% 12.8% 14.2% 15.7% 17.1% 18.5% 19.9% 21.3% wacc ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s ev/s 5.5% 1.50 1.52 1.55 1.58 1.61 1.64 1.67 1.70 1.73 1.76 1.79 6.6% 1.42 1.45 1.48 1.51 1.54 1.56 1.59 1.62 1.65 1.68 1.70 7.7% 1.36 1.38 1.41 1.44 1.46 1.49 1.52 1.55 1.57 1.60 1.63 8.7% 1.29 1.32 1.34 1.37 1.40 1.42 1.45 1.48 1.50 1.53 1.56 9.8% 1.23 1.26 1.28 1.31 1.33 1.36 1.39 1.41 1.44 1.46 1.49 10.9% 1.17 1.20 1.22 1.25 1.27 1.30 1.32 1.35 1.37 1.40 1.42 12.0% 1.12 1.14 1.17 1.19 1.22 1.24 1.27 1.29 1.31 1.34 1.36 13.1% 1.07 1.09 1.12 1.14 1.16 1.19 1.21 1.23 1.26 1.28 1.31 14.2% 1.02 1.05 1.07 1.09 1.11 1.14 1.16 1.18 1.21 1.23 1.25 15.3% 0.98 1.00 1.02 1.04 1.07 1.09 1.11 1.13 1.16 1.18 1.20 16.4% 0.93 0.96 0.98 1.00 1.02 1.04 1.06 1.09 1.11 1.13 1.15 source: calculations of the author table 7 shows that the received average ev/s ratio under the two-stage model is 1.30. the table also shows that as a result of the change of the net operating margin and the weighted average cost of capital during the explicit forecast period, the fundamental ev/s ratios vary within a narrow range – between 0.93 and 1.79. this is mainly due to the moderate average input variables during the stable growth period. the calculated average ev/s of 1.30, even though somewhat higher than the one under the one-stage model, is two times lower than the actual average ev/s for sofix of 2.67. this is again an indicator that the sofix is probably significantly overpriced. dimitir nenkov / finance, accounting, and business analisys 50 conclusion the p/s and ev/s ratios provide excellent opportunity for analysis of stock prices and indexes on the different capital markets, including the bulgarian market. besides through the comparison among different markets, and with historic averages, actual p/s and ev/s can be even better analyzed by comparing them with the respective fundamental p/s and ev/s for each capital market. the derived fundamental p/s and ev/s ratios for sofix are much lower than the actual average ratios. this means that judging from these two market ratios, the sofix is probably highly overpriced. this conclusion, of course, is valid only if the average actual p/s and ev/s are representative for sofix, and if the input variables for calculating the fundamental p/s and ev/s for sofix are representative as well. dimitir nenkov / finance, accounting, and business analisys 51 references alford, a. w., 1992. the effect of the set of comparable firms on the accuracy of 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of any asset, john wiley & sons, new york, 2012 fernandez, p., 2015. valuation and common sense”, 5th ed., 2015, http://ssrn.com/abstract=2209089 fernandez, p., andrada, b., 2007. 110 common errors in company valuations, iese business school, working paper wp no 714, november 2007, appendix 1, http://www.mandaportal.com/getattachment/f64aac39-d353-4df7-907b-2c54918bbfe1/110common-errors-in-company-valuations fisher, kenneth l., 2008, super stocks, mcgraw-hill, reissued ed., 2008 http://finance.yahoo.com/q?s=%5egspc http://pages.stern.nyu.edu/~adamodar/new_home_page/datafile/.......html (10.10.2014 г.) http://uk.finance.yahoo.com http://www.multpl.com/table (12.01.2012 г.) koller, t., goedhart, m., wessels, d., 2015. valuation – measuring and managing the value of companies, (mckinsey & company ), published by john weley & sons, new york, 2015 lee, c. – “value investing: bridging theory and practice”, china accounting and finance review, volume 16, number 2 june 2014 massasuke ide, 1996. corporate profitability and stock valuation in japan, financial analysts journal, march/april, 1996 mctaggart, j. m., kontes, p. w., mankins, m. c., 1994. the value imperative – managing for superior shareholder returns, 1994 molodovsky, n., 1953. a theory of price-earnings ratios, financial analysts journal, january/february 1995 (reprinted from “the analyst journal”, november 1953) nenkov, d., 2007. koeficientni metodi za opredelyane stoynostta na kompaniite. sashtnost i osobenosti na koeficienta “cena-dohod”, nauchni trudove na unss, tom 2, 2007. nenkov, d., 2010. finansoviyat menidjmant i urocite ot finansovata kriza, doklad, mezhdunarodna nauchna konferencia “svetovnata finansova kriza i poukite za finansovia sector na bulgaria”, ravda, 24-26 septemvri 2010, str. 19-26 nenkov, d., 2014. novite rekordi na amerikanskiya pazar na akcii – visoka djstvitelna stoynost ili poredniyat balon?, ikonomicheski i socialni alternative, br. 4, 2014, s. 5-16 nenkov, d., 2015. opredelyane na 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https://www.scribd.com/document/299664919/penman-modeling-sustainable-earnings-and-pe-ratios-research-paper-by-penman-and-zang https://www.forbes.com/sites/investor/2011/03/07/five-fisher-super-stocks/#33070f3752fb https://www.forbes.com/sites/investor/2011/03/07/five-fisher-super-stocks/#33070f3752fb 11 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg audit opinion : implication from audit evidence evaluation in using professional proficiency with cautiousness and accuracy ely suhayati departement accounting, indonesia computer university, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 objective:.the purpose of the study is the use professional proficiency with cautiousness and accuracy has effects on audit evidence evaluation that has implications for audit opinion methodology : the research method that is used is descriptive verification with the help from structural equation modeling partial least square, in this research there are only 17 public accountant office with 25 partners in bandung results: audit evidence evaluation which uses the ability to be cautious and accurate has implications on audit opinion. implication: the use professional proficiency with cautiousness and accuracy is not only needed to evaluate the evidence, but also guarantee he quality of the audit results keywords: professional proficiency with cautiousness and accuracy, audit evidence evaluation, audit opinion address correspondence: e-mail : ely.suhayati@email.unikom.ac.id ely suhayati / finance, accounting and business analysis 2 (1) 2020 12 introduction abdul malik (2017) stated that due care or auditor vigilance principle is important and cannot be underestimated when collecting valid data to deliver the auditor opinion. ernst & young’s (ey) partner in indonesia, which is kap purwantono. suherman & suraja, was fined us$ 1 thousand to as regulator because they failed to make their client financial audit report. previously, ey member in indonesia announced the audit result of telecommunication firms in 2011 and gave an opinion based on inadequate evidence and inaccurate data because they published the opinion in a rush. another problem according to ifsan lukmanul hakim (2015) is the case of accounting falsification at toshiba, the ceo of toshiba corp, hisao tanaka resign due to his involvement in the greatest accounting scandal in japan, independent investigator team (commissioner (toshiba chairman) created independent panel), as a result of the investigation, they found that there was a manipulation on the financial report regarding toshiba operational profit where it stated that the profit was us $ 1,2 m from 2008-2014 but the fact is toshiba suffered a loss at that time. additionally, ifsan lukmanul hakim (2015) mention the misuse of accounting procedure continuously is done as an official policy from the management and it is impossible for anyone to go against it, according to “toshiba” culture, this problem is related to external audit (independent auditor) inaccuracy when they analyze, detect, examine and find the manipulation on the financial report that is created by the audited entity and in this case it is “toshiba”. vigilance attitude is supposed to be emphasized in every audit process, due professional care has a meaning of professional proficiency with cautiousness and accuracy, the use of professional proficiency with cautiousness and accuracy enable the auditor to obtain the trust that the financial report is free from error, whether it is caused by inaccuracy or falsification. if this attitude were underestimated by the auditor, it likely causes fatal effects such as auditing with inadequate information, invalid information and the audit process would become inaccurate which then implicate the public trust towards opinions that are stated by the auditor. due to the importance of auditor opinion of a firm for the financial report users, the auditor should have good due professional care skills to collect and analyze audit evidence that can be used to state a reliable opinion. an auditor is required to use their professional proficiency with cautiousness and accuracy because the auditor professional proficiency affects the accuracy of the opinion they give, and as a result, the auditor could obtain sufficient evidence and give adequate base in terms of giving a reliable opinion. an opinion is a point of view that is given by the partner (auditor) at a proper financial report of a firm (mulyadi, 2014: 20). mulyadi (2014: 14) also claim that the auditor gives the opinion for their client financial report by checking accounting notes that support the financial report and collect additional information, for example, ask for evidence directly and collect physical evidence from outside. sufficient and accurate audit evidence that has been obtained could reduce the audit risk to the acceptable degree, hence enable the auditor to produce adequate conclusion as the basis for auditor opinion and professional consideration (sukrisno agoes, 2017: 179). literature review the application of professional proficiency with cautiousness and accuracy the application of professional proficiency with cautiousness and accuracy in the implementation on audit task based on professional public accountant standard 2013 section 230 and 230.1 stated that “the competence level that generally owns by the auditor in auditing is a reasonable cautiousness and accuracy, the auditor should be given a task and supervise based on their knowledge, skills and ability to make them be able to evaluate audit evidence that they check.” audit evidence according to ely suhayati & siti kurnia rahayu (2013:118) “audit evidence is the overall information which is used by the auditor to reach a conclusion and will be the base of the audit opinion, and also include the information from the accounting notes that underlying the financial report and other information. additionally. audit opinion alvin a. arens, randal j. elder & mark s. beasley (2014:42), “auditor is responsible for stating an opinion in a form of written report regarding whether the financial report has been written properly in terms of the materials according to the valid framework report, and this opinion is based on the audit evidence evaluation and audit finding that has been obtained. correlation the use of professional proficiency with cautiousness and accuracy regarding the evidence ely suhayati / finance, accounting and business analysis 2 (1) 2020 13 evaluation a theory that has a correlation with those three theories above is the theory about the use of professional proficiency with cautiousness and accuracy regarding the evidence evaluation as claimed by mulyadi (2014 : 27), “the use of professional proficiency with cautiousness and accuracy means using a healt consideration in an area settlement, choosing methodology, and procedure examination for auditing. those healthy considerations would be used for the procedure testing, evaluating evidence and reporting the audit result.” theoretical framework an association theory which mentions that audit evaluation is related to audit opinion is stated by ely suhayati & siti kurnia rahayu (2013 : 117), “to give an opinion the auditor must obtain audit evidence from the report and evaluate it. the auditor needs to be able to make a decision on the opinion they express based on impartial evaluation on the evidence that has been collected.” moreover, the previous research results entitled the effect of independent public accounting and audit judgement towards public accountant opinion by ely suhayati (2016) point out that audit consideration is an important factor when considering opinion types that are suitable to be given in certain circumstances. based on association theory and previous research, it could be concluded that the research paradigms is illustrated as follows: figure 1. research paradigms hypothesis development according to the framework above, hypothesis in this research are h1: the use of professional proficiency with cautiousness and accuracy have effects on audit evidence evaluation h2: audit evidence evaluation affect audit opinion methods the method in this research is descriptive verification (causal), with the help of structural equation modelling partial least square in taking conclusion, the method of data collection is survey method because it researches more than one public accounting office, whereas the data type from this research consists of primary and secondary data. primary data is collected through questionnaire and interview, the statement on the questionnaire is in the form of a closing statement that has been provided with an alternative answer by the writer to be chosen by the respondents since the indicator for the variable that is going to be measured is already clear or has been operated before. secondary data for every variable collected through a literature review, accounting magazine, articles and journal research. as for the population in this research, there are 30 public accountant office with 47 partner, apparently 13 of the accountant office is not located at the address record, hence in this research there are only 17 public accountant office with 25 partners in bandung, which means it can be concluded that researcher research all population element or known as census. the observation unit of this is the public accountant office partner that works based on the auditor work that has been supervised by the supervisor. results and discussion recapitulation result from the questioner that distribute to 25 partners is report as follows : table 1. score percentage of respondent answer regarding professional proficiency with cautiousness and accuracy variable indicator actual score ideal score % actual score criteria knowledge 66 100 66,00% quite good skills 69 100 69,00% good ely suhayati / finance, accounting and business analysis 2 (1) 2020 14 ability 134 200 67,00% quite good total 269 400 67,25% quite good professional proficiency with cautiousness and accuracy is measured by using three indicators, which are knowledge, skills and ability. based on the answer results from 25 partners, the score that was obtained is 67,25%, it locates on the interval of 52,01-68,00 and categorizes as quite good which means that there is still a gap on the problem that occurs in terms of the professional proficiency with cautiousness and accuracy when auditing. table 2. score percentage of respondent answer regarding audit evidence variable indicator actual score ideal score % actual score criteria information evidence from accounting notes 133 200 66,50% quite good other information evidence, besides the accounting notes 129 200 64,50% quite good total 262 400 65,50% quite good audit evidence evaluation is measured by using two indicators, which are the information evidence from accounting notes and other information that are apart from the accounting notes. according to the answer results from 25 partners, the score that was obtained is 65,50%, it locates on the interval of 52,01 – 68,00 and categorizes as quite good which means that table 3. score percentage of respondent answer regarding audit opinion variable indicator actual score ideal score % actual score criteria financial report that are free from material misstatement 138 200 69,00% good financial report that are corresponding with the applicable financial report framework 133 200 66,50% quite good total 271 400 67,75% quite good audit opinion is measured by using two indicators, which are a financial report that is free from material misstatement and a financial report that is corresponding with the applicable financial report framework. based on the answer results from 25 partners, the score that was obtained is 67,75%, it locates on the interval of 52,01 68,00 and categorizes as quite good which means that there is still a gap on the problem that occurs in terms of the partner who give audit opinion. hypothesis testing to test how big the use of professional proficiency with cautiousness and accuracy influences the audit evidence evaluation (y), and the implication towards audit opinion (z), by using structural equation modelling partial least square 2.0. in the structural equation modelling, there are two types of model that formed, the first one is a measurement model and the other one is a structural model. measurement model (outer model) this research uses 3 latent variables with the total of 7 manifest variables. latent variable from the use of professional proficiency with cautiousness and accuracy consists of 3 manifest variables while for the latent variable of audit evidence evaluation consist of 2 manifest variable and audit opinion variable consist of 2 manifest variables, the calculation result that uses smartpls 2.0 obtained a diagram with full path model as follows: ely suhayati / finance, accounting and business analysis 2 (1) 2020 15 figure 2. outer model structural model (inter model) hypothesis 1: how much the use of professional proficiency with cautiousness and accuracy affects the audit evaluation evidence. table 4. inter model x  y latent variable coefficient line tcalculate tcritical information conclusion x  y 0.813 31.762 2.120 ho rejected significant the use of professional proficiency with cautiousness and accuracy influence the audit evidence evaluation as much as 91,3% with the value of tcalculate (31,762) greater than the value of tcritical (2,120), hence it can b conclude that ho is rejected and accepted ha which means that the use of professional proficiency with cautiousness and accuracy affects the audit evidence evaluation according to 25 public accountant office partners in bandung. hypothesis 2: how much does the evaluation of audit evidence has implication on the opinion table 5. inter model y  z latent variable coefficient line tcalculate tcritical information conclusion y  z 0.875 33.126 2.120 ho rejected significant audit evidence evaluation has implications on the opinion as much as 87,5%, with the value of tcalculate (33.126) greater than the value of tcritical (2.120), therefore it could be concluded that ho rejected and ha accepted which means that the audit evidence evaluation has an effects on the opinion according to 25 public accountant office partners in bandung.based on the results and discussions above, the use of professional proficiency with cautiousness and accuracy affect the audit evaluation that has an implication on audit opinion. this statement is corresponding with the research conducted by mark w. nelson (2009) & dewi fatmawati (2018): the more the auditor acts carefully and vigilance, the more he or she convinced with the evidence evaluation that they obtain rather than searching information from the management team. while according to chin cheal zenb et al. (2018): vigilance and accuracy lead to fraud detection and as a result, it increases the audit quality. phil d. wedemeyer (2010), steven m. glover (2013) and fkris hardies & sanne jansien (2017): audit quality is affected by the use of professional proficiency with cautiousness and accuracy. kelsey r. brussel et al. (2019): as the vigilance increase, fraud detection also increases. augustine (2013) stated that audit evidence is used to measure the auditor a final opinion. lia dahlia iriani (2017) mention that higher competence, independence and professionalism would produce an audit with better quality. conclusions the auditor who is incautious and careless when evaluating audit evidence can cause the audit opinion that published by the partner to be unsuitable with the client condition, therefore it is better for the auditor to use their professional proficiency with cautiousness and accuracy and it means that they use their knowledge, skills and ability when auditing. as a result, the auditor is able to optimally evaluate audit evidence based on the information from accounting notes or other sources, audit opinion implication that publishes by the partner is their client financial report that has been audited by public accountant firms which is free from error and correlated with the valid financial report framework. to make sure that the ely suhayati / finance, accounting and business analysis 2 (1) 2020 16 auditor keep using their professional proficiency with cautiousness and accuracy in evaluating audit evidence that has implication on audit opinion, it suggested that the supervisor need to supervise the auditor after they have finished the auditing to make sure that the opinion match the appropriate financial report and hence the people would trust the audit result as one of the product from public accountant firms. the contribution of this research is the use of professional proficiency and with cautiousness and accuracy when evaluating evidence has implications for audit opinion. for further research we suggest that conducting research into the use of use of professional proficiency and with cautiousness and accuracy will produce quality audits so that the opinions generated will be of high quality because people trust towards public accountant as an independent body in auditing the financial report are enormous, these trust are given by the people because they are the one who uses the public accountant service, but due to lack of carefulness from the auditor when checking the evidence cause the report material to be wrong even until the audit opinion publish references abdul malik (2017)., “mitra ernst & young indonesia didenda rp 13 m di as”, https://bisnis.tempo.co, sabtu 11 februari 2017. alvin a. arens, randal j. elder, mark s. beasley translate by herman wibowo. 2014. auditing & jasa assurance : pendekatan terintegrasi, edisi kelimabelas jilid i, penerbit erlangga. augustine, o. enofe, chijioke mgbame, lucky g. odeyile, kinglsey kuegbe. research journal of finance and accounting, vol 4 no. 13 (2013, impact of audit evidence on auditor’s report chin cheal zenb, cheot siew siewa, maryf dan mohd danial afiq khamar tazilah, 2018. a study on the relationship between professional skepticism characteristics and auditors’ fraud detection in malaysian context. dewi fatmawati, inneke puspita & arizona mustikarini, 2018. does accounting education affect professional skepticism and audit judgment. ely suhayati, 2016 : pengaruh independensi akuntan publik dan audit judgment terhadap opini akuntan publik. jurnal ekonomi, sosial dan bisnis, issn 0216-6437 vol 12 no. 1 april 2016.. hal 3230-3238, penulis mandiri. fkris hardies and sanne jansien, 2017. ar reseach project : professional skepticism : a trending concep in need of understanding, doi : 10.5117/mob.91.24053 iapi.2013. standar profesional akuntan publik. jakarta, salemba empat. ifsan lukmanul hakim (2015)., skandal terungkap, ceo toshiba mundur”,http://bisnis.liputan6.com/ read/2277114/skandal-terungkap-ceo-toshiba instutut akuntan publik indonesia. 2011. standar profesional akuntan publik, jakarta : salemba empat. kelsey r. braasel., richard c. hatfield erin burrell nickell linda m. parsons, 2019. the effect of fraud risk assesment frequency and fraud inquiry timing on auditors’ skeptical judgments and action.horizon akuntansi. lia dahlia iryani. 2017. the effect of competence, independence and proffessional auditors to audit quality, journal of humanities and social studies, vol 1 number 01 sept 2017. mark w. nelson, 2009. a model and literature review of professional skepticism in auditing, article in auditing a journal of practice & theory 28 (2), doi : 10:2308/aud.2009.28.2.1 mulyadi. 2014. auditing, edisi 6 buku 1 : penerbit salemba empat jakarta. phil d. wedemeyer, 2010. a discussion of auditor judgment as the critical component in audit quality a practioner’s perspective, internasional journal of disclosure and goverance, nov 2010, vol 7, issue 4, pp 320-333. sekaran, uma., and roger bougie. 2010. research methods for business, a skill building approach. fifth edition. new york : john willey and sons, ltd publication. siti kurnia rahayu dan ely suhayati. 2013. auditing konsep dasar dan pedoman pemeriksaan akuntan publik. cetakan kedua, jakarta: graha ilmu. stevhen m. glover and dauglas f. prawit, enhancing auditor professional skepticism, nov2013 sukrisno agoes. 2017. auditing petunjuk praktis pemeriksaan akuntan oleh akuntan publik, edisi 5, buku 1. jakarta: salemba empat. sumber salah satu auditor di kap di wilayah bandung 15/03/2018, wawancara terkait fenomena yang berhubungan dengan judul. kap y. http://bisnis.liputan6.com/%20read/2277114/skandal-terungkap-ceo-toshiba http://bisnis.liputan6.com/%20read/2277114/skandal-terungkap-ceo-toshiba 102 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg what determine accounting information system implementation? evidence from indonesia sri dewi anggadini accounting department, universitas komputer indonesia, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 this study is about how the implementation of accounting information systems produces quality of financial information on state owner enterprises in indonesia. this study answers the problem of how the accounting information system produces accurate, relevant, timely and complete financial information. the implementation of the accounting information system, can not be separated from ethics and user competence as a factor that has an impact on the current accounting information system. data was collected using questionnaires, direct observation, and interviews. the research method used is quantitative and qualitative with a descriptive and verification approach. the number of samples used were 58 state owner enterprises indonesia. the analytical tool in the study uses path analysis by testing the spss hypothesis. the results of the study show that ethics and user competence affect the implementation of accounting information systems and also affect the quality of financial information. keywords: accounting information system, accounting information, ethic and competence address correspondence: e-mail: sri.dewi@email.unikom.ac.id sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 103 introduction in an organization, especially private organizations, the accuracy and completeness of information information in this case finance becomes the main element in its management so as to achieve optimal company goals. quality of financial information is not possible if the accounting information system implemented is not in accordance with the rules. many problems occur because accounting information is not presented accurately, timely, relevant and complete so that it is easy to abuse. in the information system that is available, not everyone is satisfied with the information system based on the case experienced by pt kereta api indonesia when implementing the erp (enterprise resource planning) system that is used has failed due to errors in the it team. the difficult situation experienced by the information technology team in managing human resources and infrastructure in the form of fostering a sense of leadership and employee confidence that in its management has targets whose achievements require no short time, besides producing a level of satisfaction that is not yet optimal, the information system used by pt kereta api indonesia (persero) has not yet been integrated, in the sense each organizational function and subdivision works separately. users of information systems who are dissatisfied have been felt by users of information systems at pt pos (persero). before pt pos (persero) replaced the accounting information network system to erp with a sap based tool that is now in operation after it only began operating in january 2013, the performance of pt pos indonesia before the replacement of the system was considered to be very slow. another phenomenon occurs in pln workers who are members of the pln workers union (sp) in sumatra that is not in accordance with the new system that has been implemented, namely the change of the manual payment system to an online system. during this salary payment system, bonuses especially sppd (official travel order) is done manually through approval through a piece of paper, but since the erp was launched on july 1, 2012 the payment system, especially sppd (official travel order) changed to the online system. from the above phenomenon implies that the process is too long to delay the sppd payment due to the use of an online payment system that makes pt pln employees feel disadvantaged, this does not reflect indicators of the quality of financial information, one of which is the satisfaction of users of the is measured by using questionnaires and interviews. this condition requires the improvement of the ais of each institution in the government and strengthens the synergized accounting information system owing to the fact that through the application of a quality ais, it is expected to realize the goals of the organization (gelinas et al., 2012). one of the ways by companies to detect errors and minimize the risk of errors is to facilitate the implementation of ais. in contrast to previous studies this study explains detecting fraudulent in terms of the application of ais (bassellier, 2000). this research is important to do, because it can identify fraud in state owner enterprises throughout indonesia, this research can find out implementation of accounting information systems (sri dewi anggadini, 2018) such problems that occur the discussion of the accounting information system are associated with the influencing factors in the form of ethics and competencies that occur in state owner enterprises throughout indonesia. literature review user ethic users of information systems in an organization are very important in producing information that will significantly contribute to strategic running and achieving competitive advantage (mcleod & schell, 2007: 79). bodnar & hopwood (2014: 158) added that users consist of heterogeneous groups of people and can be distinguished from others because they are based on functions related to data processing or information technology. ethics appears in someone who has a valuable character in every step of decision making. honest, fair, responsibility and empathy are values for someone who is ethical. (horngren et al., 2008: 25). agree with hansen & mowen (2007: 17) and horngren et al (2008: 25), hartman & desjardins (2008: 76) revealed that the ethical characteristics applied in carrying out activities consisted of honesty, quality, responsibility, compassion, fairness and respect. based on the description above, the dimensions and indicators of user ethics used in this study refer to the theory according to laudon & laudon (2014: 159), supported by the theory presented by hansen & mowen (2007: 17). user competency high personal competence will spur users to use ais, so that the quality of ais becomes more effective. users of information systems who have good techniques derived from education that have been taken or from experience using the system will increase satisfaction in using the accounting information system. the definition of competence proposed by dessler (2011: 169) is competencies is a personality sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 104 that a person shows for the performance he produces. work based on competence shows that the work done can be measured, observed and proven both from knowledge, skills and behavior that shows good behavior in accordance with the expected job criteria. furthermore mondy (2010: 244) states competence has an element of ability and variety of all skills possessed by someone both related to technical, character or orientation to the future. the sustainability of the information system is inseparable from the user who runs the organizational function in this case the information system (bodnar & hopwood, 2014: 17). as a user, an accountant must be able to be involved in designing accounting information systems (gelinas et al., 2012: 27) so that competence is needed from users in the implementation of information systems (kassboll & chawani, 2010) because user competency is an important element in determining an information system can be implemented optimally. accounting information system implementation ais is one type of system needed by companies to produce financial information needed by personnel and other related parties in connection with decision making and other policies. in general, all companies need reliable, timely and accurate information. the fundamental role of ais in organizations is to produce quality of financial information (azhar susanto, 2008: 374). in addition, the implementation of information system is the key for an organization to achieve success effectively (wixom, 2005). system quality is one set of characteristics will be fairly apparent to users after they have interact with the system for only a short period time. gorla et al. (2010) states that the implementation of information system is measured from technically sound, error-free, easy to learn, user friendly, well documented and flexible (kouser, 2011). furthermore o'brien & marakas (2011: 51) states the success of information systems is not only measured in terms of efficiency, in this case the minimal cost, time of information resources used, but success is also measured through the effectiveness of information technology that supports the organization's business strategy. gelderman (1998), the successful application of ais is the intensity of the use of ais (intended use) in daily work and user satisfaction. whereas gorla et al. (2010) measure the quality of the system seen from error free, easy to learn, easy to use, good documentation and flexible. financial information quality o'brien & marakas (2011: 424) argues that quality of information if the information product that has valuable and accountable characteristics, attributes and content so that information can be used as a basis for decision making. information has three dimensions, namely time, content and form. according to kieso et al. (2012: 44) information quality is measured by relevance, faithul representation and enhancing qualities. whereas mcleod & schell (2007: 35) and azhar susanto (2008: 13) state that a quality information must have characteristics of relevance, accuracy, timeliness and completeness. then hall (2011: 13) adds summarizing so that the measurement of quality accounting information consists of relevance, accuracy, timeliness, completeness and summarizing. alter (2002: 67) states that quality information can be measured by accuracy, precision, completeness, age, timeliness and the source of the information. not much different according to mcmanus & harper (2003: 257) the basic key in determining quality information is seen from functionally, reliability, efficiency, usability, portability and maintainability. next romney & steinbart (2015: 30) determine the information quality have some the characteristics. in line with schermerhorn (2011: 159) criteria for quality information consists of timely, high quality, complete, relevant and understandable. theoritical framework ethical linkages with information systems conveyed by hall (2011: 112) that ethics is closely related to business, information systems and computer technology. this was confirmed by henderson et al (2006: 314) that the application of accounting information systems is inseparable from user ethics such as conditions for illegally copying information, misuse of information, computer crime, information fraud. the results of the myers & venable (2014) study concluded that there are 6 (six) ethical principles that must be applied in the use of is. the public interest is meant to prioritize the public interest over personal interests, informed consent shows that in carrying out activities related to running an is, it is necessary to pay attention to the rights and risks received, privacy is to maintain and respect each other, honesty and accuracy is the ethics of actually carrying out activities, property what is meant is an agreement on ownership of information, quality of the artifact. furthermore olumoye (2013) in his research revealed that ethics in this case the responsibility and accountability of a person is needed in carrying out their activities in the context of developing information systems. this is in agreement with chen, et al (2011) in his research that user responsibility has an important role in improving the performance of information systems. guragai et al. (2014) in his research revealed the relationship between sia and ethics that need to be considered if there is a gap to provide input for further research. ethics deals with the main function of sia, which is recording, reporting, and control, with a focus on data and the use of sia as needed sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 105 kreitner & kinicki (2010: 137) states that the concept of competence is understood as a combination of ability and skills because both of them receive considerable attention in today's management circles. the efficient and effective use of this information system requires workers who have the necessary knowledge and skills (henderson, 2006: 5). mcleod & schell (2007: 76) states that user knowledge and skills are needed in the use and utilization of information systems munirath et al. (2014) state that the knowledge and skills of information technology and the ability to regulate the information system processes in an organization are the main factors that have an impact on is quality. sabherwal et al. (2006) in his research stated experience of one measure of competence that affects the implementation of is that are applied. the experience of is has a positive effect on the implementation of information systems. this finding means that the more user experience about information systems, the implementation of is will be aligned. next bassellier et al. (2000) in his research revealed the dimensions of competence can be in the form of psychology, education, self-management, human resources including knowledge and skills have an impact on the success of is. research directed to the influence of the quality of sia on the quality of financial information empirically shows the following results: salehi et al (2010), on the success of is in the emergence of the economy in iran, shows the results that ais can improve the truth of financial statements and finance report. a study conducted by sajady et al (2008) on evaluating the effectiveness of accounting information systems also shows the results that the implementation of accounting information systems in companies can cause improvements in the quality of financial statements and accelerate the company's transaction process. then research conducted by x and pilar (2000) on improving accounting information systems through the integrity of new technologies shows results consistent with the two previous researchers, that accounting information systems can be considered as a support base for satisfying information requests during the decision making process. in the case of this research, it is stated about the characteristics that must be possessed by the accounting information system in the operational phase in an effort to increase the quantity and quality of information. to reinforce the study of the influence of accounting information system quality on the quality of financial information, xu (2009) in their case study in australia, related to key issues of management of financial information quality concludes also that issues related to ais are seen as the most critical of high quality information. based on the aforementioned framework, the hypotheses proposed in this study are: h1 : user ethics affect the quality of ais h2 : user competence affects the quality of ais h3 : the quality of ais influences the quality of financial information. methods the method used is verification (verificative research) and explanatory (explanatory research) or causality (causal study), that this research aims to determine that one variable causes changes to another. in order to facilitate the interpretation and testing of hypotheses, the data collected will be analyzed using certain methods. the data of this study were obtained by submitting the questionnaire to the respondents through a questionnaire, the answers from the respondents to the question were the measures to be tested. in the data obtained from the respondents tested the validity and reliability so that the data can accurately describe the measured concept. because the data of research variables obtained through questionnaires are data with ordinal scale, so that data can be analyzed statistically the scale must be scaled into intervals using the method of successive interval (msi). n analyzing the data of this study using path analysis which aims to determine the cause and effect between independent and dependent variables so that by using this path analysis the magnitude of the influence of each independent variable on the dependent variable. based on the relationship between exogenous variables (x), a path diagram can be drawn that describes the relationship paradigm between variables as shown in the following figure: sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 106 figure 1. path analysis structure hypothesis testing is done using path analysis. path diagram as shown in figure 1 above can be formulated into 2 structural equation forms as follows: description: ais = implementation of ais e = ethics c = competence ai = financial information results and discussion the statement of the questionnaire submitted must meet the standards of valid and reliabel. validity and reliability tests show that the statements in this study using co-efficiency correlation not less than 0.30 and the recommended co-efficiency reliability is not less than 0.70. the measurement tool used to analyze validity and reliability is the spss version 20 program. table 1. recapitulation of valid and reliabel item r valid reliabel ethics 0.445-0.671 valid 0.7001 competence 0.404-0.615 valid 0.7668 ais 0.600-0.713 valid 0.7865 accounting information 0.551-0.750 valid 0.7432 the accuracy of the respondent's answers is very important so that it will have an impact on the validity and reliability test. variable descriptive analysis in this study includes user ethics, user competence, implementation of accounting information systems, and quality of financial information. to describe the variables, in this study using the percentage of the actual score of each dimension of the ideal score, then the data is interpreted into five categories, among others: superior, good, sufficient, moderate, and worst. variables are measured using rankings summarized from likert. the score is given in the answers which are then summed up. the score summary table is presented as percentage values and categories of each variable. judging calculation, it shows that the respondent's statement about the user's ethics can be considered fair with a score of 64.7%. this means that user ethics carried out in state owner enterprises can be considered fair. furthermore, related to user competence, respondents stated that it was identified as fair with a score of 64.9%. this means that the user's competence has an impact on the activities that have been carried out. the same measurement can be reflected in the ais that is run. the system is showed fair with a value of 57.8% even though the respondent gave a bad answer with a score of 50.6%. this phenomenon illustrates that the accounting information system applied in state-owned enterprises runs fairly, but still has shortcomings in its implementation. furthermore, quality ai, in general, is considered fair with a score of 60.9% but has a lack of accuracy; accounting information has been reported on time, has 50.4%. to analyze user ethics and user competency in the current accounting information system and influence quality ai, this research uses path analysis method. however, before analyzing the causal pathway, a significant test is needed for each path coefficient. the measurement scale of both cause and x 1 x 2 y z  1  2 r x1x2 p yx2 p yx1 p zy px1x2  sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 107 effect variables must include interval size, so it is necessary to increase the measurement scale from ordinal to interval using the msi method. the following table 2 shows the results linking the y variable and the z variable. table 2. kol-smirnov y z n interval normal 58 58 mean standar 92.745231 22.58591 57.6689014 13.51865 most extreme between abs .185 .256 + .156 -195 .178 -256 kolmogorof 2-tailed .985 1.457 .568 .086 in table 2 it can be explained about significant value to test the normality of the y variable is 0.568 and the z variable is 0.086. these values are greater than 0.05 so that it can be said that the data stated in the variables y and z are normally distributed. the model in this study has the following two substructures : ais = implementation of ais e = ethics c = competence ai = financial information model: sub structure 1: y = pyx1 x1 + pyx2 x2 + 1 spss used in this study, obtained the path coefficient value to determine pyx1 value of 0.546 and pyx2 of 0.372. the following table shows the r2 value, namely the number of simultan impact (together) of the independent variables on dependent y. table 3. model summary item r square r2 error stdr 1 .876a .872 .864 .3122 predictors : (constant), x2, x1 based on this table illustrates about r2 = 0.872 of adjusted r2 = 0.864. conditions means about the two variables, user ethics and user competency have an simultaneous effect (together) on the implementation of ais as much as 87.2%. next, this conditions value of 12.8% or more than 0.128 represents the influence of another object not examined. sub structure 1: y = 0.546 x1 + 0.372 x2 + 0.872 next, simultaneous hypothesis the variables table 4. simultaneous f test fcount ftable p-value item 46.174 2.8571 0.000 count > table this tables illustrates about f count value is 46,174. this value will be tested using statistics and then compared with other f values in the table for a = 0.05. it is learned that the f table value is 2.8571 achieved because the f count value is greater than f table. the results showed that the level of deficiency was 5% (a = 0.05), so ho was rejected and hi was accepted. in this case, it can be concluded that, with a confidence level reaching 95%, user ethics and user competence have a significant influence on the implementation of accounting information systems in state owner enterprises throughout indonesia. table 5. partial t count t tabel p-value 4.381 1.7542 0.018 sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 108 2.756 1.7542 0.034 table 6. conclution t test t count t tabel p-value item 4.381 1.7542 0.018 count > table 2.756 1.7542 0.034 count > table this table above, both each independent variable shows significant results. this illustrates that both the user's ethical variables and the user's competencies have a significant effect on the information system run by the company. in other words, these two variebals are important factors that must be considered in running the system model : sub structure 2 : z = pzy y + 2 based on this description, can descibed dan explain in figure 2. figure 1. the result of research model path diagram effect user ethic on ais quality the results of testing the data states that user ethics affect the quality of ais, but the implementation is not optimal enough to improve the quality of ais. therefore, to improve the quality of ais that exist in soes, the user ethics must also be improved. rocheleau (2006: 264) who revealed that ethics related to the information system environment. next, continued o'brien & marakas (2011: 54) asserting that as managers, professional entrepreneurs and employees must have ethical responsibilities in the use of information systems. still according to o'brien & marakas (2011: 562) that ethics can not be separated from the use of information systems, which in their use in business, have a large impact on society and thus can cause ethical problems in the areas of crime, privacy, individuality, work, health and working conditions. ethical linkages with information systems conveyed by hall (2011: 112) that ethics is closely related to business, information systems and computer technology. this was confirmed by simkin et al (2013: 314) that the application of ais is inseparable from user ethics such as conditions for illegally copying information, misuse of information, computer crime, information fraud. effect user competency on ais quality the results of testing the influence of user competencies on the quality of financial information systems indicate that user competencies affect the quality of ais. the discussion of this study provide empirical evidence that the better the competency of users will improve the quality of ais. in other words it can be interpreted that the quality of ais can be improved if soes increase user competency by providing human resources such as managers or staff who have knowledge and skills. this is in accordance with laudon & laudon (2014: 114) states that in order to implement a successful or quality information system, managers or staff as users must have skills related to information systems. daoud & triki (2013) revealed in his research that the competency of accounting users is an important factor in the success of ais. the same thing was conveyed by taher belhaj et al. (2014) in his research that the success of is is highly dependent on the level of competency of its users. effect ais quality on financial information quality the results of the study are also in line with the opinion of hall (2007: 21) which states that the accounting information system supports the provision of accounting information. this result also supports the opinion of o'brien & marakas (2011: 34), that the purpose of an information system is to produce implementation of ais 0.128 0,126 0.91 6 ethics competence quality of ai 0.546 0.372 sri dewi anggadini / finance, accounting and business analysis 2 (2) 2020 109 enough information for its users (ahmad, 2013). this is also in line with research, such as research conducted by taher belhaj et al. (2014) which states that the quality of ais affects the quality of financial statements (alzoubi, ali. 2011). this result is also in line with xu (2009) who found a significant impact of the quality of ais on accounting information (sri dewi anggadini, 2017). the results of data testing also support the research of salehi et al (2010) which states that accounting information systems affect the quality of financial information by assisting in providing good accounting information. wongsim & jing gao (2011) agree that ais affect the quality of information which is then used in making a decision, marked by the dimension of information quality has a positive relationship with the process of adopting ais (sri dewi anggadini, 2017). conclusion user ethics and user competencies applied in state owner enterprises have a significant influence on the implementation of is in partially and simultaneously. partially, the influence of user ethics variables on the implementation of ais is more bigger than user competence, this suggests that the implementation of ais is more influenced by utilitarianism, individual rights and distributive justice of a user in running ais compared to knowledge and skills owned by users. furthermore, the implementation of ais has an impact on the quality of ai, it meaned that the better the ais implemented, the higher the quality of ai produced. the good quality of information produced in an organization is one of the competitive advantages for the organization concerned, the quality of the information provided is important for the success of the system implemented in the organization concerned as a guideline for the implementation of the accounting process (xu, 2009). ais produce financial information (hall, 2007: 21). ais is very important for the success of an organization, namely by facilitating day-to-day operating processes by providing information that is useful for organizational management (gelinas et al., 2012: 17). laudon and laudon (2014: 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economics, university of national and world economy, sofia, bulgaria1 department of finance, university of national and world economy, sofia, bulgaria2 info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 the present study addresses the problem of basic income (bi), in its two varieties, as universal bi (unbi) and as unconditional bi (ubi), with a view to the effect on individuals' well-being. for this purpose, slemrod's general model was adapted and a graphical interpretation based on the standard leisure-time model was made. the use of the specific toolkit of ordinal utility theory makes it possible to identify an unexpected "externalities" the emergence of a personal and social dilemma that generates crowding out-effect, which is able to eliminate the beneficial effects on the well-being of the introduction of bi into any of its forms, whether universal or unconditional. in this context, a proposal has been made (de lege ferenda), on the adaptation of the structure of the tax system that must incorporate the taxation of robotic labor: to successfully implement the bi conception. keywords: basic income, slemrod, robotictaxation, welfare address correspondence: e-mail: ibeev@unwe.bg1, yankohristozov@unwe.bg2 beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 36 introduction the research is organized as follows: first, the issue of the terminological meaning of the concepts of universal basic income and unconditional basic income is solved. this is necessary since many authors and almost all policy makers do not distinguish between these two forms of basic income, and this is necessary since they have very different meanings, respectively. and impact; and an input mechanism. an extension to the slemrod model was then made to identify the effect of basic income on individuals' behavior and on their incentives to work based on the conclusions of the study of the choice determined by the introduction of tax through the analytical model. the direction and mode of impact is established, but the question of its effect on well-being remains open. this problem is solved by analyzing based on a graphical interpretation of the standard “leisure-time” model, with a theoretical implication with the introduction of basic income. thus, the transition from the quantitative to the qualitative method makes it possible to identify not only the effect on well-being, but also to identify the externality that lies in the formation of a social and personal dilemma. the study concludes with the relevant conclusions of the analysis. first, a terminological clarification. universal basic income (unbi) is often synonymous with unconditional basic income (ubi). this synonymizing is legitimate insofar as both unbi and ubi are payments intended to form a level of income defined as 'basic' and (1) equal and (2) for all whether they are paid work. in this sense, "basic income" is "unconditional" and "universal" (equal). we believe that a difference must be made according to which ubi is a payment regardless of the amount of remuneration. the ubi doctrine is defined as “… the income paid by the government to every full member of society, (1) even if he does not want to work, (2) whether he is rich or poor, (3) with whom he lives and (4) regardless of which part of the country he lives ”(van parijs, p. (1995) cited by sabotinova, 2015). the definition here implies that “… basic income is the income paid by the political community to all its members on an individual basis, without an income test or job requirements” (ibid.). to put it another way, ubi is "revenue neutral". while unbi is a payment that has a "universalizing" nature, i.e. it is a payment that generates a universal (equal) level of income, defined as 'basic', considering the received transfer payments or other forms of income. understood in this way, in the case of employees, ubi can be realized through a negative income tax (as suggested by nobel laureates milton friedman, james tobin, etc.), but it applies only to a certain portion of employees for those , whose income "covers" the income threshold, defined as "baseline." in other cases, employees (low-income, below a certain base level) or non-working people need to be supplemented with a direct cash payment (from the budget). because of these significant differences between unbi and ubi, some researchers view unbi as a "commons dividend" (standing, 2019), while others continue to identify it (haagh, 2018; bendel, 2019; etc.). in this case, the lack of a unified doctrinal interpretation is not a weakness of theory but is indicative of the multidimensionality and complexity of the phenomenon, as well as its relative novelty (or rather: new reading) and significance. second, theoretical accumulations. the idea of basic income as modern as it sounds, is not new it is new to read! thus, according to many researchers, it was erected as far back as 1797 by thomas payne, others pushed the border even further back in 1217, referring to some of the productions indicating such an idea in the charter of the forest (1217), which, along with magna carta, proclaimed on the same day, they constitute the "core" of the british constitution. the latter clearly indicates that, conceptually, the subject matter of ubi (resp. unbi) is an integral part of the research for the "common good" as a constitutionally declared value (beev, 2017): "the first obligation of the state is to make every a child born on its territory to have a good place to live, clothes, food and education until she reaches adulthood” (john ruskin, 1872), and in 1906 winston churchill calls for“ a level of income below which we cannot to allow people to live and work”(sabotinova, 1995). in practical terms, the first to campaign (from 1918 to 1922) for the introduction of basic income was dennis miller in connection with the discussion of the new poverty law (ibid., 1995). the following are conceptual proposals by william beveridge (1942) and rhyswilliams (1943), which are embedded in the political concepts of british political parties and represent options for integrating personal taxation with the social security system. at the same time, in the united states, the idea of basic income became, as a research problem, the work of milton friedman (1943), who considered the possibility of its practical implementation through the technique of negative income tax. in his concept, elements of income-life theory (see above in the statement) are intertwined, which states that friedman proposes “… the poor pay taxes in years when their incomes reach and exceed tax levels, and in years. when their income is below tax levels, they will be paid the appropriate amounts until they reach a certain minimum level of income '(sabotinova, 1995). the debate was initiated by george stigler (1946), galbraith (1958), james tobin (1967), friedrich von hayek (1979), and many others, also finding political answers in the face of tax reforms carried out by presidents nixon and kennedy, but the debate on this and its implications (for example: health care, education, etc.), continues today. contemporary economic theory in its various schools prioritizes endogenous explanation of business cycle fluctuations. (nozharov, 2016). introducing ubi and unbi is related to income and wealth distribution but it impacts on entrepreneurship, economic growth, respectively. stressing on determinants of wealth and income distribution is thus highly important (peshev et al., 2019). beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 37 as we enter this debate, we add another argument: the advent of new technologies, and in particular, the ongoing technological revolution, understood as a change in the social nature of production based on robotic labor and artificial intelligence resulting in the release of "living labor". obviously, this leads to a reduction in income (in all three forms) for workers, for others it generates unemployment, the risk of poverty and social exclusion, and ultimately affects well-being. this brings up the "agenda" of the question: how will society respond to this challenge? the lack of a clear and timely response the first on a theoretical and reflective level at a practical level, would lead to "... a collapse in democracy and public relations" (acemoglu, 2019). in turn, "democracy" as an ingredient of the "common good" (beev, 2017), defines the importance of this problem remarkable in this case is that it is not theory but practice that places it on the "agenda" of society. thus, some of the most wealthy entrepreneurs, such as mark zuckerberg (facebook), lion musk (spaceex), richard branson (virgin group), werner goetz (dm), etc., recognize the concept of unbi as a possible answer to the challenges of the technological revolution based on of digitalization and transformation of artificial intelligence-based production. at the same time, public authorities, aware of the importance of the issue, do not remain indifferent to this possibility and conduct controlled experiments with the unbi (currently limited to a number of governments or municipalities) whose results (at present) are controversial. the reason for this is that the so-called. "controlled dbm experiments" are conducted in the unreformed public sector and, the unreformed fiscal system. considered in this perspective, the problem is too trivial: unbi is the answer to automation, but its funding remains based on classic income taxation and individuals' wealth. the discrepancy is obvious: so, if the need for the introduction of unbi comes from automation, then the financing mechanism must be tied to it. in other words, fiscal reform is needed to tax robotic labor. this aspect of theory has been elaborated in recent years (abbott and bogenschneider, 2018; bendel, 2019; et al.), but it is "part of the puzzle": the introduction of tax-funded robbery-based unbi puts a number of social and personal dilemmas. related to the issues in this chapter, it poses the challenge to interpret how the presence of basic income would affect the behavior of businesses and consumers. put another way: how does the introduction of unbi change work incentives? the reformulated question points to the possibility of interpreting the answer to the primary problem as a modification of the orthodox "leisure-time" model, with income and leisure time corresponding to the axes (figure 1 et seq.). we will look at the impact of basic income on labor supply in its two options: as ubi and as unbi.it has already been stated that ubi is an unconditional payment to everyone, which does not have the character of a community dividend supplement. this means that, regardless of the amount of current income determined by the level of labor supply, the income of each individual increases by a fixed amount. in the graph (figure 1), this increase in income is reduced to shifting the original budgetary restraint ab in parallel upwards to position a`b`, i.e. the introduction of ubi has (as a first and immediate graphically represented effect) a parallel shift in income (just as with the introduction of a negative specific income tax) figure 1. figure 1. leisure work model: introducing ubi source: own analysis thus, the condition of the non-work individuals, respectively. and receive no income is repositioned from a. to a`.; while the condition of those who theoretically receive the highest possible income, using all the available labor time, is repositioned from tb to tb. there is a parallel shift of the в а free time: 0h. labor: 24h. in co m e un uk e а` leisure time option free time: 24h. labor: 0h. в` e` в а free time: 0h. labor: 24h. in co m e un uk e а` free time: 24h. labor: 0h. в` e` labor-preferred option d` d` о о v v` beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 38 budgetary restriction from b to b` (figure 1). when analyzing the effect of bbd introduction, it is essential to consider the nature of individual preferences. thus, if an individual 'values' leisure time higher (i.e. leisure and work income are not perfect substitutes), this implies a 'turning' of individual indifference curves to their preferred good (i.e. leisure) figure 1, left image. in this case, with the introduction of ubi, it will reduce labor supply from the od level to the od` level, which is determined by the corresponding optimal levels of labor / income distribution e, resp. e`. conversely if labor preferences are surprising, the individual is stimulated to work harder figure 1, right image (graphical analysis can be done independently), respectively, from av at level av`. conclusion: the effect of the introduction of ubi on labor supply is critically dependent on the elasticity of the indifference curves. in addition, the graphical model has additional informativeness: the introduction of ubi will increase community well-being in both options, the new equilibrium is on higher indifference curves, which means that with the introduction of ubi, the community well-being is necessarily increasing. to this must be added an important behaviorist phenomenon the increase in labor supply, as an effect of the introduction of ubi, is an effect that is explained by the higher satisfaction with the work performed. we also test the result through an analytical model, modifying slemrod's general model (slemrod, 1998), which examines the behavior of individuals when introducing a tax on labor income. the pioneers in this direction are allingham and sandmo (1972), who offer a model of analysis that has become popular as the "as model", which looks at the comparative statistics of the original model of individual behavior, with the decision to hide taxes are analogous to the choice of portfolio and its extensions to include socially conscious behavior, taking into account the participation of individuals in the black labor market and tax evasion by companies. subsequently, slemrod (1998) adapts the model to a leisure-time model that extends the utility function by incorporating an expense "c" to realize an "a" (avoidance) income reduction. thus, the maximization problem is: (1) under the condition of income: і = (1-tx)*w*ql + tx*a – c + m (2) as shown in (1), the expression for income (2) is supplemented by "tx * a" relative to the expression for income in standard models: і = (1-tx)*w*ql + тр (3) in expression (2), the value "tx * a" denotes the "saved" tax; it is reduced by the cost of tax avoidance "c"; and "m" denotes an observable characteristic which, in addition to "tr" (transfer payments), includes other income whose source is not labor (inheritances, rents, etc.). thus, on the basis of margin analysis, slemrod concludes that if marginal tax avoidance costs are less than the additional tax burden that arises as a result of rising income in turn: due to increased labor time; to compensate for the reduced income, the individual would be inclined to offer more work. in the slemrod model (as seen in the constructed maximization problem expression 1), the elasticity of substitution is crucial, but unlike the standard "work-leisure" model, the actual "behavioral response" (due to tax changes) depends and tax avoidance technology. in slemrod's original model, the tax avoidance expense "c" is a function of the amount of labor, the tax rate, and the magnitude of the "desired" tax reduction of the "a" income. obviously, the latter (a) is an unobservable characteristic, while 'm' is an unobservable characteristic, but limited only to sources of income not obtained because of labor supply. but "m" may also include earnings that are not formally compensated for work they are different types of "incentives" (such as: vouchers for purchases, discount coupons at certain outlets, sports cards, various types of insurance etc.). after all, the “m” component of the maximization function can include not only the income and “incentives” that are observable, but also various other observable characteristics that are not relevant to income such as gender, educational qualifications, etc. in the current study, we modify the original slemrod model, with the magnitude of the "desired" tax reduction of income (a) being an unobservable characteristic and (m) an observable characteristic describing other non-labor income; by turning on ubi. in the constructed interpretive model (m), let it consist of only unconditional basic income: і = (1-tx)*w*ql + tx*a – c + ubi (4) where "ubi" is income from non-work activities, such as ubi, i.e. this is income where you do not have to make a choice between spending "free time" and "other" goods (for the acquisition, respectively, the consumption of which you must invest some time in labor effort), but at the expense of this affects labor supply. in this statement of modification of the general slemrod model, the solution to the optimization problem follows the same algorithm, but more importantly: it reaffirms the conclusions made regarding labor supply. in view of the current analysis, however, the more significant conclusion is that bbb is "tax neutral"! is this also true for unbi? let us check this by building appropriate interpretative models that consider the specific difference between ubi and unbi (see above). the introduction of universal basic beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 39 income (unbi) requires an income test and has the character of a "community dividend". this means that, unlike in the case of ubi, the budget constraint will not be shifted in parallel upwards but will be a combination of the original ab and unbi budget constraint. thus, the unbi as a fixed amount of basic income is represented by a straight line parallel to the axis measuring the amount of labor (figure 2), which is why the original budget equilibrium ab is modified the new ubi offset budget constraint is represented by a broken line bca`figure 2: figure 2. model „free time – labor” – introducing unbi source: own analysis as can be seen from the presented in figure 2 the new budget restriction is bca`, where the ca part is offset by unbi of the original budget restriction, which falls below the level of the basic income generated this is the ca part. we distinguish between two variants of initial equilibrium the first variant in which the initial equilibrium is “above” the unbi and the second variant, in which the initial equilibrium is “below” the unbi respectively, the left and right images of figure 3. figure 3. leisure work model: variant with an initial equilibrium of "over" unbi source: own analysis in the first embodiment, depending on the nature of the preferences, respectively. the degree of substitution between "work" and "leisure", two cases are possible: the first case where the indifference curve uk touches, except for the original budgetary restriction, and the offset compensated by the unbi (left image in figure 3); the second case where the indifference curve uk does not touch the offset of the new budget constraint в а free time: 0h. labor: 24h. in co m e с uk e а` initial equilibrium variant "over" the unbi free time: 24h. labor: 0h. unb d в а free time: 0h. labor: 24h. in co m e uk e а` free time: 24h. labor: 0h. с initial equilibrium variant "under" the unbi в а free time: 0h. labor: 24h. д о хо д с uk e а` first case (with two optima) free time: 24h. labor: 0h e` в а free time: 0h. labor: 24h. д о хо д uk e а` free time: 24h. labor: 0h с second case (with one optima) d d` un beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 40 (figure 3, right image). in the first case (of option 1 with an initial optimum above the unbi), there are two labor supply optimums simultaneously, illustrated graphically with e and e` respectively (left image in figure 3). since these optimates lie on the same indifference curve, the effect of introducing a unbi is uncertain: an individual can continue to "work for more money" and offer a quantity of work in ad volume (choice determined by e) or prefer to substitute for the difference between unbi and higher income with more free time, and to offer work in volume ad` (choice determined by e`). the value of this analysis is that it successfully demonstrates one of the aspects of social and personal dilemmas (see above) that the individual faces, proving that, in many cases, the introduction of unbi socially imposed behavioral models and community-based behavioral models will be essential for the labor supply! it should be noted that in this case there will be no increase in community well-being since there is no movement to a higher indifference curve. in the second case (option 1 with an initial optimum above unbi), the individual preference curves are positioned so that the second equilibrium necessarily lies on a higher indifference curve (graphical analysis can be done independently) and is determined by touching (optimal choice) or intersection (not optimal choice) of indifference curves with the offset (by unbi) part of the budget constraint. in this case, a personal dilemma does not arise: the new point of contact (or intersection) will appear preferred. however, this will mean that the introduction of unbi has discouraged labor supply! the analysis made shows that the introduction of unbi has an undefined effect on well-being: in the first case, there is a reduction in the amount of labor offered, giving rise to a personal (and social) dilemma, with no positive impact on well-being; and in the second case, well-being is increasing, labor supply is decreasing, and the new choice may be pareto-optimal (in the presence of tangent to ca`) or not, but in both varieties, personal (and social dilemma) does not breed. in the second embodiment, where the initial equilibrium is below the level of the unbi, two situations establishing the new equilibrium are also possible. figure 4. model “free time – labor”: variant with initial equilibrium “below” unbi source: own analysis in the first, the new equilibrium is determined by the intersection of a higher indifference curve with the portion of the unbi offset budget restriction ca` left image of figure 4; and in the second case, there is a situation where the new equilibrium is determined by a higher indifference curve that touches the offset portion of the budget constraint ca '(you can do the graphical analysis independently using the models in figure 4). it is clear that in this situation, in the first case, there is a choice that is not pareto-effective, and in the second, it is pareto-effective; but the effects of the introduction of unbi on labor supply and welfare are identical: in both cases labor supply is being discouraged and welfare is increasing. but it does mean in both cases, that a social dilemma arises: should society "tolerate" this kind of "optimistic" behavior? in conclusion: the introduction of ubi in all cases increases community well-being and does not raise social and personal dilemmas, which cannot be said for sure about unbi. thus, while looking socially fairer and relatively easier to implement through a negative income tax, unbi is the less favorable choice for introducing basic income. the analysis underlined the importance of the problem of 'basic income', making it clear why this concept is still in the 'experimental phase'. в а free time: 0h. labor: 24h. in co m e с uk e а` pareto inefficient balance free time: 24h. labor: 0h. в а free time: 0h. labor: 24h. in co m e uk e а` free time: 24h. labor: 0h. . с pareto efficient balance un un beev ivailo, hristozov yanko / finance, accounting and business analysis 2 (1) 2020 41 references abbott, r., bogenschneider, b. 2018. should robots pay taxes? tax policy in the age of automation. harvard law & policy review, vol. 12: 145-175 acemoglu, d. 2019. „why universal basic income is bad idea?‟ project syndicate. 19 jul allingham, g., agnar sandmo. 1972. “income tax evasion: a theoretical analysis,” journal of public economics 1: 323-338 beev, i. 2017. economic constitution, sofia: izdatelstvo unwe beveridge, w. 1942. social insurance and allied services. london: his majesty‟s stationery office burczak t. 2013. a hayekian case for a basic income. palgrave macmillan. new york: 49-64 cook, e., wedderburn, a. 1906. the works of john ruskin. london: george allen galbraith. j. 1958. the affluent society. boston: houghton mifflin haagh, l. 2018. the case for universal basic income. cambridge, oxford, boston, new york: polity nozharov shteryo, 2017. "exogenity as a challenge of the modern economic theory," economy and economic theory: problems and interactions, conference proceedings 2017, department of economics, university of economics varna, issue 1, pages 108-117, december. peshev, p., stattev, s., stefanova, k., & lazarova, m. (2019). financial wealth inequality drivers in a small eu member country: an example from bulgaria during the period 2005-2017. sabotinova, d. 2016. the idea of an unconditional basic income – emergence, evolvement and implementation. business posoki journal. burgas: 32-44 slemrod, j. 1998. a general model of the behavioral response to taxation. working paper no. 6582, nber. cambridge sloman, p. 2015. beveridge‟s rival: juliet rhys-williams and the campaign for basic income. 1942-55. new college. oxford: 1-23 standing g. 2019. piloting basic income as common dividends. london: pef stigler, g. 1946. the economics of minimum wage legislation. american economic review, vol. 36. pittsburgh: 358-365. tobin j., pechman j.a. & mieszkowski p.m. 1967. is a negative income tax practical? the yale law journal, vol. 77, no. 1. danvers: 1-27 van parijs, philippe. 1995. real freedom for all – what (if anything) can it justify capitalism? oxford: clarendon press / oxford university press. https://ideas.repec.org/a/vra/pr1712/y2017i1p108-117.html https://ideas.repec.org/s/vra/pr1712.html https://ideas.repec.org/s/vra/pr1712.html 12 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg public finances on the balkan peninsula – a comparative study of twelve countries presiana nenkova1, nelly popova2, diyana metalova3 department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 6 january 2021 revised 24 march 2021 accepted 18 april 2021 over the past three decades the balkan countries have experienced a range of transformations, from a change in political and economic governance in some and difficult early years of transition to stabilisation and an accelerated economic growth, crisisand post-crisis periods, with certain countries going not only through hard economic times but also through political, including military, turmoil. this poses major challenges for their fiscal policies, to the extent that these developments affect the fiscal sector and its governance both directly and indirectly. after a period of enhanced revenues that helped finance higher spending, the balkan countries like the european union countries and the rest of the world have been enduring severe recessions during the years following 2008. falling revenues and rising spending needs together have put heavy stress on fiscal balances thus reflecting in a serious increase of government debt. despite the subsequent recovery in public finance, public sector governance in later years again faces serious challenges such as mitigating the consequences of the covid-19 pandemic, while at the same time certain balkan countries continue to experience serious economic problems. the aim of this paper is to offer a comparative study of public finances in twelve balkan counties and provide an overall picture of fiscal policies implemented in these countries during the period 2004—2018. keywords: budget balance, public sector revenue, public sector expenditure, public finance, balkan countries *address correspondence: e-mail : pnenkova@unwe.bg1, npopova@unwe.bg2, d.myetalova@unwe.bg3 mailto:pnenkova@unwe.bg1 mailto:npopova@unwe.bg mailto:d.myetalova@unwe.bg presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 13 introduction the balkans are often described as a contradictory region that, considering its small size, concentrates a huge conflict potential, historical baggage and political tension. tracing indisputable boundaries in the balkan region is hampered to a certain extent by the fact that the natural geographic borderlines of the balkan peninsula do not coincide with state borders. the definition of a region‘s borderlines is the result of ―the geographic proximity factor as much as it is the result of other factors such as the cultural, social and economic similarity among countries, the economic flows among them and the foreign policies they implement‖ (moraliyska, 2014). according to karastoyanov and popov, ―the balkan countries are a geographic space that is unique in its features and stands out with a range of specific characteristics in terms of political space, culture and history‖ (2011, p.23). the spatial scope of the balkan region covers not only the states that are located in their entirety on the balkan peninsula such as bulgaria, greece, north macedonia, albania, bosnia and herzegovina, and montenegro, but also slovenia, croatia, turkey and romania, the territories of which are only partially located on the balkan peninsula. the balkan region spans across south-eastern europe and the south-west peripheral parts of the asian continent where turkey is located. the area of the balkan region includes, in full or in part, 12 countries. the balkan peninsula is the region‘s heartland but in terms of territory, it takes up only onethird of the balkan region. over the past three decades the balkan countries have experienced a range of transformations, from a change in political and economic governance in some and difficult early years of transition to stabilisation and an accelerated economic growth, crisisand post-crisis periods, with certain countries experiencing not only economic hardship but also political, including military, turmoil. this poses major challenges for their fiscal policies, to the extent that these developments affect the fiscal sector and its management both directly and indirectly. it could be said that at the start of the new millennium the balkan countries in general are seeing an overall stabilisation of their economic and political situation. following a period of intensive economic growth until 2008 which had a positive effect on public revenue and spending as well, the balkan countries, just like the eu, are experiencing a period of slow-down in economic activity. currently, the balkans are faced also with new serious challenges such as the wave of refugee since the main route of migrants to central and western europe crosses the region, and the balkan countries, and in particular turkey, are suffering some of the gravest economic consequences of the current wave of refugees. another challenge comes from the emerging future fiscal risks for the economies caused by the covid-19 pandemic. to start with, the most serious of these has to do with the need to relocate increasing amounts in the government budgets to finance various healthcare activities. next in terms of significance is need for fiscal governance to be able to respond in a timely manner to the capacity to allocate budget funding to make an increasing number of social payments, in view of the realization of unfavourable forecasts for rising unemployment rates and the growing number of people who need financial aid. social systems experience an additional burden from the worsening demographic trends and the increasing life expectancy, with a gap that has appears to be growing. existing research in the problem area tend to focus on a more limited range of countries. in particular, some of the authors place the stress on examining fiscal governance in the so-called western balkans, which encompasses states that are potential candidates for eu membership such as albania, bosnia and herzegovina, kosovo, north macedonia, serbia and montenegro. a core subject of those studies are the fiscal vulnerabilities and the possibilities to strengthen fiscal discipline with a view to the future eu accession (teqja and polena, 2015), and the impact of the global financial crisis on their economies (bartlett, 2010). an evaluation of fiscal policies pursued on the western balkans during the various stages of the economic cycle in the period 2000—2015 and a comparison to the experience of new eu member states are provided also in an imf study (imf, working paper 15/172). in another group of studies, the analysis focuses on the countries that joined the eu most recently, i.e. bulgaria, romania and croatia (vasiloiu, 2019). there is also research (gechert and ansgar, 2015) where the focus is on fiscal challenges faced by countries that are already part of the euro area, and studies on the impact of fiscal policy on macroeconomic aggregates in turkey (karagöz and keskin, 2015). this paper aims to provide a brief comparative overview of the current status and the development of public finance in 12 countries in the balkan region in the period 2004—2018, namely bulgaria, romania, slovenia, croatia, greece, serbia, north macedonia, kosovo, albania, bosnia and herzegovina, montenegro and turkey. the first five are eu member states, while the rest are potential members. part one describes the developments in public revenue and presents the mix of tax revenues of the balkan countries by main types of taxes. part two traces the dynamics of public spending over the same period and presents their structure as per the economic and functional classification. part three analyses budget balance dynamics in the countries under examination. the data sources used to obtain the information necessary for the study include statistical presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 14 international databases of the imf, world bank and eurostat. to obtain additional data for certain periods or countries, the official websites of local institutions such as ministries of finance, statistical offices, central banks, etc. have also been used. dynamics in public sector revenue developments in the size and structure of public sector revenue of the balkan countries in the period 2004—2018 are largely due to their fiscal policies aimed at promoting investment and economic growth. these policies are manifested in the adoption of relatively low tax rates and expanding the tax base. changes in the business cycle stages, and in particular, the global financial and economic crisis, also affect the dynamics of budget proceeds via the automatic fiscal stabilizers and via the discretionary measures undertaken. as a third determinant, one can be highlighting the consolidation of public finance in the post-crisis years. in the period under examination, public revenues of the balkan countries in general remain at relatively low levels compared to eu member states. nevertheless, there are distinct fluctuations, in line with the cyclical changes in the economy (figure 1). in the period from 2004 to 2007, the general government sector revenue share in gdp terms grew from 35.7 % to 37.6 % on the average. considering the fact that, in that period, the tax policies of most of the balkan countries was aimed at reducing the tax burden, the observed growth in fiscal revenue should be attributed largely to cyclical factors, and in particular to a strong growth in gdp and in consumption. these cyclical factors are particularly manifest in montenegro, and less so in kosovo and albania (koczan, 2015, p. 6). the period from 2008 to 2011 exhibits a decrease in public revenue in the balkan countries to 36.2 % in gdp terms, due to the decline in economic activity following the onset of the global crisis. in the following years, fiscal proceeds revamped and in 2018 stood at 37.8 % in gdp terms on the average. throughout the 2004—2018 period, eu countries stand out, with a significantly higher level of public revenue in gdp terms. the average figure is 43.1 % for 2004 and 45.1 % for 2018, respectively. it is noteworthy that in both groups of countries the share of public revenue in gdp grew by about 2 percentage points over the analysed period. source: see appendix 1, author’s calculations figure 1. general government sector revenue (% of gdp) despite the relatively low average of public revenue, significant differences are observed among the balkan countries. as shown in table 1, in 2018, the contribution of public revenue in gdp was the highest in greece and croatia, where it exceeds the eu average. in slovenia, bosnia and herzegovina, serbia and montenegro, the share of revenue is also above 40 % of gdp. in the same year, kosovo and albania have the lowest public revenue-to-gdp ratio, at below 30 % in both countries. table 1. general government sector revenue (% of gdp) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 albania 25.0 25.4 26.3 26.1 26.9 26.1 26.2 25.4 24.8 24.2 26.3 26.4 27.6 27.7 27.6 bosnia and herzegovina 38.2 40.4 42.8 43.6 42.7 41.7 42.8 43.3 43.7 42.6 43.7 43.1 42.7 43.0 43.0 bulgaria 39.6 37.8 35.5 38.8 38.7 35.2 33.2 31.9 34.1 37.5 37.9 38.7 35.1 36.0 38.5 greece 38.8 39.4 39.2 40.4 40.7 38.9 41.3 43.9 46.9 49.2 46.7 47.9 49.5 48.2 47.9 kosovo 21.0 21.3 22.8 23.7 24.3 28.2 26.3 27.0 26.1 24.6 23.9 25.1 26.3 26.2 26.1 35.7 36.0 36.8 37.6 37.5 36.5 36.4 36.2 37.0 37.1 37.4 37.9 37.7 37.5 37.8 43.1 43.5 43.7 43.9 43.8 43.6 43.6 44.1 44.7 45.4 45.1 44.7 44.7 44.8 45.1 32.0 34.0 36.0 38.0 40.0 42.0 44.0 46.0 48.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 balkan countries (average) eu countries (average) presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 15 romania 32.7 32.7 33.5 34.7 32.3 30.3 33.1 34.1 33.7 33.3 34.1 35.5 31.9 30.8 31.9 north macedonia 36.1 33.9 33.7 33.9 35.4 33.0 32.3 31.9 32.1 30.1 29.7 31.0 30.4 30.6 30.5 slovenia 44.7 45.1 44.3 43.4 43.7 43.5 44.6 44.2 45.4 45.7 45.3 45.9 44.3 44.0 44.3 serbia 38.9 40.9 41.6 41.5 41.0 39.3 39.3 37.7 38.6 37.3 39.0 39.3 40.8 41.5 41.5 turkey 30.5 31.7 33.4 32.2 31.5 33.0 33.6 33.9 34.1 34.6 33.8 34.2 34.7 33.1 32.7 croatia 43.9 43.3 43.4 43.3 43.0 42.8 42.1 41.1 43.0 42.9 43.4 45.3 46.5 46.1 46.5 montenegro 39.7 40.1 45.2 49.4 50.0 45.6 42.2 39.6 41.1 42.9 45.1 42.1 43.0 42.2 42.9 source: see appendix 1, author’s calculations the dynamics of public revenue in each of the balkan countries in the period 2004—2018 shows significant fluctuations caused by changes in the business cycle and by the discretionary measures undertaken. figure 2 illustrates the change in the revenue amount of the general government sector in % of gdp in the countries on the balkan peninsula before, during and after the global financial and economic crisis. as indicated above, the 2004—2007 period saw an increase in fiscal proceeds in most balkan countries that was most pronounced in montenegro (9.7 percentage points) and in bosnia and herzegovina (5.4 p.p.). in that period, the share of public revenue in gdp terms decreased only in bulgaria, north macedonia, slovenia and croatia, despite the increase in revenue in absolute terms. source: author’s calculations figure 2. general government revenue share in gdp (percentage points change) during the years of the global crisis (from 2008 to 2010), public revenue share in gdp terms declined by 1.4 percentage points on the average. the drop was most pronounced in montenegro (–7.7 p.p.) and in bulgaria (–5.5 p.p.). fluctuations in the figures for public revenue in the countries under examination are the result of the openness of their national economies. the strong dependence on foreign investments creates conditions for steep shifts in the stage of the economic cycle (the so-called boom-andbust cycle). the substantial deterioration of the budget position of the balkan countries post-2008 shows that the spike in fiscal proceeds in previous years was largely cycle-driven (koczan, 2015, p. 8). against that backdrop, increasing national savings with a view to limiting the dependence on external financing can be seen as a major task for the balkan countries. this challenge is particularly acute for countries with ageing populations (european commission, 2019). the dynamics of tax revenue, including social security contributions, as a share of gdp in the period 2004—2018 is shown in table 2. throughout the analysed period, the balkan countries saw an average growth rate of 2.4 percentage points, most significantly in greece (9.4 p.p.) and in bosnia and herzegovina (5.7 p.p.) and kosovo (4.9 p.p.). despite the overall upward trend, fluctuations in the share of tax revenue in gdp are observed in most countries. from 2004 to 2007, there was a significant increase in montenegro, bosnia and herzegovina and in serbia. -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 a lb an ia b o sn ia an d h erzego vin a b u lgaria g reece k o so vo r o m an ia n o rth m ace d o n ia slo ven ia se rb ia tu rke y c ro atia m o n te n egro a ve rage a ve rage eu change 2004-2007 change 2008-2010 change 2011-2018 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 16 table 2. general government tax revenue in % of gdp (including social security contributions) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 albania 22.5 22.9 23.5 23.6 24.5 23.7 23.3 23.4 22.6 22.2 24.1 23.9 25.1 25.7 25.7 bosnia and herzegovina 32.4 34.6 37.3 37.5 37.3 36.3 37.3 38.4 38.5 37.4 37.7 37.7 37.6 37.9 38.1 bulgaria 31.4 30.2 29.7 31.4 30.5 27.0 26.0 25.2 26.6 28.3 28.3 28.9 28.9 29.3 29.8 greece 31.9 33.3 32.5 33.4 33.6 32.8 34.1 36.0 38.7 38.5 39.0 39.4 41.4 41.3 41.4 kosovo 18.3 18.4 20.2 19.0 21.1 20.3 20.6 22.3 21.9 21.0 20.9 21.8 23.4 23.3 23.2 romania 28.1 28.7 29.3 28.9 27.3 25.8 27.0 28.2 27.7 27.3 27.5 28.0 26.5 25.7 26.7 north macedonia 30.2 29.0 28.6 29.4 29.8 28.0 27.7 27.6 27.3 25.6 25.9 26.8 26.9 26.9 27.4 slovenia 38.7 39.4 38.9 38.1 37.7 37.5 38.2 37.7 38.1 37.7 37.6 37.7 37.8 37.5 37.7 serbia 33.0 36.2 36.3 36.2 36.2 34.6 34.2 33.0 33.9 33.2 34.6 33.9 35.1 36.1 36.0 turkey 22.8 22.9 23.6 23.3 23.5 24.7 26.4 27.2 26.7 27.2 26.5 27.0 27.6 26.7 26.1 croatia 36.4 36.3 36.8 37.0 36.9 36.4 36.0 35.2 35.9 36.4 36.6 37.2 37.7 37.7 38.5 montenegro 34.4 35.3 37.3 40.5 40.7 36.8 36.4 35.2 36.1 37.5 40.3 37.3 37.3 37.2 37.4 average 30.0 30.6 31.2 31.5 31.6 30.3 30.6 30.8 31.2 31.0 31.6 31.6 32.1 32.1 32.3 source: see appendix 1, author’s calculations after the onset of the global crisis, in the 2008—2010 period, revenue in gdp terms fell down in most countries on the balkans and the drop was most pronounced in bulgaria and montenegro. in that period, tax revenue rose substantially in turkey (2.9 p.p.), less significantly in greece and slovenia (0.5 p.p.), and it remained at its pre-crisis level in bosnia and herzegovina. after 2011, the tax revenue-to-gdp ratio climbed back up in most of the countries under examination, with the largest increase registered in greece and bulgaria. to sum up, the dynamics of tax revenues in the period 2004—2018 exhibited strong fluctuations in montenegro and bulgaria, and to a lesser extent in serbia as well. in 2018, the tax revenueto-gdp ratio ranged from 41.4 % in greece to 23.2 % in kosovo, and it averaged 32.3 % for the countries under examination. proceeds from taxes and social security contributions dominate within the total amount of revenue in the general government sector in the balkan countries. as evident from table 3, the share of tax revenue in the analysed period was on the rise in most balkan countries, with most pronounced increases in north macedonia (6.1 p.p.) and in turkey (5.1 p.p.). in 2018, the share of tax revenue ranged from 77.3 % in bulgaria to 93.2 % in albania, with the average for all balkan countries at 85.7 %. table 3. general government tax revenue share in total public revenue (including social security contributions) source: see appendix 1, author’s calculations 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 albania 90.0 90.0 89.6 90.7 90.8 90.6 88.9 92.0 91.1 91.7 91.6 90.3 90.9 92.6 93.2 bosnia and herzegovina 84.7 85.7 87.2 85.9 87.3 86.9 87.0 88.7 88.0 87.9 86.2 87.3 88.0 88.2 88.5 bulgaria 79.4 80.1 83.7 80.9 78.8 76.5 78.2 79.1 77.9 75.6 74.7 74.8 82.5 81.2 77.3 greece 82.3 84.7 83.1 82.7 82.6 84.3 82.5 82.2 82.5 78.2 83.5 82.2 83.6 85.8 86.3 kosovo 87.3 86.5 88.3 80.0 86.8 72.1 78.4 82.6 83.9 85.4 87.2 87.1 89.0 88.9 89.0 north macedonia 83.7 85.5 84.7 86.5 84.1 85.1 85.7 86.6 85.0 84.9 87.4 86.3 88.4 87.9 89.8 romania 85.9 87.7 87.5 83.2 84.5 85.2 81.8 82.8 82.3 81.9 80.4 78.9 83.1 83.5 83.8 slovenia 86.6 87.4 87.8 87.9 86.3 86.1 85.7 85.2 84.1 82.5 82.9 82.2 85.3 85.1 85.1 serbia 84.9 88.5 87.4 87.2 88.1 87.8 86.9 87.4 87.8 88.9 88.8 86.4 86.1 87.1 86.6 turkey 74.7 72.3 70.7 72.3 74.7 74.9 78.4 80.2 78.1 78.7 78.2 79.0 79.5 80.8 79.8 croatia 82.9 83.8 84.9 85.4 85.7 85.1 85.5 85.7 83.6 84.7 84.4 82.1 81.0 81.7 82.7 montengrgo 86.6 88.1 82.5 82.1 81.4 80.8 86.1 88.8 87.8 87.5 89.4 88.5 86.7 88.1 87.3 average 84.1 85.0 84.8 83.7 84.2 83.0 83.8 85.1 84.3 84.0 84.6 83.7 85.3 85.9 85.8 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 17 table 4 shows the structure of tax revenue of the balkan countries by type of tax (direct, indirect and social security contributions) as a ratio to gdp. in most of the countries analysed (except for romania and slovenia), proceeds from indirect taxes account for the highest relative share which, in 2018, averaged 15.7 %. in that year, kosovo and croatia were at the top, with the highest proceeds from consumer taxes in gdp terms of 20 %, while the lowest ratio is exhibited by romania (10.4 %) and turkey (11.1 %). over the examined period 2004—2018, there is an increase of 0.7 p.p. on the average. the most significant increases were registered in greece (5.4 p.p.), kosovo (4.1 p.p.) and montenegro (3.2 p.p.). on the other hand, a more noticeable decrease was recorded in north macedonia (–3 p.p.). proceeds from social security contributions rank second in terms of relative share of gdp in the balkan countries. in 2018, the average ratio was 10.2 %, ranging from 15.8 % in slovenia to 5.7 % in albania. kosovo does not have any revenue from social security contributions. in 2004 — 2018, revenue from social security, contributions grew by an average of 1 percentage point in the countries on the balkan peninsula. the most significant increase was registered in turkey (3.7 p.p.) and in bosnia and herzegovina (3.1 p.p.). during the same period, the share of revenue declined more significantly only in north macedonia (–1.4 p.p.) and in bulgaria (–1.2 p.p.). finally, revenue from direct taxes account for 6.1 % of gdp on the average in 2018. the highest ratio is that of greece (10.2 5), and the lowest are those of kosovo (4 %) and bosnia and herzegovina (4.1 %). an examination of the change over the analysed period reveals that revenue from direct taxes in gdp terms has increased by an average of 0.6 p.p. the most significant increases were registered in greece (1.9 p.p.) and kosovo (1.6 p.p.). a notable drop was registered only in romania (–1.6 p.p.). table 4. tax revenue structure (% of gdp) year direct taxes indirect taxes social security contributions albania 2004 3.1 13.5 4.5 2010 3.8 14.4 4.3 2018 4.7 14.3 5.7 bosnia and herzegovina 2004 2.9 17.0 12.0 2010 3.2 19.0 15.0 2018 4.1 18.8 15.1 bulgaria 2004 5.8 15.8 9.9 2010 5.1 14.2 6.7 2018 6.0 15.0 8.7 greece 2004 8.2 11.6 12.1 2010 8.4 12.6 13.1 2018 10.2 17.0 14.2 kosovo 2004 2.4 15.9 0.0 2010 3.2 18.1 0.0 2018 4.0 20.0 0.0 romania 2004 6.5 11.9 9.8 2010 5.8 11.9 9.4 2018 4.9 10.4 11.4 north macedonia 2004 3.8 15.2 10.0 2010 3.3 13.1 8.9 2018 5.4 12.3 8.6 slovenia 2004 8.1 15.4 15.2 2010 8.0 14.0 16.1 2018 7.9 14.0 15.8 serbia 2004 5.5 17.5 10.1 2010 5.3 15.9 11.6 2018 5.8 16.4 12.2 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 18 year direct taxes indirect taxes social security contributions turkey 2004 5.9 11.7 5.2 2010 5.9 12.7 7.7 2018 6.1 11.1 8.9 croatia 2004 6.1 18.5 11.7 2010 6.6 17.6 11.8 2018 6.5 20.0 12.0 montenegro 2004 6.0 15.3 11.7 2010 4.9 17.6 12.2 2018 5.4 18.5 11.3 source: see appendix 1, author’s calculations the main characteristic feature of the balkan countries is the high share of indirect taxes, which, on the average, account for almost 50 % of the total amount of tax proceeds (fig.3). it is worth noting the extremely high level of indirect tax revenue in kosovo, where it provides for over 80 % of all tax revenue. in albania, croatia and bulgaria, indirect taxes also amount to more than half of the tax revenue. to compare, the share of indirect taxes in the eu-28 is about 34 %. at the same time, most balkan countries stand out for their relatively low level of proceeds from direct taxes. in 2018, they account for 19.4 % of their tax proceeds, against 34.5 % in the eu, on the average. the lowest share of direct taxes is observed in bosnia and herzegovina (10.8 %), kosovo and croatia (16.8 %), and the highest was that in greece (24.6 %). source: author’s calculations figure 3. tax revenue structure in 2018 (% of total tax revenues) as a final point, revenue from social security contributions amounts to an average of about 31 % of all tax revenues of the balkan countries, the same as the eu average. however, there are substantial differences among the countries. in terms of revenue from social security contributions, slovenia, romania and bosnia and herzegovina stand out, with around 40 %. notably, no data is available for revenue from social security contributions for kosovo. this is due to the fact that the system of public social security in that country is an early stage of development. on the spending side, social benefits are financed largely from the general budget revenue, with only a small portion covered through targeted social security contributions by employees and employers (mustafa, haxhikadrija, 2019, p. 13). the makeup of tax revenues of the balkan countries is the result of their fiscal and tax policies. in the first years of transition to a market economy, they implemented large-scale reforms aimed at stimulating investment and economic growth. these reforms included a considerable decrease of taxation rates for direct taxes, and in some cases progressive tax rate scales were replaced by a flat rate applicable to personal income. in 22.1 10.8 20.2 24.6 16.8 18.3 20.4 20.4 18.7 23.3 16.8 19.9 19.4 34.3 55.6 49.3 50.8 41.0 83.2 39.0 44.8 37.3 45.7 42.7 52.0 49.6 49.3 34.7 22.2 39.6 29.0 34.4 42.7 31.4 41.8 34.0 34.0 31.2 30.0 30.9 31.1 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 direct taxes indirect taxes social security contributions other presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 19 exchange, the fiscal burden on consumption was increased. the tax structure of the balkan countries, which is based primarily on indirect taxation, has had significant social, economic and fiscal effects. firstly, that type of tax structure generally has relatively limited possibilities to redistribute national income. in specialized literature, taxes on consumption are often defined as regressive since they pose a greater burden on lower-income households. secondly, the predominant share of revenue from indirect taxes in total tax revenue implies a certain degree of procyclicity on the revenue side of the budget and reduces its capacity for macroeconomic stabilisation. revenue from indirect taxation moves in a straight-line dependency with changes in economic activity. in their turn, direct taxes, and in particular progressive taxation of personal income, work to soften any economic imbalances to a greater extent. a relatively small share of direct taxes implies a weaker effect of the automatic fiscal stabilisers, hence the weaker stabilisation role of fiscal policy. it is the structure of tax revenue that largely explains the significant fluctuations in budget proceeds observed in the years prior to and after the global crisis. dynamics in public sector expenditure in the period 2004—2018, there was substantial dynamics in the public sector spending figures of the balkan countries. as can be seen from figure 4, spending in the general government sector in 2004 stood at 38.2 % of gdp, and declined slightly in the following years. after the onset of the global economic and financial crisis, the share of public spending in gdp went up and reached 42.1 % in 2009. in 2013, it went up again, but as from the following year, the public spending-to-gdp ratio started to go down, reaching 34.4 % in 2018. over the entire analysed period, the average figure for public spending in the eu was considerably higher, at45.9 % in 2004 and 45.8 % in 2018, respectively. source: author’s calculations figure 4. general government spending (% of gdp) balkan countries differ substantially in terms of the share of public spending in gdp (table 5). in 2018, it had the highest value in greece, croatia and montenegro, exceeding 46 % in these three countries. in that year, the share of public spending in gdp was the lowest in kosovo, albania and north macedonia. table 5. general government spending (% of gdp) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 albania 30.2 28.9 29.7 29.6 32.5 33.2 29.3 28.9 28.2 29.2 31.5 30.5 29.5 29.7 29.2 bosnia and herzegovina 36.7 38.0 40.1 42.5 44.8 46.0 45.2 44.5 45.7 44.8 45.8 42.5 41.5 40.4 40.8 bulgaria 37.8 36.7 33.7 37.7 37.1 39.3 36.4 33.9 34.4 37.9 43.3 40.4 35.0 34.9 36.6 greece 47.6 45.6 45.1 47.1 50.8 54.1 52.5 54.1 55.8 62.4 50.3 53.6 49.0 47.4 46.9 kosovo 26.4 22.4 20.4 17.4 24.3 26.9 27.4 28.1 28.4 27.9 26.5 27.0 27.7 27.6 29.0 romania 33.8 33.5 35.6 37.5 37.6 39.4 40.0 39.5 37.3 35.4 35.3 36.1 34.5 33.5 34.8 north macedonia 35.8 33.7 32.8 33.0 35.3 35.4 34.8 34.3 36.0 34.1 33.9 34.5 33.3 33.8 31.6 38.2 37.1 37.2 37.7 40.0 42.1 40.9 40.4 40.8 42.1 41.1 40.7 39.0 38.2 38.4 45.9 46.0 45.4 44.8 46.3 50.2 50.1 48.6 49.0 48.7 48.0 47.0 46.4 45.9 45.8 30.0 35.0 40.0 45.0 50.0 55.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 balkan countries (average) eu countries (average) presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 20 slovenia 46.6 46.4 45.5 43.4 45.1 49.4 50.2 50.9 49.4 60.3 50.8 48.7 46.3 44.1 43.6 serbia 38.9 39.8 43.0 43.3 43.5 43.5 43.7 42.3 45.1 42.5 45.2 42.8 41.9 40.4 40.9 turkey 34.5 31.8 32.1 32.4 33.0 38.2 36.4 34.2 35.1 35.2 34.3 34.3 36.1 34.9 35.1 croatia 48.8 46.9 46.5 45.6 45.8 48.9 48.6 49.0 48.3 48.3 48.7 48.6 47.4 45.3 46.3 montenegro 41.2 41.9 42.0 43.2 50.3 50.9 45.8 44.8 46.4 47.2 47.7 50.0 46.2 46.8 46.2 source: see appendix 1, author’s calculations it is interesting to explore the developments in the level of public spending in each of the balkan countries prior to and after the global crisis (figure 5). from 2004 till 2008, public spending in gdp terms grew at an average rate of 1.8 percentage points, most notably in montenegro (9 p.p.) and in bosnia and herzegovina (8.1 p.p.). the growth in spending in montenegro was the result of a strong gdp growth in that period, and of the transition to an independent state (world bank, 2019, p. 10). in that period, a more significant decrease was reported in croatia (–3 p.p.) and in kosovo (–2.2 p.p.) the global financial and economic crisis interrupted the predominant upward trend in the value of public spending. from 2009 until 2018, public spending in gdp terms experienced a downturn in all countries on the balkan peninsula except for kosovo. the most significant decreases were registered in greece (–7.1 p.p.), slovenia (–5.8 p.p.) and bosnia and herzegovina (–5.2 p.p.). the substantial reduction in public spending in that period can be attributed to the efforts to consolidate public finance. despite the overall reduction in public spending post-2009, certain countries display temporary, significant spikes. for instance, there was a considerable increase in greece in the period from 2008 until 2013, after which spending dropped down drastically. several balkan countries experienced a banking crisis, with the cost of bailing out covered by the public sector. in 2013, the share of public spending in slovenia went up by almost 11 percentage points from the previous year as a result of public refinancing of several large credit institutions. in the following year, the amount of spending went back down. a one-off increase in spending in gdp terms was reported in bulgaria in 2014 as a result of problems in the banking sector. source: author’s calculations figure 5. general government spending share in gdp (percentage points change) the structure of public spending can be analysed on the basis of both an economic classification and a functional classification. the economic classification examines the cost of producing or purchasing from a third-party goods and services necessary for supplying goods by the public sector, and the direct transfers paid out to households and enterprises (andjelkovic et al., 2010). under the economic classification, public spending is distinguished into current and capital spending, and the former predominate in the total amount of public spending. current spending includes the following components: compensation of employees in the public sector, use of goods and services (intermediate consumption), interest payments on public debt, subsidies, social spending, and other current spending. capital spending, in its turn, refers to spending incurred by the institutional entities within the general government sector for the acquisition or improvement of long-term assets (consumption of fixed -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 a lb an ia b o sn ia an d h erzego vin a b u lgaria g reece k o so vo r o m an ia n o rth m ace d o n ia slo ven ia se rb ia tu rke y c ro atia m o n te n egro a ve rage change 2004-2008 change 2009-2018 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 21 capital). for eu member states, statistical information about the amount of capital investment is available from eurostat. since the imf database does not provide data for this indicator, for the rest of the countries under examination, data about the indicator ‗net acquisition of non-financial assets‘ is used as a corresponding measure. according to the imf definition, net acquisition of non-financial assets is equal to the difference between non-financial assets acquired and those released. it includes net investment in nonfinancial assets and fixed capital consumption. (imf, 2014, 81). table 6 shows a breakdown of public spending in balkan countries by type of economic activity as a ratio to gdp in 2004, 2010 and 2018. within current spending, in all balkan countries except for kosovo, the largest relative share is that of social spending (in cash and in kind) paid out to households in order to overcome existing social risks and cover basic needs. significant differences can be observed among the individual countries where, for 2018, social spending accounted for the largest relative share in greece (20.7 % of gdp) and slovenia (17.6 % of gdp), and the lowest was that in kosovo (6.6 % of gdp) and albania (10.3 % of gdp). concerning its dynamics in time, in the period 2004—2018, social spending in gdp terms grew in most balkan countries, with the most significant growth exhibited in kosovo (6.6 p.p.), greece (5.6 p.p.), bosnia and herzegovina (3.2 p.p.). decreases are observed in serbia, turkey, slovenia, croatia and montenegro. in the period under examination, social spending in the balkan countries in gdp in terms grew by an average of 1.5 percentage points. the second most significant component of current spending was compensation of employees, which includes salaries and social security contributions for people employed in the public sector of the economy. in 2018, the share of that component ranged from 11.8 % of gdp in greece and croatia to 4.5 % of gdp in albania. from 2004 to 2018, this spending item decreased in 7 balkan countries, most significantly in albania (–2 p.p.) and in serbia (–1.8 p.p.). spending for compensation of employees marked the most substantial increase in kosovo (2.3 p.p.). the ‗consumption of goods and services‘ (intermediate consumption) component measures the cost of goods and services (except for long-term assets) invested in the creation of public goods. in terms of that indicator, there also considerable differences across the analysed countries. in 2018, the share of spending for intermediate consumption ranged from 2.5 % of gdp in montenegro to 8.1 % in croatia. in 2004—2018, that component of current spending decreased in 9 balkan countries, most significantly in kosovo (–3.3 p.p.) and in bulgaria (–3.1 p.p.). on the average, this spending item decreased by 0.9 p.p. during the analysed period. the category of transfers shown in table 6 brings together two items of current spending: subsidies and transfers (grants). subsidies are defined as unilateral payments to public and private enterprises in the respective country with the aim to influence the level of production, the cost of output or the profits of those enterprises (imf, 2014, p. 131). in their turn, transfers are payments to other institutional entities with the general government sector, and payments to other countries and to international organisations. in 2018, the spending-to-gdp ratio was the highest in montenegro (6.3 %), and the lowest in greece (0.3 %). interest payments on public debt, on the whole, account for a small relative share in the gdp of the countries on the balkans, and in 2018 it ranged from 3.3 % in greece to 0.3 % in kosovo. with regard to capital spending, there are also differences among the balkan countries. in 2018, it recorded its highest value in kosovo (7.9 % of gdp, while the lowest level was that in north macedonia (2.5 % of gdp) and in bosnia and herzegovina (2.7 % of gdp). from 2004 to 2018, capital spending increased in 7 balkan countries, most significantly in montenegro (5 p.p.). the decrease was most pronounced in greece (–4.1 p.p.) and in croatia (–3.7 p.p.). table 6. general government spending structure by economic purpose (% of gdp) compensation of employees intermediate consumption interest payments transfers social benefits other current capital expenditure albania 2004 6.6 3.3 3.9 2.8 6.8 1.6 5.2 2010 5.3 2.8 3.4 2.8 8.6 1.5 5.4 2018 4.5 2.8 2.2 3.2 10.3 1.3 4.8 bosnia and herzegovina 2004 10.6 8.5 0.5 1.1 11.8 2.8 1.4 2010 12.5 10.2 0.5 1.9 14.9 2.8 2.5 2018 10.2 7.2 0.7 1.4 15.0 3.1 2.7 bulgaria 2004 9.9 7.9 1.8 0.9 12.2 1.3 3.9 2010 9.1 5.7 0.7 1.1 13.5 1.2 4.9 2018 9.5 4.8 0.7 2.2 13.0 2.3 4.0 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 22 greece 2004 11.3 6.4 4.8 0.1 15.1 2.0 8.0 2010 12.4 6.0 6.0 0.2 20.9 1.9 5.0 2018 11.8 4.6 3.3 0.8 20.7 1.8 3.9 kosovo 2004 6.3 7.0 n/a n/a n/a n/a 6.6 2010 7.1 4.1 0.1 1.8 3.9 0.0 10.3 2018 8.8 3.7 0.3 1.7 6.6 0 7.9 romania 2004 8.2 5.7 1.5 2.0 9.8 1.2 5.4 2010 9.6 5.5 1.5 1.0 13.9 1.9 6.6 2018 10.9 5.1 1.1 0.4 11.6 1.8 3.9 north macedonia 2004 7.6 4.8 0.8 n/a n/a n/a 4.2 2010 7.9 4.8 0.7 n/a n/a n/a 4.5 2018 6.3 3.4 1.2 2.4 14.6 0.8 2.5 slovenia 2004 11.5 6.0 1.7 1.7 18.7 2.0 5.2 2010 12.5 6.8 1.6 1.8 20.1 1.9 5.5 2018 11.1 6.2 2.0 0.8 17.6 1.8 4.1 serbia 2004 8.7 7.5 1.2 2.9 16.1 0.0 2.4 2010 11.2 6.3 1.1 2.4 17.8 0.7 3.2 2018 9.2 6.8 2.1 2.2 14.7 1.4 3.9 turkey 2008 7.3 4.0 4.6 0.8 12.7 1.2 3.7 2010 8.2 4.8 3.5 1.2 13.2 1.6 3.4 2018 8.0 4.9 3.0 1.7 11.7 1.1 4.0 croatia 2004 11.8 6.9 1.8 2.3 15.7 1.3 9.1 2010 12.2 7.6 2.4 2.4 15.9 1.8 6.3 2018 11.8 8.1 2.3 1.6 15.5 1.5 5.4 montenegro 2004 14.5 4.3 1.5 2.3 13.9 2.7 1.8 2010 10.9 5.2 1.0 7.7 13.6 0.9 4.7 2018 11.2 3.1 2.2 6.3 11.7 1.5 6.8 source: see appendix 1, author’s calculations figure 6 shows the structure of public spending in 2018 by economic function. the classification of spending according to the functions of government (cofog) is a detailed presentation of the functions or social and economic purposes, which the institutional entities included in the general government sector aim to achieve by means of the various types of public spending (imf, 2014). the functional classification is a statistical tool suitable for measuring and comparing the relative significance of key functions of the public sector in each country. as seen from the graph, spending for social protection accounted for the largest relative share in all balkan countries in 2018, standing at an average of 12.6 % of gdp, compared to 18.6 % in the eu. it is worth noting the substantial difference in the percentage of social spending among the individual balkan countries, ranging from 19 % of gdp in greece to 6.5 % of gpd in kosovo. the second most significant spending category is ‗general public services‘, where the average share in gdp for the balkan countries and for the eu equals 5.8 % of gdp. in 2018, the highest numbers for spending in that category were those for montenegro (10.7 % of gdp), greece (8.3 % of gdp) and in bosnia and herzegovina (8.1 % of gdp). spending for economic affairs ranked third in the balkan countries. it averaged 5.4 % of gdp, compared to 4.2 % for the eu. the substantial share of this spending category in montenegro (7.9 % of gdp) stands out. a significant difference in the relative share of health spending among the countries on the balkan peninsula and the eu is observed, with 4.9 % and 7.1 % of gdp, respectively, for 2018. among the balkan countries, slovenia and croatia (6.6 % of gdp) had the highest level of health spending, while the lowest level was that in albania and in kosovo (3 % of gdp). in 2018, spending for education in gdp terms in the balkan countries averaged 4 %, against 4.7 % in the eu. the share of defence spending was equal in both groups of countries and amounted to 1.2 %. presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 23 source: see appendix 1, author’s calculations figure 6. general government spending according to cofog in 2018 (% of gdp) note: the heading “other expenditure” comprises “environmental protection”, “housing and community amenities” and “recreation, culture and religion”. containing the levels of public debt is key to reducing macroeconomic risks, especially considering the non-availability of other mechanisms for macroeconomic stabilisation in some of the balkan countries, including the absence of an independent currency (european commission, 2019, p. 6). after the onset of the crisis, the balkan countries varied in the fiscal stimulus tools at their disposal, which largely depend on the condition of their public finance. the analyses provided by the european commission concerning the structure of fiscal adjustment show that fiscal position improvements can be attributed mostly to improved revenue collection rates, while lower interest payments have largely been offset by increases in other items of public spending. in serbia, montenegro and albania, corrections to budget deficits were archived mostly through measures undertaken on the revenue side. in north macedonia and croatia, the improvement in the budget balance was the result of cutting current spending. the structure of budget consolidation is an indicator for potential weaknesses in public finance in the conditions of an economic downturn. if the increase in budget revenue is driven mostly by cyclical factors, then it can be expected that revenue would decrease rapidly, once the stage in the business cycles changes (european commission, 2009, p. 7). 9.2 13.0 12.0 19.0 6.5 11.6 11.5 16.7 14.1 9.9 14.7 11.8 12.5 18.6 5.2 8.1 3.3 8.3 3.3 4.6 2.9 5.3 6.0 5.8 5.4 10.7 5.7 5.8 0.7 0.9 1.1 2.0 0.7 1.7 0.9 1.0 1.7 1.8 1.1 1.5 1.3 1.3 1.7 3.2 2.5 2.1 2.6 2.2 2.2 1.5 2.5 2.1 2.4 3.6 2.4 1.7 2.8 2.7 6.7 4.4 6.7 4.2 3.3 4.7 5.2 4.1 6.7 7.9 4.9 4.2 3.0 5.9 5.0 5.0 3.0 4.7 4.9 6.6 5.4 5.1 6.6 5.3 5.0 7.1 3.1 4.0 3.5 3.9 4.5 3.2 3.5 5.4 3.2 3.7 5.3 4.1 4.0 4.7 2.9 2.0 2.6 2.3 1.7 2.7 2.4 2.3 2.7 2.0 3.9 1.3 2.4 2.5 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 social protection general public services defence public order and safety economic affairs health education other presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 24 4. changes in government budget balance budget balance is a key indicator of the direction of the fiscal policy pursued. there is no unanimity in economic theory as to whether a balanced-budget policy should be pursued, or whether the state should use the budget as a tool to pursue a policy of macroeconomic stabilisation. moreover, the genesis of budget deficit is very important. a budget deficit may be due to ineffective spending policy or to a targeted investment policy aimed at upgrading public infrastructure, which is a precondition for a higher economic growth in the future. a policy of budget deficit has a counter-cyclical effect on the economy when it is implemented in the conditions of a recession (irrespective of whether it is the result of the automatic fiscal stabilisers or the discretionary government policy at work). it should be noted that it is more difficult to implement a policy of budget surplus in periods of economic growth, particularly in developing countries, where there is an acute need for infrastructure improvement (imf, wp 15/172). governments are often subject to strong pressure from certain interest groups (lobbies, trade unions, etc.) which demand that additional spending should be incurred, where such spending had been postponed on the argument of non-availability of funds; in the presence of a budget surplus, however, that argument does not hold. for that reason, although economic theory prescribes that reserves for absorbing economic shocks must be set up, the pursuit of an austere fiscal policy is not a particularly common approach in governing public finance. that is why government policies are often pro-cyclical in a period of economic expansion. the fiscal instability of a country has an impact on the whole monetary and economic union and erodes its trustworthiness. although fiscal policy is a national prerogative, the deepening of the economic integration among countries requires a certain degree of coordination. the budget deficit indicator is an important indicator of the stability of public finance; hence the eu‘s stability and growth pact sets a limit to its share in gdp of up to 3 % of gdp (eu, council regulation no 1466/97, article 2-a). in the case of non-compliance with that requirement, an excessive deficit procedure is launched, requiring the country concerned to undertake corrective measures to manage the situation. in the period 2010—2011, such procedures were launched for 24 eu member states. the common failure to comply with that requirement, and with the debt criterion, as well as the need to strengthen the sustainability of public finance in eu member states led to the formulation of fiscal ruled that are binding on the member states of the union. the fiscal rules are long-term quantitative restrictions on government spending, deficit, debt or other fiscal indicators. several decades ago, only a few countries had fiscal rules. currently, however, over 90 countries abide by such restrictions, including, of course, the eu member states. there is evidence that strict fiscal rules promote fiscal discipline, at least in countries that tend to run large deficits (wb, wp fiscal rules for the western balkans, 2019). western balkan countries, which are not members of the eu yet but wish to accede to it, must comply with the eu requirements for maintaining fiscal discipline and must follow the established quantitative fiscal rules. presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 25 source: see appendix 1, author’s calculations figure 7. general government balance (% of gdp) the budget balances of the countries under examination have fluctuated during the past 15 years, which is largely but not exclusively the result of the cyclical development of their economies. the discretionary measures undertaken by governments with respect to fiscal incentives or fiscal consolidation also play a role. the analysis of the dynamics of one of the most important fiscal indicators, budget balance, in the countries from the balkan region informs the following conclusions:  the countries under examination exhibit a marked tendency to stick to a policy of budget deficit. the budget balance is negative, on the average, for the european countries throughout the observed period.  the global financial and economic crisis in 2009 put the public finance of the balkan countries to the test and reflected in a sharp increase in their budget deficits considerably in excess of the limit of 3 % of gdp only for one year. a lesser deficit is recorded only for north macedonia, and kosovo even has a slight surplus.  still, the severe worsening of the budget balance in 2009 in the countries under examination is not as drastic, compared to eu countries (8 of the countries have a deficit below the eu average).  as early as in 2010, 8 countries shrunk their budget deficit, which is in line with the economic development recovery.  over the 15-year period, the highest surpluses (over 6 %) were achieved by kosovo and montenegro in 2007, melting away during the next year, 2008.  in the period 2010—2014, all countries had a negative budget balance.  the deficit in the year of the crisis, 2009, ranged from 2 % to 6 % in gdp terms in most countries, but greece and romania reached record-high deficits of 15 % and 9 % of gdp, respectively. bulgaria is among the countries with the lowest deficit.  in 2014 bulgaria breached the budget deficit limit for the second time but managed to avoid the excessive deficit procedure since the european commission agreed that it was due to an -20 -15 -10 -5 0 5 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % o f g d p bulgaria greece croatia romania slovenia montenegro north macedonia turkey serbia bosnia and herzegovina kosovo albania threshold eu-28 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 26 extraordinary event relating to the declaration of bankruptcy of a key bank (corporate commercial bank) and the need to finance the deposit guarantee fund.  during the first 10 years of the period, greece stands out as the country with the largest deficits, but in the last three years it has registered a positive balance already.  slovenia ended 2013 with a much higher deficit than 2009, with –14.6 % of gdp, against –5.8 % in 2009, the reason being that the country carried out a major bank recapitalisation (about eur 3 billion).  in the last 3 years of the period under observation, almost all of the countries had budget balances above the threshold of –3 % of gdp (except for montenegro).  a budget deficit policy was pursued throughout the period by romania and albania. for albania, a policy to restrict the budget deficit in the last three years is observed, bringing it down to around 2 %, whereas earlier it was in the range of 4—5 %. in 2018 slovenia reported a budget surplus for the first time in 22 years. in the period under examination, the strongest driver behind the fluctuations in the budget balances of the balkan countries was the global financial and economic crisis, along with certain one-off events such as the recapitalisation of banks in slovenia in 2013 (stability programme of the republic of slovenia, 2014, p.21) and the failure of corporate commercial bank in bulgaria in 2014. those factors led to an increase in the deficit-to-gdp ratio, which, in its turn, raises the issue of sustainability of public finance systems and the levels of government debt. the overall budget balance is affected also by the countries‘ level of indebtedness, since interest costs can be a major spending item. the burden of interest payments over the period under observation in the balkan countries was below 4 % of gdp, except for turkey and greece. at the beginning of the period, turkey allocated 10 % of its gdp to interest payments, but in the following 6 years, it managed to bring down that share to below 4 %, while greece registered record-high interest spending of around 7.5 % of gdp in 2011. the burden of debt repayment was lower in most balkan countries compared to the average burden in the eu at the start of the period, but the situation reversed post-2013. in the eu, in 2018 it went down even below 2 % of gdp, while in the balkan countries it climbed up. source: see appendix 1, author’s calculations figure 8. government interest expenditure (% of gdp) to get a better understanding of the fiscal situation, let us examine how the elimination of interest spending affects it, i.e. what the budget balance would look like if countries had no debts. to that end, let 0 1 2 3 4 5 6 7 8 9 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 % o f g d p bulgaria greece croatia romania slovenia montenegro north macedonia turkey serbia bosnia and herzegovina kosovo albania eu-28 presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 27 us compare the budget balance to the primary budget balance available at the beginning and at the end of the period under examination. the results are shown in the figure below. source: see appendix 1, author’s calculations figure 9. budget balance and primary budget balance ( % of gdp) the primary budget balance available looks better for all of the countries under examination, since each country has some degree of indebtedness, the largest deviations between the two indicators are noticeable for the most indebted countries, i.e. turkey, greece, montenegro, serbia, slovenia and albania. compared to the beginning of the period, the largest improvements in the primary budget balance are exhibited by greece, croatia, slovenia and kosovo, while in the case of turkey there is a serious worsening. overall, in 2018 the primary budget balance available is closer to the budget balance as at the beginning of the period (2004). the absence or presence of a correlation between the budget balance available and the real rate of economic growth over the period 2004—2018 is shown in the table below. table 7. correlation between the budget balance and the real rate of economic growth over the period 2004—2018 correlation coefficient bulgaria 0.704486 strong correlation greece 0.494235 medium correlation croatia 0.596686 medium correlation romania 0.67786 strong correlation slovenia 0.598439 medium correlation montenegro 0.60807 medium correlation north macedonia 0.690461 strong correlation turkey 0.478209 medium correlation serbia 0.682901 strong correlation bosnia and herzegovina 0.713847 strong correlation kosovo 0.691888 strong correlation albania -0.01925 very weak negative correlation source: author’s calculations with the exception of albania, for all other countries the assumption that there is a statistically significant link between the budget balance and the real rate of economic growth is confirmed (the correlation factor is between 0.5 and 0.7). albania has maintained some of the highest growth rates throughout the period and it is the only country that did not slip into a recession, even in 2009, but instead registered a growth rate of 3.4 %. at the same time, the country stimulated domestic demand through major fiscal incentives as well, as it pursued a policy of budget deficit throughout the period. presiana nenkova et al. / finance, accounting and business analysis 3 (1) 2021 28 conclusions the overview of the dynamics of public revenue in the period 2004—2018 has shown that the balkan countries have a lower public revenue-to-gdp ratio compared to the eu. over the analysed period, there was an increase in revenue but despite that, there are distinct fluctuations in the years prior to and during the global economic crisis. these fluctuations are particularly manifest in montenegro. the dynamics in total public revenue and tax revenue of the balkan countries exhibits a certain pro-cyclicity that is the result of the fiscal policy pursued. the structure of tax revenue in a large number of the balkan countries is characterised by a large share of indirect taxes, mostly at the expense of direct taxes. this implies both a weaker re-distributional role of the public sector and relatively limited capacity to implement macroeconomic stabilisation. in the period 2004—2018, the share of public spending in the gdp of most of the balkan countries remained lower than the eu average, with the exception of greece, montenegro and croatia. those three countries stand out among the rest with the considerable involvement of the government in the economy. in 2008, the number of countries having a large public sector went up, but at the end of the period, this number gradually went down, mostly due to the action undertaken to reduce public spending in some of the balkan countries. the trend shows that at the end of the period in quite a few of the countries in the balkan region the government yielded in the running of the country‘s economy. despite the overall reduction in spending post-2009, some of the countries display temporary, significant spikes. in the structure of public spending according to an economic classification and a classification by function, the most significant item in gdp terms was social spending. that is why that component of public spending showed the most significant increase in the period 2004—2018. the budget balance remained negative during most of the investigated period, which comes to show a tendency for the countries in the study to pursue a policy of budget deficit both in times of economic downturn and in economically more favourable times. the financial and economic crisis of 2009 is the main reason for the worsening in the performance of the budget balances across the board in the countries examined. references andjelkovic, b. chubrik, a., dabrowski, m., mogilevskiy, r.,sinitsina, i., wozniak, p. 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(accessed on 07.02.2021). available at: https://sbb.gov.tr/wpcontent/uploads/2018/11/general-government-revenues-and-expenditures.pdf https://finance.gov.mk/wp-content/uploads/2021/02/1.2mk-erp-2020-2022_en.pdf https://finance.gov.mk/wp-content/uploads/2021/02/1.2mk-erp-2020-2022_en.pdf https://www.mfin.gov.rs/en/documents/macroeconomic-and-fiscal-data/ https://www.mfin.gov.rs/en/documents/macroeconomic-and-fiscal-data/ https://www.mfin.gov.rs/wp-content/uploads/2019/10/erp-2020-2022-eng.pdf https://www.mfin.gov.rs/wp-content/uploads/2019/10/erp-2020-2022-eng.pdf https://www.mfin.gov.rs/en/activities/bulletin-public-finances-june-2020/ https://www.mfin.gov.rs/en/activities/bulletin-public-finances-june-2020/ https://sbb.gov.tr/wp-content/uploads/2018/11/general-government-revenues-and-expenditures.pdf https://sbb.gov.tr/wp-content/uploads/2018/11/general-government-revenues-and-expenditures.pdf 96 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg comparative study of major central bank’s monetary policy in response to the pandemic crisis gergana mihaylova-borisova* finance department, university of national and world economy, bulgaria info articles abstract keywords: central bank, monetary policy, key objectives, euro area, usa. objective: the study aims to investigate the policy, performed by the main central banks during the crisis, related to spread of the covid-19 crisis all over the world. the central bank’s policy was one of the key policies for the countries to counter the negative effects, from the coming new crisis. the crisis is different in character from the previous global crisis in 2009 and it is characterized with higher negative impacts on the economic activity and unemployment of the countries. methodology: the study examines the monetary policy tools used by the major central banks in particular the fr (federal reserve), the european central bank, the boe (bank of england) during the covid-19 crisis. the data used are the official one, published by the eurostat, european central bank, federal reserve, oecd. through the methods of analysis and synthesis the effectiveness of the monetary policy, done by the covered central banks, is investigated. the data used are for the period 2007-2021. results: the analyses indicate that the bank of england, as well as the fr was in more privileged terms than the european central bank (ecb) before the covid-19 crisis. their main interest rates were positive and these banks could apply conventional instruments of policy at the beginning of the crisis before conducting the nonconventional policy tools. implication: the study’s results are beneficial for central banks for countering the negative effects of the covid-19 crisis, turning to the deep economic crisis afterward. *address correspondence: e-mail: gmihaylova-borisova@unwe.bg finance, accounting and business analysis 3 (2) 2021 97 introduction the world has been hit by a new type of crisis, the so-called pandemic crisis, linked to the distribution of a new virus, the coronavirus covid-19. this was after a series of turbulences starting with the global crisis on financial markets in 2008. because they have been significantly affected by the turbulence, some countries, or areas have been unable to recover fully before the new crisis emerges in 2020. countries are experiencing moderate rates of economic growth just before the coronavirus emerges in 2020. in 2019, the ea’s economic growth is 1.5%, while in the uk (united kingdom) and united states of america (usa) it is 1.4% and 2.2% respectively. in these conditions, the role of central banks remains prominent, as they could act expansionary with their instruments in order to recover economies from another crisis. of course, fiscal policy also contributes to the achievement of the ultimate objectives of economic policy, but insofar as for some countries the possibilities of government response are limited, the active intervention of the banks is also necessary. the study aims is to examine the monetary policy pursued by major central banks during the pandemic crisis associated with the widespread of the covid-19 worldwide. monetary policy is one of the key policies in countries to counter the negative effects coming from the new crisis. the crisis is different from the previous global financial crisis in 2008, but is characterized by stronger negative effects on economic development and unemployment. the thesis defended in the study is that the central banks, in particular the bank of england (boe) and the federal reserve (fr), undertook swift action to counter the new pandemic crisis, avoiding a significant deterioration in their economic performance and showing economic agents that they are willing to use all tools to reach their objectives. this is also thanks to their more privileged position because their main interest levels (rates) are at higher level than the rates of the ecb, which are zero and some of which are even on a negative trajectory. the study examines the tools of policy implemented by major central banks: the fr, the boe and the ecb during the pandemic crisis. the data used are official one and have been released by the oecd, the ecb, the fr, and the boe. the methods of analysis and synthesis are used to examine the effectiveness of the bank’s policy. the data used are for the period 2007-2021. there are individual studies on the instruments implemented by specific central banks worldwide, but no studies have been conducted that focus on a comparative analysis of the instruments undertaken and their effectiveness and efficiency. this study contributes to the economics literature in two ways: first, it provides a comparative analysis of the measures taken by leading central banks in relation to the coronavirus outbreak in the respective country; second, it assesses the efficiency of the three leading central bank’s policy on the macroeconomic indicators in particular the economic growth, inflation and unemployment, again emphasizing comparative analysis. the study consists of the following parts: the first one outlines the relevance and objectives of the study, and thesis being defended. the second part reviews the literature as well as the research methods and data used for the purpose of proving the thesis. in the next part, the monetary policy tools of the leading banks, the boe, ecb and fr are presented. the fourth part analyses the results of the tools used by providing a comparative analysis of the activity of the central banks in the ea, usa and uk in respect to macroeconomic performance and the meeting the objectives. in the last part, the main conclusions are presented. literature review there are studies in the economic literature that have focused on the unconventional monetary policies of leading central banks in response to the global crisis in 2008. the nonconventional monetary policy instruments that were introduced to counteract to the global crisis in 2008 have been studied in detail, as well as their impact on the ecb’s monetary policy (mihaylova-borisova, 2014; mihaylovaborisova, 2016; mihaylova-borisova, 2018; mihaylova-borisova, 2020; trifonova, trifonova, 2016; courthimann, winkler, 2013; giannone et all, 2011; smaghi, 2009; szczerbowicz, 2015; trichet, 2013;). among these studies, those that analyse the advantages and disadvantages of applying one or several instruments are distinguished. for example, mihaylova-borisova (2018) examines the effects of negative interest levels introduced by the ecb in mid-2014, and szczerbowicz (2015) studies quantitative easing associated with the purchase of certain assets by the ecb. the federal reserve's unconventional monetary policy is studied by rudebusch (2018), bank for international settlements (2019), neely et all (2021). bank for international settlements (2019) provides a comparative study of unconventional policy implemented by central banks since the global crisis, excluding measures implemented by central banks to counteract to the pandemic crisis. it examines the types of unconventional measures and provides finance, accounting and business analysis 3 (2) 2021 98 guidance on when these instruments should be applied and how often, i.e. it seeks to draw lessons from the measures applied in response to crises. neely et all. (2021) also analyse the measures applied by the central banks in particular the fr, the boe, the ecb, etc. the aim of their study is to track how central banks change their unconventional monetary policy to promote economic activity and maintain price stability over the period 2013 to 2019. the study traces in detail how central banks manage to cope with the challenges they face, while also trying to take into account the structural features of their economies. among the published studies on central banks' monetary policy during the covid-19 crisis, most of them focus on a separate investigation of the measures implemented by a specific central bank to respond to the coronavirus crisis (mihailova-borisova, 2020; clarida et all, 2021). there is also comparative research on the performance of specific banks' measures to react to the covid-19 crisis at its initial emergence (center for economic policy research, 2021). no comparative studies are found on the impact of measures implemented by leading central banks to respond to the pandemic crisis. methods to study the impact of monetary policy tools used by the leading banks such as the fr, boe and ecb, the methods of analysis and synthesis are used. data for the period 2007-2021 is used to analyse the effectiveness of monetary policy implemented by the leading central banks. the aim is to present the state of the studied indicators such as economic growth, inflation, unemployment before the occurrence of the pandemic crisis, which in turn is to be compared with the state of these main macroeconomic indicators after the emergence of the crisis until today. the statistical information used has been published officially by the oecd, the ecb, fr and boe. monetary policy of major central banks during the pandemic crisis this part of the study examines the measures taken by leading central banks in response to the development and expansion of the pandemic crisis associated with the spread of the coronavirus. monetary policy of the federal reserve despite the good outlook for the u.s. economy in the beginning of 2020, the fr is relying on "forward guidance" to communicate to the public that "the coronavirus poses possible risks to economic activity" (federal reserve, 2020a). thus, the fr was already declaring its willingness to act with the available tools before the pandemic crisis spread. on march 3, 2020, to counteract to the growing risks of contagion, the fr decided to reduce the federal funds rate by 50 basis points to a range of 1-1.25%, respectively (federal reserve, 2020b). an argument in favour of the use of this instrument is the achievement of the set objective of price stability and maximum employment and. with these actions, the fr is ahead of the other two banks, stating its serious intention to neutralise the negative effects of the covid-19 crisis on the country's economic development and to realise the objectives. in doing so, the federal reserve is demonstrating resolve and timely action to address the uncertain situation surrounding the expansion of the pandemic crisis. ten days later (march 13, 2020), president donald trump declares a state of emergency in the usa, which, together with the fast spread of the virus, causes economic agents to act in panic and stock up, emptying stores. these actions are forcing the central bank to intervene again, as it is clear that the economy will be negatively affected. the federal reserve is taking another cut in the federal funds rate on march 15, 2020, but this time by as much as 1 percentage point to a range of 0%-0.25% (federal reserve (fr), 2020c). the central bank firmly states that it is ready to maintain this range until the moment when it can achieve its goals of maximum employment and price stability achieving the symmetric target of 2%. in addition to this traditional monetary policy tool, the federal reserve is also taking additional actions to purchase of at least 500 billion dollars of securities and at least 200 billion dollars of mortgage-backed securities. these additional actions are being taken to ensure the smooth functioning of the treasury securities market and to ensure the continued flow of loans to households and businesses. the federal reserve is also introducing new weekly repo operations to maintain and eliminate problems in the functioning of financial markets. on march 15, 2020, the federal reserve also cut the discount window rate by 150 basis points to 0.25% (federal reserve, 2020d). this measure is taken to meet the liquidity needs of banks. the duration of the lending period is also increased to 90 days. the federal reserve is also encouraging banks that have finance, accounting and business analysis 3 (1) 2021 99 built up liquidity and capital buffers to use them as they lend resources to businesses and households that are affected by the covid-19 crisis conditions considered unforeseen and adverse. in order to maintain and facilitate the flow of dollars into the financial markets internationally, the fr improved the terms of swap lines with some central banks, such as the central bank of canada, boe, bank of japan, the ecb and the central bank of swiss central bank the actions presented by the fr display that it is taking swift and far-reaching action for the purpose of limiting the negative impacts on the economy as a result of the covid-19 virus. these largescale actions are in all areas important to the federal reserve, including: actions to reduce interest rates, provide liquidity and better funding opportunities for banks, help credit reach households and businesses more easily, and bank regulations and initiatives. following these large-scale actions on a number of areas, on march 17, 2020, the federal reserve is also moving to introduce additional mechanisms to help the flow of resources to economic agents. several facilities have been introduced including: 1/commercial paper funding (cpff) (federal reserve, 2020e). various economic activities are directly financed through the commercial paper market. the federal reserve seeks, through the provision of credit, to support businesses, households, and jobs in the economy. the facility is intended to ensure liquidity protection to issuers of commercial paper. to this end, special purpose vehicles (spvs) operate to purchase a1/p1 rated unsecured and asset-backed commercial paper from issuing companies. 2/primary dealer credit (pdcf) (federal reserve, 2020f). under this facility, the federal reserve provides overnight and term funding to primary dealers of priced securities. the facility can be collateralized by a broad range of investment-grade debt instruments, such as commercial paper and municipal bonds, as well as equities. financing can be for a term of up to 90 days. 3/ money market mutual fund liquidity (mmlf) (federal reserve, 2020g). under this facility, the federal reserve announces rules under which financial institutions can benefit from the liquidity support offered by the central bank. the facility is intended to improve liquidity and the sound functioning of the money market, as well as to help the economy. on march 19, 2020, the federal reserve also introduces new swap lines with nine other central banks. swap lines for not more than usd 60 billion are being negotiated with the banks of brazil, mexico, sweden, south korea, singapore and australia, and lines of up to usd 30 billion are being negotiated with the central banks of new zealand, norway and denmark (federal reserve, 2020h). with the spread of the coronavirus comes a second series of large-scale actions by the federal reserve on march 23, 2020. on that date, the federal reserve commits to unlimited bond buying i.e. "in the amounts needed" (federal reserve, 2020i) for the purpose of maintaining the smooth functioning of the government securities markets and the mortgage-based securities markets. in addition, the federal reserve is introducing a new program to provide up to usd 300 billion in funding to support credit growth to employers, businesses, and consumers. three mechanisms (facilities) are being introduced, the first two for large employers and the last to support businesses and households: 1/primary market corporate credit (pmccf) to be used for new loans and bonds issued; 2/secondary market corporate credit (smccf) to be used to ensure liquidity for corporate bonds, which are outstanding; 3/term asset-backed securities loan (talf), which should be used to make easier the flow of loans to reach households and enterprises. the facility also envisages the issuance of abs (asset-backed securities), which to have for a collateral loans for car purchases, student loans, etc. in addition to these new facilities, two of the facilities introduced a week earlier, the cpff and mmlf, have been expanded to broaden the types of securities, providing opportunities for municipalities to access credit as well. all these mechanisms and measures show that the fr is prepared to do everything and implement as many tools as possible to prepare the economy for the coming health and subsequent economic crisis. the following week, the federal reserve continues with the introduction of new measures. a new temporary mechanism for foreign monetary authorities is being created to help markets function smoothly, including the treasury markets. this temporary mechanism, the fima repo facility, is intended to provide temporary liquidity of us dollars in international markets so that there is not necessarily a need to sell securities on the open market (federal reserve, 2020j). the federal reserve continues with active tools to assists businesses and households on april 9, 2020. it is taking action to provide an additional usd 2.3 trillion for the economy by reintroducing new mechanisms to ensure that it meets its objectives of promoting maximum employment and maintaining price stability: 1/ paycheck protection program liquidity (ppplf), aimed at providing liquidity to small enterprises so that they can retain their employees even if they are not at work because of social distance measures and finance, accounting and business analysis 3 (1) 2021 100 containment of the spread of the coronavirus. 2/main street lending program (mslp), aimed at providing usd 600 billion in credits to small and medium-sized businesses that had a satisfactory financial situation before the pandemic crisis. these are businesses with up to 10 000 employees and annual revenues of no more than usd 2.5 billion. banks can sell up to 95% of loans under the facility, while the remaining 5% should be retained as collateral to eliminate risky lending. 3/ municipal liquidity facility, intended to provide usd 500 billion in loans to states and municipalities. the federal reserve also provides additional funding by expanding the size and scope of the pmccf), smccf and talf. these facilities are planned to provide up to usd 850 billion in loan funds. at end-april, the federal reserve issued a decision to keep interest rates unchanged given that the health crisis has had a significant negative impact on economic performance, inflation and employment in the short run. on june 10, 2020, the central bank continues to hold interest rates at the same levels and announces its intention to increase ownings of securities and mortgage-backed securities at least at the current pace. in the months leading up to the december 16, 2020 meeting, the fr kept interest levels at current levels, and at the last meeting of the year decided to increase holdings of securities by usd 80 billion a month and mortgage-backed securities by usd 40 billion a month. these monthly rates are planned to be maintained at least until the central bank's stated goals of reaching maximum employment as well as price stability are more substantially met (federal reserve, 2020k). this policy is continued at subsequent meetings in january, march, april, june, july, and september 2021 by maintaining the specified interest levels and quantity of monthly purchases of securities and mortgage-backed securities. on september 22, 2021, progress is reported on indicators of economic performance and employment, noting the important role of vaccination. it emphasizes that the sectors that were most affected by the pandemic crisis have been recovering in the next months (federal reserve, 2021). in reviewing all the measures undertaken by the fr to deal with the pandemic crisis, one is impressed by the swift and timely action taken at the first signs of the crisis. a year on, the federal reserve is pursuing the same course of monetary policy, holding interest rates steady until some more substantial enhancements is reached in meeting the central bank's targets. monetary policy of the boe to react against pandemic crisis in 2020 the boe with its three committees took several decisions to strengthen the economy in the united kingdom. on its special meeting, the central bank disclosed a package of pandemic measures on march 11, 2020. the meeting was done before the regular scheduled meeting on march 25, 2020, which showed that the boe was ready to act immediately, but later than the federal reserve. at this special meeting the monetary policy committee decided to reduce the bank rate by 0.5 basis points to the level 0.25%. the committee also decided to introduce so-called new term funding scheme, which was designed to help the small and medium-sized enterprises (bank of england, 2020a). the term funding scheme would be financed by the central bank’s reserves issuance. the banks will be able to receive additional funding in case of rising lending to the small and medium-sized enterprises. at the same time, the financial policy committee decided to cut the rate of countercyclical capital buffer from 1% to 0%. on march 17, 2020 the boe and hm treasury started a new facility – covid-19 corporate financing, aiming to assist liquidity for larger firms. the facility will purchase commercial papers with maturity up to one year, providing support to non-financial companies with violation to their cash flows and supporting them to pay salaries, suppliers and rents. the covid-19 corporate financing facility is set to terminate for purchases of new commercial paper on march 23, 2021.. two days later (march 19, 2020) the monetary policy committee took decision to increase the stock of purchased uk government bonds by gbp 200 billion to gbp 645 billion and to reduce further the bank rate by 0.15 percentage points to 0.1% (boe, 2020b). in addition, the borrowing allowance of the term funding scheme was increased from 5% to 10% of the stocks of the bank’s lending to the real economy. on march 24, 2020 the bank of england activated the contingent term repo facility, aiming to help in case of the sudden demand of liquidity. in the following months the bank of england kept the bank rate the same and only increased the targeted stock of uk government bonds. on june 18, 2020 the central bank raised by gbp 100 billion the uk government bonds’ stock to gbp 745 billion (boe, 2020c) and stepped up it further on november 5, 2020 by gbp 150 billion to reach gbp 895 billion (boe, 2020d). in 2021 the bank of england kept the bank rate at the same level of 0.1% and performed the asset finance, accounting and business analysis 3 (1) 2021 101 purchases up to gbp 895 billion. the boe’s actions showed that the central bank acted in towards policy stimulus, credit policy and provision of lending to non-financial businesses, and macroand micro-prudential policy. monetary policy of the ecb the ecb’s policy differs from the actions of the other two banks – the fr and boe. the difference is related to the reason that the ecb’s main interest rates are at very low level i.e. the bank's starting position is less favourable. as of 18 september 2019, the main refinancing operations’ rate is 0% and the interest rates on the deposit and credit facilities are -0.5% and 0.25%, respectively (figure 1). there can be no possibilities of a continued reduction in the rate on main refinancing operations, as it is currently zero. source: european central bank figure 1. european central bank key interest rates the other two leading central banks have seen higher interest rates, allowing them to be cut as a first response to the pandemic, i.e. the federal reserve and the bank of england initially relying on conventional monetary policy tools. moreover, even the federal reserve is also relying on a decrease in the minimum reserve ratio to 0%, a change announced on 15 march 2020 and effective from 26 march 2020 (fr, 2020c). due to the lack of response options for the european central bank from the set of conventional monetary policy tools, it is turning to the continuation of nonconventional tools. it is noteworthy that the european central bank reacted almost two weeks later to the coming pandemic crisis than the federal reserve. thus, on 12 march 2020, the european central bank for the first time introduced a set of measures consisting of: implementing additional refinancing operations with long terms to provide liquidity to the ea’s financial system; introducing better conditions under the long-term refinancing operations, which will take place in the next one-year period starting in june 2020 and will apply to small and medium-sized enterprises. these better conditions are linked to the setting of an interest rate 0.25 percentage points under the main refinancing operations’ average interest rate (mihaylova-borisova, 2020, pp.189) . a decision on additional asset purchases, of which net amount is to be eur 120 billion by end-december 2020. these purchases are in addition to an existing asset purchase program existing with a monthly volume of eur 20 billion. the following week (18 march 2020), the european central bank decides at an extraordinary meeting to launch a pandemic emergency purchase programme (pepp). by the end-2020, the european central bank sets the value of this programme at eur 750 billion. greek government securities are also included in the pandemic asset purchase programme. the european central bank is gradually increasing the duration and volume of the pandemic programme, initially by a further eur 600 billion in june 2020. at the end of 2020 (on 10 december 2020), the european central bank increases the volume of the programme by a further eur 500 billion to eur 1,850 billion and the end of the programme in march -0,5 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 x iii v ii i i v i x i iv ix ii v ii x ii v x iii v ii i i v i x i iv ix ii v ii x ii v x iii v ii i i v i x i iv 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 deposit facility main refinancing operations marginal lending facility finance, accounting and business analysis 3 (1) 2021 102 2022. at end-april 2020, the european central bank further eases the conditions for long-term refinancing operations by setting the interest rate 50 basis points below that for main refinancing operations. non-targeted pandemic longer-term refinancing operations (peltros) are also launched. following these measures taken in response to the pandemic crisis, the ecb has not changed its policy stance. the unconventional instruments put in place to deal with the pandemic crisis remain in place until october 2021. effectiveness of the monetary policy of the major central banks in order to assess how effective the actions taken by the central banks under consideration have been, one should analyse what is happening to the bank’s objectives. the main objective of all three central banks is to achieve price stability. the european central bank is the furthest away from the pre-pandemic understanding of price stability, reporting inflation of around 1% on an annual basis between the third quarter of 2019 and the first quarter of 2020 (figure 2). the boe and fr achieved about 2% y/y inflation before the pandemic crisis. due to the health crisis, a decline in inflation has been seen in the uk, ea and usa. the deceleration in inflation was prolonged in the euro area, as most eu countries have seen a substantial drop in demand for goods and services and very high infections by end-2020. a gradual increase in inflation began after the second wave of the covid-19. in the period april-june 2021, the uk and the ea achieve price stability. however, the united states sees a more substantial rise in inflation. in the third quarter of 2021, inflation in the uk and ea is 2.7% and 2.8% respectively, while inflation in the united states reaches 5.3%, due to labour shortages and shortages of raw materials for businesses. labour shortages force employers to pay higher wages to retain workers. this, in turn, causes employers to increase the prices of final products, which inevitably affects inflation in the country. source: oecd figure 2. inflation, annual growth rate, % the reduction in inflation in the period april-june 2020 in the countries under consideration is also in line with the economic downturn, which is most significant in the united kingdom due to the significant number of sick people and the need to close the economy. a gradual recovery of the economies follows in the next quarters, with the united kingdom recording the highest economic growth of 5.5% q/q in the period april-june 2021 (figure 3). the united states of america and euro area are still reporting a moderate pace of recovery. finance, accounting and business analysis 3 (1) 2021 103 source: oecd figure 3. gdp growth rate, percentage change, previous period, % in respect to the unemployment rate, the strongest shock to the indicator was observed in the usa (figure 4). in the second quarter of 2020, the unemployment rate jumps dramatically to 13.1% compared to 3.1% in the previous quarter. the most affected sector because of the pandemic is the leisure and hospitality sector, which reports a substantial unemployment rate of over 39%. usa’s unemployment is not increasing at this rate and did not reach these levels even in the aftermath of the international crisis, when in october 2009 unemployment was reported at 10% according to data published by the congressional research center (crc, 2021). such a significant increase in the unemployment rate is not observed in the united kingdom and the euro area, which, despite the closure of the economies, managed to maintain the unemployment rate at least in the period april-june 2020 and assume a slight increase in the next two quarters of 2020. however, in the third quarter of 2021, the highest unemployment rate of 8% of the labour force is seen in the euro area. finance, accounting and business analysis 3 (1) 2021 104 source: oecd figure 4. unemployment rate, % of labour force despite the big shock on unemployment in april-june 2020, the united states of america managed to contain its levels in the very next quarter, and a year later unemployment is even below 6%. the rapid containment of unemployment shows that the federal reserve is responding quickly to the looming risks of a pandemic crisis by taking timely conventional and nonconventional monetary policy tools. it is also no coincidence that the us central bank has decided to continue to raise its holdings of treasury and agency mortgage-backed securities, at least until the central bank's objectives of maximum employment and price stability are more substantially met. in respect to employment rate, the united states of america again had the strongest negative effect on the indicator in april-june 2020 due to the pandemic crisis (figure 5). however, due to timely measure of the federal reserve, the employment rate rose significantly in the quarters after the second wave of the coronavirus pandemic. in the second quarter of 2021, the euro area remained with the lowest employment rates. source: oecd figure 5. employment rate, % of working age population finance, accounting and business analysis 3 (1) 2021 105 in the current environment of a continuing health crisis and rising inflation globally, central banks may need to consider more carefully whether they need to continue some of their non-conventional tools or whether they should suspend or limit some of them, such as asset purchases. conclusions the study presented the unconventional policy tools of the ecb, the federal reserve and the bank of england. a comparative analysis of the measures as well as their performance on key macroeconomic variables such as economic activity, inflation and unemployment rates was carried out. results showed that the federal reserve and the bank of england were in more privileged conditions and terms than the european central bank before the pandemic crisis. their key interest rates were positive and these banks could apply traditional instruments for the monetary policy at the beginning of the crisis before conducting the non-conventional policy instruments. the us, the uk and the ea’s gdp growth rates were negative in the second quarter of 2020, but gradually the countries covered achieved moderately positive growth rates. the united kingdom recovers fastest, registering economic growth of 5.5% in the second quarter of 2021. in terms of price stability, the covered countries and communities managed to achieve their price stability target quickly after the first signals of the pandemic crisis, but now central banks face a new challenge rising inflation. this calls into question whether central banks should continue on the same course of monetary policy or whether they should abandon and remove some of the measures introduced in response to the pandemic crisis, such as the restriction of asset purchases. acknowledgment this work was supported by thе unwe research programme (research grant no10/2021 „economic activity and development of the banking sector in central and eastern europe in the context of contemporary crisis processes“) references mihaylova-borisova 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whereby returns are significant in predicting their future dynamics, as well as, the trading volume. however, trading volume has a very limited power on the future dynamics of stock returns. the study also finds bidirectional causality between trading volume and volatility of returns in malaysia and singapore. in particular, singapore market can be perceived as the focal stock exchange that has cross-market relationships with its other two neighbors. keywords : stock return, volatility, asean address correspondence: e-mail : faroukmusa2013@gmail.com1, musa.ibn@gmail.com2 mailto:faroukmusa2013@gmail.com1 mailto:faroukmusa2013@gmail.com1 m.r. miseman et al. / finance, accounting and business analisys 2 introduction trading volume is an independent variable and can be useful in confirming price action and measuring the strength of a market move (pring, 2006). it is a common knowledge among traders that if price moves up or down, the perceived strength of that move depends on the volume for that period. there are studies that show using volume to analyze stocks (assets) can bolster profits and reduce risk (mitchell, 2011). volume is defined as the number of shares traded. assuming that investors are rational, the sale and purchase of assets are mainly driven by news and information. two of the most widely cited theories (mixture of distribution hypothesis and sequential information arrival hypothesis) both contend that trading volume is a variable that captures information and hence, factor-in investors’ collective reaction to news into the stock price (asghar, 2011). after all, what moves prices is the relative enthusiasm of buyers or sellers in response to given information (pring, 2006). granger and morgenstern (1963) was one of the first authors who showed how investors could extract information about the future payoff of a security from its price. numerous studies seek to extend the model by incorporating both price and trading volume into the equation. for example, several empirical studies support the idea that trading volume contains information about future returns. such popular landmark studies include epps and epps (1976), copeland (1976), karpoff (1987), lamoureux and lastrapes (1990), gallant, rossi and tauchen (1992), campbell, grossman and wang (1993), blume, easley and o’hara (1994), wang (1994) and lee and rui (2002). more attention had been drawn to tap on this issue since karpoff (1987) pointed out four importance of investigating the relationship between trading volume and security’s prices. according to him, such study is important: (1) to provide insights into the structure of financial markets; (2) for event study; (3) for the debate over the empirical distribution of speculative prices; and (4) for research into futures markets. besides uncovering the relation between price and volume, the price volatility of financial asset is the key for risk management, which serves as the basis for investing decisions and indicators of the healthiness of financial market (dan, yuan & zhong, 2013). therefore, it is also important to study how trading volume impacts volatility of return, besides price changes. this study seeks to draw the attention towards emerging markets, particularly southeast asia due to several factors. in the past decades, a large number of countries have reformed their markets to be more open to foreign investment, transparent and thoroughly regulated. emerging markets especially in southeast asia have received huge capital inflows and become an important alternative for investors who seek for international diversification. according to michelfelder and pandya (2005), the correlations of equity returns between emerging and developed countries are low. the information flow in the markets is also not equivalent due to the significant institutional differences. hence, it is possible to reduce portfolio risk by participating in emerging markets. as a matter of proof, harvey (1995) showed that adding portfolio of emerging markets to a diversified developed markets portfolio would reduce total risk by six percentage points. hence, these findings demonstrate that the emerging markets should become important destinations for international portfolio diversification; thus requiring more theoretical and empirical understanding. as the intended result, this study could provide a closed solution where investors may possibly infer information about the future trading signals from (1) the market return, (2) return volatility and (3) trading volume. besides, crosscountry comparison and inter-market influence will also be learnt which will help to infer decisions on regional portfolio diversification. problem statement in addition to that, most from the already few studies conducted in emerging markets (such as choudhry, 1996; sabri, 2004; and michelfelder and pandya, 2005) contend that there are differences in the volume-return-volatility link between mature and emerging markets. therefore, one cannot imply the results found in the developed markets to hold in the emerging markets. due to their varying characteristics, isolated studies have to be conducted in the emerging markets to understand the behavior of volume as an agent of information flow towards stock returns and volatility in their own unique landscape. the body of literature lacks studies that look into the dynamic relationships of volume-returnvolatility by way of cross-country comparison. this issue is considered as imperative based on the “contagion theory” of “spillover effect” proposed by king and wadhani (1990) in which traders in one market may draw inferences about stock price in their own market by observing price movements in another. for example, lee and rui (2002) find that the us trading volume contains predictive power for uk and japanese trading volumes whereas choi, yoon and kang (2013) find evidence of causality between volume, return and volatility in japan, korea, hong kong, and china. the research questions for this study are: i. are there any contemporaneous and dynamic cause-and-effect relationships between trading volume and stock market returns in the southeast asian equity markets? ii. does trading volume influence return volatility of the concerned stock indices? m.r. miseman et al. / finance, accounting and business analisys 3 iii. is the stock market return and return volatility in one market influenced by the volume of another market in southeast asia? the main objectives of this study are to investigate the relationships between trading volume, stock market returns and returns volatility in southeast asian equity markets. the specific objectives are: i. to examine the contemporaneous and dynamic causal relationships between trading volume and stock indices returns in each of the southeast asian markets. ii. to determine the dynamic relationship between trading volume and return volatility in each of the southeast asian stock markets. iii. to investigate any cross-market influence between trading volume to stock returns and trading volume to return volatility in the region. literature review efficient market hypothesis (emh) describes the behavior of prices in stock markets (park & irwin, 2007). according to jensen (1978), an efficient market is “the one where it is impossible to make economic profits by trading based on the respective information”. the emh theory pertains to this study since the analysis of the predictive power of trading volume is basically an effort to find ways to predict the future prices (and return) and to beat the market be making a proactive strategy in investment. thus, the researcher is implying that the stock markets in southeast asia might be imperfect and not fully efficient; or showing a weak or semistrong emh. the dynamics between trading volume, stock returns and the volatility of stock market returns can be explained by two basic approaches. the first group of approach suggests that differences in investor opinions and expectations are the source of changes in trading volume, price change and volatility (admati & pfleiderer, 1988; harris & raviv, 1993; wang, 1994; he & wang, 1995). the second group of approach suggests that it is the manner in which information arrives at the market which determines the relationship between the three variables. the two most cited theories under the second group are the sequential information arrival hypothesis (siah) and the mixture of distribution hypothesis (mdh). copeland (1976) proposes the siah, which is, later extended by morse (1980) and jennings, starks and fellingham (1981). according to the theory, a positive bidirectional causality relationship exists between absolute values of price changes and volume. siah assumes that all traders receive new information in a sequence. in other words, new information that reaches the market does not reach all participants simultaneously, but to one at a time. as information is distributed sequentially from one group to another, traders revise their positions every time new information arrives and the final equilibrium is only established after a sequence of transitional equilibriums. therefore, due to the series of multidirectional information flow, siah suggests that there should be a bidirectional lead-lag relation between volume and volatility. lagged values of volume may contain the information that is useful to predict current price returns and, vice versa (celik, 2013). in contrary to that, the mixture of distribution models (mdh) is championed by clark (1973), epps and epps (1976), and harris (1986). the theory states that price changes and trading volume relations occur due to a mixture of distribution. epps and epps (1976) use trading volume to measure the level of market disagreement as traders revise their reservation prices based on the arrival of new information into the market. as market disagreement widens, the resulting revisions in reservation price, in turn, will increase the level of trading volume. since all traders simultaneously receive new information and that the price and volume change simultaneously, hence it should be impossible to use past return data to forecast volume. relationship between trading volume and stock market returns blume et al. (1994) investigate and develop a model that links trading volume to stock price behavior. in their model, the aggregate supply is fixed, while the demand side changes as traders receive various signals about fundamental values of assets. in their analysis, trading volume indicates the quality or precision of information in past price movements. they suggest that investors who consider some measurement of past volume in their technical analysis can obtain additional profits and perform better than those who only rely on price measures. podobnik, horvatic, petersen and stanley (2009) investigate the possible relations between the two variables by analyzing the properties of the logarithmic volume-price changes. using de-trended cross-correlation analysis on daily data of the new york stock exchange (nyse), standard and poor’s (s&p) 500 index and 28 other financial indices all around the world, they propose that the underlying processes for logarithmic price change and logarithmic volume change are m.r. miseman et al. / finance, accounting and business analisys 4 similar. smirlock and starks (1988) applied the granger causality technique to examine the lagged relationship between absolute price changes and volume in equity markets and investigate the implications of this relationship for the microstructure of these markets. their results indicate that there is a significant unidirectional causal relationship running from absolute price changes to volume at the firm level. in addition, bauer and nieuwland (1995) investigate this issue by using daily stock return and volumes for 30 stocks listed in frankfurt stock market. however, they find that trading volume has exploratory power to predict stock returns and is valuable as a proxy for information arrival. campbell et al. (1993) present a model, which postulates that price changes accompanied by high volume tend to be reversed, while prices changes on days with low volume tend to stay in the current direction. blume et al. (1994) finds that volume is a valuable information in technical analysis. this is also supported by wang (1994), shows that volume may provide information about future returns via a model based on information asymmetry. chordia and swaminathan (2000) use var tests with pairs of high and low volume portfolio return to analyze daily and weekly stock return as well as average trading volume covering long period from 1963 to 1996. their findings show that daily or weekly returns of stocks with high volume lead daily or weekly return of stocks with low volume. there is a tendency for high volume stock to respond rapidly and low volume stock to respond slowly to new market information. pisedtasalasai and gunasekarage (2007) examine the causal and dynamic relations among stock returns, return volatility and trading volume for five emerging markets in the region, which are indonesia, malaysia, singapore, thailand and the philippines. they find strong evidence of asymmetry in the relationship between the stock returns and trading volume; whereby there is significant causality running from stock returns to trading volume for indonesia, malaysia, singapore and thailand while significant causal effect from trading volume to stock returns was detected only for singapore. in the philippines however, none of such causality exist. however, there are researchers who find bidirectional relationship between the two variables. ratner and leal (2001) examine the latin american and asian developing financial markets and find a positive contemporaneous relation between return and volume in these countries except india. moosa and al-loughani (1995) studied four emerging asian stock markets (malaysia, the philippines, singapore, and thailand), they also find bi-directional causality between volume and returns. some conclusions can be drawn from the literatures. firstly, these past studied have found some relationship between trading volume and stock price changes (returns), despite bearing different magnitudes in various markets. nevertheless, most studies lend support that price changes (return) may have positive contemporaneous relationship with trading volume. secondly, the studies that look on the causality relationship aspect may have inconclusive evidence. while the studies have found causality running between trading volume and stock returns, the direction can be either unior bi-directional. therefore, stock returns may positively cause trading volume, but still, the opposite might not necessarily hold true. this relation will obtain further evidence from this study. relationship between trading volume and volatility of stock returns in a dynamic content, an important issue would be whether information about trading volume is useful in improving forecasts of price changes (returns) and the volatility of the return. in terms of the causal relation between volume and volatility, lee and rui (2002) examine the two variables in and across three advanced markets (new york, london and tokyo stock exchange). upon employing vector autoregressive (var) analysis, they fail to prove the causal relationship between volume and return in the same market. however, they find evidences for inter-related positive feedback between trading volume and stock return among the three markets. their findings show causal relationship running from the new york market variables (trading volume, stock return and return volatility) onto london and tokyo markets variables. these findings lend support for spillover effect where information from one market is transmitted to another, thereby affecting its returns and volatility. pisedtasalasai and gunasekarage (2007) examine relations among stock returns, return volatility and trading volume for five emerging markets in southeast asia. the garch test yield evidence that the trading volume of some markets seems to contain information that is useful in predicting future dynamics of return volatility. similarly, in kuala lumpur stock exchange (klse), ahmed, hassan and nasir (2005) have concluded that current volatility can be explained by past volatility that tends to persist over time. these findings are also consistent with those of najand and yung (1991), foster (1995) and huang and yang (2001) but in contrary to the earlier findings by lamoureux and lastrapes (1990) in the developed markets. subsequently, using data from the same market (klse), tan and tay (2011) employ garch model to test for contemporaneous correlation between trading volumes and return volatility of the klci index. however, they find that including trading volume in the conditional variance (return volatility) equation leads to a reduction of volatility persistence, which is inconsistent with ahmed et al. (2005). in the european market, naka and oral (2013) examines volatility of stock returns and trading volume by m.r. miseman et al. / finance, accounting and business analisys 5 employing garch and tgarch models in istanbul stock exchange national-100 index. the results suggest that stable distributions clearly outperform the gaussian case. the results also indicate that the trading volume significantly contributes to the volatility, and indicate the strong leverage effects on volatility in the market. again, this is also consistent with the results found by other researchers in other emerging markets. it is quite clear that studies have shown that the relationship between trading volume and volatility will most probably be a positive one. this finding is quite consistently obtained from many emerging and developed markets. it is also possible to obtain bidirectional causality relationship from the two variables, even though it is not the motive of the study. nevertheless, one may conjecture that the same findings may hold in the southeast asian equity markets; hence, the fourth hypothesis is developed based on this notion. review on cross-country, inter-variable spillover effects from the view of international capital asset pricing model, the findings that stock returns in different countries are correlated to different degree is not a new phenomenon. in an attempt to explain why, king and wadhani (1990) proposed a “contagion theory”, where they proposed that a “mistake’ in one market is transmitted to another. traders in one market draw inferences about shocks to their local stock price fundamentals by observing price movements in other markets. the study on inter-market relationship is valuable to the literature especially in today’s environment where information is widely accessible and national markets are becoming increasingly competitive. according to lee and rui (2012), there is some overlapping trading period and multiple listings of the same securities across different markets. moreover, many of the markets within the same region often carry the same characteristics such as level of economic development, socio-economic advancement and time zone. therefore, studying international markets interrelationship may allow researchers to learn more from the continuous trading and uninterrupted transmission of information, particularly in their effect towards volume, stock prices and return volatility. in this sense, some studies on national equity markets have focused on the correlation of return between different markets. one of the earliest studies, agmon (1972, 1974) finds that these return correlations are insignificant or unstable. a later study by jaffe and westerfield (1985) find contradictory result, where the correlations among national markets are positive and significant. similarly, eun and shim (1989) find significant cross-country interactions using vector autoregression (var) technique. they also conclude that the us market has an influential role against the rest of the markets under study. copeland and copeland (1998) go deeper into the issue to explore the contemporaneous and lead-lag relations of market returns and find a strong contemporaneous relationship among regional exchanges that open at the same time. consistent with eun and shim (1989), they also reveal that the u.s. leads the european and the pacific markets by one day. these findings all lend support to the view that financial market variable in various countries may be interconnected to some extent. besides the co-movement of returns among markets, researchers are also interested to determine whether there are any spillover effects in volatility among the regional markets. for example, hamao, masulis and ng (1990) found spillover effects from the us and the uk stock markets to the japanese market. they contend that the spillover effect of information by trading volume of one country to volume in another is a rare subject of discussion in the literature and call for more empirical studies. lee and rui (2002) find a positive feedback relationship between trading volume and return volatility in all three markets. they find that the us trading volume contains predictive power for uk and japanese volumes. michelfelder and pandya (2005) compare the volatility of stock returns and predictability in two mature markets (japan and united states) against seven emerging equity markets (india, hong kong, south korea, malaysia, singapore and taiwan). using egarch, the study finds that emerging markets have higher volatility but lower persistence of shocks as compared to the two mature markets. they also have greater impact on volatility of stock returns during non-trading days than mature markets. in addition, the var test shows that us shocks are rapidly transmitted to the rest of the world, implying dependency of emerging markets returns towards the returns on mature markets. choi et al. (2013) provide evidence on the domestic and cross-country relationships between trading volume, return and volatility in four asian stock markets. the study employs granger causality and garch to model the relationship and finds evidence that financial market variables across the countries are interrelated. one of the principal discoveries is that hong kong financial market variables, in particular trading volume, have extensive predictive power for the variables of japan and korea. japanese stock market, on the other hand, is substantially influenced by variables of korea, hong kong, and china. several conclusions can be made from the literatures discussed above. firstly, multiple researchers have found the existence of inter-relationships between financial market variables across countries. secondly, trading volume may have the power to predict return and volatility in other markets. thirdly, the number of studies in this field is still quite scarce, and almost all from the already few literatures are concentrating on mature markets. it would be interesting to replicate the studies into financial markets in other parts of the m.r. miseman et al. / finance, accounting and business analisys 6 world. research methodology two conceptual frameworks are henceforth presented. figure 1 presents the framework for the domestic cases, where separate estimations will take place for each country’s financial market variables of concern. on the other hand, figure 2 presents the framework for cross-country relationships, where the study seeks to test whether trading volume in one market of concern has predictive power on stock returns and return volatility in another two markets. independent variable dependent variables figure 1 : conceptual framework 1 (domestic) figure 2 : conceptual framework 2 (cross-country) there are two dependent variables in this study, which are stock market returns and volatility of the returns. stock market return is defined as the rate of change (gain or lose) in the price of the concerned stock market indices. the time-series daily index returns are calculated using the logarithmic of daily difference of the market index value as follows: stock returns = ln (pt– pt-1) *100 where pt– pt-1 are closing daily prices of the stock market indices at time t and t-1. this definition and derivation of stock market return are the same in both domestic and cross-country cases. volatility refers to the rate of fluctuation in the share prices, which in this study is derived from time series of past market index prices. being measured using variance, volatility is a measure for deviation of price of over time. in other words, it refers to the amount of uncertainty or risk about the size of changes in the stock’s value. a higher volatility means that a stock’s (index) value can potentially be spread out over a larger range. this means that the price can change dramatically over a short time period in either direction. a lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. the measures of stock return volatility in both domestic and cross-country cases are the same. the independent variable of concern in this study is trading volume, which is defined as the number of shares that changed hand during a particular trading period. this definition of trading volume is following chen, firth and rui (2001) where volume is regarded as a measure of how much of a given financial asset (in this case; stocks) has been traded in a given period of time. in this study, trading volume be expressed in a natural logarithm form in order to ensure its stationarity. based on the discussion from the literatures, these following hypotheses are to be tested: h1: there is positive contemporaneous relationship between trading volume and stock market returns in the southeast asian equity markets. h2: there are causal relationships between trading volume and stock market returns in the southeast asian equity markets. h3: there is a relationship between trading volume and stock market volatility in the southeast asian equity trading volume stock returns return volatility trading volume in country a stock returns in country b return volatility in country b m.r. miseman et al. / finance, accounting and business analisys 7 markets. h4: there are inter-market causality relationships between trading volume and stock market returns among the southeast asian stock markets. h5: there are inter-market causality relationships between trading volume and stock market volatility among the southeast asian stock markets. data collection methods in a research involving stock market performance, profitability, volatility and such, previous researchers have stressed on the importance of using the highest-frequency data as possible. it is because the stock market often shows high volatility that can be best captured by the use of intraday or daily data. hence, this study will employ daily time-series data on stock index prices and trading volume from the three southeast asian stock markets (malaysia, indonesia and singapore). each country is represented by only one broad-based index, which captures the overall performance of the stocks listed in them. the indices are ftse-bursa malaysia kuala lumpur composite index (klci) for malaysia, the ftse straits times index (sti) for singapore and the jakarta stock exchange composite index (jci) for indonesia. all three indices are broad-based market capitalization weighted index of a specified number of constituent stocks designed to measure the overall performance of the respective stock exchanges. this study requires raw data on the daily closing prices and trading volume for the respective stock indices. the necessary datasets are sourced from datastream database and cross-compared or verified using data coming from yahoo finance website. the period extends from january 2000 until the end of december 2014, totaling of 15 years and span over approximately 3,600 observations per country. for the purpose of cross-country analysis, the data is initially screened where figures on dates that are not matched by both markets in comparison will be eliminated. the data had undergone a series of tests. initially, some preliminary steps are taken onto the data to test for optimum parameters or fitness of the data. the steps are as follows: trend and unit root tests previous studies such as chen et al. (2001) document evidence of both linear and non-linear trends in time series of trading volume information. the granger causality test that are employed in this study assumes that the variables are stationary. therefore, it is important to test for stationarity of the stock return and volume data. following lee and rui (2002), the researcher examined the linear and non-linear time trend in trading volume by estimating the following regression: vt = α + βt + χt2 + ɛt (1) where, vt is the raw trading volume data while t and t2, respectively are linear and quadratic time trends. to test for a unit root (or the difference stationarity process), the researcher had employed both augmented dickey-fuller (adf) test proposed by dickey and fuller (1979) and the phillip-perron (pp) test proposed by phillip and perron (1988). the tests are undertaken onto both the returns and the detrended trading volume data. the model estimation is as follows: a) augmented dickey-fuller regression ∆xt = ρ0 + ρxt-1 + ∑ 𝛿 ∆𝑥𝑡−1 𝑛 𝑖−1 (2) b) phillip-perron regression xt = α0 + αxt-1 + µt (3) the differences between the two unit root tests are in terms of their treatment of any “nuisance” serial correlation. the pp test tends to be more robust to a wide range of serial correlation and time-dependent heteroskedasticity, thus is employed for robustness check. in these tests, the null hypotheses stating that the series are nonstationary: ρ = 0 and α = 1, is interpreted based on the reading on t-statistics. contemporaneous volume – return relationships the tests underlined in this section are dedicated to examine the first hypothesis of a positive contemporaneous relationship between trading volume and stock returns. in the past, many researchers employed various techniques to test such relationships. following lee and rui (2002), the relationships are tested using an instrumental variable estimator as a newey-west regression estimator to avoid problem of simultaneity bias. another advantage of the technique is that it produces heteroskedasticity-consistent estimates by correcting the covariance matrix of the consistent instrumental estimator. in addition to the newey-west regression model, a garch model is incorporated to include heteroskedasticity and can be extended to include other effects on conditional variances. this model offers considerable flexibility in robust modeling of stock returns, which is done upon obtaining positive contemporaneous results between trading volume and stock returns from the newey-west regression. m.r. miseman et al. / finance, accounting and business analisys 8 therefore, to test whether the positive contemporaneous relationship still exist after controlling for nonnormality of error distribution, the following garch (1,1) model will be estimated: rt = b0 + b1v1 + ɛt, ɛt | (ɛt-1, ɛt-2, …) ~n(0, ht), (4) ht = a0 + a1ɛ2 t-1 + a2ht-1 dynamic causal volume – return – volatility relationships the techniques to be discussed under this section seek to test the second and fourth hypotheses of the causal relationships between trading volume, stock market returns and volatility of returns; in each of the southeast asian equity markets and by way of cross-country relations. thus, these tests apply in both domestic and cross-country cases. the only difference between the two is that in the former, the variables in the same country are regressed, whereas the latter involve variables from a pair of different countries. as a bidirectional test, the procedure tests whether trading volume precedes stock returns, vice versa, which is the main agenda behind granger’s (1969) test of causality. in this test, if an event ‘x’ occurs before an event ‘y’, then it can be concluded that ‘x’ causes ‘y’. if prediction of ‘y’ using past ‘x’ is more accurate than the prediction without using past ‘x’ in the mean square error sense, ‘x’ is said to granger-cause ‘y’. the following bivariate autoregression is used to test for causality between each pair among trading volume, stock returns and returns’ volatility: 𝑥𝑡 = 𝛼0 + ∑ 𝛼𝑖𝑥𝑡−1 + ∑ 𝛽𝑖𝑦𝑡−1 + 휀𝑡, 𝑛 𝑖=1 𝑚 𝑖=1 𝑦𝑡 = 𝛾0 + ∑ 𝛾𝑖𝑥𝑡−1 + ∑ 𝛿𝑦𝑡−1 + η𝑡, 𝑛 𝑖=1 𝑚 𝑖=1 (5) in the first causality equation, if after the regression, beta (βi) coefficients are statistically significant, it can be said that unidirectional causality relationship exists between the two variables (i.e.: return cause volume). the significance of the relationship will be determined based on the accompanying p-value of t-statistic, where a t-stat reading that rejects the hypothesis that βi = 0 for all ‘i’ will mean that return causes trading volume. similarly, in the second equation, if causality runs from volume to returns, then the 𝛾i coefficient will be mutually different from zero. if both βi and γi are statistically different from zero, then it will be concluded that there is a feedback relation (bidirectional causality) between returns and trading volume. volatility modeling the methods described here seek to achieve the fifth objective. many methods are developed by the past researchers to formulate a measure of volatility because of a special feature of volatility that it is not directly observable. this study applies a garch (1,1) model with modification to include a student’s tdistribution as an alternative to the standard gaussian distribution. student’s t-distributions is a rich class of probability distributions that allows skewness and heavy tails, which are apparently present in economics and financial data especially stock returns. to support that, naka and oral (2013) find that the usage of garch and tgarch models with stable distribution assumption provide better goodness of fit over the traditional gaussian models. therefore, the model specification will be based on the one set by naka and oral (2013). the researcher imposes stability conditions to estimate the garch model so that these processes will have strictly stationary solutions. the estimated model is then fitted into the following equation: 𝜎2 𝑡 = 𝛾 + 𝛼𝑈2 𝑡−1 + 𝛽𝜎2 𝑡−1 + 휀 (6) where; γ is the constant coefficient representing long-term volatility, αis the coefficient for 𝑈2 𝑡−1which is the lagged squared return and β is the coefficient for𝜎2 𝑡−1 which represents the lagged variance. the best fit for the model in terms of lag length is determined using akaike information criterion (aic) and log likelihood (log ll). a model is considered best fitted when it has a small aic and high log ll. on the significance of variables, the garch estimation result will be interpreted based on the t-statistics to determine whether the three components of garch (long-term volatility, lagged squared return and lagged variance) do have significant impact on the overall volatility (variance) of the stock return. data analysis and findings unit root tests p-values malaysia singapore indonesia adf phillipperron adf phillipperron adf phillipperron index return 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 trading volume 1.0000 0.0000 1.0000 0.0000 1.0000 0.0000 logged trading volume 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 m.r. miseman et al. / finance, accounting and business analisys 9 table 1: results of unit root test the unit root test is conducted to test for stationarity of the data. based on table 1 above, the index return data is stationary in original form under both augmented dickey-fuller (adf) and phillip-perron (pp) measures as 0.0000 p-values are recorded for all countries. this observation can be seen more clearly from the line charts below (figure 3), where the stock returns for all countries do not exhibit any upward or downward trends as the plots move sideways. therefore, the dataset is stationary, and there is no unit root; as suggested by the adf and pp statistics. this heteroskedastic property is as expected from any financial return series. malaysia singapore indonesia figure 3 : line charts for stock market return however, problems were detected when it comes to trading volumes as all of them fail to record significant p-values under adf measure. this fact is supported by the figure 4 as the volume data in their original form, do exhibit observable patterns and are unstable across time. the trading volumes tend to spike during a certain period and remain low during another, which suggests evidence for volatility clustering. malaysia singapore indonesia figure 4 : line charts for trading volume (original form) to circumvent this problem, the volume data is transformed into logged form to provide for more consistency and stability. this resulted in stationary data as evidenced by the 0.0000 p-values under both adf and pp statistics in table 1. figure 5 below supports this point, as the logged trading volume data plot is now behaving in more stable and stationary manner. thus, the data is now fit to be used for the subsequent data analysis processes. -1 5 -1 0 -5 0 5 1 0 1 5 r e tu rn _ k l c i 01jan2000 01jan2005 01jan2010 01jan2015 daily -1 0 -5 0 5 1 0 r e tu rn _ s ti 01jan2000 01jan2005 01jan2010 01jan2015 daily -1 0 -5 0 5 1 0 r e tu rn _ jc i 01jan2000 01jan2005 01jan2010 01jan2015 daily 0 2 0 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 0 v o l_ k l c i 01jan2000 01jan2005 01jan2010 01jan2015 daily 0 2 0 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 v o l_ s ti 01jan2000 01jan2005 01jan2010 01jan2015 daily 0 2 .0 0 0 e + 0 9 4 .0 0 0 e + 0 9 6 .0 0 0 e + 0 9 8 .0 0 0 e + 0 9 1 .0 0 0 e + 1 0 v o l_ jc i 01jan2000 01jan2005 01jan2010 01jan2015 daily m.r. miseman et al. / finance, accounting and business analisys 10 malaysia singapore indonesia figure 5 : line charts for trading volume (logged form) contemporaneous relationships the following tests are conducted for the first hypothesis. firstly, a newey-west regression technique is applied to take into consideration of the heteroskedastic nature of the stock return data. the newey-west regression is performed with zero lag, in order to consider only the contemporaneous (current-time) relationships between trading volume to stock return, instead of considering the effect of past trading volume in predicting the dependent variable. the results are presented in table 2: malaysia singapore indonesia number of observations 3622 3028 3345 f-stat 4.66 3.68 4.10 prob. > f-stat 0.0310 0.0552 0.0430 constant coefficient (p-value) -1.0666 (0.035) -1.2467 (0.057) -0.7692 (0.064) logged trading volume’s coefficient (p-value) 0.0598 (0.031) 0.6667 (0.055) 0.0436 (0.043) table 2 : newey-west regression result for contemporaneous relationship the f-statistic indicates that the model for malaysia and indonesia are well-specified; which is supported by the significant p-values (0.031 for malaysia and 0.043 for indonesia). singapore, however, fail to make the cut as the recorded p-value of f-stat is 0.0552, slightly higher than 0.05 significance level. however, this value is still acceptable since it is not too far from 0.05. in terms of individual significance of the independent variable, the trading volume is found to be significantly related to stock returns in malaysia and indonesia in 95% confidence interval as the countries recorded p-values of t-statistics of 0.031 and 0.043 respectively. both p-values are significantly lower than 0.05, hence the null hypothesis for both countries are successfully rejected. thus, it can be said that trading volumes have positive predictive power over stock returns in both of the two countries. since trading volumes in all countries had shown significant positive association to the stock market return, the analysis is taken a bit further to consider the effects of conditional variances and establish more rigor into the findings. this is undertaken by running the following garch (1,1) estimations. garch (1,1) model on top of the newey-west regression, garch (1,1) test for contemporaneous relationships is undertaken in order to include other effects on conditional variances into the estimation. this model has the advantage of offering considerable flexibility in robust modeling of stock returns, hence is used to complement the earlier findings. the results are presented in table 3 below: z-statistics malaysia singapore indonesia constant (θ) (p-values) -2.195087 (0.0000) -1.887198 (0.0001) -0.3355161 (0.3250) trading volume (ω) (p-values) 0.122139 (0.0000) 0.1023116 (0.0250) 0.024855 (0.1600) table 3 : garch (1,1) regression result for contemporaneous relationship 1 6 1 7 1 8 1 9 2 0 2 1 lv o l_ k lc i 01jan1960 01jan1962 01jan1964 01jan1966 01jan1968 01jan1970 date_code 1 6 1 7 1 8 1 9 2 0 2 1 lv o l_ s ti 01jan2000 01jan2005 01jan2010 01jan2015 daily 1 6 1 8 2 0 2 2 2 4 lv o l_ jc i 01jan2000 01jan2005 01jan2010 01jan2015 daily m.r. miseman et al. / finance, accounting and business analisys 11 trading volume is found to have a positive contemporaneous relationship to the malaysian stock market return that is similar to the results found from the newey-west regression. the relationship is significant at 1%, since a p-value of 0.000 is obtained and hence the null hypothesis is rejected. for the sake of forecasting, the 0.1221 omega coefficient carries the implication that any 1% increase in trading volume will increase the malaysian stock market return by 0.1221%, ceteris paribus. for singapore, the result shows that a positive dynamic relationship does exist between trading volume and stock market return in the market, also corroborating to the results found in newey-west regression earlier. the null hypothesis is successfully rejected as the calculated p-value is significant at 0.025. the elasticity coefficients imply that on average, any 1% increase in trading volume will add to the stock index return by 0.10%, all else being equal. nevertheless, the effect is minimal since the value of coefficient is quite small. in contrary to the previous results, the indonesian market, however, exhibit no significant contemporaneous relationship between trading volume and stock market as the independent variable failed to register a significant p-value (p = 0.16 > 0.05). unlike the other two markets, the null hypothesis for the indonesian case is failed to be rejected and hence, slightly contradictory to the findings in newey-west technique. this also indicates the presence of heteroskedasticity in the indonesian dataset, which is greatly constrained and penalized by the garch (1,1) method. hence, several overall conclusions can be drawn out of the findings from these two techniques. firstly, trading volume in all markets are significant in explaining stock market returns under both methods, with exception to the indonesian case. secondly, it can be generally deduced that trading volume has positive relationship with stock market returns, hence, an increase in trading volume will increase stock return. thirdly, the effect or elasticity of return to changes in trading volume is very small; and fourthly, there has to be a large change in trading volume before it can result in moderate level of change in stock returns. these findings will be further elaborated in chapter five, alongside with other important findings of the study. granger causality tests this series of tests are intended to check on the validity of hypotheses number two and three. lag length for each granger causality estimates were obtained from the regression. the lag is chosen based on the aic, hqic and sbic, depending on which lag received the most asterisks from the three measures. to simplify the task, decision is also made based on the p-value of each lag, where the highest lag with significant pvalue (less than 0.05) is chosen. table 4 below summarizes the granger causality test results for each pairs of volume and returns. panel 1 highlights the causality running from trading volumes to stock returns and vice versa within the same markets while panel 2 of table 4 contains the results of causality among and between the two variables in different markets. m.r. miseman et al. / finance, accounting and business analisys 12 null hypotheses obs p> chi-sq lags r-sq prob. > f – stat. panel 1: between local trading volumes and returns for each countries lvol_klci does not g-cause return_klci 2,489 0.0000 10 0.0245 0.228 return_klci does not gcause lvol_klci 0.0000 0.8280 0.056* lvol_sti does not g-cause return_sti 2662 0.0221 6 0.6828 0.344 return_sti does not gcause lvol_sti 0.0000 0.0088 0.368 lvol_jci does not g-cause return_jci 2104 0.0000 10 0.8550 0.387 return_jci does not g-cause lvol_jci 0.0000 0.0295 0.502 panel 2: between cross-country trading volumes and returns lvol_klci does not g-cause return_sti 2227 0.0000 10 0.8207 0.847 return_sti does not gcause lvol_klci 0.0032 0.0183 0.168 lvol_klci does not g-cause return_jci 2001 0.0000 8 0.8344 0.848 return_jci does not g-cause lvol_klci 0.0634 0.0125 0.850 lvol_sti does not g-cause return_klci 1454 0.0000 15 0.6867 0.025** return_klci does not g-cause lvol_sti 0.0000 0.0753 0.139 lvol_sti does not g-cause return_jci 1904 0.0000 7 0.6886 0.226 return_jci does not g-cause lvol_sti 0.0014 0.0181 0.841 lvol_jci does not g-cause return_klci 1595 0.0000 10 0.8615 0.666 return_klci does not g-cause lvol_jci 0.0000 0.0351 0.293 lvol_jci does not g-cause return_sti 1001 0.0000 19 0.8769 0.051** return_sti does not g-cause lvol_jci 0.0000 0.0918 0.418 ***represents the causal relationship being significant at 1%. **represents the causal relationship being significant at 5%. *represents the causal relationship being significant at 10%. table 4: pairwise granger causality tests (between volume and return) in terms of causality running between trading volumes in each country and the stock market returns, it can be concluded that not much relationship is going on. in malaysia, the trading volume is not significant in causing the stock market return as the p-value is recorded at 0.228, higher than 0.05 significance level. however, the klci market return is significant at 10% level in granger-causing its trading volume, as a pvalue of 0.056 is recorded.in sum, there is a significant unidirectional causality relationship running from return to volume hence the null hypothesis that return does not granger cause volume is successfully rejected, while the opposite null hypothesis is failed to be rejected. looking at the results in panel 2, the malaysian market trading volume also fails to granger-cause stock returns in singapore and indonesia. these are evident by the insignificant p-values of 0.847 and 0.848 recorded in each markets respectively. the null hypotheses that trading volume in malaysia granger-cause stock market return in singapore and indonesia are thus, failed to be rejected. the opposite is also holding true. the stock market returns in both singapore and indonesia also found not to significantly grangercause the malaysian trading volume, as they both recorded p-values of 0.168 and 0.850 respectively. hence, both of the null hypothesis associating stock market returns in singapore and indonesia to granger-cause trading volume in malaysia failed to be rejected. in conclusion, the malaysian trading volume has no significant causality relationship with all of the malaysian, singapore and indonesian stock market returns. in the opposite way, there is also no causality from singapore and indonesian stock returns to the malaysian market trading volume. the malaysian stock return is the only variable found as significant in grangercausing its own trading volume, hence suggesting only a unidirectional causality relationship. for singapore (refer to panel 1), no causality is found between trading volume and stock return. this is m.r. miseman et al. / finance, accounting and business analisys 13 because both causality tests running from trading volume to stock return, vice versa recorded insignificant p-value readings of 0.344 and 0.368 respectively. however, in panel 2, there is an evidence that the singaporean trading volume causes foreign stock returns, as a p-value of 0.025 is recorded from singaporean trading volume to the return of klci. this pair is significant at 5% level, which also means that the null hypothesis is successfully rejected. the trading volume in singapore may cause changes in stock market returns in malaysia, nevertheless, the opposite causality is insignificant at p-value of 0.139. lastly, there is also no causality between singaporean trading volume and indonesian stock market return. insignificant pvalues of 0.226 and 0.841 are recorded for the volume-return and return-volume pairs respectively. in conclusion, trading volume in singapore is only related to the malaysian stock return (with unidirectional causality); while no stock returns in any country can granger-cause the singaporean trading volume. for the case of indonesian trading volume, the variable is found not to granger-cause the jakarta composite index, as a p-value of 0.387 is obtained for the pair. the same goes to the other way around, as it recorded an insignificant p-value of 0.502. both of the null hypothesis are thus, failed to be rejected. trading volume in indonesia is also found not to be having any granger-causality relationship with the malaysian stock market return as p-values of 0.666 is recorded for causality from volume to return and 0.293 for return to volume, thus both null hypotheses are failed to be rejected. however, trading volume of the indonesian market is found to granger-cause the sti return at roughly 5% level, successfully rejecting the null hypothesis. on the other way around, singapore stock market return does not granger-cause indonesian trading volume, based on the 0.418 p-value thus, the null hypothesis is failed to be rejected. in conclusion, just like singapore trading volume, the indonesian volume does not granger-cause its own stock market return, but is associated to the returns in other stock markets instead. in sum, there are only three significant pairs observed from the causality analysis thus far. it is interesting to note that (1) the malaysian returns can granger-cause its own volume but not the other way around; (2) the singapore trading volume can granger-cause klci return; and (3) indonesian trading volume has a causality relationship with sti returns. some inter-market relationships can be observed from the results as trading volume in one country may explain the variation of returns in other markets. to continue with the analysis, table 5 below shows the results of pairwise granger causality tests among and between each countries’ trading volume. null hypotheses: obs prob. > chi-sq lags r-sq prob. > f – stat. lvol_sti does not g-cause lvol_klci 1106 0.000 20 0.6826 0.000*** lvol_klci does not g-cause lvol_sti 0.000 0.7935 0.062* lvol_jci does not g-cause lvol_klci 1432 0.000 11 0.8593 0.400 lvol_klci does not granger cause lvol_jci 0.000 0.8318 0.206 lvol_jci does not g-cause lvol_sti 1155 0.000 13 0.7625 0.000*** lvol_sti does not g-cause lvol_jci 0.000 0.6490 0.000*** ***represents the causal relationship being significant at 1%. **represents the causal relationship being significant at 5%. *represents the causal relationship being significant at 10%. table 5 : pairwise granger causality tests (between volume of each market) sti and klci volumes are found to bi-directionally granger-cause one another. singaporean trading volume records a p-value of 0.000 against the malaysian trading volume; significant at 1% level, hence rejecting the null hypothesis. the same goes to the other way around, where malaysian volume is significant at 10% level to cause singapore volume as a p-value of 0.062 is recorded. similarly, a significant at 99% level bidirectional causality is detected as running between singapore and indonesian trading volumes. both of the null hypotheses are rejected at once here, indicating that volumes in both of the markets do cause one another and move in the same direction. however, the indonesian and malaysian trading volume showed no causality at all in any direction as indicated by the 0.400 and 0.206 p-values. hence, it can be concluded here that singapore trading volume is granger-caused by and granger-causing both malaysian and indonesian volumes, but the malaysian and indonesian volumes do not interact with one another. arguably, almost all of the trading volumes exhibit strong causality between one another as evidenced by the high r-square values. moderate to strong explanatory powers were recorded between the pairs of variables in each markets, indicating that trading volumes in different neighboring markets do move in almost the same pattern through time. m.r. miseman et al. / finance, accounting and business analisys 14 lastly, table 6 below concludes the causality tests by summarizing the granger-causality tests results for the pairs of inter-market returns. null hypotheses: obs prob. > chi-sq lags r-sq prob. > f – stat. return_sti does not g-cause return_klci 2901 0.000 5 0.0218 0.000*** return_klci does not g-cause return_sti 0.000 0.0088 0.010*** return_jci does not g-cause return_klci 2531 0.000 5 0.0289 0.000*** return_klci does not g-cause return_jci 0.000 0.0140 0.718 return_jci does not g-cause return_sti 3386 0.000 1 0.0193 0.479 return_sti does not g-cause return_jci 0.000 0.0010 0.000*** ***represents the causal relationship being significant at 1%. **represents the causal relationship being significant at 5%. *represents the causal relationship being significant at 10%. table 6 : pairwise granger causality tests (between returns of each market) the results suggest bidirectional causality between klci and sti returns, as indicated by 0.000 pvalue for the case of sti returns to klci returns, and 0.01 for the case of klci to sti. both of the pairwise causality is significant at 99%, indicating rejection on both of the null hypotheses. nevertheless, the r-square values are very small and almost negligible as sti return can only explain 2.18% of klci return while klci return can only explain sti return by 0.88%. return of klci is also caused by jci return at 1% significance level; hence, the null hypothesis is rejected. however, the opposite causality from indonesian to malaysian market return does not take place as a p-value of 0.718 is recorded. only a unidirectional relationship is observed between the pair. the r-square value for this pair is also very small at 2.89%. similarly, a unidirectional causality is recorded running from singaporean return to indonesian return at 1% level while the opposite causality is insignificant due to the p-value of 0.479. thus, only the null hypothesis for the case of sti return to jci return is rejected while the reverse is failed to be rejected. just like the other two markets, the r-square indicates that singapore return can only explain the variation of indonesian return by less than 1%. therefore, even though the causality is present, the strength of association between the pairs of stock market returns is still questionable. it is to be noted here that all of the tests are considered wellspecified due to the fact that none of the pair exhibit insignificant p-value reading on the chi-square distribution except two which are the causality from singapore return to indonesian return and indonesian return to malaysian volume. with at least 1,000 observations taken into consideration in each pair of variables, these results are considered valid and reliable. this point will be further validated by the following test results accompanying the granger-causality estimation in stata. the series of tests involved are lagrangian multiplier test for autocorrelation, jarque-bera test for skewness and kurtosis (normality) and eigenvalue stability condition tests. causality between trading volume and volatility of stock returns the following table 7 contains the granger-causality results for the pairs of trading volume and volatility of stock returns for both local and cross-country cases. m.r. miseman et al. / finance, accounting and business analisys 15 null hypotheses obs p > chisq lags r-sq prob. > f – stat panel 1: between local trading volumes and volatility of returns for each countries lvol_klci does not g-cause variance_klci 3451 0.000 8 0.1052 0.000*** variance _klci does not g-cause lvol_klci 0.000 0.8256 0.000*** lvol_sti does not g-cause variance _sti 2967 0.000 9 0.8222 0.052** variance _sti does not g-cause lvol_sti 0.000 0.6857 0.000*** lvol_jci does not g-cause variance _jci 3171 0.000 9 0.8410 0.888 variance _jci does not g-cause lvol_jci 0.000 0.8590 0.148 panel 2: between cross-country trading volumes and volatility of stock returns lvol_klci does not g-cause variance _sti 3400 0.000 10 0.8984 0.020** variance _sti does not g-cause lvol_klci 0.000 0.8255 0.844 lvol_klci does not g-cause variance _jci 3171 0.000 9 0.2628 0.878 variance _jci does not g-cause lvol_klci 0.000 0.8586 0.818 lvol_sti does not g-cause variance _klci 2862 0.000 9 0.0763 0.000*** variance _klci does not g-cause lvol_sti 0.000 0.6876 0.467 lvol_sti does not g-cause variance _jci 2862 0.000 9 0.8258 0.991 variance _jci does not g-cause lvol_sti 0.000 0.6882 0.798 lvol_jci does not g-cause variance _klci 3171 0.000 9 0.2628 0.878 variance _klci does not g-cause lvol_jci 0.000 0.8586 0.818 lvol_jci does not g-cause variance _sti 3148 0.000 9 0.8958 0.528 variance _sti does not g-cause lvol_jci 0.000 0.8602 0.000*** ***represents the causal relationship being significant at 1%. **represents the causal relationship being significant at 5%. *represents the causal relationship being significant at 10%. table 7 : pairwise granger causality tests (between volume and volatility) the analysis will begin by observing the results that are presented in panel 1 of the above table 7. the p-value of chi-square results suggests that all estimations are well-fitted. the results also suggest for a bidirectional causality relationship between trading volume and variance (volatility) of stock returns in the malaysian stock market, as evidenced by the 0.000 p-values. a weak predictive power is documented running from volume to volatility (by 10.52%), but a strong relationship is seen running the other way around which is by 82.56%. the same conclusion can be drawn from the singaporean case, whereby both parts of the causality registered significant results at 5% and 1%. thus, there are also bidirectional causality relationships between volume and volatility in the singapore market. the strength of association is high, since volume can explain volatility by 82%, while volatility explains volume by 68.5% in the market. however, indonesian market failed to register any significant reading of p-value to justify a causality relationship going on. therefore, it can be concluded that there is no causality relationship between volume and return volatility in the indonesian market. panel 2 of table 7 summarizes the granger-causality results for the cross-country pairs of variables. similarly, the models are well-fitted as evidenced by the significant chi-square values. the malaysian trading volume is found not to granger-cause or be granger-caused by volatilities of jci since both of the p-values are insignificant. however, a significant unidirectional cause-and-effect relationship is observed running from klci volume to sti’s return volatility. likewise, the sti trading volume is also not associated at all to the indonesian market’s return volatility, since both of the pairs did not produce any significant p-value readings. the only causality is seen running from singaporean’s trading volume to the malaysian return, which is significant at 1% level. however, the association is not as strong since a very small r-square value of 0.0763 is recorded, suggesting that the singapore market volume can only explain 7.63% of the malaysian market return volatility. finally, the indonesian trading volume is not associated with the malaysian stock return volatility, since the pairs failed to produce any significant readings on p-value. it also cannot grangercause the singaporean volatility, as evident by the 0.528 p-value. however, the singapore return volatility m.r. miseman et al. / finance, accounting and business analisys 16 does have a significant causality relationship with the indonesian volume, and this association is strong at 86.02%. as the general conclusion from these inter-market granger-causality test results, the volumes of klci and sti have the power to cause the volatility in each other’s stock returns, but not to the jci. in relation to the local volume-volatility relationship, both malaysian and singapore variables are able to significantly granger-cause each other. this implies that the volume and volatility of returns in the two markets are interrelated to one another. however, the opposite is true for the indonesian case, where the trading volume and volatility are not causing each other at all. these results highlight the weak association contained in the indonesian stock market variables in relation to its own and other markets’ variables. conclusion the first objective of the study is to examine the contemporaneous and dynamic relationships between trading volume and stock indices returns in malaysia, singapore and indonesia. this objective is realized using three methodologies, which are newey-west and garch (1,1) regressions for contemporaneous relationship and granger causality for dynamic relationship. firstly, on the contemporaneous relationship, there are significant positive relationships between trading volume and stock returns in all countries of concern. more precisely, the newey-west test reveals that the trading volume in malaysia and indonesia are significant at 5%, while singapore’s is marginally significant at 10%. the garch (1,1) test results echoes the earlier findings, but also point that the indonesian trading volume is insignificant in explaining the stock returns. in sum, these results suggests that trading volume does influence the movements of stock returns in southeast asia, and higher volume tends to be associated to higher stock returns; albeit in very small elasticity. therefore, investors may use this indicator as a signal for profit-making situation and to avoid going long on common stocks during times when trading volumes are in a falling trend. several overall conclusions can be pinched out of the findings from these two techniques. firstly, trading volume in all markets is significant in explaining stock market returns under both methods, with exception to the indonesian case. secondly, it can be generally inferred that trading volume has positive relationship with stock market return, hence, an increase in trading volume will increase stock return. thus, the null hypothesis number 1 is successfully rejected. thirdly, the effect or elasticity of return to changes in trading volume is very small; and fourthly, there has to be a large change in trading volume before it can result in moderate level of change in stock returns. this positive association between volume and return is in accordance to the results of most of the past studies. as the wall street adage states, “it takes volume to move prices”, the academic world is pleased that volume movement causes price changes in similar direction. some of the past studies that share the same finding in the emerging markets are moosa and al-loughani (1995) who finds that the relation of price-volume in southeast asian is contemporaneous, lagged and positive; and ratner and leal (2001) who find a positive contemporaneous relation between return and volume in the latin and asian financial markets. the positive relationships are as expected since the increase in trading volume represents the growing demand and interest in the market (from the market participants) which, tends to make the price moves more abruptly. the buying and selling activities made by traders influences the price to move up and down and since more traders are actively buying and selling, the price changes will be more aggressive. this finding is consistent with lamoureux and lastrapes (1990) in usa, dan et al. (2013) in china and naka and oral (2013) in turkey. secondly, on the dynamic relationship, the granger causality shows that none of the local trading volumes is significant in explaining the variation in the respective countries stock market returns. the same goes for the other way around, except for the klci return which is significant at 10% level in grangercausing its trading return. in other words, only a unidirectional causality running from return to volume is observed, indicating a rejection of null hypothesis number 2. even though this result is supportive to the one found by léon (2007) in africa, it is rather in contrary to this paper’s results on the contemporaneous relationship; which suggest a strong explanatory power borne by trading volume onto stock returns. it is also in contrary to moosa and al-loughani (1995) who find bidirectional relationships between the same two variables in the same markets. however, when taken together, trading volume does contain some information that is useful in predicting future dynamic of stock market returns in southeast asia. the second objective of this study is to seek to determine the dynamic relationship between trading volumes and return volatility in each of the southeast asian stock markets. this objective is achieved by administering the pair wise granger-causality tests between two pairs of variables within the same markets. as a general conclusion, volumes and volatility are able to significantly granger-cause each other in the stock markets of malaysian and singapore, which calls for the rejection of null hypothesis number 3. this implies that the volume and volatility of returns within the two markets are internally interrelated to one another. trading volume will cause fluctuation in share price and hence, return whereas in reverse, volatility m.r. miseman et al. / finance, accounting and business analisys 17 of return will affect the number of shares being traded in the exchange. this finding corroborates the sequential information arrival hypothesis (siah) which suggests that information are relayed into the stock market participants in stages, hence there tend to be multiple transitional equilibrium points established before the true equilibrium point is met. therefore, there are many opportunity for the two variables to be intertwined by the forces in the market, and hence, it explains why the two variables may interrelate with one another. however, the opposite is true for the indonesian case, where the trading volume and volatility are not causing each other at all. these results highlight the weak association contained in the indonesian stock market variables in relation to its own market variables. given the high degree of fluctuation in share volume and return in the market (as described in descriptive statistics), there must be other variables that can explain this phenomenon. along with the second objective, comes the requirement to model the volatility of the respective countries’ stock market returns, which becomes the third objective of the study. the objective is achieved by running the garch (1,1) model. the results expose that only singapore market’s long-term volatility is significant in influencing its overall volatility of stock return. however, the observed relationship is negative, which implies that that the longterm volatility is negatively factored into the current volatility. in other words, the stock return’s volatility moves in opposite way from the long-term variance. the lagged square returns (representing the adjustment to past shocks) are found to be significantly explaining the variation in stock return volatility in all countries. the alpha value ranges from 0.61 to 0.96, which means that the stock markets return in southeast asia are sensitive to their own past return series. since the coefficients are positive, traders are advised to use the past return as an indicator for future volatility of returns. for example, if today’s stock return is positive, one can expect that tomorrow’s return will be volatile whereas if today’s return is negative, the next trading day will be most likely be characterized by small changes in stock prices. the shock in past returns is the variable that carries the most weights in influencing the three markets’ volatility of return. singapore stock returns, in particular is the one that is most sensitive to its past returns since the rate of decay is very slow and the effect is likely to persist in longer period as compared to the other two markets. in other words, singapore market has the highest volatility and persistence than malaysia and indonesia. this is in contrary to michelfelder and pandya (2005), which suggest that emerging markets have higher volatility but lower persistence of shocks as compared to the more mature markets. the lagged variance (representing adjustment to past volatility) is also found to be significant in all three countries. however, the lagged variances are less influential as compared to the squared return in explaining the return volatility. this implies that the current volatility of return is influenced by the past volatility. for the matter of forecasting, if today’s volatility increases, the future volatility is more likely to slightly increase as well. in terms of decay effect, all of the stock market returns volatility dissipates only slowly going into the future. any momentum created by shocks in today’s rate today is likely to continue going into the far future especially in singapore. this carries significant impact especially in knowing to what extent does the momentum created by a shock, say, a financial crisis or major macroeconomic event will pose onto the stock market’s performance in the countries. for singapore in particular, the trend will be likely to persist for a longer time as compared to indonesia and malaysia. the good implication about this observation is that any large price increase will bring about larger swing in the future; which amplifies profitability, but so does large price falls; which can amplify losses. therefore, even though it is more risky to invest in the singaporean market as compared to malaysia and indonesia, the incentive from assuming the added risks may also be handsomely rewarding. in addition to that, the volatility of stock market returns in all three markets tends to adjust to past volatility in moderate pace. this means that past variances are moderately factored into the return volatility and the effect will die in a short time. in overall, these results are in accordance to those found by pisedtasalasai and gunasekarage (2007) who studied the same markets and found that the volume in some markets contain information that is useful in predicting future dynamics of return volatility. the same view is shared by ahmed et al. (2005) who concluded that the current volatility in southeast asian stock market could be explained by past volatility that tends to persist over time. other earlier studies by najand and yung (1991), foster (1995), and huang and yang (2001) also reside behind the same view. objective number four is dedicated to investigate any cross-market interaction between trading volume and stock returns, and between trading volume and return volatility in the region. this objective is realized with the aid of the pairwise granger causality test. between one market stock returns and trading volumes in another, the results revealed that not much significant relationship is going on between the three countries. only two pairs of variables are significant, which are: singapore’s trading volumes onto malaysian stock returns, and indonesia’s trading volumes onto singapore’s returns. the rest of the pairs are recorded insignificant results. the findings suggest that there exist some explanatory power in trading volumes of m.r. miseman et al. / finance, accounting and business analisys 18 singapore and indonesia in affecting the return in another market. this finding also lend support to the contagion effect theory proposed by king and wadhani (1990) in which traders draw inferences by observing variables from another stock market, leading the variables to link up to some extent. in terms of inter-market relationships between volumes in two different markets, there seems to be more positive results. bidirectional causality relationships exist between singapore and malaysian trading volumes, as well as between singapore and indonesian trading volumes. the malaysian and indonesian trading volume, on the other hand, failed to register any significant result. this finding suggests a strong association stemming from singapore to the other two markets where volumes in singapore tend to grangercause those of malaysia and indonesia. all in all, the null hypothesis number 4 is also successfully rejected. as the implication, traders may aim to look at the singapore’s volume movements and use it to infer a prediction into the other two markets. looking on the theoretical aspect, this finding is also supporting king and wadhani’s contagion theory mentioned earlier. more interesting results are obtained from the pairs of inter-market returns. in contrary to the results found by mitchelfelder and pandya (2005) who posit that developing countries’ stock returns are not linked to one another, this study had proved otherwise. the singapore market return is associated bi-directionally to malaysian return, and uni-directionally to indonesian return. again, this suggests a strong association between singapore returns to its neighbors. the malaysian and indonesian market returns tend to be affected to what is happening in singapore, perhaps because the singaporean market is more advanced, more developed and is one of the major financial centers in the world. on the other hand, indonesian market return is able to granger-cause those in malaysia but malaysian returns could not return the favor. on the causality between trading volume and return volatility in cross market perspective, the volumes of klci and sti have the power to cause the volatility in each other’s stock returns, but not to the jci. this implies a mutually strong inter-variable causality relationship between malaysian and singaporean markets, as well as a weak relationship possessed by the indonesian market variables onto the other two markets. it also means that the investors in malaysia and singapore may infer trading decisions by looking at the trends in each other’s variables, hence supporting for a rejection on null hypothesis number 5. on the other hand, investors in indonesia may find it not useful to look into volatility data of the neighboring two markets. despite the mixed findings, these evidences are enough to conclude that the stock market returns in neighboring countries in southeast asia are interrelated to some extent, with singapore being the center of gravity that binds them up together. these findings also lend support to the contagion theory or spillover effect. indeed, the financial variables in different markets may be related to one another and hence, one may infer trading decisions in one market by referring to the trends in another. this is also consistent with lee and rui (2012) who suggest that markets with overlapping trading period may share many characteristics in the stock market variables movement. sabri (2008) also stand behind the same argument as he found that the volume-stock price movements in arab stock markets are significantly integrated. the fifth and final objective of the study is to find evidence supporting either mixture of distribution hypothesis (mdh) or the sequential information arrival hypothesis (siah) in the three stock markets. this objective can be realized by looking at the findings that have been discussed thus far. both theories concern about the flow of information to the stock market, with trading volume being a proxy that implies the information movement within the market. copeland (1976) developed the siah model which essentially contends for a positive bidirectional relationships between return and volume. on the other hand, clark (1973) posits a positive unidirectional causal relationship running from trading volume to stock returns in his mdh theory. this study finds only a unidirectional relationship between malaysian market’s return and volume. in addition to that, singapore’s trading volumes are also able to granger-cause malaysian return while indonesian volumes are also able to cause the singapore’s return. therefore, it is quite clear that the study lends support to the mixture of distribution hypothesis. in this theory, trading volume represents a mixture of disagreement among market participants about future movement of stock prices and as they revise the prices of their market orders, this will increase the level of trading volumes. in turn, the market return will be affected. this finding is consistent to those of ahmed and nasir (2005), pisedtasalasai and gunasekarage (2008) and tan and tay (2011), among all who studied the interactions between volume and stock returns in the same southeast asian markets. in concurrence to this study, all of them also found that trading volumes contain information that is useful in predicting future returns and volatility. nonetheless, another interesting finding to mention is in terms of the relationships between the pairs of local volume to its return volatility. this study found evidence that the two variables are bi-directionally causing one another in malaysian and singaporean markets. taking these findings into account, a support on the siah is established. this asymmetric information model hypothesizes that new information reaches one market participants at a time, instead of simultaneously. this normally happens in markets which are characterized by high number of individual investors and less efficient; which fits the character of the southeast asian markets. due to the sequence of information flow, lagged volatility may have the ability to m.r. miseman et al. / finance, accounting and business analisys 19 predict current trading volume and, vice versa. the same finding echoes through many other developing exchanges such as in brazil (de medeiros & van doornik, 2006), middle east (sabri, 2008) and africa (léon, 2007). limitations of the study a study is only as relevant as the samples that make up its findings. therefore, the fact that this study only employs datasets from three southeast asian countries is an issue that can be addressed in the future by expanding the sample size. the inclusion of more entities into the dataset could help to improve the rigor of the findings as well as enrich the academic world. secondly, the study is only concentrating on the developing stock exchanges in southeast asia, while there are numerous other markets that share the same characteristics and may be very well fit into consideration. in addition, the focus on samples coming from a nearby region will involve the inclusion of regional risks into the picture. adverse conditions coming from political, economic and environmental aspects of the region may exogenously influence the variables and distort the overall findings. another issue to mention is the sample period that covers daily data from year 2000 to 2014. a major economic crisis had happened in between of this period, hence may actually affect the findings. m.r. miseman et al. / finance, accounting and business analisys 20 references admati, a. r. & pfleiderer., p. 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(1994). a model of competitive stock trading volume: theory and evidence. journal of political economy, 102, 127-168. 176 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg the influence of internal audit activities and business complexity on the amount of fees for external auditors (case study of manufacturing companies on the idx) arum ardianingsih*, hidayatul affifah universitas pekalongan, indonesia info articles abstract keywords: the amount of fees for external auditors, internal audit activities an audit is a supervision activity and evaluation of the effectiveness of internal control and the reasonableness of the financial statements. the purpose of the audit is to add the value to the company's operations and improve the reliability of financial reporting. internal audit activities provide company business risk information to external auditors so as to reduce the scope of the audit and have an impact on the amount of fees for external auditors. companies that are increasingly complex businesses owned also make the completion of the audit longer, as a result the amount of the fees for auditor services rises. this study wants to examine the effect of internal audit activity and business complexity on the amount of fees for external auditor services. the analysis technique uses classical assumption test, multiple linear regression and hypothesis testing. this study found that internal audit activity did not have a effect on the amount of auditor fees. while the complexity of the business has a positive effect on the amount of auditor fees. *address correspondence: e-mail : arumbundavina@gmail.com finance, accounting and business analysis 3 (2) 2021 177 introduction the contemporary business era has changed the business order to be borderless and increased business risk. conflicts of interest between shareholders, company management, employees and parties within the company's circle itself have increased the risk of this business, so an independent party is needed to bridge this matter. external auditors are independent parties outside the company whose job is to check the fairness of the company's financial statements so as to minimize the occurrence of fraud. external auditors or independent auditors are needed by companies because many business decisions are based on independent auditor reports. the external auditor's duties and responsibilities are quite large, making the company provide compensation for audit services. in determining the amount of compensation for audit services, the auditor must pay attention to several things such as the responsibilities attached to the audit task, the complexity of the transaction or the complexity of the business division, the expertise and knowledge of the company being audited. the amount of fees for auditor services has been determined through the bargaining power between the company as a client and the auditor as an examiner of the company's financial statements. the amount of auditor fees is sometimes too low or too high because there is no standard for auditor fees, so it is feared that it will have an impact on the quality of the audit results provided. in 2016, the indonesian institute of certified public accountants (iapi) issued decree no. kep.95/iapi/ii/2016 contains aspects that are taken into account in determining the fee for auditor services such as the size of the company, transaction complexity and business complexity, the competence of the auditor to enter into carrying out his audit duties. this iapi decision letter provides a standard for the amount of auditor fees and ensures that the audit carried out has been running well. empirical evidence shows that audit fees can be influenced by auditor concentration ratios, public accounting firm size, firm size and number of subsidiaries (suharli and nurlaelah, 2008). an audit conducted by an external auditor usually considers a recommendation report as a result of an audit that has been carried out by an internal audit. the company's internal control is usually carried out by internal audit. the supervisory activities carried out by the internal auditors include monitoring the effectiveness of the company's internal control, projects or work programs, ensuring the achievement of company objectives as reflected in the company's financial statements. external auditors and internal auditors have responsibilities, goals, qualifications and duties in different activities, but both must coordinate with each other so that audit results can be of high quality and can be used for company business decision making. the internal audit activity assists the external auditor in identifying significant risks and the effectiveness of internal control which in turn has an impact on determining the amount of fees for external auditors' services. the research of hapsari and laksito (2013) found that the number of audit objects audited by the internal audit unit for 1 period had influenced the audit fees paid by the company. rahayu (2017) found something different, namely internal audit, which was seen from the number of internal audit members in the company, did not affect the audit fee. one of the internal audit activities is to supervise the complexity of business transactions and the complexity of the company's business. in general, companies listed on the indonesia stock exchange (idx) have many business divisions or subsidiaries. the complexity of the business seen from the number of subsidiaries has been able to make the scope of audits carried out by external auditors wider. the complexity of business transactions in each parent and subsidiary means that the external auditor's duties and responsibilities are getting bigger. so that the amount of external auditor fees charged by the company is getting bigger. okta's research (2016) on business complexity which is calculated on a dummy basis where (1) means having a subsidiary, while (0) not having a subsidiary turns out to be considered in determining the audit fee. this study tries to proxy the complexity of the business by looking at the number of subsidiaries owned by the company. because subsidiaries can reflect the complexity of business transactions, it increases the scope of the audit. so the possibility of an external auditor fee will increase. meanwhile, according to hay, et.al(2006) suggests that when the complexity of the client is higher, the audit becomes more challenging and requires a longer completion time so that it has an impact on the amount of remuneration for external auditors' services. these phenomena are a reference for researchers to propose problem formulations (1) can internal audit activities affect the amount of remuneration for external auditors' services?. (2) can the complexity of the business affect the amount of remuneration for external auditors? the purpose of this study is to provide empirical evidence that internal audit activities and business complexity in manufacturing companies on the idx have an influence on the determination of the amount of remuneration for external auditors. methods the research conducted is a type of causal research or cause and effect. this study identifies a finance, accounting and business analysis 3 (2) 2021 178 causal relationship between variable x and variable y or how variable x affects variable y (sugiyono, 2013). there are 2 independent variables (x) in this study, namely internal audit activity (x1) measured from the frequency of supervision carried out by internal audit so as to provide added value for company operations. meanwhile, the x2 variable is the complexity of the business as measured by the number of subsidiaries. the dependent variable (y) in this study is measured by the logarithm of the external auditor's fee. the object of research is a manufacturing company listed on the indonesia stock exchange (idx). the sample criteria are (1) manufacturing companies that are listed consecutively during 2016-2018, (2) companies that issue annual reports and have been audited by external auditors, (3) financial statements include the amount of fees for external auditors , internal audit activities and has subsidiaries. the data analysis technique used classical assumption test, multiple linear regression analysis and hypothesis testing. results and discussion this research was conducted on the audited annual reports of manufacturing companies listed on the indonesia stock exchange (idx). the observation period in this study was 2016-2018. the research sample amounted to 51 consisting of 17 manufacturing companies during the 2016-2018 period, presented in the table as follows: table 1. company sample list code company name ades pt. akasha wira international tbk akpi pt. argha karya prima industry tbk almi pt. alumindo light metal industry tbk amfg pt. asahimas flat glass tbk dvla pt. darya–varia laboratoria tbk icbp pt. indofood cbp sukses makmur tbk impc pt. impack pratama industri tbk indf pt. indofood sukses makmur tbk kdsi pt. kedawung setia industrial tbk klbf pt. kalbe farma tbk lmsh pt. lionmesh prima tbk mbto pt. martina berto tbk mlbi pt. multi bintang indonesia tbk smsm pt. selamat sempurna tbk tcid pt. mandom indonesia tbk unvr pt. unilever indonesia tbk wsbp pt. waskita beton precast tbk classical assumption test results the classical assumption test in this study consisted of normality test, multicollinearity test, heteroscedasticity test and autocorrelation test. the normality test shows a significance value of 0.145 and the value of kolmogorow-smirnov is 0.151 so that the data is said to be normally distributed. the result of the tolerance value for the internal audit activity variable is 1,977 with a vif value of 1,023 while the business complexity variable is 1,975 with a vif value of 1,021. this means that there is no multicollinearity. the results of the heteroscedasticity test using the glejser test show a significance value for the internal audit activity variable of 0.592 and business complexity of 0.057 so there is no heteroscedasticity because the sig value is above 0.005. autocorrelation test using durbin watson obtained a value of 2,391 so that there is no autocorrelation. the influence of internal audit activities on the external auditor fees based on the regression test, the results obtained a significance value of 0.856 with a coefficient of -0.004. so that the internal audit activity does not have a negative effect on the amount of fees for external auditors' services. internal audit activities owned by publicly listed companies have met the requirements set by the stock exchange to carry out internal supervision. because the internal audit activity is related to the supervision of the company's operations, supervision of the effectiveness of the company's internal control, significant business risks that need to be watched out for so that the company's goals can be achieved. internal audit activities are also related to oversight of company policies and rules, company work programs and good governance systems. when internal audit activity increases, external auditors can use information from internal audit related to significant risks in the company. this will reduce the finance, accounting and business analysis 3 (2) 2021 179 need for the scope of the audit to be carried out by the external auditor, thereby reducing the amount of the auditor's fee. this study supports the research conducted by dita (2017) and rahayu (2017) about the internal audit function having no effect on the determination of audit fees. the effect of business complexity on the amount of external auditor fees. the results of the regression test obtained a significant value of 0.000 with a coefficient of 0.071. this means that companies that have a high business complexity will make the amount of compensation for external auditor services high as well. the bigger the company, the more likely it is that there are more and more subsidiaries that are scattered. because the complexity of the business refers to the complexity of the transactions that occur between the parent and the subsidiary. the complexity of this relationship makes the duties and responsibilities of the audit scope of the auditor increase. as a result, the amount of service fees set also increased. this research is in line with okta's (2016) research which states that the number of subsidiaries owned has an effect on the determination of the audit fee. conclusion internal audit activities do not have a negative effect on the amount of fees for external auditors' services. companies with better internal audit controls will reduce monitoring of external auditors, reduce the scope of audits carried out and will not increase audit fees given by companies to external auditors. business complexity has a positive influence on the amount of remuneration for external auditors. the more complex the client company, the auditor will face a high significant risk, the scope of the audit and audit responsibilities are getting bigger, so that the amount of remuneration for external auditor services will also increase. references dita, nurwulansari. 2017. “pengaruh fungsi audit internal, kompleksitas dan ukuran perusahaan terhadap fee audit”.jurnal akuntansi, fakultas ekonomi universitas muhammadiyah yogyakarta. vol. iv. no. 1. hapsari. erlina dyah. dan laksito. herry. 2013. pengaruh fungsi audit internal terhadap fee auditor eksternal. diponegoro journal of accounting. volume 02. no. 02. hal 1-10. hay. 2008. “evidence on the impact of internal control andcorporate governanceon audit fees”. international journal of auditing. institut akuntan publik indonesia.2016. surat keputusan nomor: kep.95/iapi/ii/2016 tentang penentuan imbalan jasa audit laporan keuangan. jensen & meckling. 1976. the theory of the firm: manajerial behaviour. agency cost, and ownership structure, journal of financial andeconomics, 3:305360. messier, willian f., steven m. glover, dan douglas f. prawitt. 2006, “jasa audit dan assurance: pendekatan sistematis”. ed.4, terjemahan nuri hinduan, jakarta: salemba empat mulyadi. 2010. auditing. edisi keenam. buku 1. jakarta: salemba empat. okta, yora. 2016. “faktor-faktor yang mempengaruhi penetapan audit fees”. jurnal akuntansi. fakultas ekonomi universitas maritim raja ali haji. rahayu, sri, 2017. “analisis pengaruh audit risk, ukuran perusahaan & internal audit terhadap fee audit eksternal (studi empiris pada perusahaan perdagangan, jasa &investasi lainnya yang terdaftar dalam bei (bursa efek indonesia) tahun 2013-2015)”. skripsi: universitas maritim raja ali haji. simunic, d. (1980). “the pricing of audit services: theory and evidence”. journal of accounting research (spring):161-190. singh, hajinder dan newby rick. 2009. internal audit and audit fees: further evidence managerial accounting journal. vol. 25. no. 4. pp. 309-327. sugiyono, 2013. metode pendidikan penelitian. bandung: alfabeta. yasin, f.m. nelson. s.p. 2012. “audit committee and audit internal: implicaion on audit quality”.international joutnal of economics. management and accounting. 1 finance, accounting and business analysis volume 2 issue 1, 2020 http://faba.bg impact profit when implementation of international financial reporting standards (ifrs) surtikanti surtikanti departement accounting, indonesia computer university, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 objective: the purpose of the study the implementation of the international financial reporting standards (ifrs) regarding investment, property company profit after the adoption of international financial reporting standards (ifrs) regarding investment property and analysis of application of ifrs on property investment to increase company profits. then what will be investigated is the valuation of investment properties using the fair value model and the difference between the profit balance before tax and operating income. methodology: the study examines financial statement observation, within 2010-2015 financial statements from pt. astra international tbk. using descriptive statistics, correlation and regression analyses. results: it is found of the study prove how an increase in property value is obtained by an increase in corporate profits after the application of the international financial statements. implication: the results of the study show that earnings at the time of ifrs implementation are useful indicators for investors. this proves that changes in accounting standards have an influence on the quality of accounting information. keywords: international financial reporting standards, investment property and profit address correspondence: e-mail : surtikanti@email.unikom.ac.id surtikanti / finance, accounting and business analysis 2 (1) 2020 2 introduction the development of an increasingly global world causes business needs so that the financial reporting standards of countries in the world converge on the name international financial reporting standards. the convergence of ias and ifrs has been carried out by many countries and made ias and ifrs as the most widely accepted financial accounting standards worldwide (paananen and lin, 2008). in indonesia, the ifrs adoption program was made in full by the indonesian institute of accountants (iai) as of december 23, 2008 with a 2012 target for the adoption process to be completed. investors believe that the adoption of ifrs will result in a higher quality of financial reporting information, by reducing the information asymmetry between the company and investors, which will lead to reduced cost of capital. investors also believe that the application of the same standard will reduce costs in comparing financial statements and the performance of companies between countries (armstrong et al., 2009). while practitioners claim the adoption of ifrs can improve the functioning of global capital markets by providing comparable and high-quality information to investors (barth in chalmers, 2010). the convergence or adoption of ifrs is intended to improve financial statement information so that it is more comparable and of better quality (barth, 2008) and also more accurate, comprehensive and timely (ball, 2006). in valuing assets, there are three financial accounting standards that exist in ifrs that use the basis of revaluation and fair value in valuing assets, namely ias 16 concerning "property, plant and equipment", ias 38 about "intangible asets", ias 40 about "investment property" and ias 41 on "agriculture". (iai, 2010). ifrs uses a lot of mark-to-market basis as a basis for valuation both in determining the fair value and revaluation value. the use of fair value is considered to provide more relevant information in decision making. as a result of the revaluation of assets causes the value of these assets can go up or down. the difference arising from the revaluation of assets that increase in value of assets is recognized as a revaluation surplus that is a profit for the company, the profits obtained are recognized in the income statement, so as to increase profits for the company. while the difference in the decline in asset revaluation is a loss for the company. impairment in asset value is recognized as loss, so that losses from impairment of assets can reduce the profits obtained. barth et al. (2008) and bartov et al. (2005) conducted a test to examine the effect of using ifrs on the quality of accounting and the relevance of the value of financial statements in companies originating from varios countries. the results show that after the adoption of ifrs, accounting quality has improved the retained earnings correction. usually, many management are shocked by the consequences of the significant profit effect as a result of ifrs adoption. the effect can reduce profits or can increase profits. literature review international financial report standard the international financial reporting standards (ifrs) are formed by the international accounting standards board (iasb) based in london, england. according to the ifrs, the american institute of certified public accountants (aicpa) is “international financial reporting standards (ifrs) are a set of accounting standards, developed by the international accounting standards board (iasb), that are becoming the global standard for the preparation of public company financial statements.” whereas warren, et al (2014) international financial reporting standards (ifrs) are a set of global accounting standards developed by the international accounting standards board (iasb) for the preparation of corporate financial statements. the purpose of ifrs convergence is to increase transparency and accountability in financial statements and to increase global investment flows through comparison of financial reports between one country and another. according to warren, et al (2014) since 2005, all 27 countries in europe (eu) have been required to present financial reports using ifrs. assets components of a company's financial position consist of assets (assets), debt (liabilities), and equity (capital). assets are elements of the balance sheet that form a company's financial position information. according to the financial accounting standard board (fasb) (sfac no.6, par. 25) assets are "assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events." meanwhile according to the indonesian institute of accountants (2009: 9) states that assets are "assets are resources that are controlled by the company as a result of past events and from which future economic surtikanti / finance, accounting and business analysis 2 (1) 2020 3 benefits are expected to be obtained by the company" from the definitions above, the writer can conclude that assets are assets owned / controlled by companies that have economic benefits in the future, assets can be classified into current assets and noncurrent assets (fixed assets). current assets current assets are cash and other assets that can be cashed, sold or used in an accounting period or in the normal course of business activities. according to psak no. 1, an asset is classified as a current asset if it has the following characteristics: 1. it is estimated to be realized or owned for sale or use within the normal operating cycle period of the company. 2. owned for trading or for short-term purposes and is expected to be realized within 12 months from the balance sheet date. 3. the form of cash or cash equivalents whose use is not restricted. current assets include the following components: cash (cash), short-term investments (marketable securities), notes receivable, accounts receivable, inventory, supplies, supplies, prepaid expenses ), accrued revenues. fixed assets fixed assets are assets that will be used or controlled by the company in the long run (having an economic life of more than one year). the components of non-current assets are as follows: 1. long-term investment, is investment / money in other parties for the long term (more than one year). 2. tangible fixed assets, are assets owned by companies that are physically visible (concrete) and used in the company's operations in the long term (not expired in one period of company activity). 3. intangible fixed assets, the company's assets are physically invisible, but is a right that has value and is owned by the company to be used in company activities. tangible fixed assets tangible fixed assets are tangible assets that are relatively permanent in nature that are used in normal company activities. tangible assets can be used for a relatively long period of time (more than one accounting period). tangible fixed assets owned by a company can have various forms such as land, buildings, machinery and tools, vehicles, furniture and others. from the types of tangible fixed assets above for accounting purposes, groupings are made as follows: 1. fixed assets whose age is unlimited as land for company location. 2. fixed assets whose age is limited and when they are used up can be replaced by similar assets, for example buildings, machinery, tools, vehicles and others. 3. fixed assets whose age is limited and when they are used for expiration cannot be replaced by similar assets, for example natural resources such as mining. fixed asset capitalization there are a lot of fixed assets owned by companies and have a very large value, in order to avoid expenditures for assets that are relatively large and less efficient and the administration of assets which takes time and costs more than the acquisition of these fixed assets, a capitalization policy is needed, that is, policies set a minimum amount or limit on which an asset can be capitalized or adjusted to the needs of the company with this capitalization policy, company difficulties can be reduced, especially in distinguishing between capital expenditure and income expenditure a) capital expenditure is capital expenditure which has a useful life of more than one accounting period. b) revenue expenditure (revenue expenditure) is expenditure whose useful life is only for one accounting period is usually recorded as expenses. the basic consideration in recording expenses for fixed assets is how long the benefits of these expenditures can be felt, in addition to consideration of the useful life, sometimes for practical issues, deviations are made: 1) the expenditure is relatively small. 2) the benefits in the future are not very meaningful. 3) it is difficult to measure the useful life in the future. often the authorities in the company decide accounting policies that contain expenses up to a certain amount considered as income expenditures and expenses above a certain amount are considered as capital expenditures if those expenditures clearly provide benefits for the coming period. surtikanti / finance, accounting and business analysis 2 (1) 2020 4 investment companies in managing their funds are allocated into several aspects, including allocated for investment. the investment made by the company is expected to provide benefits for the company. abdul halim (2005: 4) argues that investment is "investment is essentially the placement of a number of funds in the hope of obtaining future profits." according to irham fahmi (2006: 2) argues that investment is "investment can be defined as a form of managing funds to provide benefits by placing funds in allocations that are expected to provide additional benefits." from this explanation the authors can conclude, that investment is a placement of funds in allocations that are expected to generate profits for the company in the future. types of investment in its activities, investment is generally known in two forms, namely, first real investment (real investment) generally involves tangible assets, such as land, machinery, or factories. second, financial investment (financial investment) involves written contracts, such as ordinary shares and bonds. furthermore according to irham fahmi (2006: 2) quoted from psak number 13, there are several types of investments, namely: 1) current investment. current investments are investments that can be immediately cashed and are intended to be held for a year or less. investments in the capital market are short-term investments. this is seen in returns measured by capital gains. for speculators who like capital gains, the capital market can be an attractive place, because investors can buy when prices fall and resell when prices rise. the difference is seen that the abnormal return will calculate the benefits 2) long-term investment. long-term investments are investments that are made for more than one year and are not intended to spin excess cash. long-term investment is carried out with a view to controlling the activities of other companies, in this case regulating financial and operational policies. this investment can be in the form of stocks, bonds, insurance and others. 3) investment property. investment property is an investment in land and buildings that are not used or operated by the investing company or other companies in the same group as the investing company. 4) trade investment. trade investment is investment aimed at facilitating or maintaining business or trade relations. investment property one of the investment activities carried out by the company is through investment property, this investment property can be in the form of land or buildings. this investment property is not used by the company in carrying out its operations. according to the international accounting standards (ias 40.5) investment property is "investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both." while the indonesian institute of accountants (2009: 13.2) argues that investment property is "investment property is property (land or building) or part of a building or both) that is controlled (by the owner or lessee / lessee through a finance lease) to produce a rental or for an increase in value or both, and not to: 1. used in the production or supply of goods or services for administrative purposes; or 2. sold in daily business activities. " investment property is recognized as an asset if there is a high probability that the company will obtain future economic benefits from the contribution of the asset and the cost of the asset can be measured reliably. at the initial measurement, investment property is recognized at its acquisition cost, which consists of the purchase price and transaction costs that can be directly distributed. a company can choose to measure all subsequent investment properties using one of the following models: 1. the cost model, which measures investment properties at cost less accumulated depreciation and impairment losses. 2. fair value model, which measures investment property at fair value. gains and losses from changes in fair value are recognized in profit or loss when incurred surtikanti / finance, accounting and business analysis 2 (1) 2020 5 fair value the fair value of an asset can be determined in accordance with market value. because many ifrs use mark-to-market basis as a basis for valuation. if there is no market value that can be used as fair value, the valuation basis can use a mark-to-model basis or by using techniques with the assistance of an independent appraisal service. according to the indonesian institute of accountants (2009: 13.1), argues that fair value is "fair value is an amount that is used to measure assets that can be exchanged through an arm's length transaction involving parties who wish and have adequate knowledge." meanwhile, according to hennie van greuning, translated by edward tanujaya (2005: 295) argues that fair value is "fair value is an amount that can be used as a basis for exchanging assets or settling obligations between parties who are knowledgeable and wish to conduct arm's length transactions." fair value advantages include: 1. financial statements become more relevant for the basis of decision making 2. improve the comparability of financial statements. 3. information is closer to what users of financial statements want. profit every company will try to get as much profit as possible, because profit is one of the measurement tools to measure company performance. the greater the profits obtained, the better the performance of the company. wild and subramanyam (2014: 25), states earnings or net income indicates company profitability. earnings reflect returns to equity holders for the period concerned, while items in the report detail how profits are earned ". whereas according to l.m. samryn (2012: 429), "profit is a source of internal funds which can be obtained from normal company activities that are not requires extra costs for storage and use " net income is an indicator of the company's performance in a period and can be used to do evaluations of the company, among others: evaluating the company's past performance, can be used to predict the company's performance in the future, and can help assess the uncertainty of future cash flows front (schroeder et al, 2009). the calculation of a company's profits is done every month, but for practical purposes the calculation of profits is done at the end of the accounting period. this calculation is stated in an income statement. calculation of profit and loss has two objectives, namely: 1. internal purpose this goal relates to the leadership's efforts to direct the company's activities towards profitable activities. information about profits can be used for company leaders to evaluate the company's operating activities in the past period, conduct analysis and improve to improve the ability of business units to generate profits. 2. external purpose the profit calculation is intended to provide liability to shareholders, for tax purposes, for issuance of shares on the stock exchange and requests for credit to banks. profit is important information in a financial statement. this statement is based on sofyan syahri harahap (2007: 297) stating that profit is the most important information in this figure is most important for: 1) tax calculation, functions as a basis for imposing taxes that the state will receive. 2) calculate dividends distributed to owners and to be retained in the company. 3) become a guide in determining accounting policies and decision making. 4) be the basis in profit forecasting and other company economic events in the future. 5) be the basis in calculation and efficiency research. 6) assess the presentation or performance of the company or company segment / division. 7) calculation of zakat as a human obligation as a servant of his lord through payment of zakat to the community. there are four types of profit classification in presenting financial statements, are as follows: a) gross profit from sales, is the difference between sales and cost of goods sold, this profit is called gross profit from net sales, not yet reduced by operating expenses for a certain period. b) net operating profit of the company, i.e. gross profit minus a number of sales costs, administrative costs and general costs. c) net profit before tax deduction, which is the company's overall income before tax deduction, which is the acquisition if operating income is reduced or added to the difference in revenue and costs. surtikanti / finance, accounting and business analysis 2 (1) 2020 6 d) net profit after tax deduction, i.e. net income after adding or subtracting non-operating income and expenses and deducting taxes. the types of profits in relation to profit calculations are as follows: 1) gross profit is the difference between net income and sales and cost of goods sold. 2) operating profit, that is, the difference between gross profit and total operating expenses. 3) net profit is the last number in the calculation of profit and loss where to find operating income plus other income minus other expenses. impact of capitalization on profit and return on investment capitalization has two effects on profits. first, capitalization defers costs. this means that capitalization results in higher profits during the acquisition period but lower profits in the next period when compared to costing. both capitalization results in a series of income smoothing. namely the allocation of costs over the benefit period produces a more stable accrual earnings figure and is a more meaningful measure of company performance. capitalization increases the fluctuation of earnings and the ratio of investment returns. capitalization affects both profits and investments from the ratio of investment returns. conversely charging asset costs results in a lower investment base and increases profit fluctuations. charging also results in a bias against earnings measurement, because earnings are stated to be too low in the acquisition year and too high in the following years. relationship between ifrs application and company profit the adoption of ifrs impacts companies in many ways. the aspects of interim reporting and valuation bases are the most affected. in its development, ifrs adopted a lot of fair value that uses actual value and present value. the use of fair value is considered to provide more relevant information in decision making. one of the fair value uses adopted by the indonesian institute of accountants is regarding investment properties (psak 13 revised 2007). psak 13 provides two alternative measurement of investment properties, namely using the cost model and the fair value model which must be applied consistently. the fair value model, which underlies the measurement of investment property after initial measurement, at fair value with changes in fair value recognized as profit or loss. according to hennie van greuning (2005: 295), "measuring property investment at fair value. gains and losses from changes in fair value are recognized in profit or loss when incurred." the use of the fair value model in valuing investment property, will cause changes in the value of the investment property. changes in value can go up or down, if the value has increased then the company benefits from the difference in the increase, and if the value goes down then the company will suffer losses instead. gains and losses from changes in value are recognized in the income statement. so that the application of the fair value model and investment property will have an impact on corporate profits. then indirectly the application of ifrs will affect the profits earned by the company. theoritical framework the existence of various crises in setting standards encourages the emergence of regulatory policies. because demand for such policies or standards is driven by crises that arise, the determinants of accounting standards respond by providing these policies (ghozali and chariri, 2007). the existence of ifrs raises several arguments about changes that occur to financial numbers which will simultaneously affect the quality of the financial statements produced. according to baruch lev in hendriksen (2005) which states that changes in applicable standards have a real influence on financial operations. regulatory theory in this study is used because the related theme is about accounting standards namely ifrs, with ifrs, it will lead to policies on the uniformity of financial statements and the quality of accounting contained in each financial statement. one of the adoptions made by indonesia to ifrs is about "investment property" (ias 40) by revising psak no. 13 in 2007. in ias 40 (par.33-56) provides two alternative measurements of investment property, namely using the cost model and the fair value model that must be consistently applied. like ias 40, psak 13r (par. 36-59) also provides two alternative measures of investment property measurement, using the cost model and fair value model that must be applied consistently. previously in psak no. 13 does not allow the use of a fair value model in valuing investment properties. the choice of a fair value model in measuring investment property results in a change in value whether it is an increase or decrease in value. revaluation of assets not only increases the value of assets but can reduce the value of assets that have not been or have been revalued (ias 16, ias 38, ias 40 and ias 41). the difference from the increase in value of the asset is a profit for the company, while the surtikanti / finance, accounting and business analysis 2 (1) 2020 7 difference from the decrease in the value of the asset is a loss for the company. according to the indonesian institute of accountants (psak 13 revised 2007) stated that "the entity that chooses the fair value model for the first time classifies and records part or all of the rights to the property in an operating lease that meets the requirements as investment properties must recognize the effect of the election as an adjustment to retained earnings for the period in which the election was made". so we can conclude the use of fair value in measuring investment property will have an impact on corporate profits. ismail et al. (2013) states that the application of ifrs will result in higher earnings quality. increasing earnings quality is evidenced by a decrease in earnings management and an increase in the relevance of earnings through the price-earnings model and return learning model. chiu and lee (2013) state that the adoption of ifrs reduces the amount of accounting policy, increases the relevance of reported earnings and changes the timeliness of asymmetric earnings. "clarkson et al. (2011) states that the application of ifrs increases the relevance of book value and earnings, shown through eps and bvps values are greater, gjerde et al. (2008) states that the adoption of ifrs increases the value of the stock market. "siregar (2016) also shows the same results that with the adoption of ifrs increases the quality of earnings reported by companies based on the description above, the use of the fair value model in valuing investment properties will cause changes in the value of the investment property. changes in value can go up or down, if the value has increased then the company benefits from the difference in the increase, and if the value goes down then the company will suffer losses instead. gains and losses from changes in value are recognized in the income statement. so that the application of the fair value model and investment property will have an impact on corporate profits. then indirectly the application of ifrs will affect the profits earned by the company. hypotheses development and research methods according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: hypotheses: the adoption of international financial reporting standards will have an impact on corporate profits. the method used in this research is descriptive verification method with a quantitative approach. the population of this study is the financial statements of pt. astra international tbk., pt. astra otoparts tbk and pt. astra graphia tbk. from 2010-2015. then the sample of this study is the financial statements, the financial position report and the profit and loss statement of pt. astra international tbk., pt. astra otoparts tbk, and pt. astra graphia tbk. in 2010 and 2015. findings implementation of ifrs regarding investment property in companies investment property is land or buildings that are owned for operating leases or increases in value, and are not used or sold in operations. in valuing investment properties owned by companies, there are two types of valuations, namely the cost model and the fair value model. the most important application of ifrs is the application of fair value. pt. astra international tbk., pt. astra otoparts tbk., and pt. astra graphia tbk. evaluates the investment properties it owns using the fair value model. investment property is stated at fair value, which reflects market conditions determined annually by independent valuers. changes in the fair value of investment properties are recognized in the consolidated statement of income. changes in fair value cause the difference, if the value of investment property rises, the difference is in the form of profits and vice versa, if it goes down, then it is a loss. analysis of company's earnings after implementing ifrs regarding investment property profit is one of the measuring tools in measuring company performance. company performance can be said to be good if the company can get a large profit. after the application of ifrs regarding investment property, there are advantages and disadvantages arising from the difference in valuation of investment properties that are valued using the fair value model. the profits and losses are then included in other income / expenses in the company's income statement. descriptive statistik to find out the impact of the implementation of ifrs on investment property on company profits, the author will conduct an analysis using statistical analysis. for this reason, the variables x and y are calculated as in table 1 below. table 1 step-by-step to explain the profit impact of ifrs implementation on investment property surtikanti / finance, accounting and business analysis 2 (1) 2020 8 table 2 shows the impact of application (ifrs) regarding investment property as an independent variable (x) on earnings as the dependent variable (y). from table 3 shows that the correlation number (r) of 0.719 shows a positive number, indicating the same direction in the relationship between variables. meaning: if the value of investment property has increased, the profit earned by the company will increase as well. from table 4 the value of 51.7% of the profit obtained after operating income at pt. astra international tbk., pt. astra otoparts tbk., and pt. astra graphia tbk. influenced by the application of ifrs regarding investment property. while the rest, which is 48.3% is influenced by other factors, such as interest income, profits from disposal of assets, interest expense and others. from the results of testing the hypothesis know that ha is accepted and h0 is rejected because tcount is greater than ttable, so it is stated that the application of ifrs regarding investment property has a significant impact on profits at pt. astra international tbk., pt. astra otoparts tbk., and pt. astra graphia tbk. emperical results hypothesis testing results indicate that ho is rejected and ha is accepted so that it can be concluded that the ifrs implementation of investment property has a significant impact on profits. the use of the fair value model in valuing investment property will cause changes in the value of the investment property. changes in value can go up or down, if the value has increased then the company benefits from the difference in the increase, and if the value goes down then the company will suffer losses instead. gains and losses from changes in value are recognized in the income statement. so that the application of the fair value model and investment property will have an impact on corporate profits. then indirectly the application of ifrs will affect the profits earned by the company. the results of the analysis of the impact of ifrs implementation on investment property on company profits indicate a strong and positive relationship between the difference in investment property values and the difference between profit before tax and operating profit. the magnitude of the contribution of the impact of the application of ifrs regarding investment property to corporate profits was 51.7%. this number means that 51.7% of profit is obtained after operating profit at pt. astra international tbk., pt. astra otoparts tbk., and pt. astra graphia tbk. influenced by the application of ifrs regarding investment property, while the remaining 48.3% is influenced by other factors such as interest income, profit from asset release, interés expense, foreign exchange gains/losses, and others. based on the hypothesis test, it is known that the application of ifrs regarding investment property have a significant impact on profits at pt. astra international tbk., pt. astra otoparts tbk., and pt. astra graphia tbk. discussion and conclusion the application of ifrs in indonesia follows a road map set by dsak-iai, namely by adopting one by one ifrs standards until 2010. the application of ifrs must be done carefully, companies need to study the readiness to carry out ifrs adoption, starting from aspects human resources, legal and legal climate, accounting information systems, and taxation aspects. the implementation of ifrs has an impact on the company in many ways. the aspects of interim reporting and assessment bases are the things most affected. the fair value model, which underlies the measurement of investment property after initial measurement, is fair value with changes in fair value recognized as profit or loss. "measuring property investment at fair value. gains and losses from changes in fair value are recognized in the income statement when they arise" marisi p. purba (2010). latridis and rouvolis (2010) using a sample of companies provided on the greek stock exchange found in the period after the adoption of ifrs provides an increased relevance of the book value of equity and earnings to stock prices. the value relevance according to kargin (2013) is the ability of an information presented in the financial statements for discussion and value conclusions company. information in financial statements has value relevance if such information can be used as a basis for predicting and estimating market value of the company. then the use of the fair value model in assessing investment property will lead to changes in the value of the investment property. the change in value can go up or down, if the value increases, the company gains from the difference in increase, and if the value goes down then the company will suffer a loss. gains and losses from changes in these values are recognized in the income statement. so that the application of the fair value model and investment property will have an impact on company profits. then indirectly the application of ifrs will affect the profits obtained by the company contributions and future studies the contributions of the study can be noticed in different ways. firstly, in indicating the influencein the application of ifrs, the most important thing is the application of fair value. the application of fair surtikanti / finance, accounting and business analysis 2 (1) 2020 9 value in a company only applies to investment properties, it is best to apply the fair value to all assets of each company. the researcher suggests that the next researcher can expand this research by using various other factors such as earnings management and the relevance of the value of financial information apart from the factors that have been studied. future studies should use larger sample sizes or long periods for research with the same or different variables. future studies to compare the findings of this study with others. references abdul halim (2005: 4) analisis investasi. jakarta : salemba empat. adibah, wan, w. ismail, k.a. kamarudin, t. van-zijl dan k. dunstan. 2013. earnings quality and the adoption of ifrs-based accounting standards: evidence from an emerging market. asian review of accounting 21, no. 1: 53-73. armstrong, c.s., m.e. barth, a.d. jagolinzer, e.j. riedl. 2009. market reaction to the adoption of ifrs in europe. http://ssrn.com/abstract=90342) ball, ray. 2006. international financial reporting standards (ifrs): pros and cons for investors. http://ssrn.com/abstract=929561 barth, m.e., w.h. beaver, dan w.r. landsman. 2001. the relevance of the value relevance literature for financial accounting standard setting: another view. journal of accounting & economics 31, no. 13. barth, m.e., w.r. landsman, dan m.h. lang. 2008. international accounting bartov, eli, s.r. goldberg dan m.s. kim. 2002. comparative value relevance among german, u.s., and international accounting standards: a german stock market perspective. http://ssrn.com/abstract=316525 chalmers, keryn, greg clinch, dan jayne m. godfrey. 2010. changes in value relevance of financial information upon ifrs adoption: evidence from australia. australian journal of management 36, no: 2. chang, y., liou, h., 2013. the effect of ifrs and the institutional environment on accounting quality in chinese listed firms. the journal of american business review, cambridge. vol.1, num2, summer. clarkson, p., hanna, j. d., richardson, g. and thompson, r. 2011. the impact of ifrs adoption on the value relevance of book value and earnings. journal of contemporary accounting & economics, vol. 7, pp.1-17. dewan standar akuntansi keuangan. 2010. instrumen keuangan: pengakuan dan pengukuran. dalam: pernyataan standar akuntansi no. 55 revisi 2010. jakarta: ikatan akuntan indonesia. gjerde, oystein; kjell hendry knivsfla & frode saettem. 2008. the value-relevance of adopting ifrs: evidence from 145 ngaap restatements. departement of finance and management science. greuning, hennie van. 2005. international financial reporting standards: a practical guide. jakarta : salemba empat. penerjemah: edward tanujaya hung, mingyi dan k.r. subramanyam. 2004. financial statement effects of adopting international accounting standards: the case of germany. http://ssrn.com/abstract=622921 (diakses oktober 2016). ikatan akuntan indonesia. 2009. standar akuntansi keuangan per 1 juli 2009. jakarta : salemba empat irham fahmi. 2006. analisis investasi dalam perspetif ekonomi dan politik. bandung : refika aditama kargin, s, 2013. the impact of ifrs on the value relevance accounting information: evidence from turkish firms. international journal of economy and finace, 5 (4), pp. 71–80 latridis, george., dan rouvolis. 2010. the post-adoption effect of the implementation of international financial reporting standards in greece. journal of international accounting, auditing and taxation. 19, 55-65. pananen, mari dan hengshiu lin. 2008. the development of accounting quality of ias and ifrs over time: the case of germany. http://ssrn.com/abstract=1066604 purba, marisi p.. 2010. international financial reporting standards konvergensi dan kendala aplikasinya di indonesia. yogyakarta : graha ilmu. scott, w.r. 2014. financial accounting theory (7th ed.). toronto: prentice hallwarren, et al (2014) siregar, hanifah. 2016. pengaruh adopsi ifrs terhadap kualitas laba. tesis. universitas gadjah mada. yogyakarta.siregar (2016) standards and accounting quality. http://ssrn.com/abstract=1029382) weygand, jerry j. kieso, donald e. dan kimmel, paul d. 2008. principal accounting. jakarta : salemba empat http://ssrn.com/abstract=90342 http://ssrn.com/abstract=316525 http://ssrn.com/abstract=1029382 surtikanti / finance, accounting and business analysis 2 (1) 2020 10 appendix table 1. descriptive statistic no. x y x2 y2 xy 1 128000 3487000 16384000000 12159169000000 446336000000 2 27000 3646000 729000000 13293316000000 98442000000 3 20653 319948 426546409 102366722704 6607886044 4 -2717 527010 7382089 277739540100 -1431886170 5 8121 -22000 65950641 484000000 -178662000 6 1 -22169 1 491464561 -22169 statistic x y x2 y2 xy total 181058 7935789 17612879140 25833566727365 549775315705 table 2. regression coefficient calculation results model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 551899,601 669120,097 ,825 ,456 properti investasi 25,541 12,350 ,719 2,068 ,107 a dependent variable: laba table 3. correlation analysis results selisih properti investasi selisih laba properti investasi pearson correlation 1 ,719 sig. (2-tailed) ,107 n 6 6 laba pearson correlation ,719 1 sig. (2-tailed) ,107 n 6 6 table 4. coefficient of determination of variable x with y model summary(b) model r r square adjusted r square std. error of the estimate 1 ,719(a) ,517 ,396 1361252,17680 a predictors: (constant), properti investasi b dependent variable: laba 92 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg effects of coronavirus pandemic on the economic performance of bulgaria and the eu gergana ilieva mihaylova-borisova university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 the study examines the negative effects of the coronavirus pandemic, came in 2020, on the economic development of european union countries, including bulgaria. the negative impact on the economic performance of the european countries is investigated by analyzing the dynamics of several indicators, such as economic growth, unemployment, production in manufacturing, construction production, retail sales. the results of the analyses showed that the countries, registered the largest total number of coronavirus cases were the most negatively affected in terms of economic growth rates, unemployment, and manufacturing production. in addition, the coronavirus pandemic had stronger negative effects on the economic performance of the european countries than the international financial crisis in 2008-2009. the reason for the stronger negative effect of the health crisis on the economic development of the countries compared to the financial crisis in 2008 is its comprehensiveness and the impact on almost all sectors of the economy, and not only the impact on the financial sector. keywords: comparative economics, economic growth, unemployment, economic crisis, health crisis address correspondence: e-mail: gmihaylova-borisova@unwe.bg gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 93 introduction the countries development depends not only on internal factors, but also on external ones. very often one country is influenced from the crisis periods of another country, especially in case of close trade relations between countries, or in case of similar economic development because of the spillover effect. some of the countries are more exposed to external factors, depending on their monetary regimes and exchange rate regimes. in the twenty first century the countries faced several crisis periods, having international character. the crisis periods started from one country and after that it has been transmitted to several countries, having their negative consequences on their economic development. for example, the financial crisis started in mid-2008 in the united states, which was spread to a lot of countries in europe and in bulgaria too. after that followed the debt crisis in eurozone in 2012-2013, having negative effects on the countries with huge government debt, exceeding the value of the countries’ gdp. almost ten years later, the countries faced a new type of crisis so-called health crisis, caused by the coronavirus (covid-19), which turned to economic crisis in almost all countries, due to the spreading coronavirus cases, enforcing the governments to stop enterprises to work in order to limit the virus spreading. the coronavirus pandemic continues and probably the economic situations in almost all countries around the world is likely to deteriorate. thus, the different types of crisis and their influence on the economic performance of countries are very important topic, which deserve to be investigated. the aim of the study is to investigate the effect of the coronavirus pandemic on the economic development of european countries, including bulgaria. the following hypothesis can be tested: the countries in the european union (eu), including bulgaria were negatively affected by the coronavirus crisis, having strong negative effect on the economic growth, unemployment, manufacturing production, construction and retail sales. some countries, which had more coronavirus cases at the outbreak of coronavirus at the beginning of 2020, such as italy, united kingdom, france, germany, austria, spain, were hit stronger than the other countries in the european union. these were mostly advanced economies in the eu. in addition, the second hypothesis can be tested: the stronger negative effects of the coronavirus pandemic on the countries’ economic performance could be expected than the effects of the international financial crisis in 2008-2009 on the economic development of the same countries. the study is structured in five parts. first part is the introduction. the second one makes a review of the literature. the next part reveals the methodology used. the fourth part is related to analyses of the results. the fifth part has the main conclusions, which come from the analyses. review of the literature there are a number of studies examining various aspects of the economic development of the countries of the european union and / or the economic development of the individual countries in it. the world economic forum (2019) outlined the countries that have higher economic growth in the european union such as bulgaria, poland, slovakia, latvia, lithuania and estonia in the period 2003-2015 than the others and concluded that there are regions in the countries of the european union, which can provide a good basis for the future economic growth of the union. chobanov (2019) examines the economic development of bulgaria after the global financial crisis in 2008 to the second quarter of 2018. the comparison of the economic development of bulgaria and the other 12 central and eastern european countries, representing the last wave of eu enlargement, was made. the author concluded that the bulgarian economy slowed down its economic growth rate as compared to the average for other countries, due to the lack of structural reforms, which to address the problems. nenkova and metalova (2019) made an overview of tax policy in bulgaria in the period 2005-2017 and pointed out that the tax system had a strong impact on economic growth, which on the other hand determines the tax revenue volume. the fiscal decentralization and its success in bulgaria in the period 2003-2012 were examined in nenkova (2014). the increasing local government revenue autonomy was important for the public finances in order the government to be able to use more efficiently its resources, contributing for the faster economic growth rate. the role and importance of european union investments for the economic development of the western balkans countries was analysed in popovic, eric (2017). by using the panel analysis and v.a.r. model the authors proved the relationship between gdp per capita and the eu investments. the effects of the financial crisis on the economic development of the european union is investigated in several studies. the world economic forum (2015) investigates the countries approaches for surviving the global financial crisis in 2008. the european countries followed the common approach in coping the financial crisis, increasing government borrowing, increasing government revenues by rising taxes and gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 94 decreasing government spending. kovachevich (2016) tested the long-term relationship between the exchange rate regime and the government debt in greece, ireland, italy, portugal and spain, affected by the debt crisis in the eurozone. the spillover effect of the global financial crisis was very strong around the world, including in the european countries. after the collapse of lehman brothers in 2008 the financial crisis, which initially started in the real sector in the united states, affected the western european countries. terazi, senel (2011) pointed out that the financial crisis affected significantly the european union, especially the new members such as czech republic, estonia, latvia, lithuania, hungary, poland, slovenia, slovakia, romania and bulgaria. there were two main channels. the first one was related to the credit squeeze, which had subsequent negative effect on investments and consumption. the second channel was related to the downturn in the global economy, which on the other hand, had its negative effect on exports of the countries. terazi, senel (2011) stressed that the financial crisis in 2008 was stronger in intensity and coverage as compared to the great depression in 1930‘s. szekely and noord (2009) also stated that the european union was in its deepest recession since 1930s. ferreiro and carrasco (2016) investigated the impact of the financial and economic crisis on european union member states by focusing on the dynamic of a number of real and financial variables since 2003. atanasov et. all (2016) focused on the analysis of bulgaria’s development before and after financial crisis in 2008. they concluded that the country was highly vulnerable to the regional and global factors. the reason for that was the country’s dependence on export earnings and foreign investment. the relationship between the financial crisis in the real economy and the state of the banking system was investigated by sotirova (2012). the researcher concluded that the banking sector has experienced a healthy development and succeeded to create a favourable environment for the bulgarian economy, which helped the country to cope with the financial crisis. there are few studies, dedicated to the impact of coronavirus pandemic on the economic development of the countries. chen et all. (2020) use high frequency data such as electricity usage, smartphone movements, employment for small businesses and hourly workers to analyze the economic impact of the coronavirus pandemic on the european countries and on the united states. they concluded that the countries and regions, having more sizeable covid-19 cases, experience higher economic losses. unido (2020) also investigated which countries and manufacturing sectors were the most affected by the coronavirus crisis. the study showed that the advanced economies were hit hardest by the coronavirus pandemic, but also two emerging regions in particular emerging and developing europe and latin american and the caribbean would experience above-average decline in their economic growth rates, by 7.7% y/y and -7% y/y in 2020, respectively with world average growth rate of -6.4% y/y in 2020. sofia municipal privatization and investment agency and inovative sofia (2020) investigated the impact of covid-19 across various industries at sofia level. there were no other studies, concentrated on the impact of the coronavirus pandemic on the bulgarian economy. methods the impact of the coronavirus pandemic on the economic development of the european union countries, including bulgaria will be investigated by comparing the economic indicator for the two groups of countries: the most affected by coronavirus pandemic (mainly advanced economies) and less affected by the coronavirus health crisis. for the purpose of the analyses the countries in the european union will be divided on countries, which were the most affected by the coronavirus pandemic in terms of total coronavirus cases: italy, united kingdom, france, germany, austria, spain, belgium. the remining countries in the european union were less affected by the coronavirus pandemic. despite of the fact that the united kingdom escaped the european union, the country is included due to the fact that for the most of the analyzed period it is part of the european union. table 1. coronavirus total cases, as of may 31, 2020 country total coronavirus cases spain 286,509 uk 248,202 italy 232,979 germany 183,294 france 151,753 belgium 58,381 austria 16,731 source: www.worldometers.info/coronavirus/ gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 95 the period, which will be covered in the study, is 2007-2020. the longer period is necessary to test the second hypothesis and to compare the economic performance of countries in these two crisis periods. the data used for the comparative analysis are published on regular basis by the statistical offices, international organizations, eurostat. the study is limited from the continued uncertainties, related to coronavirus development and the possible second wave of coronavirus cases in coming months. economic development of the euroepan union countries the impact of the coronavirus pandemic will be investigated on the economic activity of the european union countries. in the first quarter of 2020 the most affected countries in the european union (italy, united kingdom, france, germany, austria, spain and belgium) reported an average decline in their gdp by 3.4% as compared to the same quarter of the previous year. the less affected countries by the coronavirus pandemic in terms of number for total cases reported an average increase in the gdp by 0.1% y/y in the first quarter of 2020 as compared to the first quarter of 2019 (figure 1 and figure 2). as compared to the financial crisis the effect of the coronavirus pandemic on the economic development of the most affected advanced countries was almost the same as the effect of the international financial crisis in 2008. this was valid especially for italy and france, which reported an economic decline of -5.6% y/y and -4.7% y/y in the first quarter of 2020 versus -7.6% y/y and -4% y/y in the first quarter of 2009. figure 1. economic growth rate of austria, belgium, germany, france, spain, italy, united kingdom, percentage change compared to same period in previous year, % source: eurostat -10 -8 -6 -4 -2 0 2 4 6 8 2 0 07 q 1 2 0 07 q 3 2 0 08 q 1 2 0 08 q 3 2 0 09 q 1 2 0 09 q 3 2 0 10 q 1 2 0 10 q 3 2 0 11 q 1 2 0 11 q 3 2 0 12 q 1 2 0 12 q 3 2 0 13 q 1 2 0 13 q 3 2 0 14 q 1 2 0 14 q 3 2 0 15 q 1 2 0 15 q 3 2 0 16 q 1 2 0 16 q 3 2 0 17 q 1 2 0 17 q 3 2 0 18 q 1 2 0 18 q 3 2 0 19 q 1 2 0 19 q 3 2 0 20 q 1 belgium germany spain france italy austria united kingdom gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 96 figure 2. economic growth rate of bulgaria, eu and the less affected countries in the eu, percentage change compared to same period in previous year, % source: eurostat in respect to manufacturing production, the most affected countries by coronavirus pandemic reported strong decline of 34.5% y/y in april 2020, accelerating the decline of 15.3% y/y in march 2020. the decline in manufacturing production, caused by the coronavirus pandemic, is significantly larger than the registered declines in manufacturing production during the international financial crisis. for example, manufacturing production fell by 19.8% in april 2009 in the most affected countries by coronavirus pandemic (figure 3). figure 3. production in manufacturing, austria, belgium, germany, france, spain, italy, united kingdom, percentage change compared to same period in previous year source: eurostat the less affected countries by coronavirus pandemic reported decline of 20.4% y/y in april 2020, accelerating the drop of 7% y/y in march 2020. the decline in manufacturing production, caused by the coronavirus pandemic, is significantly larger than the registered drop in manufacturing production during the international financial crisis. in april 2009, the manufacturing production went down by 19.1% y/y in the less affected countries by coronavirus pandemic (figure 4). -8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 2 0 07 q 1 2 0 07 q 3 2 0 08 q 1 2 0 08 q 3 2 0 09 q 1 2 0 09 q 3 2 0 10 q 1 2 0 10 q 3 2 0 11 q 1 2 0 11 q 3 2 0 12 q 1 2 0 12 q 3 2 0 13 q 1 2 0 13 q 3 2 0 14 q 1 2 0 14 q 3 2 0 15 q 1 2 0 15 q 3 2 0 16 q 1 2 0 16 q 3 2 0 17 q 1 2 0 17 q 3 2 0 18 q 1 2 0 18 q 3 2 0 19 q 1 2 0 19 q 3 2 0 20 q 1 bulgaria european union 27 countries (from 2020) average growth rate, less affected countries in the eu -50,0 -40,0 -30,0 -20,0 -10,0 0,0 10,0 20,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 belgium germany spain france italy austria united kingdom gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 97 figure 4. production in manufacturing, bulgaria, eu and the less affected countries in the eu, percentage change compared to same period in previous year source: eurostat in respect to construction production, the most affected countries by coronavirus pandemic recorded again strong drop of 37.8% y/y in april 2020, accelerating the decline of 18% y/y in march 2020. the strongest decline was seen in italy, the country where the coronavirus case was met for the first time in europe. the construction production in italy fell by 67.8% y/y in april 2020 (figure 5). again, there was a stronger decline in construction production during the coronavirus pandemic as compared to the period of the international financial crisis. in 2009, the construction production of these countries went down by 10.6% y/y in january and 11.5% y/y in february 2009. figure 5. production in construction, austria, belgium, germany, france, spain, italy, united kingdom, percentage change compared to same period in previous year source: eurostat the less affected countries by coronavirus pandemic reported decline of 6.5% y/y in april 2020, accelerating the drop of 2.8% y/y in march 2020. the decline in construction production was comparable to that recorded during the international financial crisis. the strongest decline of 8.6% y/y in construction -40,0 -30,0 -20,0 -10,0 0,0 10,0 20,0 30,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 bulgaria european union 27 countries (from 2020) average growth rate, less affected countries in the eu -80,0 -60,0 -40,0 -20,0 0,0 20,0 40,0 60,0 80,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 belgium germany spain france italy austria united kingdom gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 98 production of the less affected countries by coronavirus pandemic was recorded in may 2009 (figure 6). in bulgaria the construction production declined by higher rate of 20.4% y/y in may 2020 than the average level for the less affected countries in the eu. despite the reported declines in the construction production in the less affected countries, the reported drops were lower that that seen in the period of the global financial crisis. figure 6. production in construction, bulgaria, eu and the less affected countries in the eu, percentage change compared to same period in previous year source: eurostat retail trade was also negatively affected by the coronavirus pandemic. in the most affected countries by the coronavirus pandemic in terms of the total number of coronavirus cases, there was a decline of 22.1% y/y in april 2020. again, the reported declines were stronger than that of the period of the international financial crisis. in may 2009, retail sales stepped down by only 3.1% in february 2020. figure 7. retail trade, austria, belgium, germany, france, spain, italy, united kingdom, percentage change compared to same period in previous year source: eurostat in the less affected countries by the coronavirus pandemic reported a decline of 16.2% y/y in april 2020, while in may 2009 the registered drop was 8.4% y/y, being lower as compared to the period of the health crisis. in may 2020, the retail sales recovered, dropping by only 4.6% y/y due to the removal -40,0 -30,0 -20,0 -10,0 0,0 10,0 20,0 30,0 40,0 50,0 60,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 bulgaria european union 27 countries (from 2020) average growth rate, less affected countries in the eu -40,0 -35,0 -30,0 -25,0 -20,0 -15,0 -10,0 -5,0 0,0 5,0 10,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 belgium germany spain france italy austria united kingdom gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 99 of a significant part of the measures against the coronavirus pandemic in many countries and opening if trade centers and small shops. figure 8. retail trade, bulgaria, eu and the less affected countries in the eu, percentage change compared to same period in previous year source: eurostat in the crisis periods the number of unemployed increases due to the decrease in the aggregate demand. in case of the coronavirus pandemic some of the businesses such as automotive industry even stopped their production, due to high costs, increasing hospital coronavirus cases and lack of exports markets due to borders closure. trade centers, shops, some service sectors, restaurants, and coffees stopped working, which triggered the small and medium-sized enterprises’ owners to lay off their workers. governments tried to help the sectors, which were the most affected by the pandemic, to stop the fast increase in unemployment. in bulgaria the government undertook a measure, which to pay up to 60% of the worker’s salaries and the employers to keep on paying the remaining 40%. in the austria and germany also, the governments tried to help the enterprises and people, but aiming to prevent workers from entering the labor market during the strict coronavirus measures. as a result of the pandemic the unemployment rate in the countries started to increase. the most affected countries reported a rise in unemployment rate. in germany the unemployment rate rose from 3.1% at end-2019 to 4.4% in may 2020. in spain the unemployment rate also rose from 13.7% at end-2019 to 14.3% at end-may 2020, while in italy it stepped up from 4.3% at end-2019 to 6% at end-may 2020 (figure 9). the unemployment rate in the most affected countries by the coronavirus pandemic rose by only 0.2pps y/y to 7.6% at end-may 2020. -30,0 -20,0 -10,0 0,0 10,0 20,0 30,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 bulgaria european union 27 countries (from 2020) average growth rate, less affected countries in the eu gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 100 figure 9. unemployment rate, austria, belgium, germany, france, spain, italy, united kingdom, percentage of active population, % source: eurostat the countries with less coronavirus cases reported higher increase in the unemployment rate (figure 10). the unemployment rate stepped up from 5.6% at end-may 2019 to 6.3% at end-2020. in case of bulgaria, the unemployment rate rose from 4.2% at end-may 2019 to 5% at end-april 2020 and decreased by 0.4% m/m at end-may 2020. the decline in unemployment rate was related to the measure undertaken by the government 60% to 40%, which helped the employers to retain their workers. in addition, in may 2020 most of the restrictive measures was lifted, and the sectors affected by the pandemic-related economic closure are recovering. figure 10. unemployment rate, bulgaria, eu and the less affected countries in the eu, percentage of active population, % source: eurostat the analyses of the short-term indicators for the economic development in the european union showed that there were strong negative effects on the european union countries especially on the countries with the highest number of coronavirus cases. the negative effect was seen in the economic growth rate, construction and manufacturing production. for these countries (belgium, united kingdom, germany, spain, italy, austria, france) the reported declines were stronger than the drops reported during 0,0 5,0 10,0 15,0 20,0 25,0 30,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 belgium germany spain france italy austria united kingdom 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 2 0 07 m 01 2 0 07 m 07 2 0 08 m 01 2 0 08 m 07 2 0 09 m 01 2 0 09 m 07 2 0 10 m 01 2 0 10 m 07 2 0 11 m 01 2 0 11 m 07 2 0 12 m 01 2 0 12 m 07 2 0 13 m 01 2 0 13 m 07 2 0 14 m 01 2 0 14 m 07 2 0 15 m 01 2 0 15 m 07 2 0 16 m 01 2 0 16 m 07 2 0 17 m 01 2 0 17 m 07 2 0 18 m 01 2 0 18 m 07 2 0 19 m 01 2 0 19 m 07 2 0 20 m 01 bulgaria european union 27 countries (from 2020) average growth rate, less affected countries in the eu gergana ilieva mihaylova-borisova / finance, accounting and business analysis 2 (2) 2020 101 the international financial crisis in 2008. at the same time, the less affected countries by the coronavirus pandemic in the european union reported the comparable declines in gdp growth rate, construction, manufacturing production and retail sales to the drops seen during the international financial crisis. unido (2020), quoting ma et. all (2020), stressed that the decline in the gdp growth was less severe in low-income countries, facing the coronavirus pandemic, than the advanced countries. the future economic development of the eu countries depends on the development of the coronavirus pandemic. in countries with more cases of coronavirus in the first months of 2020, a smoother exit from the health crisis can be observed in following months. in countries that have had fewer cases of coronavirus, the situation is yet to worsen, which will change the future development of short-term indicators. it is possible to expect even greater deterioration of indicators in these countries. conclusion the analyses showed that there is strong negative effect of coronavirus pandemic on the economic development of the countries in the european union, which have the most total coronavirus cases. the gdp decline in the advanced countries because of the coronavirus crisis was even stronger that the gdp drop because of the international financial crisis in 2008. in respect to the less hit economies by the coronavirus cases, the gdp declines but with lower grade as compared to the international financial crisis. the short-term indicator – manufacturing production and construction production, showed even stronger decline in april 2020 as compared to its decline during the international financial crisis. the reason for that was the fact that the health crisis affected almost all sectors in the economy, not only the financial sector as it was during the international financial crisis in 2008. unemployment rate remained less affected by the coronavirus pandemic, but it would increase in following months as the effects are manifested in the longer term. references atanasov, a, trifonova, s. 2016. assessing the impact of the global financial crisis on bulgaria's economy from the sector perspective. international journal of emerging research in management &technology chen, s, igan, d., pierri, n., presbitero, andr. 2020. the economic impact of covid-19 in europe and the usa& outbreaks and individual behavior matter a great deal, non-pharmaceutical interventions matter less. 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monetary policy’s instruments in vietnam: basis and evolution in a difficult international financial context quang nguyen university of picardie, france info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: monetary policy; reserves requirements; interest rate; openmarket operations; emerging market; inflation targeting; vietnam abstract ___________________________________________________________________ this work provides an overview of the evolution of monetary policy in vietnam in the years following the changes in the vietnamese economy in 20 years, through two periods with two financial crises (1997 asian financial crisis and 2008 financial crisis). this work also includes a synthesis of the theoretical and empirical research of vietnamese authors on the subject of monetary policy analysis in vietnam. in addition, this study aims to understand the change in monetary policy in vietnam, the socialistoriented economy, lower middle-income emerging economy, through the adjustment of the instruments that have been developed by the central bank of vietnam. in this period of study, analyses can show to what extent reforms can explain why monetary policy developments are intended not only to stabilize the macro-economy and ensure strong economic growth, but also to address one of the biggest problems in the vietnamese economy, inflation.  address correspondence: cs 52501 80025 cedex, chemin du thil, 80025 amiens, prancis quang nguyen / finance, accounting and business analysis 1 (2) (2019) 127 introduction after 40 years of reunification (the victory over the united states in 1975) and 30 years after the reforms (the doi moi policy renovation in 1986), vietnam is considered a success story in the development process, with great achievements made in recent years, as well as great development potential in the future. major organizations such as the united nations (un), the world bank (wb), the asian development bank (adb) and also the american financial group bloomberg have addressed this development. the progress made in recent years has been driven mainly by sustained economic reforms, integration into the global economy and an environment of macroeconomic stability. after the period of hyperinflation (see figure 1), since 1990, its gdp has been multiplied by about 3 times, the gdp growth rate per year has reached 5.7%. since 2000, after learning from the experience of the slightly negative effects of the asian financial crisis1, the economy has seemed to be recovering with stable economic growth averaging 8% per year, a level that was surpassed only by china in asia and continued to grow until the global economic crisis of 20082. however, since 2007, and in particular the 2007-2008 global financial crisis, vietnam has been experiencing macroeconomic instability. the gdp growth rate has declined sharply while the inflation rate has reached double-digit values (pham, 2016). recent studies have provided evidence that a malfunctioning monetary policy may have contributed to the slowdown in economic growth. the vietnamese government and the central bank appear to have maintained traditional approaches to monetary policy management, although vietnam's economy has become more open and better integrated into the 1 see hochraich d. (1998), "financial crisis and competitiveness in asian countries, beyond the monetary crisis” in ceri studies, fondation nationales des sciences politiques, paris 2 pham, t. a. (2016), pg. 3 global economy with vietnam's accession to the wto in 2007. conceptual developments and further theoretical analysis can provide insights into the effectiveness of monetary policy management in dealing with external shocks. figure 1. gdp growth and inflation in vietnam in the period of hyperinflation (19801989) source : pham, t. a. (2016), p. 12 in order to stabilize the macroeconomic situation and control inflation, the monetary policies of the central bank of vietnam are adjusted, by instruments, according to the real financial situation on the market, in particular after the asian crisis of 1997 and after the global financial crisis in 2008. in the context of developments in vietnam's economic and financial sector, the results of the theoretical analyses presented in this paper are demonstrated on the basis of the reforms of the instruments based on the data in the two periods (1998 2007 and 2007 2018). the rest of the document is organized as follows. section 2 presents the literature review on the subject. section 3 provides a brief overview of monetary policy in vietnam. section 4 describes the management of the financial instruments of the central bank of vietnam over two different periods. section 5concludes the document. review of the litterature monetary theories often focus on different factors and relevant policies will reflect the platforms of theory. to decide how the different policy instruments are used, regular policy makers must evaluate the time and effectiveness quang nguyen / finance, accounting and business analysis 1 (2) (2019) 128 of economic policies through experimentation. the problem of monetary theories in the economy is often controversial. for example, some assumptions about the effects of monetary problems are based on real economic growth, while others attempt to reject it and do the opposite. in addition, the effectiveness of monetary and fiscal policy is the subject of a long debate. the conceptual foundations of monetary policy are often mentioned by: (1) quantitative money theory3, which shows that, in the long run, money supply does not depend on gdp, but on price changes or changes in the general price level. the arguments also show the importance of the speed of money supply growth. this theory can also be considered the first recognized theory of how monetary policies affect the general market price through changes in the money supply. (mv = pv); (2) traditional keynesian theory4, the main argument of the theory is that employment is mainly determined by consumer demand. this is completely different from the arguments of the neoclassical school of economics where the price of labour is the key factor determining employment. hicks (1937) and hansen (1953) explained the effect of monetary adjustment in macroeconomic theory of keynesian theory by the is-lm model. this model is based on the relationship between interest rates and real output, showing the balance of the market for goods and services. the model is also used in money markets, but only when the economy is closed; (3) mundell (1963) and fleming (1962)5 developed a model 3 see fisher, i., & brown, h. g. (1912), “the purchasingpower of money”, 2006 édition, cosimo classics. 4 see keynes, j. m. (1936), “the general theory of employment, interest, and money”, united kingdom: palgrave macmillan. 5 see mundell, r. (1963), “capital mobility and stabilization policy under fixed and flexible exchange rates”, the canadian journal of economies and political science /revue canadienne d'economique et de science politique, 29(4), 475-485. that could be used in an open economy. this model is also known as the is-lmbop model. it is often used to describe the short-term relationship between nominal exchange rates, interest rates and output in an open (developing) economy. the mundell-fleming model is often remembered for the argument that an economy cannot simultaneously maintain an independent monetary policy with fixed exchange rates and free capital flows (mundell-fleming trilemma); (4) phillips' curve6, by british economic studies from 1861 to 1957, william phillips (1958) found an inverse relationship between monetary wage changes and unemployment. samuelson and solow (1960) used phillips' results to apply the relationship between the inflation rate and the unemployment rate to the united states. samuelson and solow argue that inflation and the unemployment rate are inversely related, constructing the famous phillips curve, in order to argue that to consolidate employment, it is necessary to keep the inflation rate at its fair value. however, the recent phillips curve is no longer very applicable because many studies have been conducted with data from different countries showing that there is no clear bidirectional impact between inflation and growth. in the 1990s, the phillips curve also gave it an error through studies such as those by barro (1995) and fischer (1993), which show that inflation remains high while economic growth is low; (5) monetarism7, represented by see fleming, m. (1962), “domestic financial policies under fixed and under floating exchange rates” staff papers (vol. 9, pp. 369-380), international monetary fund. 6 phillips, a. w. (1958), “the relation between unemployment and the rate of change of money wage rates in the united kingdom”, 1861-1957, economica, 25(100), 283-299. 7 cf. friedman, m. (1948), “a monetary and fiscal framework for economic stability”, the american economic review, 38(3), 20. friedman, m. (1963), “inflation: causes and consequences”, proquest/csa journal division. quang nguyen / finance, accounting and business analysis 1 (2) (2019) 129 milton friedman, who praised the importance of monetary policy for fiscal policy. the arguments put forward in this school often argue that changes in money supply have a major influence on national production in the short term and on the general price level in the long term. since then, money economists have often stressed that, in order to conduct monetary policy properly, it is necessary to control the money supply in circulation (friedman, 1948). returning to the case study of monetary policies in the vietnamese market, we can see that before the 2000s, there was a lot of theoretical and empirical research. however, these studies are more descriptive arguments by comparing past and current data and analyzing proposed economic objectives and prospects for vietnam's future (tran & vuong, 2009). the study of monetary policy during this period is usually conducted by foreign economists such as fforde et de vylder (1996), oudin (1999) or riedel and turley (1999). however, these studies do not deal in depth with the objectives of monetary policy, but most of them deal with issues related to vietnam's macro economy. in particular, during this period, the vietnamese economy was gradually moving from a subsidized to a market-oriented economy. research analyses are often focused and developed on policy of doi moi (renovation) and trade balance recommendations. in the period following the 2000s, in particular vietnam's accession to the wto in 2007, in addition to the great benefits of economic openness and integration into the world economy, vietnam also faced significant challenges and difficulties due to the global economic crisis. vietnamese economic experts and policy makers have become considerably aware of the direct link between financial crises and monetary policy. as a result, more and more studies are focusing on central monetary friedman, m. (2001), “one world, one currency options politiques”, institute for research on public policy. policy issues, using not only theoretical arguments but also empirical models. however, the above studies have focused on specific monetary policy issues, but do not cover the overall objectives constructed in financial markets. in addition to the relationship between macroeconomic factors (such as economic growth), issues such as inflation rates, exchange rates or credit management are often the most important. there have been many analytical studies on the exchange rate problem. in vuong and ngo's study (2002), which focused on the period during and after the 1997 asian financial crisis, the var model demonstrated that vietnam's monetary value can be maintained by adopting a parallel exchange rate regime. following the may study (2007), in the context of macroeconomics in times of global economic crisis, the author argued that vietnam applies a flexible exchange rate regime instead of a fixed exchange rate regime. the author made the above argument after conducting a comprehensive study of the exchange rate regime using an optimal monetary theory. in addition, nguyen, t. p. & nguyen, d. t. (2009) also concluded that mismanagement of the exchange rate regime can lead to a decline in the efficiency of the exchange market in the economy. the problem of real exchange rate adjustment has also been the subject of empirical studies. nguyen and kalirajan (2006), exports can be stimulated and the balance of payments current account can be improved if the dong is devalued. through his research, the author also shows that dong devaluation can reduce the real exchange rate in the short term. maintaining the stability and competitiveness of real exchange rates is also central to the results of the study conducted by le (2007). in addition, many studies have been conducted on inflation as part of the analysis of monetary transmission channels in vietnam. these analyses often focus on the causes and consequences of inflation on the economy. studies often show that the cause of inflation is often explained by credit, studies also show that the money supply does not significantly affect inflation. given the empirical results of the quang nguyen / finance, accounting and business analysis 1 (2) (2019) 130 imf's research with a six-quarter delay8, money supply growth explains only about 10% of the inflation rate and the effect will decrease over time. by researching bhattacharya (2013), the results show that credit growth has a positive effect on inflation for the economy with a lag of more than a year (using data from 19992013), the study does not, however, show the relationship between inflation and money supply in vietnam. similarly, using quarterly data from 1996-2005, le & pfau (2009) showed that the cause of inflation does not come from m2 after the econometric model was applied. in addition, the results of the analysis during this period also showed that counterpart credit had a significant impact on the cpi. this study also shows that the government and the state bank manage the injection of liquidity into the market through credit channels (analysis of variance with an eight-quarter lag), credit accounted for 23.08% of output’s shocks, while the money supply represented only 9.51%9. camen (2006) also gave the same results. thanks to the var model and the analysis of variance forecasts for the period 1996-2005, credit explains 18% of inflation, while the key rate plays no role10. in addition, camen concluded that vietnam's inflation rate was explained by both commodity prices and exchange rates. similarly, the role of exchange rates on inflation is also important for goujon, he explained in his research by analyzing the effects on the macro economy in the 1990s. the results of this study show that the inflation rate will increase by 1% when the exchange rate is depreciated by 2%. this suggests that, in order to control the inflation rate in vietnam or to increase the money supply, the author proposed to control the exchange rate as well as money market prices. in their study, however, vo et al. (2002) showed the opposite 8 see international monetary fund (2003) ‘what drives inflation in vietnam? a regional approach”, imf country report n° 06/422. in vietnam: selected issues. washington, dc, usa: international monetary fund 9 see le v. h., & pfau, w. d. (2009), p. 175 10 see camen, u. (2006), p. 247 when they assumed that exchange rates and money supply changes had only a very small effect on inflation rates. the arguments in this study were then rejected in 2010 by the results of nguyen, t. t. t. h. & nguyen, d. t. the two authors showed the important impact of exchange rate depreciation on inflation rates, although they consider inflation to be a problem originating in the national economy. in addition, studies on the analysis of the monetary policy framework were also conducted for the vietnamese economy. tran (2005), using the var model, presented the results and the relationship between the world price of gold and the price of gold in vietnam by analyzing the growth of the money supply adjusted by the central bank in response to price and exchange rate changes in the money markets; this study also shows that, by controlling interest rates, the central bank can hardly control public demand for gold. in the study of the monetary policy transmission mechanism by v. h. le and pfau (2009), the role of credit channels and exchange rates is increasingly reinforced rather than the role of interest rates in vietnam. a. t. p. le (2007) showed that strict inflation targeting in the vietnamese market is not necessary, as it places inflation targeting above other monetary policy targets. after all, when analyzing the monetary framework, studies focus almost exclusively on a specific objective using econometric methods such as var or vecm models, but there is no generalized aggregation for all targets. overview of monetary policy in vietnam state bank of vietnam (sbv) “the state bank of vietnam (below referred to as the state bank) is a ministerial-level agency of the government and the central bank of the socialist republic of vietnam”11 after the sixth congress of the communist party of vietnam, the economy 11 article 2. position and functions of the state bank of vietnam, law on the state bank of vietnam, the national assembly, n° 46/2010/qh12 quang nguyen / finance, accounting and business analysis 1 (2) (2019) 131 moved from a planned to a state-regulated market economy. we must resume the first step, the construction and reform of the operational organization of the banking system, which focused on monetary policy. since 1990, two banking ordinances have been adopted (sbv’s ordinance / commercial bank, credit union and financial corporation ordinance), the country has followed the east asian "developmental state" model with the transition of vietnam's banking system from one level to two levels12. the objective is to promote and ensure sustainable economic development through structural changes in the production system and a high rate of economic growth (le, 2007). it clearly defines the functions of government management for the sbv and the functional currency of credit institutions' activity (acclimatized to the market economy banking system). in october 1998, two banking laws were replaced by two new ones: the law on state banking and the law on legal credit institutions. these two laws have contributed to the proper functioning of the banking system, which has become freer, more open and more compatible with major changes in the banking sector13.in terms of many aspects of the organization and implementation of monetary policy in vietnam, the power of the state bank is quite limited. in general, important monetary decisions are governed by the national assembly, the government and the national monetary policy advisory council. on the other hand, the state bank must prepare an annual report on the activities to be carried out in the context of the implementation of monetary policy in the past, as well as suggestions for future economic development. the government, after receiving the report, may make changes and amendments in consultation with the national monetary policy advisory 12 further analyses are mentioned in the article lich sử ngân hàng nhà nước viêt nam (history of the central bank of vietnam) on the official sbv website (see bibliography) 13 law on the state bank of vietnam (1997) council, which is then transmitted to the national assembly for final approval. the congress will normally approve the forecasts according to different objectives, such as the state budget or the economic growth objective. after receiving final approval, the state bank may conduct monetary policy activities related to the development of the financial market and may adapt accordingly; however, the bank may report periodically to the govemment and the national assembly (camen, 2006; national assembly of vietnam, 1997). consequently, from a legal point of view, the role of the state bank is quite limited, while the government's intervention is quite strong in the implementation of monetary policy in vietnam. before the real volatility of inflation, economic growth became difficult. to improve the operational effectiveness of macroeconomic policies, the ministry of finance and the state bank of vietnam (sbv) signed the coordination and information exchange regulation (29/2/2013). subsequently, four government agencies, such as the ministry of planning and investment and the state bank, the ministry of finance and the ministry of industry and trade also signed the regulation on coordination in macroeconomic management and direction (12/01/2014). coordination between fiscal policy and monetary policy only arises when both policies are implemented by two independent organizations. in the case where one organization depends on the action of the other organization, or under the direction of another organization, it has the natural consequence that mutual coordination of organizations is necessary in the implementation of policies. in practice, in vietnam, monetary policy was carried out by the central bank, which gradually became independent of the functioning of fiscal policy. monetary policy objectives in vietnam monetary policy has been identified through the construction of a specific policy, price stability. on the other hand, they are credit policy (tools for mobilizing capital and quang nguyen / finance, accounting and business analysis 1 (2) (2019) 132 extending loans to all economic sectors); central bank independence to overcome the "inflation bias" (bordes, 2007), implementation of positive real interest rate policy, interest rate adjustments in line with inflation volatility; exchange rate policy and a number of other support tools. in vietnam, three monetary policy objectives are commonly set: inflation, economic growth and a balanced state budget. the process generally proceeds in the following order: (1) the government determines, implements and directs monetary policy and determines the amount of liquidity injected into the economic market; (2) the national assembly oversees the implementation of monetary policy; and (3) the government has an obligation to report periodically on the progress of monetary policy. in addition, other monetary policy objectives are also pursued by law. according to the 1998 law on the state bank of vietnam, the sbv’s mission is to stabilize the value of the currency, ensure the security of the banking system and facilitate socio-economic development (kovsted et al. 2002). moreover, the relationship between nominal exchange rates and domestic prices is still closely linked (le, 2007). the importance of this link is evident in the difficult period before the implementation of the doi moi policy in 1986. it was at this time that vietnam faced hyperinflation and a sharp drop in the exchange rate on the financial market. compared to many developing countries, vietnam has always focused on the objective of curbing inflation through its experience with hyperinflation and public sensitivity to market price fluctuations. subsequently, the central bank of vietnam carries out more efficient operations, demonstrating the role of management through the promulgation and finalization of mechanisms, policies and administration of policies that work effectively. the innovative organization of the banking system has made a pact with science. the strengthening of the state commercial banking system, the development of international relations and construction regulations make it possible to set up and manage the credit institutions' system. monetary policy construction and operation then becomes more comprehensive and efficient, helps to curb inflation, and gradually stabilizes the value of the dong. in the early 2000s, vietnam's economic growth increased significantly thanks to the implementation of an accommodative monetary policy and fiscal stimulus, but the vietnamese government seems to have failed to achieve the economic growth target in this period. the average economic growth from 2001 to 2007 reached 6.94%. this ratio fell by 1.06 percentage points in the period 2008-2015. meanwhile, the average inflation rate from 2008 to 2015 was 4.32 percentage points higher than the period from 2001 to 2007. figure 2. gdp growth and inflation in vietnam (1997-2018) source: gso, private calculations -5 0 5 10 15 20 25 1 9 97 1 9 98 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17 2 0 18 inflation, consumer prices (annual %) gdp growth (annual %) quang nguyen / finance, accounting and business analysis 1 (2) (2019) 133 through the analysis of economic policies in vietnam, the fact is that economic growth is the government's main objective (to et al., 2012). normally, the state bank is responsible for developing the monetary policies necessary to achieve the objectives set. in addition, the role of the state bank is to control nominal exchange rates, monitor liquidity pumping and provide credit to the economy. the state bank's objectives are generally published each year at the same time as the government's economic objectives. for example, in 2017, the government set an economic growth target of 6.7% and an inflation target of less than 4%. at the same time, the state bank has also set a target that the exchange rate should not increase by more than 2% and that the m2 should increase by only 3.9%. it can be seen that the role and objectives of the government and the bank are often controversial, they can be discussed and analysed by vietnamese economists to reflect conflicts and make recommendations for the future in terms of economic benefits (pham, 2011). in 2015, vietnam's economy grew at a higher rate. the inflation plan has been kept at very low levels (in 2015, average annual inflation growth was 0.63% to 6.68%). this is the result of the economic governance efforts of government agencies. they have been working to repel the effects of the "shock" both inside and outside the economy over time, especially since the global financial crisis of 2007-2009. according to gso reports, vietnam's gdp growth in 2018 was 7.08%, its highest level since 2008, while inflation remained below 4%. this result shows that the vietnamese government has learned lessons, it partly reflects the synchronization achieved between the sbv and the vietnamese government14. management of monetary policy’s instruments period from 1998 to 2007 14 gso annual report (2018) in this phase, the objective of monetary policy was to stabilize the macro-economy and ensure strong economic growth. increasing the pace of development was the main objective of this phase. macroeconomic objectives imply in a broader sense that the control of the target, economic stability, uneven growth over the year, and the inflation fluctuation ratio are not too high. the aim was to achieve the balance of payments from shortage to equilibrium and eventually to surplus. in particular, it was necessary to ensure a balanced budget, in particular, to increase revenues and reduce operating expenses in order to concentrate public investment. the interest rate: this period is marked by a fundamental change in the management of interest rates, so that they can be adapted to the pace of vietnam's economic reform. sbv managed the interest rate policy through a maximum interest rate cap under the loan term. interest rate caps and the interest rate differential have been announced. commercial banks applied some flexibility to adjust interest rates for loans and deposits that corresponded to the characteristics of capital and trade in particular. the interest rate mechanism made fundamental changes starting in may 2000. reserves requirements: under the reserve requirement for regulations issued under sbv decisions no. 1991/1999 / qd-nhnn1 1997, the reserve requirement ratio for credit institutions has been decided (6% for short-term and demand deposits; 6% for medium and longterm deposits). interest must also be paid for excess reserves, as well as penalties if credit institutions do not have the mandatory reserve account. these rules encourage credit institutions actively operating in the company's capital. they implement the stipulated required reserve, a consistent operational target for monetary policy. refinancing: through mortgage documents and mortgages in commercial banks' foreign currency deposits, the central bank carried out the short-term refinancing to compensate for the temporary payment difficulties of commercial banks. in 1998, the quang nguyen / finance, accounting and business analysis 1 (2) (2019) 134 refinancing interest rate can be adjusted from 1% to 1.1% per month. in 1999, when there was the interest rate reduction, the refinancing ceiling was lowered to 0.85% each month. open-market operations: these are carried out on 12 july 2000. the market opening date, chaired and inaugurated by the central bank on the occasion of the first session. market tools are now functional, they are considered the most important tools of monetary policy, because they have more advantages than other tools. they allow the central bank to actively operate a flexible monetary policy. consequently, the application of open-market has marked an important development in the management of the central bank's monetary policy, moving from the use of rigid administrative tools to flexible and more efficient tools. the credit limit: giving the credit line will generate difficult factors for commercial banks. although this tool has been applied since 1994, its impact on performance was only observed in the second quarter of 1998, but the central bank did not apply this tool as a routine tool in monetary policy management. period from 2007 to 2018 the economic context is more broadly and deeply integrated into the global economy, leading to faster trade development and the inflow of international capital more rapidly and intensely. thus, the construction and operation of monetary policy becomes more complex and difficult. a flexible monetary policy is implemented through the adjustment of the tool. more precisely15: interest rate: from may 2007 to june 2008, the central bank raised the key interest rate in order to absorb the excess liquidity caused by strong foreign capital inflows. in late 2008 and early 2009, when inflationary pressure eased, the central bank also reduced the policy rate to support economic growth. 15 the data and number in the analyzes are taken from the annual reports of the central bank of vietnam between 2009 and the first quarter of 2010, the central bank carried out the base rate mechanism under which banks set the deposit and lending rates to vnd. it was not to exceed 150% of the base rate. in 2011, to adjust interest rates, the central bank gradually increased the operator in order to implement a restrictive and prudent monetary policy, but also to fight inflation. in 2012, on the condition that inflation forecasts were on a downward trend, the interest rate tool was actively used. the downward trend had to be followed online by reducing inflation and inflation expectations. it was necessary to ensure that the real interest rate was positive, in order to prevent a further increase in inflation. recently, due to the excess liquidity of commercial banks, from march 2014 to today, the refinancing rate is 6.5%, which is much lower compared to the 15% at the end of 2011 and the rediscount rate of 4.5%. reserves requirements: thanks to monetary policy, the refinancing rate has been better controlled, in line with the objectives and monetary developments of each period. in 2007, in order to neutralize excess liquidity in the banking system, alongside open market operations tools, the central bank raised the percentage of the reserve requirement ratio for commercial banks in mid-2007 and early 2008. at the end of 2008, the central bank lowered the rrc to reduce liquidity pressures for banks, which reduced funding costs and encouraged banks to raise capital and loans. in particular, the reserve requirement ratio for vnd deposits declined rapidly from 11% in mid-2008 to 3% in the first quarter of 2009. it is still at 3% at the moment. the reserve requirement ratio for foreign currency deposits declined more slowly, from 11% between 2008 and 4% in 2010. since september 2011 until today, it has been maintained at 6%. open-market operations: since july 2000, open-market operations have been constantly being developed. they have become a tool for currency regulation, mainly through sbv. since 2007, the tendency of the foreign currency to circulate in vietnam has increased, which can quang nguyen / finance, accounting and business analysis 1 (2) (2019) 135 cause the currency to devalue. the central bank increased foreign exchange reserves in order to stabilize the exchange rate. if in the period from 2008 to 2009, the deadline for long-term securities mainly offer 7 and 14 days. during the first 3 quarters of 2010, the 4% interest rate subsidy for short-term loans expires, so the central bank increased the purchase term by an additional 28 days to support banks' liquidity, allowing them to reduce market interest rates and continue to support economic growth. the exchange rate: the exchange rate tool has been significantly adjusted to reflect as closely as possible the pace of supply and demand in the exchange market, as a basis for improving market regulation. in the period before 2011, the exchange rate was still under pressure and the foreign exchange market was unstable in january 2011. the central bank had revised the marginal rate to 9.3%, while there was a narrow negotiating margin between +3% and +1%. after that, the central bank implemented flexible market intervention to stabilize the exchange rate, which helped to reduce dollarization. in 2012 2013, the central bank aims to control the increase in exchange rates within the limit of 2 to 3% per year with the aim of controlling the possibilities of a devaluation of the vietnamese currency. moreover, it has also created favorable conditions for companies active in the preparation and implementation of a business plan. in june 2013, thanks to sbv's operating practices, the exchange rate was only adjusted by 1%. in september 2014, the central bank adjusts the exchange rate to only 1% and it will remain so until the end of the year. in 2015, due to the volatility of the global economy, the adjustment of the renminbi (yuan) exchange rate by china and the interest rate adjustment by the us federal reserve (fed) at the end of 2015, the volatility of exchange rate pressure in vietnam was quite high. the sbv devalued the value of the vnd three times in 2015 (january, may and august) with an adjustment of 1%. with the devaluation of the local currency in may 2015, due to the strong pressure due to the devaluation of the yuan, the state bank of vietnam adjusted the rate from +1% to +2% on 12/8 and from +3% on 19/8. other tools: after a long period of floating interest rates, the central bank reused the wear rate to limit its cap that could cause fluctuations in money market liquidity. the central bank set the cap at 12%/year in may 2008 and adjusted the cap to 14%/year from march 2008. this cap was lowered by the central bank when the inflation risk came under control. on 29 october 2014, in accordance with decision no. 2173 / qd-nhnnn dated 28/10/2014, the sbv set out the provisions mobilizing the ceiling on demand deposits (from 1 to 6 months) at 5.5% and 1% for deposits of less than 1 month. in addition, during this period, in order to help control credit growth and to contain inflation, the central bank asked commercial banks to control credit growth and associate it with credit quality. in addition, the central bank's monetary policy has actively collaborated with fiscal policy to attract capital by transferring about vnd 50 trillion from central bank cash deposits. since 2009, expansionary monetary policy measures have prevented the risk of recession. the central bank has put in place programs to support the interest rate at 4%, as indicated by the government for all loans, which has helped to eliminate difficulties for companies. in 2011, due to rising inflationary pressures, coupled with the tightening of traditional instruments, the central bank also used other measures to strictly control the currency, it increased the tightening effects for the 20% lower credit growth rate. in 2012 and 2013, the central bank continued to monitor credit growth, but at a higher level of control than in the previous year. this shows that even if the central bank pursues an expansionary monetary policy, there is still some caution about the risk of excessive credit expansion. in 2014, the target set is the m2 have increased by about 16-18% and the annual rate of credit growth by 12-14%. in short, this was the last time that the central bank and the ministry of finance had to intervene through flexible policy tools and efforts to implement the quang nguyen / finance, accounting and business analysis 1 (2) (2019) 136 government's macroeconomic objectives. however, macroeconomic objectives, including the objective of economic growth, are not always possible for many objective and subjective reasons. conclusion after having applied changes in laws and principles by monetary authorities, monetary policy has become an indispensable tool in the macroeconomic operator, its role for the economy is becoming clearer and stronger. previously, monetary policy was not really a policy, now its content, tasks and objectives are clearly defined as successive stages of socio-economic reforms in vietnam's economy progress. although the vietnamese economy is not yet fully a market economy, an appropriate monetary policy has been found to adapt to the country's conditions. this is reflected in the favorable macroeconomic indicators that vietnam has achieved over 20 years and through creative adaptation to real situations. it has been built a favorable regulatory environment, realized the role and motivation, premises of the legal environment in the innovation of monetary policy, currency system credit bank. with experiences, exploitations, capturing the reality signal, it was first set up the basic elements of the abandoned legal environment, from the birth of the two banking ordinances with the first law to regulate legal relations and commercial banks, the central bank has evolved its laws. a first law on credit institutions was adopted by congress and became effective on 1/10/1998. in recent years, the introduction of the second law into banking practices has focused on a new legal framework. money and banking transactions have many remarkable achievements. a two-tier banking system is now in place, the central bank uses lenders of last resort, commercial banks control borrowing and carry out banking activities under the direction of the central bank. the autonomy of the company and the elimination of subsidies to banks are increasingly reducing operating costs, in order to enable companies to be more efficient. the bank has updated a large number of innovations, bringing new technology into operational management as well as the construction of a payment system through modern computer networks. this is considered a positive step towards transforming the quality of money and banking operations in vietnam. references hochraich d. (1998), “crise financière et compétitivité dans les pays d’asie, au delà de la crise monétaire” (in english : financial crisis and competitiveness in asian countries, beyond the monetary crisis) in les études du ceri, fondation nationales des sciences politiques, paris pham, t. a. (2016) “monetary policies and the macroeconomic performance of vietnam”, phd dissertation, queensland university of technology. bhattacharya, r. (2013), "inflation dynamics and monetary policy transmission in vietnam and emerging asia", imf working papers, wp/13/155. kovsted, j., rand, j., tarp, f., nguyen, d. t., nguyen, v. h. & thao, t. m. (2003), “financial sector reforms in vietnam: selected issues and problems”, mpra paper, university library of munich, germany. le, a. t. p. (2007), “monetary policy in vietnam alternative to inflation targeting: political economy”, research institute (peri). le, v. h. & pfau , w. d. (2009), “var analysis of the monetary transmission mechanism in vietnam”, applied econometrics and international development, 9(1), pg. 165-179. mai, t. h. (2007), “solutions for exchange rate policy of transition economy of vietnam”, phd dissertation, martin luther university, halle (saale). nguyen, n. t. & kalirajan, k. (2006), “can devaluation be effective in improving the balance of payments in vietnam?”, quang nguyen / finance, accounting and business analysis 1 (2) (2019) 137 journal of policy modeling, 28(4), pg. 467476. nguyen, t. p. & nguyen, d. t. (2009), “exchange rate policy in vietnam, 1985 – 2008”, asean economic bulletin, institute of southeast asian studies, 26(2), 27 pg. nguyen, t. t. h. & nguyen, d. t. (2010), “macroeconomic determinants of vietnam's inflation 2000-2010: evidence & analysis”, vepr working paper. oudin, x. (1999), "le doi moi et l'évolution du travail au vietnam" (in english: the doi moi and the evolution of work in vietnam), tiers-monde, tome 40, n°158. pg. 377-396. to, t. a. d., bui, q. t., pham, s. a., duong, t. t. b. & tran, t. k. c. (2012), “inflation targeting and implications for monetary policy framework in vietnam”, (rs-02). hanoi, vietnam: knowledge publishing house. tran, k. v. (2005), “monetary and exchange rate policies in transitional economies: the case of vietnam”, american university. tran, t. d. & vuong, q. h. (2009), “a note on studies of monetary policy and implementation in vietnam”, working papers ceb, universite libre de bruxelles. riedel, j. & turley, w. (1999), “the politics and economics of transition to an open market economy in viet nam”, oecd working papers, oecd development centre, 57 pg. vo, t. t., dinh, h. m., do, x. t., hoang, v. t. & pham, c. q. (2002), “exchange rate in vietnam: arrangement, information content and policy options”, vol. 0219-6417, no. 18, hanoi: central institute for economic management. vuong, q. h. & ngo, p. c. (2002), “tiep can ly thuyet ty gia kep: kiem dinh thong ke quan he hoi doai usd: vnd” (in english: the parallel exchange rate approach for investigating usd: vnd relationship), economic studies review, institute of economics (viet nam) (42(292)), 10 pg. 117 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg the global reference rates reform and its impact on the bulgarian banking industry darina koleva university of national and world economy, bulgaria info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: reference rates, interbank offered rates, loan markets, banking abstract ___________________________________________________________________ this paper analyses the problems that market users face after the global scale reform of reference rates. the plan to replace the libor with new deeply market-rooted reference rates urge both private and public sectors to unite efforts in finding sustainable and long-term decisions promoting financial stability. some of the previously existing rates are substantially revised, others – phased out, and a third group – that of the nearly risk-free rates is in a stage of development and testing. it is too soon to measure the impact of those reforms adequately. however, a detailed discussion of the basic features of the reference rates helps to make some preliminary conclusions in the case of bulgaria.  address correspondence: 1700 studentski kompleks, sofia, bulgaria darina koleva / finance, accounting and business analysis 1 (2) (2019) 118 introduction since its creation in late 1960s, the london interbank offered rate (libor) became the most widely used on a global scale reference interest rate (schrimpf and sushko, 2019), covering an enormous range of financial products and uses like debt and cash instruments (mortgages, corporate loans, government bonds, credit cards, student loans, etc.) and derivatives (interest rate and currency swaps, etc.). although there were some sporadic suggestions concerning its sustainability, it was not until june 2012 that the u.s and european regulators reported the details on the large-scale manipulation of the libor officially. the scandal led to fines and reputational damage to the involved financial firms. more importantly, further maintenance of libor became an insurmountable task despite the efforts to reform it and officials called for methodological changes and even for replacing it with new alternative benchmarks (see for example bailey, 2017). as a result of the common efforts of the national and international financial regulators, a new set of principles and rules for reference rates were adopted and decisions to reform or terminate the existence of those not meeting the standards were taken. the wide use of libor makes the transition away from it rather difficult as newly created alternatives’ development slowly gains momentum. however, the adoption of the eu benchmark regulation (bmr)1 led to reforms of the locally produced and used national interbank offered and interbank bid (ibor and ibid) benchmark rates all over europe, and in the case of bulgaria to the discontinuation of their calculation due to “the lack of licensed or registered administrators from the eu or a third country, listed in a register maintained by the european securities and markets authority“ (bnb, 2017). this process inevitably is expected to have an important impact on the financial system. the purpose of this study is to provide an overview of the concept of the reference interest rates, to discuss their characteristics from the perspective of their usage, and to identify the channels through which the adoption of alternative benchmarks might impact the banking system in the case of bulgaria. reference interest rates reference interest rates are publicly accessible and regularly updated interest rates that proved to be a useful basis for a huge range of financial contracts. their importance stems from their wide usage across the entire economic system. by reflecting the cost of borrowing money in different markets, they play a vital role in pricing a vast range of assets such as securities, projects, obligations, cash flows, and even firms, which makes them play a key role in the financial system and the economy overall. the need for reference rates is entirely market-driven which explains the private interest and efforts in their creation. historically, they are a result of an extended process of trial and error in search of a benchmark that lowers transaction costs, increases transparency, fosters competition, deepens the markets and provides a mechanism for hedging common risks (duffie and stein, 2015). interbank offered rates (ibors), including the famous libor, are a vivid example of reference rates that became by far the most important and widely used interest rates. ibors are calculated daily as a trimmed average of interest rate quotations for offerings to be charged on unsecured interbank loans reported by a predetermined set of panel banks. the fact that they are creditsensitive forward-looking rates with tenors ranging from overnight up to one year makes them particularly valuable in banks’ asset-liability management. known at the beginning of the period to 1 regulation (eu) 2016/1011 of the european parliament and of the council on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, accessed online on 16.12.2019 at https://eur-lex.europa.eu/eli/reg/2016/1011/oj https://eur-lex.europa.eu/eli/reg/2016/1011/oj darina koleva / finance, accounting and business analysis 1 (2) (2019) 119 which they apply, they embed market participants’ expectations about future market interest rates, which enables the process of planning and hedging, and hence, explains why the family of ibors is so large (see table 1). table 1. the family of ibors libor london interbank offered rate reformed. to be discontinued at the end of 2021 euribor euro interbank offered rate new hybrid methodology in accordance with bmr hibor hong kong interbank offered rate revised methodology shibor shanghai interbank offered rate n.a. tibor tokyo interbank offered rate revised methodology sibor singapore interbank offered rate new waterfall methodology telbor tel aviv interbank offered rate commitment to execute transactions in accordance with the quotes stibor stockholm interbank offered rate revised methodology indian mibor mumbai interbank offered rate revised to actual traded rates (mid2015) russian mibor moscow interbank offered rate discontinued since 01.07.2016 saibor saudi arabian interbank offered rate revised methodology pakistani kibor karachi interbank offered rate n.a. ukrainian kibor kiev interbank offer rate n.a. bubor budapest interbank offered rate reformed in accordance with bmr wibor warsaw interbank offered rate reformed in accordance with bmr, transition to a new waterfall methodology pribor prague interbank offered rate reformed in accordance with bmr robor romanian interbank offered rate reformed in accordance with bmr helibor helsinki interbank offered rate discontinued since the euro adoption sitibor slovenian interbank offered rate discontinued since the euro adoption bribor bratislava interbank offered rate discontinued since the euro adoption vilibor vilnius interbank offered rate discontinued since the euro adoption rigibor riga interbank offered rate discontinued since the euro adoption talibor tallinn interbank offered rate discontinued since the euro adoption sofibor sofia interbank offered rate discontinued since 01.07.2018 source: central banks’ websites, reference rates’ administrators’ websites following the libor-rigging scandal many ibors undergo methodology revisions in compliance with the new international practice: (i) the trimming procedure is adjusted to improve the availability and reliability of price quotations, the latest being regularly checked against the actual transactions and published on an individual basis; (ii) the number of listed tenors is reduced; (iii) the methodology and transparency of selecting market makers are warranted by the licensed administrators. however, robustness and reliability of many of them remain under question due to another problem – the severe decline in interbank unsecured funding trading. ten years after the global financial crisis those markets are darina koleva / finance, accounting and business analysis 1 (2) (2019) 120 still thin with slim chances to recover because of the prolonged central banks’ unconventional policies (especially in the eurozone) and the implementation of the post-crisis binding regulatory standards. both higher capital and liquidity coverage ratio requirements make short-term lending costly. to address this problem, the international regulators issued guidance to expand the scope of transactions coverage from interbank to wholesale funding for banks. alternative reference rates ibors are interbank term interest rates but they are extensively used in derivatives markets. and from that perspective, overnight ones based on real transactions can be regarded as an alternative. while their variety is immense and history quite long, their use is limited to only national level. a widely referenced rate in the overnight index swap (ois) is the euro overnight index average (eonia), which until the end of september 2019 are computed as a weighted average of overnight unsecured lending transactions provided by a panel of banks of sound financial standing in the eu and efta interbank market. other examples are the bank of england’s sonia, the japanese tibor, the suisse tois, etc. some of them reflect unsecured funding, while others – secured. besides, until recently, none of them complied with the internationally adopted rules and methodological framework. such framework of rules set in 2013 with the adoption of the iosco’s nineteen principles for financial benchmarks (iosco, 2013) addresses the benchmark governance arrangements of the administrator, the quality of the benchmark and its underlying methodology, and the accountability of the administrator. as none of the existing benchmark rates fitted into the new criteria, they had to be substantially revised or in some cases even replaced by newly created transaction-based ones like sofr and ester (see table 2). table 2. alternative reference rates for major currencies currency nearly risk-free rate nature administrator usd secured overnight financing rate (sofr) secured frbny eur euro short-term rate (ester) unsecured ecb jpy tokyo overnight average (tona) unsecured bank of japan gbp sterling overnight index average (sonia) unsecured bank of england chf swiss average overnight (saron) secured eurex source: administrators’ web sites to increase the users’ confidence in the reliability of interest rate benchmarks in 2014, the financial stability board issued two important recommendations that shaped the benchmarks’ reforms over the following years (fsb, 2014): (i) to strengthen existing reference rates based on unsecured bank funding costs (including ibors) by underpinning them with transactions data; (ii) to develop alternative, overnight nearly risk-free reference rates (rfrs), regarded as a better indicator of the actual market stance and better-suited for the needs of the cash and derivatives markets; and (iii) to back up the existing contract robustness with appropriate fallback provisions. the european reforms following the above recommendations, many of the existing ibors become subject of revision. in europe, the authorities voted for a multi-rate approach with the efforts concentrated on preserving and strengthening the euribor and eonia, while linking the later with the recently launched near-risk free rate – the ester. euribor is the only ibor that underwent a dramatical change, as the new one is different both in value and dynamics. darina koleva / finance, accounting and business analysis 1 (2) (2019) 121 according to its revised definition, euribor nowadays represents2 the rate at which credit institutions could obtain wholesale funds in euro in the eu and efta countries in the unsecured money market (see emmi, 2019a). the scope of the market broadens from bank-to-bank to wholesale cash-only funding, and the panel of credit institutions includes only active participants in the euro money markets. what’s more, euribor’s administrator emmi has recently developed a new hybrid methodology. it follows a hierarchical three-level approach of determining each tenor of the benchmark to guarantee that it is anchored in transactions to the extent possible. the second major reform concerns eonia, which is widely used as a reference rate in financial instruments and contracts, and as a discounting curve for collateralised euro cash flows3. although it might be regarded as complementary and serving as a backstop to eonia, the new european near risk-free rate ester is designed to become an even stronger benchmark rate because it reflects the de facto wholesale euro overnight borrowing costs of euro area banks4. while the secured money market may have provided a broader base for its calculation, ester is developed as an unsecured rate for two basic reasons. first, it should share similar features with eonia. and second, the unique characteristics of the european repo market regarding the collateral used complicate its calculation. as of 2 october 2019, the ecb started publishing ester, and the eonia methodology had been „recalibrated “, literally transforming it into a fundamentally different benchmark. from that moment on until 3 january 2022 (when eonia’s publication will be discontinued) the euro 2 the new methodology obtained authorisation on 28.11.2019. 3 for a complete list of the products based on eonia see section 4.1 “eonia use in products” of the report on the transition from eonia to ester (ecb, 2018). 4 ester is calculated using overnight unsecured fixed rate deposit transactions over 1 million euros. overnight index average is to be calculated as ester plus a fixed spread of 8.5 basis points. transition to ester-based calculation of eonia raises several questions about the sustainability of the gap when the environment changes, about the reduced volatility, and its different reaction to market developments. of course, they should all be taken into consideration by the benchmark rate users in their pricing, capital and hedging models. true libor alternatives the shift away from libor is already happening as many participants in forward and derivatives markets switch towards rfrs. meanwhile, the transition in loan markets is still at its early stage. some of the loan market financial instruments like floating-rate debt securities have already demonstrated an ability to transition to overnight rfrs. and others, like corporate loans, syndicated loans and retail loans, still use ibors as a reference rate. the reason: they need a forward-looking term rate. it’s not an impossible task to develop new forward-looking term rates from the rfrs (term rfrs) as they can be based upon contracts traded on derivatives markets linked to relevant overnight rfrs (such as ois and futures markets) or created from transactions in other markets (such as those for cash products or foreign exchange swaps)5. however, there is a catch – the chickenegg problem of robustness. the iosco principles (iosco, 2013) embed the so-called concept of “proportionality”, according to which the more widely a reference rate is used, the more robust it needs to be. and this robustness of a forward-looking term rfrs can be provided only when they are derived on well-functioning, continuous and deep in liquidity markets, which might not be the case. despite the controversy mentioned above, some attempts to develop forward-looking term sonia and forward-looking term sofr reference rates are already underway. even 5 fsb (2018). interest rate benchmark reform – overnight risk-free rates and term rates. darina koleva / finance, accounting and business analysis 1 (2) (2019) 122 though their indicative values are published for consultation purposes, the de facto move toward futures-implied term rates is not expected to happen until daily rfrs futures volume and liquidity build enough. also, evolving market structures during the process of transition might present further technical challenges. as for the european efforts, the authorities recognise that for the time being creating longer-term reference rates based on (tradable) ester ois quotes is not yet feasible due to insufficient volume of transactions needed to construct purely transaction-based longer-tenor reference rates. so as may be expected, the markets will continue to stick to euribor until the underlying markets accumulate enough liquidity (emmi, 2019b). the bulgarian reference rates ibor-type rates share two features which makes them quite successful and extremely valued in the banking community. first, based on unsecured funding, they comprise a risk-free component and a credit risk premium, accounting for the perceived common credit risk of the contributing banks. banks prefer to link their loan contracts to unsecured reference rates because they provide them with a proxy hedge against funding cost risks by transferring the common bank funding cost risk onto their clients. and as nelson (2019, p.3) points out, having loan interest rates tied to a bank-creditrisk-sensitive benchmark “provides valuable insurance for banks against stressful times” 6. second, ibors are forward-looking term rates and using them helps the process of planning through embedding market participants’ expectations about future market interest rates. the bulgarian ibor-like rate sofibid shares the same positive and negative characteristics with the rest of the ibors, as they are based on similar methodologies (see table 2). it is launched in early-2003 and quickly 6 this measure of common bank risk becomes very volatile in times of stress when the perceived creditworthiness of counterparties changes abruptly. becomes an important benchmark used in levdenominated floating-rate loans until its cessation in mid-2018. euro-denominated loans, which over the period represent about one third to one half of the total outstanding amount of the loans, refer to another very important benchmark for the local banking system the euribor. table 3. historical reference interbank market interest rates in bulgaria7 sofibid (sofia interbank bid rate) since 17 february 2003 till 29 june 2018 an average of the bid quotes for unsecured bgn deposits offered in the interbank market provided by a representative panel of banks; maturities from overnight up to one year; contributor banks are licensed by the bnb with total assets not less than bgn 200 million, are active participants in the bgn money market, and handle good volumes of bgn-interest-rate related instruments, even in turbulent market conditions sofibor (sofia interbank offered rate) since 17 february 2003 till 29 june 2018 an average of the ask quotes for unsecured bgn deposits offered in the interbank market data providers: the same representative panel of banks used as in sofibid; maturities from overnight up to one year; leonia (lev overnight index average) – since 1 december 2004 till 30 june 2017 a weighted average of the interest rates on all concluded unsecured overnight lending transactions in bulgarian levs; data providers: the same representative panel of banks used as in sofibor leonia plus (lev overnight index average plus) – since july 1st, 2018 a weighted average of the interest rates on all 7 all current and historical rules, procedures and methodologies for the preparation of the reference rates are published at the bnb’s web site at http://www.bnb.bg/aboutus/aulegalframework/ aunationallegalframework/aulfrulesandproc edures/index.htm?tolang=_en http://www.bnb.bg/aboutus/aulegalframework/aunationallegalframework/aulfrulesandprocedures/index.htm?tolang=_en http://www.bnb.bg/aboutus/aulegalframework/aunationallegalframework/aulfrulesandprocedures/index.htm?tolang=_en http://www.bnb.bg/aboutus/aulegalframework/aunationallegalframework/aulfrulesandprocedures/index.htm?tolang=_en darina koleva / finance, accounting and business analysis 1 (2) (2019) 123 concluded unsecured overnight lending transactions in bulgarian levs; data providers are all banks licensed by the bnb and branches of foreign banks in bulgaria participating in the interbank lev money market; computed and published daily source: bnb. it is interesting to check whether the dynamics of both rates are similar since the bulgarian currency board automatically links the local monetary stance to the euro area policy. in figure 1, the two benchmarks are plotted together with their spread. at first sight, the two curves look alike which suggests that there should be some spillover effects through the monetary transmission mechanism. the spread depicts the higher credit risk and the much tighter liquidity conditions faced by the local credit institutions during and immediately after the global financial crisis. the story looks similar when another set of reference rates is plotted together – the local interbank overnight rate in lev leonia against the european eonia (see figure 2). figure 1. sofibor versus euribor dynamics (3m) source: bnb, ecb. -1,00 0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 8,00 9,00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 spread euribor sofibor darina koleva / finance, accounting and business analysis 1 (2) (2019) 124 figure 2. leonia/leonia plus versus eonia dynamics source: bnb, ecb. until its official demise, the sofibor was widely used to determine the interest due under loan agreements. it served well its function as it provided the borrowers with a transparent approach in determining the cost of service. credit institutions were given the liberty in choosing an appropriate market-based reference rate to replace the sofibor in the loan contracts, as long as the final rate does not generate any additional cost for their clients. most of the banks stepped on the monthly weighted average interest rate on deposit outstanding amounts with a maturity of up to 2 years, as some of them rescale the result to account for the minimum required reserves costs. this new type of methodology of setting reference rate differs in many ways from the previous ones. first, the rates are no longer forward-looking but instead – backwardslooking ones. second, the freedom for the banks to choose their indicator decreases the transparency for the clients substantially. third, one might wonder whether these new reference rates would adequately reflect the true marginal costs of funding for the banks, which doubtfully is the case. and finally, when banks are unable to hedge their funding costs, the probability of transferring the burden onto their clients increases. conclusion the plan to replace the ibors with new deeply market-rooted reference rates unlocks a global reform. some of the previously existing reference rates are substantially revised and others phased out, a third group – that of the nearly risk-free rates is in a stage of development and testing. it is too soon to measure the impact of those reforms adequately. however, based on a detailed discussion of the basic features of the reference rates, some preliminary conclusions are made in the case of bulgaria. further accumulation of data would provide adequate testing of their relevance. references bailey, a. (2017). the future of libor, a speech published on 27.07.2017 by financial conduct authority, accessed online on 16.12.2019 at https://www.fca.org.uk/news/speeches/thefuture-of-libor bnb (2017). press release from 16.03.2017, accessed online on 16.12.2019 at http://www.bnb.bg/pressoffice/popressrele ases/poprdate/pr_20170316_en -2,00 -1,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 eonia leonia / leonia plus spread https://www.fca.org.uk/news/speeches/the-future-of-libor https://www.fca.org.uk/news/speeches/the-future-of-libor http://www.bnb.bg/pressoffice/popressreleases/poprdate/pr_20170316_en http://www.bnb.bg/pressoffice/popressreleases/poprdate/pr_20170316_en darina koleva / finance, accounting and business analysis 1 (2) (2019) 125 bnb, rules and procedures, accessed online on 16.12.2019 at http://www.bnb.bg/aboutus/aulegalfram ework/aunationallegalframework/aulf rulesandprocedures/index.htm?tolang=_e n duffie, d., j. stein (2015). "reforming libor and other financial market benchmarks," journal of economic perspectives, american economic association, vol. 29(2), pages 191212, spring. ecb (2018). report by the working group on euro risk-free rates on the transition from eonia to ester, december 2018, accessed online on 16.12.2019 at https://www.ecb.europa.eu/paym/pdf/cons/ euro_riskfree_rates/ecb.eoniatransitionreport201812.en .pdf emmi (2019a). euribor questions and answers, accessed online on 16.12.2019 at https://www.emmibenchmarks.eu/assets/files/d0062a2019%20%20euribor%20questions%20and%20ans wers.pdf emmi (2019b). building a €str‐based term structure, presentation to the working group on risk‐free rates, frankfurt, 16 october 2019, accessed online on 16.12.2019 at https://www.ecb.europa.eu/paym/initiatives /interest_rate_benchmarks/wg_euro_riskfree_rates/shared/pdf/20191016/presentation _emmi.pdf fsb (2014). reforming major interest rate benchmarks, accessed online on 16.12.2019 at https://www.fsb.org/wpcontent/uploads/r_140722.pdf fsb (2018). interest rate benchmark reform – overnight risk-free rates and term rates, accessed online on 16.12.2019 at https://www.fsb.org/2018/07/interest-ratebenchmark-reform-overnight-risk-free-ratesand-term-rates/ iosco (2013). principles for financial benchmarks, accessed online on 16.12.2019 at https://www.iosco.org/library/pubdocs/pdf/ ioscopd415.pdf regulation (eu) 2016/1011 of the european parliament and of the council on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, accessed online on 16.12.2019 at https://eurlex.europa.eu/eli/reg/2016/1011/oj http://www.bnb.bg/aboutus/aulegalframework/aunationallegalframework/aulfrulesandprocedures/index.htm?tolang=_en http://www.bnb.bg/aboutus/aulegalframework/aunationallegalframework/aulfrulesandprocedures/index.htm?tolang=_en 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https://www.fsb.org/2018/07/interest-rate-benchmark-reform-overnight-risk-free-rates-and-term-rates/ https://www.fsb.org/2018/07/interest-rate-benchmark-reform-overnight-risk-free-rates-and-term-rates/ https://www.iosco.org/library/pubdocs/pdf/ioscopd415.pdf https://www.iosco.org/library/pubdocs/pdf/ioscopd415.pdf https://eur-lex.europa.eu/eli/reg/2016/1011/oj https://eur-lex.europa.eu/eli/reg/2016/1011/oj 91 finance, accounting and business analysis journal volume 1 issue 1, 2019 the fiscal policy of bulgaria in the process of integration to the european union t. houbenova-delisivkova, bulgarian academy of sciences info articles abstract the fiscal policy of bulgaria has undergone important changes in the last two decades under the process of accession to the eu. the macroeconomic aspects of bulgaria's participation in the eu in the field of fiscal policy coordination are analyzed as results achieved. the fiscal policy has contributed for the compliance with the maastricht criteria for convergence with the eu as well as for implementing the reforms of the eu economic governance in the post-crisis period. the maintenance of fiscal stability has been undertaken in medium–term but challenges have been encountered to carry out fiscal adjustment without undermining economic recovery and maintain funded by government expenses public systems. the fiscal policy performance of bulgaria is revealed with regard to problems of improving its socio-economic efficiency and preparation to join the emu. keywords : fiscal policy, macroeconomic aspects of public finance, financial aspects of economic integration. address correspondence: e-mail : stefanovatatiana@gmail.com t. houbenova-delisivkova / finance, accounting and business analysis 92 introduction the economic and financial integration of bulgaria to the european union (eu) since the start of its official membership in 2007 coincided with the global financial and economic crisis and the european sovereign crisis in the european monetary union (emu) as the “core’ of the eu integration. bulgaria’s integration has encountered the changes in the eu under the impact of two mutually interdependent processes in the economic integration in the eu. the fiscal policy has been engaged with the task of implementing adjustment strategies as eu member state and stimulating economic recovery and growth. the integration has increased its importance for the bulgarian economy and the difficulties encountered in the eu integration process have raised a number of issues for the overall impact of the fiscal policy. on one hand, due to the global crisis and the european sovereign debt crisis some of emu countries have encountered difficult challenges of fiscal consolidation and overcoming sovereign crisis made necessary introduction of new institutional and functional arrangement in the euro area. for the fiscal policy of the eu countries, the dilemma of future choice should be exacerbated: to introduce new requirements for the coordination of budgetary policies or to adopt a transition to a higher degree of mandatory community-wide choice of policy within the framework of the future fiscal union. the debate on the amendment of the concept of fiscal sovereignty of individual eu member states in connection with the new choice of stricter fiscal policy rules in the emu is set on the agenda, also for non-emu countries like bulgaria. as a country with derogation bulgaria has the obligation to prepare for membership in the emu which would have to involve more strict fiscal rules. bulgaria has already joined the fiscal compact (i.e. the fiscal part of the treaty on stability coordination and governance in the european monetary union), which sets the rules designed to strengthen the consistency between the national and european fiscal frameworks and enhance their ownership in member states. besides bulgaria has undertaken the implementation of the changes introduced to improve transparency and to reduce complexity of the current fiscal rules for the eu member states. on the other hand, bulgaria is already part and subject of the processes of "differentiated integration" between emu member states and eu member states not participating in the emu. this process has certain negative consequences under the conditions of the crisis trends in the eu since 2007. the introduction of new regulative and institutional arrangements in the emu as well as the implementation of the non-conventional monetary policy of the european central bank has substantiated the differentiated integration. as a country non-participating in emu, bulgaria has had no access to the broad range of functional and institutional supportive interventions of the ecb's monetary policy. bulgaria's financial and credit sphere remains not only segmented out of the emu but continues to be characterized by the maintenance of greater differentiation as regards monetary measures in the euro area. although at the bulgarian financial market the subsidiaries and branches of emu countries’ banking groups have dominant share in financial intermediation, the credit resources retain their higher price compared to emu. the segmentation of the bulgarian financial sector and market out of the emu ultimately leads to more limited access to external financing of the economy. credit crunching difficulties considerably burden the business's ability to absorb new debt and, ultimately, lending is not developing at rates that stimulate business growth. under the condition of the currency board as implemented monetary regime in bulgaria since 1997, the bulgarian national bank does not have any monetary policy (the only exception being the minimum reserve requirements). thus the fiscal policy of bulgaria is responsible for the macroeconomic and financial stability and it has to play major role in the overall economic development and the eu integration of bulgaria. its role has become much more significant in the undergoing process t. houbenova-delisivkova / finance, accounting and business analysis 93 in the eu at present for new choice of the model of further deepening of the integration as set on the agenda by the five presidents’ report.1 in 2018 bulgarian government chose a new approach to enhance the process of joining the euro area in close co-operation with the ecb. an action plan and a road map have been set in implementation to adapt to the reforms in the emu, part of which are the banking union, the money-laundering measures and the insolvency legal engagements.2 the paper aims to reveal the fiscal policy’s tasks and achievements during the accession to the eu. in the first part the characteristic features of europeanisation of the fiscal policy of bulgaria in 2000-2018 are presented. the second part analyses the main results of the fiscal policy and summarizes some conclusions. 1. trends and problems of fiscal policy’s development in the process of accession and integration to the eu (2000-2016) during bulgaria’s preparation and membership in the eu the fiscal policy has undergone profound changes in the programming, development, as well as implementation of public financial management and control system. in fiscal policy assessment over the last two decades, there have been achieved more clearly set and solved economic and social issues as progress has been made in fiscal discipline and in the overall europeanisation of macroeconomic policy. from the point of view of the functional and institutional changes in the public finances in view of the eu requirements and the projected expectations, several stages can clearly be distinguished: 1) pre-accession stage; 2) post-accession period (2007-2016); 3) a forthcoming period (2019-2021) of preparation for inclusion in the eu economic and monetary union and finalizing the implementation of the 2020 strategy objectives. the change in the state of public finances during the period of preparation and membership in the eu (1999-2016) reflects also the impact of the fiscal consolidation, which started with the introduction of currency board monetary regime in mid1997. it is supported by the applicable rules for budgetary discipline, stemming from the requirements of the currency board. it is sufficient to highlight the two "pillars" of fiscal discipline under the terms of the currency board: the obligation to maintain fiscal reserves and discontinue the ability of the bulgarian national bank to credit the government directly. on the one hand, the government is not entitled or lending to the bnb as a central bank, and in turn the bnb as a central bank cannot provide direct loans to the government. on the other hand, the government's obligation to maintain fiscal reserves in the bnb issue management balance in compliance with the currency board plays an important role as a “pillar “of money supply by the bnb and maintaining its stability.3 to the extent that the bnb is deprived of the discretionary monetary intervention according to the real changes, fiscal policy challenges are closely dependent on the challenges of managing government budget revenues and expenditures according to the fiscal constraints. the integration of bulgaria from the very beginning of the process for the eu accession (during the stage of association to the eu as started in 1995 and in the pre-accession period since 1999) 1 five presidents' report: completing europe's economic and monetary union, 22 june 2015 2 on 22 august 2018 the government approved an action plan with measures in response to the republic of bulgaria’s intentions to join the erm ii and the banking union by july 2019. the document has been drafted as a consequence of the joint letter, sent on 29 june 2018, of the minister of finance and the governor of the bulgarian national bank concerning the participation of the republic of bulgaria in the single supervisory mechanism (ssm) by means of establishing close cooperation with the european central bank within the meaning of regulation (eu) no 1024/2013 as well as the intentions of the country to apply for participation in the erm ii mechanism, which has also received the political support of the eurogroup. 3 in the absence of a monetary policy of the bnb due to the introduction of the currency board, the only instrument that the bnb can apply is the requirement for banks to maintain minimum reserve requirements on deposits. http://www.minfin.bg/upload/37885/letter-by-bulgaria-on-erm-ii-participation.pdf http://www.minfin.bg/upload/37885/letter-by-bulgaria-on-erm-ii-participation.pdf https://www.consilium.europa.eu/en/press/press-releases/2018/07/12/statement-on-bulgaria-s-path-towards-erm-ii-participation/ https://www.consilium.europa.eu/en/press/press-releases/2018/07/12/statement-on-bulgaria-s-path-towards-erm-ii-participation/ t. houbenova-delisivkova / finance, accounting and business analysis 94 depends increasingly on the fiscal policy and on its more effective coordination according to the eu requirements .4 under the direct supervision of the european commission, comprehensive reforms have been carried and are underway in the public finances’ system to meet the requirements for membership. in the eu, conceptually, fiscal policy is subject to the implementation of fiscal consolidation programs based on the community and the open method of co-ordination as well as to the implementation of policy guidelines in order to achieve the goals of the 2000 lisbon strategy. the main challenge during the pre-accession period (1999-2006) for bulgaria's fiscal policy in macroeconomic aspect is the transition to indicative forecasting, planning and implementation of the government budget as well as the building up of sustainable institutional capacity for the management of public funds. under the conditions of structural adjustment of the bulgarian economy caused by the adaption to market forces at the single european market these tasks have raised substantially the role of the fiscal policy during the transition to market economy. since 1996, the eu law has been transposed in the field of public procurement. since 2003 the program budgeting and decentralization of local finances have been introduced with strategy of gradualism which has been kept until present times. in the pre-accession period, bulgaria not only pledged but also transposed eu legislation in the field of public finances and public accountability in a timely manner, including a comprehensive reform of the system for management and control of public funds. bulgaria has introduced a fully harmonized ec system of management and control over its own public funds and the european union funds by improving public accountability of budgetary resources from the republican government budget as well as of municipal budgets. fully in line with european law, the reform of the customs policy has been implemented with a view to the introduction of the eu common customs tariff as of 2007, as well as the commitments to tax and excise harmonization with the eu and the protection of the euro and the european funds. at the same time, it has proceeded with the transposition of eu law in order to be able to have the status of a member state with derogation as regards the adoption of the euro. these requirements include: • the completion of the liberalization of capital movements (article 56) • the ban on any direct financing of the public sector by the bnb as a central bank; • a ban on any privileged access of the public sector to financial institutions (article 103); • achieving compliance of the status of the national bank with the eu treaty, including ensuring the independence of the monetary authorities. these requirements are the first "block" of the macroeconomic framework that has been fulfilled as a prerequisite for bulgaria's accession to the eu. the ban on direct financing of the public sector is an essential element of fiscal discipline and independence of the bnb. the ban on privileged access to financial institutions adds up to the bnb's independence as a central bank and guarantees market discipline in public sector involvement in the financial market, strengthens the free movement of capital and ensures that market criteria are to be applied to the public sector in cases of getting loans from the banking system. thus the independence of the bnb, as a central bank, has been envisaged to fulfill its future function of being committed to maintaining price stability in line with the 2004 bulgarian national bank strategy for the 4 european union the stability and growth pact (sgp) is the rule-based fiscal framework of the european union (eu). eu members are bound to avoid excessive deficits (defined with reference to a 3 percent of gdp threshold for the general government deficit) and reduce their public debt-togdp ratio to below 60 percent. in addition, they commit to aiming at structural balances close to balance or in surplus (with country-differentiated margins). the provisions of the sgp apply to all eu members, although provisions for imposing sanctions for noncompliance apply only to members of the euro area. the sgp, in force since 1997, is based on the treaty of the european union (“maastricht treaty),” adopted in 1992, and consists of two eu regulations with force of law complemented by european council resolutions.. t. houbenova-delisivkova / finance, accounting and business analysis 95 adoption of the euro by 2010. under these conditions, the currency board regime has become instrumental for contributing to enhancing the fiscal discipline. on the other hand, in 2000-2006 capital liberalization supported the more efficient allocation of financial resources through the market. the inflow of foreign direct and portfolio investment increased by 2008 when the slowdown started and the foreign investments were greatly reduced. the inflow of capital investment in the period up to bulgaria's entry into the eu has been coupled with credit expansion that allowed to attain higher growth rates and macroeconomic policy targeted at higher economic efficiency. during the period of bulgaria's membership in the eu (2007-2016), the budget policy is committed to fulfilling the maastricht criteria for stable government finances by implementing the convergence programs and the national reform program. firstly, since 2007, the macroeconomic policy framework has become more restrictive, with stronger fiscal discipline and the further deepening of integration of economic policy. in 2009 bulgaria's failure to comply with the fiscal deficit maastricht requirement has caused a monitoring procedure for the excessive government deficit. the economic policy has become engaged to comply with eu policies of achieving the community priorities and has therefore become subject to strict procedures of coordination and multilateral surveillance. the main instruments for coordination of the economic policy of bulgaria as an eu member state are the stability and convergence programs, the broad economic policy guidelines and the increasing number of community instruments, including the european semester, the macroeconomic imbalances procedure programming concerning structural policies. bulgaria's fiscal policy has become fully involved with implementation of community procedures for better economic governance since 2010. this complements with new mechanisms the requirements for compliance with the criteria for emu and the complementary requirements of the fiscal pact which is based on the stability and growth pact in emu. with bulgaria's participation in the implementation of the new eu economic governance approaches, the chances of participation in the eu economic and monetary union should be improved. an additional importance for strengthening the role of fiscal policy is the fact that bulgaria, together with 24 other eu member states since march 2012, has become a party to the stability, coordination and governance treaty in emu. the treaty is introduced for the improvement of the stability and growth pact of the emu and comes into force on 1.01.2013. under part iii of this treaty (known as the fiscal pact) the main tasks of achieving better fiscal discipline are treated. in this context, the role of government finances for the revival of economic growth has been raised by underlying the role of fiscal discipline. the implementation of the eu multiannual budgetary programming and planning 2014-2020 supports the implementation of integration policy at macroeconomic level. in principle, this is a priority for which bulgaria has made efforts and has achieved compliance with the macroeconomic convergence criteria. the overall strategy of economic governance of eu integration is subject to the objectives of restoring the conditions for sustainable growth and employment in the member states. at the same time, the requirements towards government finances in the new eu economic governance are considerably more complicated and the conditions for the entry of emu are becoming more comprehensive as conditionality. the europe 2020 strategy reflects the recognition that the union's economic and monetary union complicates the implementation of fiscal sovereignty of the countries of the european union because the possibilities of matching national budgets to the needs of financing growth through budget deficits become strategic issues of the economic governance. progress and coherence in the area of financial management and control systems in the budgetary sector of bulgaria , as well as the absorption of european funds, are significant. after some delay in 2013-2014, the framework for public finance management in bulgaria has t. houbenova-delisivkova / finance, accounting and business analysis 96 been updated by the adoption in 2015 of the fiscal council and automatic remedies act and the inclusion of our fiscal council in the eu fiscal council committee. the independence of government finances is supported by the lawfulness of fiscal rules in line with european requirements. the main recognition in the theoretical and applied debates about fiscal and financial liberalization rules is that they are a "good" drug against economic stagnation, but only on the premise that this "drug" has no harmful side-effects. in applying the fiscal rules, bulgaria shows discipline, but in practice there is not a completely satisfactory improvement in the effectiveness of fiscal policy, especially in some areas funded with the public money. this is a challenge to make better use of the freedom to implement the fiscal sovereignty of our country and to make better the national choice of policy targets in order to respond more adequately to the needs of the real economy and its ongoing structural adjustment in the future. undoubtedly, the policies that are implemented through the government budget are the most important, and their choice (with the exception of the eu's common policies) remains fully in the mandate of each bulgarian government. in general, empirical research has already shown that the application of good practices and rules of economic liberalization should not only lead to better results in purely financial accounting terms (higher budget revenues, higher budget balances, lower government debt), but these practices and fiscal rules have to contribute for the achievement of higher efficiency of macroeconomic policy. thus the importance of the policies implemented through the government budget has been increasing. 2. main results of bulgaria’s fiscal policy implementation the fiscal policy has the primary responsibility for maintaining the financial stability in bulgaria under the currency board regime because of the lack of monetary and exchange rate policy to influence macroeconomic liquidity, including the change in money supply and demand. the goals of meeting the maastricht criteria of sound public finance have become inseparable part of the achieving the overall fiscal policy sustainability. for the entire period 2000-2016 bulgaria's government budget deficit shows a trend of fiscal stabilization and consolidation which to a great extent allows the sustainability of macroeconomic stability. there have been only for short periods some deviations to higher negative values compared to the reference maastricht criterion. the fiscal policy has been influenced by the higher rates of the economic growth as well by the cyclical changes in the period under review. (see fig.1). t. houbenova-delisivkova / finance, accounting and business analysis 97 figure. 1. the annual rate of growth of the gdp of bulgaria (1996 2017) (market prices, %) for the period (2002-2008) has been kept on comparatively stable track record due to the increased aggregate supply and consumption and fiscal consolidation. the foreign capital inflows as a substantially increased external source of finance and the maintenance of credit expansion stimulating aggregate demand and growth rates. gdp growth rate for the period (2005-2008) has averaged annually 6.4%. compared to other eu member states bulgaria has experienced since the start of the new millennium high rates of economic growth which have raised the expectations as well as some doubts for the continuity of the “catch up” type of growth after joining the eu. the growth of domestic and foreign capital investments has been concentrated predominantly in construction, real estate, tourism and services which contributed to overheating the economy. during the period 2005-2008, bulgaria's gdp grew by a relatively rapid pace but in 2009, due to the impact of the global economic crisis the gdp contracted by 5% and a slowdown of economic growth followed (fig. 1). the step-by-step process of aligning fiscal policy with eu requirements has progressed in the 2005-2007 period when bulgaria achieved positive economic growth rates. thus a budget surplus has been maintained by 2008. two "episodes" of increased primary government budget deficit should be reported respectfully: in 2009 of 3.32% of gdp and in 2014 of -4.58% of gdp. due to the exceedance of the reference value of the accrual budget deficit indicator, the european commission applied the excessive deficit procedure to bulgaria. since 2010 began a gradual recovery of the bulgarian economy, but at a very slow pace. in 2010, growth was only 0.7%, in 2011 rose to 2% and in 2012 was only 0.2%. in 2011, and further up to mid2012 there was some reduction of the government deficit. in 2013 and 2014 the economic growth remained rather modest at the rate respectively of 1.1 and 1.7%. for achieving the precrisis level of growth it has taken five years. in 2015 the rate of growth has increased to 2.9% and higher rate of 3.4% in 2016. however, since 2012 the unsatisfactory economic growth record has been accompanied by relatively modest fiscal deficits, low inflation and a stable currency. growth has been deprived of new capital inflows from abroad as direct and portfolio investments have fallen considerably as result of the global and the european sovereign crisis and still remains at very low level in mid-2017. the economic growth has become largely dependent on domestic factors. fiscal policy has complied with the eu fiscal rules. nevertheless the economic cost of this t. houbenova-delisivkova / finance, accounting and business analysis 98 restrictive policy has become too high not only for systematically underfunded budget systems such as internal order, health, education, social services, defense, science and culture but also for the economy as a whole. social tensions have exacerbated political uncertainty and economic instability and triggered early parliamentary elections in 2013. in the ensuing period until mid-2014, the slowdown in fiscal policy was a consequence of both government interventions due to the banking system crisis and increased budget spending in the public sector, which increased the government budget deficit above the reference value for 2014 and 2015 respectively (see figure 2). figure 2. government primary deficit(-) or surplus(+) (as % of gdp)for 2000-2018 source: eurostat, 2018. as regards the indicator for an average annual rate of growth of the public debt-to-gdp bulgaria has had consistently consolidated its fiscal policy throughout the period (1998-2018). fiscal discipline has been much strict if compared with other eu countries. since the end of the 90s the fiscal policy of bulgaria has a priority target for a long-term decline in the public debt-to-gdp ratio, not just its stabilization at post-crisis levels. having gained from own experience that high public debt tends to raise interest rates, lower potential growth, and impede fiscal flexibility bulgaria has maintained fiscal consolidation aim the period under review. the public debt was raised in 2014 as the fiscal policy reacted as the ultimate absorber of negative shocks in the financial sector. the need to provide state aid to meet the needs of the deposit guarantees repayments after the closure of corporate commercial bank and the liquidity support for other 2 domestic banks in crisis has caused fiscal readjustment. the steep rise of the ratio of the public debt-to-gdp caused the assessment of bulgaria as a country with imbalances by the european commission’s alert mechanism for macroeconomic imbalances. by end of december 2015 the government debt-to-gdp ratio is 26.4%, with the share of domestic government debt being 8.5% and of external government debt – respectively equal to 17.9% of gdp. in the government debt structure, domestic debt at the end of 2015 amounts to 32.1%, and external debt to 67.9% of the total debt. any further rise of the external debt indicator for the government debt may present a challenge to fiscal policy sustainability. figure 3. government debt (consolidated) of bulgaria (as % of gdp) t. houbenova-delisivkova / finance, accounting and business analysis 99 source: eurostat, 2018. the debt-to-gdp ratio is subject to the threshold of the maastricht criteria on public debt. the government debt-to-gdp ratio rose but remained well below the required maastricht benchmark, from 13.7% in 2009 to 17.1% of gdp in 2013. a new increase in government debt followed with the subsequent 2015 new government debt issues on the international market, where the country's credit rating allowed to borrow resources at favorable interest rates levels. but overall, the government debt/gdp ratio of 28.1% in 2016 remained well below the 60% reference value during the entire eurozone crisis and in the post-crisis period. in the present decade, bulgaria has maintained strict fiscal discipline keeping compliance with the maastricht criteria and adjusting to more strict fiscal rules of the fiscal pact (see fig.3). by the average annual growth rate of government debt in relation to gdp, bulgaria has performed well and it is among eu member states with low levels of government debt as per cent of gdp. in 2016-17 the lowest ratios of government debt-to-gdp were recorded in estonia (8.7 %), luxembourg (23.0 %), bulgaria (25.6 %), czech republic (34.7 %), romania (35.1 %) and denmark (36.1 %). at the end of 2017 the highest debt ratio above 60 % of gdp was registered by some emu countries including greece (176.1 %), followed by italy (131.2 %), portugal (124.8 %), belgium (103.4 %), france (98.5 %) and spain (98.1 %)(see figure 4). assessing the state of general government debt during bulgaria's accession to the eu, it should be pointed out that the predominant trend towards debt reduction in the period 2000-2014 is a direct consequence of the sustainability of fiscal consolidation. the most "steep" is the decrease in the total government debt in the period up to 2007, which is also a consequence of the higher average annual rates of economic growth as well as of the inflow of foreign capital reaching their peak in 2007. the positive fiscal balance made it possible in 2006 the government to repurchase part of the bulgaria’s external debt as well as to make unnecessary a new issue of sovereign debt as there had been high fiscal reserve achieved. fig.4. eu member states’ general government debt, 2016 and 2017 (¹) (general government consolidated gross debt, % of gdp) t. houbenova-delisivkova / finance, accounting and business analysis 100 eurostat,october 2018. a positive assessment of fiscal policy and government debt management also deserves the fact that government debt service has been carried with no additional negative consequences. uncourtly it has been the overall restrictiveness of fiscal policy which has limited budget expenditures. thus the worsening of the insufficient funding of the public budget systems has lead to the negative trends in a number of subsectors and areas of the bulgarian economy, such as pension system, health care, education and social services. in the context of the european debt crisis and the sharp deterioration in the government debt management of several emu countries, the fiscal discipline in bulgaria needs to be taken into account given the increasing rigor of eu requirements for macroeconomic stability as conditions for emu participation. the discussion on the issues of the government expenditure to service the government debt shows that bulgaria's fiscal position allows moderation and tolerance of debt service, which is undoubtedly a prerequisite for macroeconomic stability (fig.5). even in the conditions of slowdown of economic growth which is expected to occur after 2008 in the global economy servicing the public debt won’t present any problems. figure.5. due payments for servicing the government debt of bulgaria in 2000-2017 (as % of gdp) , maturities of due payments per month / source: eurostat, 2017. an important feature of bulgaria's fiscal policy is the "return” to borrowing of financial resources for the state budget through new government debt issues. the incurrence of new t. houbenova-delisivkova / finance, accounting and business analysis 101 liabilities is observed since 2014 when the issues of new loans have raised the level of total government debt. (fig.6). figure 6.bulgaria: government consolidating amounts in net incurrence of debt (in millions bgn) source: eurostat,2018. the fiscal policy has undergone deep changes as regards the ratio of fiscal revenue to gdp and the sources and structure of fiscal revenues. the ratio of fiscal revenue to gdp has reflected two main tendencies of the economic development. on one hand, it has reflected cyclical changes. since 2001 there was a downward trend of reduction of the fiscal revenues as a result of disinflation trends and fiscal consolidation. for the pre-accession period, a certain increase of the fiscal revenues from the beginning of 2002 to 2005 when the rate of growth was increased and credit expansion contributed to it. at the end of the membership negotiations in 2005 and under implementation of the pre-accession programs, the fiscal revenue was marked by a certain increase, not least due to the higher rate of inflow of foreign investments and higher rate of economic growth. on the other hand, this indicator reflects the bulgaria’s concept of economic liberalization which has been followed for the transition to market economy and the accession to the eu. this concept involves the diminishing of public ownership through privatization and stimulating business growth by reducing fiscal burden in order to encourage the nascent private sector and business entrepreneurship. t. houbenova-delisivkova / finance, accounting and business analysis 102 figure 7. bulgaria: government total revenue (as % of gdp) source: eurostat,2018. during bulgaria's eu membership, the fiscal revenues started to rebound to about 39 % of gdp by the end of 2007. the introduction of the 2008 flat tax of 10 per cent on income of physical persons and on corporate profits caused steady trend of reducing the fiscal revenues. the downward cyclical trends have also contributed causing less government revenue from all sources, including taxes. ever since that time the problems of tax collection and prevention of tax avoidance have been set on the agenda of public financial management and control and the tax collecting agencies. by the end of 2018 the ratio of government revenue as per cent of gdp amounts to 38 per cent. an important source of fiscal revenue in bulgaria is the vat.5 the contribiution of the vat has been reduced to some extent since 2007 and nearly kept at an even average level of about 9 % of the gdp in 2012-2017. 5bulgaria follows the eu rules on vat compliance, which stipulate minimum rate of15% per cent for the vat in eu member states as tax harmonization. but following the rules bulgaria makes use of fiscal sovereignty and has introduced a standard rate on goods and services of 20 per cent. the reduced rate of 9 % is valid for hotel accomodation and zero rate is previewd for intra-community and international transport. t. houbenova-delisivkova / finance, accounting and business analysis 103 figure 8.bulgaria:value added taxes’ contribution to government budget (as% of gdp) source: eurostat,2018. as a result of the 2007 integration process the liberalization of the movement of goods, services, capital and labor has made a significant impetus due to a certain nominal increase in tax revenue collected (notably excise duties have increased since 2007 as a result of tax harmonization with eu / as well as from social security contributions. at the same time the government revenue from taxes on production and imports has declined. the introduction of flat tax from 2008 is a factor for reducing the fiscal burden. the flat tax has been targeted to stimulate investments and attract foreign investors. but the negative trend of reduced revenues from corporate taxation (see fig.9) is indicative of unexpected negative trends since 2008, namely the lower rate of investments and the lack of inflow of foreign investments. besides, a process of restructuring the fiscal burden from flat tax for income of physical persons has been under way at the expense of laying higher burden on lower income groups of the population. after 2008 the redistribution ability of the income tax on persons is almost neutral which positions the poor part of income taxpayers in unfavorable state.6 in spite of the fact that the effective tax burden on labor income as measured by the implicit tax rate on labor is among the lowest in the eu, the tax wedge on low-income taxpayers remains high. 7 this tax system has been subjected to legitimate criticism and discussion about a future tax reform that may introduce tax reform aimed at greater contribution to the government revenues. the present situation is characterized by a prevailing share of the indirect taxes compared to direct taxes as contribution to the government revenue. this structure differs considerably from the practice in the other eu member states where the direct taxes have major contribution.8 the proposals for tax reform so far have not gained official support though it is recognized that 6 brusarski, r.,(2012) economic analysis “cost-benefit”, univ.publ.house stopanstvo, 2012. 161 p., [p.25] 7 popova,n. (2017) taxation of personal imcome in bulgaria and the european union, in: “the economy of bulgaria in the european union”, fastprint publ.house, 229. p.[pp.105-115] isbn: 978-619-7312-63-8. 8 yotzov, v. (2017) fiscal policy, in:” annual report 2015 "economic development and policies in bulgaria: evaluations and prospects. focus: the path to the european union and the balance-sheet of the first 10 years", pp. 46-48, victor yotzov eri-bas books, bulgarian academy of sciences economic research institute, number 35:p:1-202 edited by victor yotzov (виктор йоцов), december 2017. t. houbenova-delisivkova / finance, accounting and business analysis 104 higher revenue may improve the government budget's spending capacity for on investment, education, healthcare and demographic crisis and poverty. the contribution of corporate earnings tax revenues is highly sensitive to the decline in business growth. under the impact of the global and european debt crisis there has been sharp decline of the revenue of corporate taxes as per cent of gdp. (see fig.9) the unfavorable business environment in european and international aspect testifies to maintaining a low tax rate for corporations. front loading fiscal adjustment through tax reform would have been inappropriate in times of economic recovery. figure.9.bulgaria: government revenue from the tax on corporate profit (as % of gdp) source: eurostat,2018. figure 10: bulgaria: government revenue from net social contributions (as % of gdp) source: eurostat,2018. the trend of reducing the net social security contributions as a share of gdp is another feature of the economic reforms in the last decades. after a slowdown in the crisis years 2008-2010 the increase of social security’ contributions to the government revenues has been resumed in the subsequent period but there share is below 9% of gdp in 2017(fig.10). t. houbenova-delisivkova / finance, accounting and business analysis 105 figure 11. bulgaria: fiscal burden*(as % of gdp) * total receipts from taxes and social contributions (including imputed social contributions) after deduction of amounts assessed but unlikely to be collected source: eurostat, 2018. the trend of government’ expenditures has undergone also significant changes in the period under review. the overall utilization of the government expenditures is aimed to provide public money for the functioning of the public systems but to maintain fiscal constraints (fig.11). the government expenditures depend on cyclical changes and the capacity of the government budget to execute its redistribution function. the government revenue as fiscal burden has been decreased since 2007-2008 for two reasons; 1) due to th reduction of revenues from custom duties as with the entry of the eu these revenues have become own resources of the eu budget; 2) the flat rate of 10 per cent introduction in 2008. but the reduction of government revenues remains an issue due to the fact the government budget of bulgaria has not got capacity good enough to fulfill its redistribution function. in comparison to other eu member states this is indicative of the existing challenges to the modernization of the contemporary fiscal and public policies as regards providing for public goods in demand, especially public services, education, healthcare and medical care, internal security and defence, social integration, etc. the level of combined ratio of revenue and expenditure as per cent of gdp for bulgaria is less than 80% of gdp while in the advanced eu member states it is in excess of 100% of gdp. it is true that the level of general government expenditure and revenue varies considerably between the eu member states. besides bulgaria in 2017 relatively low combined ratios (less than 80 % of gdp) have been reported by other 10 countries, including ireland, romania, lithuania, latvia, malta, cyprus, estonia, spain, czech republic and slovakia. t. houbenova-delisivkova / finance, accounting and business analysis 106 figure 12. bulgaria: government total expenditure (as % of gdp) source: eurostat,2018. commitments to the eu to implement strict fiscal rules underpin the maintenance of a restrictive fiscal policy framework in terms of budget spending especially for some subsectors as health care and medical help which have been kept at a low level of funding in the postcrisis period (fig.12). figure.13.bulgaria: government expenditures for the public sector in 1998-2017 (in mill. bgn source: nsi, bulgaria; eurostat,2018. another case of the restrictions observed as regards government social expenditures is presented by the indicator for the old age pensions and survivors’ pensions. the government subsidy for the public pension system has been around 5-6 % of gdp until 2015 and increased up to10 % in 2018 .(fig.13 ). 0,0 500,0 1.000,0 1.500,0 2.000,0 1 9 9 8 2 0 0 2 2 0 0 6 2 0 1 0 2 0 1 4 2 0 1 8 governme nt budget subsidies total for nonfinancial enterprise t. houbenova-delisivkova / finance, accounting and business analysis 107 figure 14. bulgaria: government expenditure related to old age pensions and survivors' pensions (as % of gdp) in 1998-2018 source: eurostat,2018. as the ageing of the population of bulgaria has increased as share of the total population this trend is unfavorable. the pensions have been maintained at low level which changed after some indexation in 2016. the negative demographic trends may aggravate further the problems of rising poverty among old people. the world bank “report on bulgaria’s potential for sustainable growth and shared prosperity: systematic country diagnostic” in 2015 has underlined: “declining pension coverage plus sizable subsidies from general government revenue, which are increasingly directed to higher-income groups, tend to redistribute wealth from the unsubsidized poor to subsidized wealthier population. transfers of about 5.8 percent of gdp already crowd out productivity-enhancing investments in such areas as education, innovation, and infrastructure. it is also likely that the projected contraction in the working-age population will result in a further decline in state revenues as fewer workers join the labor market and pay income taxes. it is reasonable to expect that fewer resources will be available to cover the payg deficit as general tax revenues shrink, jeopardizing the back-up financing vehicle for the pension system.” 9 the unfavourable impact of fiscal constraints is revealed as well by the trend of the retention of the wages’ level in the public sector as a share of the overall government expenditures. the wages and salaries have not been raised above 21 per cent of the government expenditures for more than a decade.besides there have been cyclical phases of falling below this level. (see fig.14). 9 world bank. 2015. bulgaria’s potential for sustainable growth and shared prosperity : systematic country diagnostic (english). washington, d.c. : world bank group. http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-s-potential-for-sustainable-growthand-shared-prosperity-systematic-country-diagnostic t. houbenova-delisivkova / finance, accounting and business analysis 108 figure 15.bulgaria: wages and salaries as share of the total government budget expenditures in 1998-2018 source: eurostat,2018. the government expenditures for gross capital formation have shown an uprising trend in the pre-accession period from 2003 to 2007 because of the higher rate of economic growth and ongoing structural reforms. the absorption of eu funds under pre-accession funds has also contributed to this trend. it should be noted that during the first years of bulgaria’s eu membership, the gross capital expenditures as a share of the gdp decrease in 2009-2013 (fig.15). this is a direct reflection of the impact of the crisis in the eu and the slowdown in the economic growth of the bulgarian economy. the trend towards gradual increase of this relative share after 2013 was overcome to reach 6.56 per cent of gdp in 2016. this result has been largely due to the implementation of infrastructure projects and the participation of the government budget in the co-financing of the absorption of european funds at the end of the multiannual financial programming period (2007-2014). in 2016-2018 the gross capital formation has dropped sharply and unprecedently for recent decades to a level of below 2 % of gdp. the main reason for this drop is considered the reduced utilization of eu funds under programmes funded for the present 2014-2020 multiannual period by the eu budget. t. houbenova-delisivkova / finance, accounting and business analysis 109 figure 16. bulgaria: government total capital expenditure (as % of gdp) source: eurostat.2018. a significant problem for bulgaria in terms of eu accession is that low net public investment (an average of about 1-2 percent of gdp in 1993-1998) have hampered structural reforms to meet eu requirements in the run-up to accession. according to the government investment program for the period 2000-2004, public capital investment was expected to grow on average by 3-3.5 per cent of gdp annually. given the forthcoming higher needs for public investment in structural reform, infrastructure and human capital development, bulgaria's fiscal policy has encounters challenges for: 1) ensuring the desired growth of capital investment on an annual basis; 2) implementation of public-private partnerships for the realization of public capital investments that are of importance for the economic growth and ensuring the respective publicity and transparency of their realization; 3) effective absorption of eu funds for the purposes of economic and social cohesion and implementation of infrastructure projects. the increase in budget capital expenditure would not contradict the general focus on financial consolidation as far as they can contribute to accelerating economic growth. increased investment and capital transfers costs will contribute to improving the overall business environment and increased business growth rates would be more in line with the underlying e the ec to prioritize investment as a key objective of european policies and funds. regardless of the good discipline of bulgaria's public finances, in the context of a longer-thanexpected economic and financial crisis in the eu, there is an objective need to take into account the need for better integration capacity. the fulfillment of the required benchmarks under the maastricht criteria does not prove to be sufficient to achieve the desired integration effect in terms of socio-economic convergence with the eu. the changed mechanism of economic governance in the eu in fact gives better opportunities for the choice of fiscal policy in bulgaria according to the government medium term strategies in line with the recommendations and consistency of ec monitoring for better coordination. the long-term target is accelerating growth in favor of sustainable macroeconomic development. bulgaria fulfills its obligation to contribute to the eu budget (fig.16). bulgaria is one of the eu countries that receive more money than the eu budget than their installment in the eu, and this will remain the same in the current budget period (2014-2020). t. houbenova-delisivkova / finance, accounting and business analysis 110 the largest share of the funds that bulgaria receives from the eu budget is for agriculture and rural development. the agricultural policy of eu aims to help farmers and promote the production of safe and quality food, as well as the protection of the environment and the development of the rural economy. farmer per worker's earnings increased by 49% in 2012 compared to 2007's level when bulgaria joined the eu. bulgaria’s eu accession has coincided with a period of deep reform of the eu common agricultural policy, where its funding as a share in the eu budget dropped from 70% in 1985 to around 40% today and will fall further to 33% in 2020. with the new reform, which entered into force in the eu in 2014, the common agricultural policy aims to reduce disparities in countries such as bulgaria, which receive funds less than the eu average. but the forthcoming reform of direct payments from the eu budget for agriculture aims to reduce the share of the common agricultural policy for the next multiannual programming period after 2020 (see fig.17). this trend should draw attention to make timely a nationally responsible policy choice for bulgaria to support the development of agriculture by raising the role and efficiency of own government expenditures for the agricultural sector. figure 17.the common agricultural policy of the eu as share of total expenditures of the eu budget (1980-2027) bulgaria's second largest area of budget expenditures related to european policies is cofinancing from the state budget of european regional policy projects. government expenditures are made to co-finance projects for job creation, competitiveness, economic growth, improvement of quality of life and sustainable development. ecological and transport infrastructure are top priorities for bulgaria. despite the progress made in implementing the european cohesion policy for the regions, however, the issue of significant and deepened disproportions in regional development remains open to our country. regarding the achievement of a certain ratio of gdp per capita in bulgaria to the average for the regions in eu 28, the southwestern is the only region in bulgaria that has reached the target value. other regions lag behind this benchmark, with the lowest gdp per capita in the eu 30% of the eu28 average (at 45% target). regional imbalances complicate the problems of the republican budget to maintain budget systems and public spending in lagging regions and make municipal finance more decentralized. http://capreform.eu/wp-content/uploads/2018/09/cap-share-in-eu-budget-1980-2027.jpg t. houbenova-delisivkova / finance, accounting and business analysis 111 in the context of the new eu 2010 requirements on the assessment of macroeconomic imbalances, our country does not show persistent sources of imbalances that carry medium to long-term risk. it is a fact that in 2014 our country was in the group of countries with macroeconomic imbalances, mainly due to the banking crisis and the necessary actions to overcome it with state aid. the future integration has to contribute to bulgaria’s economic development by further fiscal adjustment. the conditionality applied by the european institutions regarding the assessment of the macroeconomic convergence has been given due attention. having aspired to join the european monetary union bulgaria has undertaken measures to implement policies for better compliance with the eu criteria especially in the reform areas of public education, science, internal order, health system. according to british researcher k. dyson, it is precisely from the way in which conditionality is applied to the new eu countries that the enlargement of the eurozone is subject to multidimensional conditionality, which is changing dynamically over time. 10 in summary, in spite of the macro-constraints faced by fiscal policy, it should be stressed that it may contribute better to focus on reforms to improve the business environment, to stimulate economic growth and raise the living standard. at the same time, it should be borne in mind that the implementation of structural reforms does not always have an immediate direct beneficial effect on economic growth, as shown by the experience of the eurozone itself. the example of some eurozone members states shows that delayed structural reforms can be with negative consequences for the fiscal sustainability of the countries concerned. in this sense, it is important for bulgaria that fiscal policy undertakes due reforms to improve the business environment and increase growth. conclusion assessing the importance of europeanization of bulgaria's fiscal policy, we can summarize the following conclusions: significant functional and institutional progress has been achieved through the implementation of eu law and community multilateral surveillance procedures. this is a good prerequisite for a balanced participation of our country in the coordination of the budgetary and economic policies of the member states in the eu. the introduction of the european semester and the peer review on specific areas of public finance management also confirms the capacity of our country to participate in oversight at community level. presenting the fiscal framework that integrates the budgetary effects of structural reforms in practice strengthens the responsibility and the need for greater managerial accountability not only for policy coherence with public funds with the eu priorities but for resolving the national specific problems of social and economic development. the convergence program of the republic of bulgaria for 2015-2018 foresees further cost constraints in the public sector, the implementation of which is inevitably linked to the implementation of the structural and functional reform programs in the respective sectors. consolidation of expenditure is most significant in intermediate consumption mainly maintenance costs. although the setting of goals and targeting of the main parameters of the convergence framework 2015-2018 are bound to the objectives of eu requirements for fiscal policy, the challenges are increasing due to the necessity to raise the efficiency of public spending and to stimulate economic growth. the forecasts of the international institutions for the economic growth rates of bulgaria envisage maintaining the current rates and eventually some reduction of the rate of growth for the period up to 2020-2022 under the impact of the 10 dyson, k. (2008)euro entry as defining and negotiating fit: conditionality,contagion and domestic politics, in:external empowerment and domestic transformation in east central europe, ed.by k.dyson,oxford university press p.4-45. t. houbenova-delisivkova / finance, accounting and business analysis 112 openness of the bulgarian economy and the expectations for the global economy as a whole. fiscal policy’s results highlight the need to ensure a more targeted implementation of incentives to boost economic growth. as a country with derogation but being on the road to prepare for the emu bulgaria applies strictly fiscal policy requirements. it has consistently taken into account the necessary changes in the economic governance of the eu countries and under the fiscal pact the more strict fiscal rules. the abundance of institutional changes for economic governance in the eu and emu impose the need of further improvement of policy co-ordination. thus, under the conditions of the currency board for the bulgarian economy, the issue of the strictness of the fiscal policy is more acute, as it has main responsibility to maintain macroeconomic and financial stability. in its preparation to join the emu bulgaria has to encounter the changes in the regulatory framework of fiscal rules which further co-ordinate the budgetary policies of the participating countries. t. houbenova-delisivkova / finance, accounting and business analysis 113 references bnb( 2015) plan on reforms and development of banking supervision exercised by the bulgarian national bank, sofia, 2015. brusarski, r.(2012) economic analysis “cost-benefit”, univ.publ.house stopanstvo, 2012. 161 p., [p.25]. council of ministers of republic of bulgaria (2015) national reform programme of republic of bulgaria 2020 council of ministers of republic of bulgaria (2018) action plan of the republic of bulgaria to join the erm ii dyson, k. (2008)euro entry as defining and negotiating fit: conditionality, contagion and domestic politics, in:external empowerment and domestic transformation in east central europe, ed.by k.dyson,oxford university press .[pp.4-45] ec (2018) communication from the commission to the european parliament, the european council, the council, the european economic and social committee and the committee of the regions, “a modern budget for a union that protects, empowers and defends, the multiannual financial framework for 2021-2027”, com(2018) 321 final. ecb (2014) convergence report, 2014. eurostat (2018). government finance statistics data. five presidents' report (2015) completing europe's economic and monetary unionreport by: jean-claude juncker in close cooperation with donald tusk jeroen dijsselbloem mario draghi and martin schulz http://ec.europa.eu/priorities/sites/betapolitical/files/5-presidents-report_en.pdf;. matthews, a. (2018) cap spending in the next mff, september 23, 2018 http://capreform.eu/cap-spending-in-the-next-mff/ ministry of finance of republic of bulgaria (2015) convergence programme of the republic of bulgaria 2015-2018, april, 2015. national statistics institute (2018) macroeconomic and government finance statistics data. popova,n. (2017) taxation of personal imcome in bulgaria and the european union, in: “the economy of bulgaria in the european union”, fastprint publ.house, 229. p.[pp.105-115] isbn: 978-619-7312-63-8. radev, d. (2018) bulgaria central bank statement by bnb governor dimitar radev to the euromoney yearbook: global banking & policy review 2018, 19 october 2018, bulgaria central bank statement _ iflr.com.html world bank. 2015. bulgaria’s potential for sustainable growth and shared prosperity : systematic country diagnostic (english). washington, d.c.: world bank group. http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-spotential-for-sustainable-growth-and-shared-prosperity-systematic-country-diagnostic yotzov , v. et. other authors (2017) annual report "economic development and policies in bulgaria: evaluations and prospects. focus: the path to the european union and the balance-sheet of the first 10 years", pp. 46-48, eri-bas books, bulgarian academy of sciences economic research institute, number 35:p:1-202 edited by victor yotzov , december 2017 yotzov, v. (2017) fiscal policy, in:” annual report "economic development and policies in bulgaria: evaluations and prospects. focus: the path to the european union and the balance-sheet of the first 10 years", pp. 46-48, eri-bas books, bulgarian academy of sciences economic research institute, number 35:p:1-202 edited by victor yotzov (виктор йоцов), december 2017. http://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf http://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf http://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf http://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf http://capreform.eu/cap-spending-in-the-next-mff/ http://capreform.eu/cap-spending-in-the-next-mff/ http://www.nsi.bg/en/content/5242/government-finance-statistics http://www.nsi.bg/en/content/5242/government-finance-statistics http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-s-potential-for-sustainable-growth-and-shared-prosperity-systematic-country-diagnostic http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-s-potential-for-sustainable-growth-and-shared-prosperity-systematic-country-diagnostic http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-s-potential-for-sustainable-growth-and-shared-prosperity-systematic-country-diagnostic http://documents.worldbank.org/curated/en/521881467994600656/bulgaria-s-potential-for-sustainable-growth-and-shared-prosperity-systematic-country-diagnostic t. houbenova-delisivkova / finance, accounting and business analysis 114 83 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg the analysis of transaction costs and revenue of cayenne pepper farming: an empirical study in semarang district sucihatiningsih dian wisika prajanti1*, etty puji lestari2, fauzul adzim3 1department of economics development, faculty of economics, universitas negeri semarang, indonesia 2department of economics development, faculty of economics, universitas terbuka, indonesia 3master program in economics and development studies, faculty of economics and business, universitas diponegoro, indonesia info articles abstract keywords: transaction costs, chilli, farming, income this study aims to analyze transaction costs and its effect on chili farming income in semarang regency. this study used a quantitative descriptive approach. the location of this study was in semarang regency. the population in this study were all cayenne pepper farmers in semarang regency, which amounted to about 1,345 people. the sampling technique in this study was simple random sampling with a total sample of 70 people. this study used two methods of data analysis, namely 1) analysis of transaction costs of cayenne pepper farming, 2) analysis of cayenne pepper farming income. the transaction costs of cayenne pepper farming consist of 4 (four) namely input procurement transaction costs, farming processing transaction costs (farming), output sales transaction costs, and transaction costs for supporting institutions. the highest transaction cost for cayenne pepper farming is found in the total input procurement transaction cost, which is rp. 452,000 while the lowest is in the farming process of rp. 197,000. the monitoring cost incurred by farmers is rp. 45,000. the revenue of cayenne pepper farming is rp. 70,000,000/ha with the price of rp. 35,000/kg. the use of pesticides to prevent pest and disease attacks. in cayenne pepper farming, the pesticides used by cayenne pepper farmers are herbicides and insecticides. herbicides are used to eradicate weeds and insecticides are used to eradicate pests. pests that attack cayenne pepper plants are red mites. the total pesticide cost incurred by farmers is rp. 300,000/ha. the suggestion that can be given in this study is that the government needs to map and ensure the balance of supply and demand so that the price of cayenne pepper remains stable. it is necessary to conduct socialization with farmers when planting chilies so they do not lose money. there is a need for subsidies, especially for fertilizers, which have a very important role in increasing chili productivity. *address correspondence: e-mail: dianwisika@mail.unnes.ac.id finance, accounting and business analysis 4 (2) 2022 84 introduction agriculture is one of the sectors that has an important role and contribution to the national economy. in addition to contributing to gross domestic product (gdp), the agricultural sector also plays a role in national food availability. however, the price of agricultural commodities that are uncertain and often fluctuate can have a negative impact on inflation. one of the agricultural commodities that experience price fluctuations the most is cayenne pepper. this is due to cayenne pepper farming is very risky to various risks. semarang regency is one of the areas in central java that has great potential in cayenne pepper farming as can be seen in the following figure: source: central bureau of statistics of central java, 2022 figure 1. harvested area (ha) and production (kw) of cayenne pepper in semarang regency for the 2018-2020 periods figure 1 explains that the area of harvested chili in semarang regency during the 2018-2020 periods tended to increase. however, the production of cayenne pepper actually decreased. the rise and fall of chili production will certainly affect prices in the market and will have an impact on the income of chili farmers. the income of chili farmers can also be influenced by the size of the transaction costs in chili farming. transaction costs are part of institutional economics (sultan, h., & rachmina, 2016) which cannot be avoided in the economic activities of farmers, giving rise to economic impacts for farmers such as the transfer of surplus from farmers to other parties. directly, farmers' income (benefits) can be reduced due to transaction costs (saidah, 2018). even though it is unavoidable, transaction costs can be reduced to an efficient level so that the profits obtained are maximized (haryono et al., 2021). transaction cost is a factor that affects farming income (darwanto et al., 2014), this is due to conditions of uncertainty that give rise to a cost of uncertainty. uncertainty conditions often occur in micro-businesses such as farming (sucihatiningsih & waridin, 2015). transaction cost is a factor that affects income, this is since there is no concentration of economic activity at one point (agglomeration) resulting in market failure. transaction costs appear in the input market and output market (zulkarnain et al., 2021), this is in line with kurniawan's research, (2021) which states that transaction costs are found in activities such as obtaining financing, obtaining production facilities (inputs) and marketing production results (output). therefore, it requires fees when exchanging goods or services. the costs incurred are not production costs but nonproduction costs used to obtain goods or services that meet the criteria as transaction costs (budiman, 2016). transaction costs prevent farmers from obtaining maximum income. therefore, the challenge for farmers is to reduce transaction costs when obtaining goods or services (sultan, 2015). transaction costs in farming activities cannot be avoided. farming activities are formed in an agribusiness system such as input subsystems, farming subsystems, output subsystems, and supporting subsystems (dhiarto, 2022). in each stage of the subsystem, there are transaction costs incurred by farmers to obtain a product or service. transaction costs are costs that are not included in the price of an item or service (saidah, 2018). the emergence of transaction costs occurs because there is imperfect information (wicaksono and sakti, 2016) and limited access to information (rosanti et al., 2020). therefore, economic actors are faced with incomplete information or information uncertainty (fallo et al., 2020). transaction costs are costs incurred 1034 92025 1135 109244 1151 95433 0 20000 40000 60000 80000 100000 120000 harvested area production 2018 2019 2020 finance, accounting and business analysis 4 (2) 2022 85 other than production costs. the existence of transaction costs can increase the total costs incurred in a business. the high costs incurred by business actors can result in price differences at the consumer level and the producer level (sultan, 2015). difficulties in identifying transaction costs can reduce the income of business actors as they do not realize that they have incurred other costs other than production costs that are not considered previously (setiani and prasetyo, 2020) so that low transaction costs indirectly increase revenue. the increase in transaction costs reduces the level of income, therefore transaction costs ultimately lead to inefficiency in farming. transaction costs cannot be eliminated but can be minimized. minimizing transaction costs to achieve a broader goal, namely community welfare (zulkarnain et al., 2021). transaction costs are formed due to transactions in obtaining goods or services (dhiarto et al., 2021), so that transaction costs need to be included in farming income. income is obtained from revenues and production costs, where increasing farmers' income is the main key to improving farmers' welfare. without realizing it, the welfare of farmers has not received maximum results. this is due to transaction costs that are not considered by farmers. thus, basically, the costs obtained in the field as transaction costs are costs that arise in order for an exchange to occur. this study aims to analyze transaction costs and their effect on chili farming income in semarang regency. methods this study used a quantitative descriptive approach. the location of this study was in semarang regency. there were two kinds of data used in this study, namely primary data and secondary data. primary data were obtained by questionnaires and interviews. meanwhile, secondary data were obtained from literature studies such as journals, publication reports, and so on. the population in this study were all cayenne pepper farmers in semarang regency, which amounted to about 1,345 people. the sampling technique in this study was simple random sampling with a total sample of 70 people. this study used two methods of data analysis, namely 1) analysis of transaction costs of cayenne pepper farming, 2) analysis of cayenne pepper farming income. the analysis of the transaction costs of cayenne pepper farming. the transaction costs experienced by farmers differ according to the conditions of farming management. these differences are caused by several things, namely social conditions, property rights, and market conditions (saidah, 2018). to get concrete transaction costs for cayenne pepper farming, it is necessary to look at transaction costs starting from input, farming, output, and support. systematically, transaction costs (trc) according to north and thomas (1973), are as follows: trctotal = trc1(input)+ trc2(farming)+ trc3(output) + trc4(support) explanation: trctotal = transaction costs of cayenne pepper farming (rp.) trc1(input) = input procurement transaction costs (rp.) trc2(farming) = farming process transaction costs (rp.) trc3(output) = output sales transaction costs (rp.) trc4(support) = supporting institution transaction costs (rp.) analysis of cayenne pepper farming income. to find out the income of cayenne pepper farming, an income analysis is carried out according to the instructions (soekartawi 2016). systematically, income analysis (π) is as follows: π = tr – tc thereafter, the existence of transaction cost, then systematically, the income analysis (π) is as follows: π = tr – tc π = p.q – ((fc+vc) + trc) explanation: π = farming income (rp.) trc = transaction cost (rp.) tr = total revenue (rp.) p = price (rp.) tc = total cost (rp.) q = quantity (rp.) the criteria for r/c ratio r/c > 1 : profitable farming r/c < 1 : detrimental farming. results and discussions the analysis of transaction costs for cayenne pepper farming finance, accounting and business analysis 4 (2) 2022 86 cayenne pepper farming transaction costs consist of 4 (four) namely input procurement transaction costs, farming processing transaction costs, output sales transaction costs, and transaction costs for supporting institutions. the total transaction costs of cayenne pepper farming are presented in table 1 as follows: table 1. transaction costs of cayenne pepper farming in semarang regency transaction costs of cayenne pepper farming unit total i input procurement transaction costs transaction costs for procurement of farm seeds, fertilizers, and pesticides a. information cost rp 35000 b. coordination cost rp 95000 total transaction costs rp 130000 transaction costs for procurement of farming workers a. negotiation fee rp 96000 total transaction costs rp 96000 total input procurement transaction costs rp 452000 ii transaction costs for farming process farming planning transaction costs a. coordination cost rp 89000 b. information cost rp 43000 total transaction costs for farming implementation rp 132000 a. monitoring cost rp 45000 b. transportation cost rp 20000 total transaction costs rp 65000 total transaction costs for farming process rp 197000 iii output sales transaction costs cayenne pepper sales transaction costs a. information cost rp 60000 b. transportation cost rp 35000 c. negotiation fee rp 86000 d. contract enforcement cost rp 79000 total transaction costs rp 260000 total output sales transaction costs rp 260000 iv supporting institution transaction costs credit transaction costs (farming capital) a. information cost rp 32000 b. implementation cost rp 78000 c. monitoring cost rp 64000 d. coordination cost rp 25000 e. contract enforcement cost rp 36000 total transaction costs rp 235000 total transaction costs for supporting institutions rp 235000 total transaction costs of cayenne pepper farming rp 692000 source: primary data (processed), 2022 based on table 1, it can be explained that the transaction costs of cayenne pepper farming consist of 4 (four) namely input procurement transaction costs, transaction costs for farming process, output sales transaction costs, and transaction costs for supporting institutions. the total transaction costs of cayenne pepper farming are presented in table 1. table 1 shows that the highest transaction cost for cayenne pepper farming is found in the total input procurement transaction cost, which is rp. 452,000 while the lowest is in the farming process of rp. 197,000. according to tran et al. (2014), the transaction cost incurred by farmers in farming is rp. 1,545,466, when compared to the transaction cost incurred by farmers in the research location, is still small, which is rp. 732,725,17. output sales transaction costs are in the form of sales transaction costs consisting of information costs, transportation costs, negotiation costs, and contract enforcement costs. the cost of information aims to find a place of sale that provides a better price with low refraction, while the places of sale of cayenne pepper are stalls, agents, and factories. the cost of information issued is rp. 60000 in the form of buying pulses to call the place where to sell cayenne pepper. transportation cost aims to go to the point of sale for those that cannot be contacted using two-wheeled vehicles. the transportation cost incurred is rp. 35000 in the form of vehicle fuel purchases. negotiation cost aims to get prices and reactions that meet farmers' expectations. the finance, accounting and business analysis 4 (2) 2022 87 negotiation cost incurred is rp. 86,000 in the form of purchases of cigarettes or food, which will later be given to parties negotiating with farmers. in addition, there is a contract enforcement cost incurred by farmers of rp. 79,000 which aims to strengthen the agreement between farmers and sellers, this is done by farmers with several parties such as agents. the contract enforcement costs are in the form of purchasing stamps and photocopies of documents. input procurement transaction costs consist of transaction costs for the procurement of seeds, fertilizers, and pesticides; and labor transaction costs. the transaction costs that make the biggest contribution to the input subsystem, the first is the procurement of seeds, fertilizers, and pesticides of rp. 130,000 and the second is the procurement of labor for rp. 96,000. for transaction costs for the procurement of seeds, fertilizers, and pesticides, farmers incur transaction costs such as information costs and coordination costs. the coordination cost is the biggest in obtaining production facilities, which is rp. 89,000, while the transportation cost is the small one incurred by the farmer, which is rp. 20,000. coordination costs and information costs aimed at obtaining production facilities in the form of seeds, fertilizers, and pesticides at agricultural stalls or shops in the form of communication costs (phone/short messages), transportation costs (fuel), and consumption costs (eating/drinking/cigarettes). for transaction costs on labor procurement, farmers incur transaction costs such as negotiation fees. negotiation fee of rp. 96,000, which aims to maintain the labor that will be used by farmers who plant, is in the form of communication costs (telephone/short messages) and costs for leaving work. the transaction costs of farming processes consist of transaction costs of farming planning and transaction costs of the implementation of farming. the transaction costs that provide the largest contribution to the farming process are first farming planning, which amounted to rp. 132,000, and the second is the implementation of farming of rp. 197,000. farming planning transaction costs are incurred by farmers in the form of coordination costs and information costs. of the two costs, the coordination cost is the most incurred by farmers, namely rp. 65,000, which is in the form of meeting costs for members' meetings to discuss the beginning of the planting season, harvesting, and obstacles in obtaining production facilities, while the information cost incurred by farmers is rp. 35,000 in the form of purchasing pulses to contact members for meetings. the meeting is held by members 2 times, which is at the time of entering the planting and harvesting seasons. farming implementation transaction costs incurred by farmers are in the form of monitoring costs and transportation costs. the monitoring cost incurred by farmers is rp. 45,000 in the form of village fees, which are carried out voluntarily to protect the village and the plants in the village. in addition, there is a transportation fee of rp. 20,000 which is in the form of purchasing fuel which is used to see the cayenne pepper plants that will be harvested. the analysis of cayenne pepper farming income table 2. the calculation of cayenne pepper farming income per hectare description unit physique price (rp) value (rp) revenue production kg 20000 35000 70000000 production cost 1. cash fee seeds bunch 3000 1000 3000000 urea fertilizer kg 180 2500 450000 npk fertilizer kg 150 3500 525000 sp 36 fertilizer kg 90 3000 270000 manure kg 3 8000 24000 pesticide kg 300000 labour outside family hok 20 70000 1400000 plow the land rp 550000 taxes rp 80000 freight cost rp 1500000 total cash cost 8099000 ii. cost calculated labour in the family hok 8 65000 520000 equipment depreciation rp 200000 land lease rp 5500000 total cost calculated rp 6220000 total production cost rp 14319000 profit profit over cash costs rp 61901000 profit over total costs rp 55681000 finance, accounting and business analysis 4 (2) 2022 88 description unit physique price (rp) value (rp) r/c ratio r/c on cash cost rp 8.64 rc/ on the total cost rp 4.88 source: primary data (processed), 2022. based on table 2, it can be explained that the revenue of cayenne pepper farming is rp. 70,000,000/ha with the price of cayenne pepper of rp. 35,000/kg. the total production of cayenne pepper produced by farmers is 20 tons/ha). the total cayenne pepper production is still not maximized when compared to the national productivity standard of 41 tons/ha (ministry of agriculture 2016), 23.87 ton/ha. demir (2016) cayenne pepper productivity is low due to the inefficient production input factors used and the influence of the weather. according to gameiro et al. (2016), increasing the production of cayenne pepper through extensification and intensification approaches. cayenne pepper farming cash costs consist of transportation costs (21.44%), tax costs (0.87%), plow costs (7.78%), labour costs outside the family (24.86%), pesticide costs (3.15%), fertilizer costs (32.36%), and seed costs (9.54%). the cost of fertilizer is the biggest in the cayenne pepper production process. this is because fertilizer can increase soil fertility. cayenne pepper farmers have started using organic/manure fertilizers so that they can reduce the use of chemical fertilizers that have a negative impact on the soil. according to (schmidt, 2019), the provision of organic/manure fertilizers aims to increase commodity production and production quality. labor activities for cayenne pepper farming are in the form of land processing, planting, fertilizing, eradicating hpt, weeding, harvesting, and post-harvesting. harvesting costs are the biggest costs. harvesting must be done quickly since the cayenne pepper plant is bulky (nandi et al., 2017). the use of pesticides to prevent pest and disease attacks. in cayenne pepper farming, the pesticides used by chili farmers are herbicides and insecticides. herbicides are used to eradicate weeds and insecticides are used to eradicate pests. pests that attack cayenne pepper plants are red mites. total pesticide cost incurred by farmers is rp. 300,000/ha. the number of cayenne pepper seeds used is 3000 bunches for rp. 1000/bundle. the selection of high-yielding varieties can increase the production of cayenne pepper (ariningsih, 2018) with the seeds used are the cassesa variety and the thai variety. the calculated costs consist of land leases, equipment depreciation, and labor in the family. the cost of land lease is a calculated cost of rp. 5,500,000/ha. according to schmidt, (2019), the cost of land lease is rp. 3,750,932/ha, the cost of renting the land is still relatively cheap, this is since the location of the land is quite far from road infrastructure. most of the lands are obtained from parental grants (zulkarnain et al., 2021). a large planting area can increase production and income (nandi et al., 2017). in addition to land rental costs, there is labor cost in the family of rp. 520,000. then, the depreciation cost of the equipment is rp. 200,000. cayenne pepper farmers use labor in families more. cayenne pepper farmers earn income per hectare on cash costs of rp. 61,901,000 and for a total cost of rp. 55,681,000. this condition shows that cayenne pepper farming is profitable in line with the research conducted by (pramesti, rahayu, and agustono, 2017). seen from the ratio of the revenue of cayenne pepper farmers to cash costs (r/c) of 8.64. this ratio can be interpreted as every rp. 1,000.00 cash costs incurred will receive an acceptance of rp. 8,640.00. the calculation of the revenue ratio on cash costs shows that it is greater than one (r/c > 1). this means that the farming carried out by cayenne pepper farmers is profitable and in line with previous research. conclusion based on the results and discussions, it can be explained that the transaction costs of cayenne pepper farming consist of 4 (four) namely input procurement transaction costs, farming processing transaction costs (farming), output sales transaction costs, and transaction costs for supporting institutions. the highest transaction cost for cayenne pepper farming is found in the total input procurement transaction cost, which is rp. 452,000 while the lowest is in the farming process of rp. 197,000. the cost of information incurred is rp. 60000. transaction costs on labor procurement, farmers incur transaction costs such as negotiation costs. the negotiation fee is rp. 96,000. farming implementation transaction costs are incurred by farmers in the form of monitoring costs and transportation costs. the monitoring cost incurred by farmers is rp. 45,000. the revenue of cayenne pepper farming is rp. 70,000,000/ha with the price of rp. 35,000/kg. the total production of cayenne pepper produced by farmers is 20 tons/ha). the use of pesticides to prevent pest and disease attacks. in cayenne pepper farming, the pesticides used by cayenne pepper farmers are herbicides and insecticides. herbicides are used to eradicate weeds and insecticides are used to eradicate pests. pests that attack cayenne pepper plants are red mites. the total pesticide cost incurred by farmers is rp. 300,000/ha. the number of cayenne pepper seeds used is 3000 bunches for rp. 1000/bundle. cayenne pepper farmers earn income per hectare on cash costs of rp. 61,901,000 and for a finance, accounting and business analysis 4 (2) 2022 89 total cost of rp. 55,681,000. a suggestion that can be given in this study is that cayenne pepper farming is one of the farming that has an important role in meeting basic needs. however, chili farming which has many risks makes the price of cayenne pepper very volatile. therefore, the government needs to map and ensure the balance of demand and supply so that the price of cayenne pepper remains stable. there needs to be socialization among farmers when planting chilies so they do not lose money. there is a need for subsidies, especially for fertilizers, which have a very important role in increasing chili productivity. references budiman, b. (2015). analisis komparatif biaya transaksi petani rumput laut di kabupaten takalar. agrokompleks, 14(1), 39-45. darwanto, d. h., soeratno, s., & hartono, s. (2014). analisis biaya transaksi jagung hibrida di provinsi gorontalo. sepa: jurnal sosial ekonomi pertanian dan agribisnis, 11(1), 49-54. demir, i. (2016). the firm size, farm size, and transaction costs: the case of hazelnut farms in turkey. agricultural economics, 47(1), 81-90. diartho, h. c. (2022). biaya transaksi tebu rakyat. jurnal ekuilibrium, 6(1), 26-38. diartho, h. c., wilantari, r. n., & riniati, r. (2021). peran lembaga masyarakat desa hutan terhadap usahatani kopi di desa curahkalong kecamatan bangsalsari kabupaten jember. jurnal ekuilibrium, 5(1), 36-40. fallo, f. a. i., sinaga, b. m., hartoyo, s., & simatupang, p. (2020). dampak peningkatan biaya transaksi terhadap kesejahteraan rumahtangga petani pada dataran rendah dan tinggi di nusa tenggara timur. jurnal ekonomi pertanian dan agribisnis, 4(1), 111-122. gameiro, a. h., rocco, c. d., & caixeta filho, j. v. (2016). linear programming in the economic estimate of livestock-crop integration: application to a brazilian dairy farm. revista brasileira de zootecnia, 45, 181-189. haryono, d., zakaria, w. a., murniati, k., rakhmiati, r., handayani, e. p., syahputra, f., & vitratin, v. (2021). biaya transaksi pada sistem agribisnis dan pengaruhnya terhadap pendapatan usahatani ubi kayu. jurnal penelitian pertanian terapan, 21(2), 167-183. kurniawan, d. (2021). analisis biaya transaksi pada siklus usahatani jagung di kabupaten dompu provinsi nusa tenggara barat. jurnal pendidikan tambusai, 5(3), 8030-8036. nandi, r., gowdru, n. v., & bokelmann, w. (2017). factors influencing smallholder farmers in supplying organic fruits and vegetables to supermarket supply chains in karnataka, india: a transaction cost approach. international journal of rural management, 13(1), 85-107. rosanti, n., sinaga, b. m., daryanto, a., & kariyasa, k. (2020). dampak contract farming terhadap kinerja usahatani kopi di lampung. agriekonomika, 9(2), 140-149. saidah, z. (2018). analisis biaya produksi dan biaya transaksi pada usahatani cabai merah (capsicum annum l). unes journal of agricultural scienties, 2(1), 027-040. schmidt, c. g., & wagner, s. m. (2019). blockchain and supply chain relations: a transaction cost theory perspective. journal of purchasing and supply management, 25(4), 100552. sucihatiningsih, d. w. p., & waridin, w. (2015). model penguatan kapasitas kelembagaan penyuluh pertanian dalam meningkatkan kinerja usahatani melalui transaction cost studi empiris di provinsi jawa tengah. jurnal ekonomi pembangunan: kajian masalah ekonomi dan pembangunan, 11(1), 13-29. sultan, h. (2015). pengaruh biaya transaksi terhadap keuntungan dan pembentukan modal usahatani kedelai di kabupaten lamongan, jawa timur (doctoral dissertation, bogor agricultural university (ipb)). sultan, h., & rachmina, d. (2016). pengaruh biaya transaksi terhadap keuntungan usahatani kedelai di kabupaten lamongan, jawa timur. in forum agribisnis: agribusiness forum (vol. 6, no. 2, pp. 161178). tran, m. c., gan, c. e., & hu, b. (2016). credit constraints and their impact on farm household welfare: evidence from vietnam’s north central coast region. international journal of social economics. wicaksono, b. j., & sakti, r. k. (2016). analisis perbandingan biaya transaksi usahatani tebu kontrak dan non kontrak (studi pada petani pabrik gula kebonagung kota malang). jurnal ilmiah mahasiswa feb, 3(2). zulkarnain, z., zakaria, w. a., haryono, d., & murniati, k. (2021). daya saing komoditas ubi kayu dengan internalisasi biaya transaksi di kabupaten lampung tengah, lampung, indonesia. agro bali: agricultural journal, 4(2), 230-245. 112 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg sustainability of cee on a comparative basis peter chobanov, diyana miteva department of finance, university of national and world economy, bulgaria info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: financial stability, sustainability, investor compensation schemes abstract ___________________________________________________________________ the actuality of the problems regarding the financial sustainability on national level is indisputable and attracts more and more attention. underestimation the importance of the financial sustainability is one of the key factors that contributed for the high impact of the global financial and economic crisis on the development of the global economy and its participants. the results shown in current research paper are part of an unwe project which deals with a comparative analysis of the countries in cee in terms of their financial sustainability, which was finalized in 2019. the paper compares the economic instability and the financial sustainability indicators for cee and draws conclusions and recommendations for the countries to obtain better level of sustainability and lower exposure to risks.  address correspondence: 1700 studentski kompleks, sofia, bulgaria peter chobanov, diyana miteva / finance, accounting and business analysis 1 (2) (2019) 113 introduction the actuality of the problems regarding the financial sustainability on national level is indisputable and attracts more and more attention. underestimation the importance of the financial sustainability is one of the key factors that contributed for the high impact of the global financial and economic crisis on the development of the global economy and its participants. the period of high economic growth prior to the crisis was not accompanied by prudential fiscal and economic policy and was characterized as a period of increasing indebtedness not only of the private but also of the public sector. the illusion that such period could last forever deterred buffers to be accumulated, and even became the reason for accumulation of imbalances which led to higher vulnerability and made the countries and their economic agents more susceptible to the crisis. the results shown in current research paper are part of an unwe project, which deals with a comparative analysis of the countries in cee in terms of their financial sustainability, and was finalized in 2019. cee are facing a number of risks following the global crisis. those risks could be defined as follows1: significant imbalances have been accumulated prior the crisis raising countries’ shock exposure; current account deficit reaches unsustainable higher levels in countries with fixed exchange rate in comparison to countries applying inflation targeting. romania and hungary also report comparatively high levels of this indicator prior the crisis, which makes it difficult to be sustainably funded in long term. the current account deficit is covered with direct foreign investments in the years prior the crisis only in bulgaria and estonia. while in latvia, lithuania and romania it is assessed as unsustainable in regard of deficit financing. 1 the conlusions are based on the research of chobanov, p. „the imbalances, risks and global the global crisis”, propler, sofia. after the crisis hungary, bulgaria and czech republic could not report significant growth rate, and the first two of them have permanent downturn of investments, which worsen the perspectives for a long term economic potential; investment structure prior the crisis in the cee is not particularly favorable as investments are mainly in real estates, as the highest share they have in the countries with fixed exchange rate. only czech republic, poland and hungary don’t have high growth rate of the internal credit prior to the crisis. this development within the rest countries causes apprehensions about the stability of the banking system in a case of aggravation of the economic environment. the unemployment( particularly the youth one) is higher in countries with fixed exchange rate. the good experience of economic growth prior the crisis was not used for accumulation of fiscal buffers and the policy of the majority of the countries does not fulfil the rules of the stability and growth pact, where an exception is bulgaria and estonia; countries with fixed exchange rate are with better fiscal discipline striving after fiscal consolidation; during the period 2002-2008 only bulgaria and estonia do not allowed twin-deficits which are considered to be a risky combination. countries applying inflation targeting have higher government debt than those applying fixed exchange rate. the main part of literature concerning financial sustainability so far regards only some of the economic sectors, as it is not known a research on the sustainability on a comparative basis in other chosen countries from cee to have been done. international institutions like imf and ec pay attention to similar problems, but it is often limited to do fiscal sustainability. following this risks and the research that was taken on them indicator for economic instability was designed as well as indicator for financial sustainability of investor compensation schemes. economic instability indicator in order to assess the financial sustainability and compare its levels across cee peter chobanov, diyana miteva / finance, accounting and business analysis 1 (2) (2019) 114 countries a possible decision is creating a common indicator. on table 1 results of calculations on building up a common economic instability indicator are presented. the indicator for economic instability has the following components: most significant decrease of the growth of the potential gdp after the crisis: slowest recovery after the crisis; lowest annual average growth of investments in the period 2011-2017; lowest share of machinery and equipment in gdp after the crisis; lowest rate change of the number of employed people after the crisis; highest deviation of the labor costs growth of the productivity growth after the crisis; highest average budget deficit after the crisis; most negative combination of positive deviation of the potential gdp and budget deficit after the crisis. table 1. economic instability indicator components/ country 1 2 3 4 5 6 7 8 total bulgaria 1 1 1 1 4 czech republic 1 1 estonia 1 1 2 latvia 1 1 1 3 lithuania 1 1 2 hungary 1 1 2 poland 1 1 2 romania 1 1 2 slovenia 1 1 1 1 1 5 slovakia 1 1 eurozone 2 3 1 2 1 1 2 1 13 outside eurozone 1 0 2 1 2 2 1 2 11 source: own calculations. the higher the total points one country has the higher the risk of economic instability is. according to the results slovenia, bulgaria and lithuania have the highest risk of economic instability. two of the countries are in the eurozone and bulgaria is on its way to it as well. the countries of the eurozone have higher indicator for a total instability where the risk of 4 of the components is higher: 1)potential gdp decrease in comparison with the period prior the crisis; 2) slower recovery after the crisis; 3) share of investments in machinery and equipment in gdp, 4) highest budget deficit after the crisis. those indicators give signals for midterm problem and therefore should be taken into consideration through economic policy measures. financial sustainability of investor protection schemes and economic instability within the research of the financial sustainability of cee it was reviewed also the financial sector – banks and investor protection systems as part of the participants which are important for maintaining the financial stability of the countries. as part of the important authorities the sustainability of the investor protection schemes was tested. 2 an interesting fact would be to know the interrelation between the financial sector and economic sector and their comment sustainability. therefor an indicator for the financial sustainability of investor protection schemes is build and is shown on figure 1 together with the values of the economic instability indicator for cee. the financial sustainability indicator includes the following 15 factors concerning mainly the financing and regulatory framework and structure and functions applied by the cee: 1) opportunities of the protection schemes to raise money from the market (in case of insufficiency) ; 2) coinsurance regulation – part of the losses are covered by the investors themselves which serves to decrease moral hazard; 3) type of financing of the schemes (ex ante , ex post) ; 4) available resources – indicator for the financial stability of the scheme.; 5) target level of the available resource 2 investor protection schemes are institutions established on the grounds of the eu directive 97/19 and aim at providing protection for investors in financial instruments. the functioning and structure of these schemes is pretty much similar to the deposit insurance schemes but they protect clients of investment companies and companies providing regulated investment services. peter chobanov, diyana miteva / finance, accounting and business analysis 1 (2) (2019) 115 in regard of the risk and potential payments – applying this model of financing decrease the risk of shortage of funds; 6)administrative instalments – has small impact on the indicator but improves the financial sustainability; 7) riskbased approach of instalment determination – considered to be the more fair and financial stable approach of financing – the same is applied for deposit insurance system; 8) option for additional instalments to be raised if a shortage is met – increase the sustainability of the schemes; 9) state contributions in place – increases the trust and sustainability of the schemes; 10) state guarantees increase the sustainability of the schemes in a time of necessity of funds; 11) minimum level of capital – factor for a long term sustainability of the schemes; 12) experienced with shortage of funds – increases the risk of future financial instability; 13) additional measures in place for coping with major defaults and payments – increases the sustainability of the schemes; 14) subrogation in the liquidation procedures of the failed investment company – increases the sustainability of the schemes; 15) stress tests and crisis management measures – improves the sustainability and readiness for potential crisis events. the components of the financial sustainability indicator can vary from 0 to 3. the higher the value the more sustainable the country is. the final value of the sustainability indicator is varies in the same interval from 0 to 3, where each component has a weight and the total sum of the weights is 1. figure 1. financial sustainability and economic instability indicators source: own calculations. the values of the financial sustainability indicator for cee are between 0,26 and 1,65. slovenia scores an extreme low value (0,26) which is due to the fact that there isn’t an independent investor protection scheme, but rather is just a bank account for funds to be raised, being financed ex-post (ec, 2010). the highest indicator is observed for hungary (1,65), poland (1,59) and bulgaria (1,55hungary has met a major case in 2014 which brought an entire new regulation which improved the regulative framework and established a new scheme part of the deposit insurance one. from figure 1 some conclusions could be drawn. there is a sign that countries with higher economic instability values have low financial sustainability indicators too which means that these countries have to introduce measures for 0 1 2 3 4 5 6 0 0,5 1 1,5 2 ec o n o m ic in st ab ili ty in d ic at o r fi a n n ci a l s u st a in a b ili ty in d ic a to r o f in ve st o r co m p en sa ti o n s ch em es financial sustainability and economic instability indicators financial sustainability indicator economic instability indicator linear (financial sustainability indicator) linear (economic instability indicator) peter chobanov, diyana miteva / finance, accounting and business analysis 1 (2) (2019) 116 increasing their sustainability if they want to protect themselves of future crisis events. those are slovenia and latvia. bulgaria on the other hand shows higher economic instability but proper financial sustainability of the investor protection schemes. slovakia, poland and hungary have lower economic instability index and higher financial sustainability which indicates for a lower risk for these countries – meaning that here the indicators show similar results. conclusions prior the crisis significant imbalances have been accumulated which led to higher vulnerability of the countries to shocks. that resulted in significant impact of the crisis and sharp worsening of the main economic indicators. the reviewed economic indicators allowed to build up an economic instability index which identified slovenia, bulgaria and lithuania as the riskiest countries. the eurozone countries have higher instability values. during the crisis they suffer higher cumulative decrease and need more time to return to the precrisis gdp levels. they have lower potential gdp growth. the fiscal discipline is worsen by the crisis and impact the eurozone countries with higher budget deficit. as a whole the dynamics of the economic factors under review is more volatile and triggers concerns in a midterm time. the fixed exchange rates and eurozone expansion have brought discipline for some countries prior the crisis. after becoming a member of the eurozone countries’risk of midterm economic stability seem to increase. as a conclusion it could be said that the financial sustainability of the investor protection schemes in the cee is on a good level, but risk of shortage of funds exists, which could be decreased applying the recommended actions abovementioned. it is important to be noted that the analysis and conclusions are made rather on a legislative basis and thus the low scores for some of the countries do not necessarily mean the risks their will happen, as if there are state measures in place the protection for investors could be secured, but there is still the risk that to be not fast enough and not effective in the time. the comparison between the countries of cee allows to assess the risks for development and encourage measures for a wider and more stable basis for economic growth. references directive 97/9 of ec for the investor compensation schemes. alternatives to investor compensation scheme and their impact, directorate general for internal policies, policy department a: economic and scientific policy, ep, 2012. european parliament (2011): european parliament legislative resolution of 5 july 2011 on the proposal for a directive of the european parliament and of the council amending directive 97/9/ec of the european parliament and of the council on investorcompensation schemes, p7_ta(2011)0313 commission staff working document, impact assessment accompanying document to the proposal for a directive of the european parliament and of the council amending directive 1997/9/ec on investor compensation schemes, 12.7.2010, p. 98 78 finance, accounting and business analysis volume 1 issue 1, 2019 strategies for the exploration of agribusiness policies and initiation for poverty reduction in nigeria umar farouk musa1, musa umar adam2 faculty of social and management sciences, bauchi state gadau-nigeria1&2 info articles abstract history article: received 2 june 2018 accepted 1 december 2018 published 29 january 2019 agribusiness innovation has contributed to the economic development and industrial capabilities of many countries thereby reducing poverty. however, the potentiality of agriculture in nigeria has yielded little output due to political and institutional challenges. the cardinal objective of this study is to explore the agribusiness policies and initiatives as a strategy to mitigate poverty in the nigerian context. hence, the study employed qualitative research design and collected data from fifteen informants on the strategies to reduce poverty in the study area. accordingly, findings from the survey indicated that the national, state, non-governmental organizations, private firms were the main activities applied in pushing agribusiness. conversely, poor political will, financial constraints, scarcity of agro-allied industries, marketing difficulties, low awareness and enlightenment among the farmers were observed as the major challenges of agribusiness initiatives in bauchi state. yet, the results revealed that agricultural revenue, food security, employment opportunities, the involvement of public, private and the ngos in agribusiness shall accelerate the production of animals and crops. therefore, the study proposed for steady political commitment from the government through expansion of capital resources in addition to public and private collaboration in agribusiness. the improvement of infrastructural facilities in the state, establishment of marketing boards, and mechanized farming. keywords : agribusiness, policies, poverty reduction, initiatives, strategies, bauchi state address correspondence: e-mail : faroukmusa2013@gmail.com1, musa.ibn@gmail.com2 umar and musa / finance, accounting and business analisys 79 introduction agriculture used to be the main sources of revenue to the government of federal republic of nigeria before the exploration of petroleum in commercial scale. however, the neglect of agriculture led to apparent economic predicaments prominent among include massive unemployment, inadequate access to basic needs, food scarcity and drastic increase in poverty level. hence, immediately after the independence various policies and programs mainly to boost agriculture production, economic growth and marketing of the outputs, but these policies appeared to be interventions projects and involving other financial institutions respectively. categorically, some of the main objectives of these strategies include resource allocation, redistribution of income and promote growth as well as development, amid the application of fiscal and other monetary instruments. these policies specify the framework and government`s action plan to increase food production, raw materials, export crop production, creation of employment opportunities and modernization of the agricultural sector for attainment of better living. agricultural policies as contained in the national agricultural policies 1960-1985, includes research policy, agricultural marketing and pricing policy, agricultural extension services policy, agricultural finance and credit policy, water resource development policy, agricultural rural development policy and capacity building and manpower development policy respectively. thus, studies have revealed that agribusiness activities in the areas land cultivation, poultry, livestock, dairy and fisheries contributed to poverty reduction, food security and gross domestic product in many countries such as the united states of america, brazil, china, canada, holland, china and germany among others. literature juxtaposed that preceding programs in agribusiness yielded insignificant results in nigeria; hence, other attributes such as post harvesting activities mainly processing, packaging, storage in addition to distribution and transportation were neglected. categorically, poor market and derail support for local industries, storage facilities, inadequate infrastructure, unsteady input and product prices. the peasant nature of farming, low productivity and poor technological adoption bedevilled agribusiness in bauchi state and the country at large (haruna, sani, danwanka, & adejo, 2012; olukunle, 2013). the vice president of nigeria declared that over 110 million nigerians are poor (nwabughiogu, 2015). a survey on food poverty indicated 50.23 percent and vulnerability to food poverty stipulated 61.68 percent in the federal republic of nigeria. the study recommended for policies and programs that will drastically mitigate food poverty in the country (ozughalu, 2016). similarly, reports on multidimensional poverty indicators across health, education and living standard proved that the bauchi state has 89.5 percent indicators (alkire, roche, seth & sumner, 2015). again, the selection of the study area was based on the report by the oxford department of international development which further proclaimed that bauchi state is the poorest among ten identified states in nigeria (ohdi, 2014; suleiman & karim, 2015; musa, abdullah & wahid, 2016). it is based on this background that this study infers to explore agribusiness strategies to mitigate poverty in the study area. the study is premised by two research questions; (i) what are the agribusiness policies and initiatives to alleviates poverty? (ii) how effective are these policies and initiatives on poverty reduction. furthermore, the stated objectives include (i) to explore the agribusiness potentials in the study area. (ii) to examine the effectiveness of agribusiness for poverty reduction. the paper encompasses an introduction, research questions and objectives. a qualitative research approach and thematic technique of data analysis. thus, related literature was reviewed, and innovation theoretical framework was adopted. the results were discussed based on the findings of prior researches, the recommendations and conclusion as well as references was presented respectively. methodology this study utilized the qualitative research method; non-probability sampling design and semi structured interview. we collected the data from the fifteen informants via purposive sampling from the ministries of cooperatives, agriculture, social welfare and bauchi state commission for women, youth rehabilitation and development. while some selected farmers were equally interviewed via snowballing sampling technique. the population of this study comprises of the policy makers, stakeholders and beneficiaries of the bauchi state agricultural scheme, empowerment and poverty alleviation programs. during the interview session, the informants were given 15-20 minutes on each question captured on the interview protocols (see the interview protocols, below). the data were recorded meticulously while field notes. a transcription for better organization of the data. consequently, a thematic analysis was applied in which the research questions were answered based on the themes and facilitated the achievement of the stated objectives. umar and musa / finance, accounting and business analisys 80 interview protocols what are the agribusiness policies in the state? list the impediments to agribusiness policies. how are these programs implemented. what are the achievements of these policies? can you suggest the strategies to expand agribusiness in the state. literature review this section of the study discussed types of agribusiness, development and other studies carried out on the phenomenon under study. agribusiness scheme, first appeared in the works golberg and davis in 1957, it implies joint business activities that took effect from farming to the sale of products. in other words, agribusiness is the collection of enterprises which includes diverse farming activities such as agri-chemicals, production and breeding of seeds, crops, supply of farm machineries, processing, distribution as well as retail services and marketing of the products (goldberg & davis, 1957). in other words, it is a composition of supply of agricultural inputs the farm implements, products and modification of agricultural outputs and distribution to the final consumers. based on these notions, agribusiness appeared to a foremost sources of employment and income generation across the globe. it is often characterized as businesses that covers marketing of farm output, the wholesalers, processors, retailers and other middlemen operators. agribusiness is also typified by production, distribution, retailing, franchising while professional and financial services are carried out respectively (haggblade et al, 2015). basically, agribusiness is characterized by three major substructures the farm productions, distribution and marketing of the products (tersoo, 2014). studies have indicated that most of the products and raw materials being processed are perishable; fragile and can be better managed by people with distinctive business abilities. the governments, at various level the central, states and regional authorities; or local governments have put strict regulations to ensure consumer safety and environmental protection measures. to these effects, divergent stakeholders such as producers, wholesalers, transporters and retailers across different gender are involved in agribusiness activities and in order eliminate hunger and poverty. agribusiness organizations are categorized into sole proprietorship, partnership, cooperative society, joint stock company, both private/public and state-owned enterprises respectively. the development of agricultural policies in nigeria took progression of stages aimed at boosting food security, income generation and general agricultural infrastructure. the programs include those within regions, states and national projects. for instance, the farm settlement scheme (fss); was introduced in the then western region in 1960, eastern region in 1962, midwestern region in 1964 respectively. the national outlook started in 1972, with the introduction of the national accelerated food production project (nafpp); operation feed the nation (ofr); 1976, river basin development authorities (rbda); 1976, green revolution (gr); 1980, agricultural development projects (adp); was later launched in 1975 across some states. the directorate for food road rural infrastructure (dffri); took effect in 1986, the national fadama development project was later inaugurated in 1990 in twelve states of bauchi, adamawa, gombe, niger, lagos, oyo and federal capital territory, abuja. in the year 1999, the national economic empowerment and development strategies (needs); was launched, national, specialized program on food security, 2002 and other states project respectively (ani, 2013; ekpo and olaniyi, 1995; iwuchukwu and igbokwe, 2012). literature indicated that these programs were bedeviled with inadequate collaboration between the public and private stakeholders, weak strategies, narrow focus, targets and specific objectives. embezzlement, poor monitoring, evaluation and political interference (iwuchukwu and igbokwe, 2012). nwibo and okorie (2013) conducted a survey on the constraints to entrepreneurship and investment decision by agribusiness stakeholders in the south-eastern, nigeria using mixed method research design. the results reveal that social, economic and institutional barriers such as inadequate capital and low access to formal loan schemes, poor market information, poor infrastructure and multiple taxation are major constraints to the agribusiness. the survey recommended for an increased access to credit facilities to the agribusiness entrepreneurs and market research initiatives respectively. pawa and tersoo 2013, discovered that agribusiness initiatives are capable of generating employment, revenue and poverty reduction. but poor policy articulation, inadequate capital, derailed infrastructure upset agribusiness in nigeria. singh, nain and sharma, (2016) conducted a survey on the development of agrientrepreneurship for sustainable farming income and discovered that food processing and value addition are an integral part of agriculture, thus, contributed to the socioeconomic development of india, but huge potential has been underutilized. this led to neglect of large opportunities that will develop the sector. the study suggested for improvement of strategies for the processing equipment, provision of infrastructure, capacity building, umar and musa / finance, accounting and business analisys 81 business interventions and effective marketing linkages to the consumers to tackle poverty and rural unemployment concurrently. studies have acknowledged that agribusiness initiative is a leading instrument for the development of economic and mainspring for poverty reduction (ezeokeke, anyanwu, & okoro, 2012). for instance, the results of survey carried out on agribusiness in new zealand indicated a significant output in the production of dairy from 59000 as at 1994; 155000 by 2002 and 266000 in 2010 respectively. the results further proof that land use contributed to 204, among farmers. the findings contributed to the development of high farm harvest and increased raw materials for agro-allied industries. these further influences agribusiness and later translated into poverty reduction to the farmers. (copland & stevens, 2012). ogidi, 2016 studied agribusiness for economic development in nigeria and discovered that before the exploration of petroleum in commercial quantities, agricultural products such as groundnut, cocoa, cotton and cassava were the major sources of revenue and export in the country. these products were processed into different bye products. however, political, legal constraints, poor collaboration and economic factor such as interest rates, exchange rates, and unemployment crippled these developments. hence the product faces market difficulties in the international business. a study conducted on the cooperative agribusiness in greece indicated that market orientation, brand orientation is the crucial approaches required in the development of the sector. many cooperatives have experienced organizational and strategic changes which lead to the expansion of markets. therefore, cooperative agribusiness yielded positive results and higher output in the country (benos, kalogeras, verhees, sergaki, & pennings, 2016). in a study on agribusiness innovation between thailand and nigeria; ademola, adenle, louise and hossein, (2016) compares the cassava potentials of the two countries and established that agribusiness potentials are under-exploited in africa and nigeria based on the apparent challenges related to political instability, lack of reliable financial system, poor economic infrastructure, inadequate technological readiness, land tenure practice, weak institutional infrastructure, lack of access to essential inputs for food testing, packaging and processing. findings indicated that asian and thailand agribusiness recorded success as results of innovative business in agro-industrial policy of 1958, strategic marketing, vertical integration, technical, human resource and managerial. the country invested in capacity building for cassava production. the study recommended for promotion of institutional support, agro-industrial policy, infrastructure development and establishment of strategic marketing. based on these gaps established in the literature, this study was carried in the state of bauchi, federal republic of nigeria to explore agribusiness policies and potentials. theoretical framework innovation theory is used in the context of this study in order to explore agribusiness and the precious need to revolutionize, modernized and transform agricultural products into competitive and business oriented as well as novelty so as to reduce poverty in the study area. innovation theory first appeared in the works of joseph a schumpeter in 1934. the theory stated that innovation is the crucial dimension related to economic transformation. he postulated that economic change spin around innovation and entrepreneurial accomplishments in addition to market power. innovation-originated market driven activities provides improved and better results. these will further lead to product characterization, marketing research, skills and development; financial capability and internationalization of products (binnui, & cowling, 2016). innovation theory was previously applied in management, information and communication technology (misuraca and viscusi, 2015); law (boyle, 1992); agriculture (sumberg, 2005); entrepreneurship (goldsmith, 1991); economics (hall, 1994; stiglitz, 2015); public procurement (edquist and hommen, 2000) and other related disciplines. in the context of this study, innovation entails improvement, modernization, revolution, novelty, advancement and transformation of agribusiness potentials in the study area for competitiveness, desirability of various products for consumption and tackle the under utilization of the agricultural resources respectively. furthermore, in order to push and achieve the objectives of this study; innovation theory is employed to among other things ensure increased production of agricultural produce, processing of fruits and vegetables into cans, process maize for flour, starch and other feeds. processing and changing of livestock, birds; diary products and many other farm produce to mitigate poverty. an improvement of infrastructure shall accelerates the preservation, storage and warehousing, transport services, agri-clinics and other service centers. these developments will equally enhanced trading in the aspect of retailing, farming contracts, supply chain management. other aspects of capacity building and human resource development in agribusiness. consequently, the creation of new products, market, sources umar and musa / finance, accounting and business analisys 82 of raw materials and general organization of small and micro scale enterprises besides the employment opportunities (acharya, 2007; haggblade et al, 2015). results the results of this study were analysed based on the structured interview protocols on the existing policies on agribusiness, challenges of the programs, achievements and strategies to expand agribusiness in the study area. these were later discussed and corroborated by previous studies and answered the research questions and accomplished the stated objectives. the agribusiness policies in the state the informants attested that agribusiness policies in the state are commonly categorized into national, state, ngos and private operators. national policies: include all programs initiated by the federal government of nigeria on the development of agribusiness in the state recently, such as fadama development projects which collaborated with the state government projects in boosting modern and irrigation farming, processing and marketing of the products like rice, wheat and other perishable products (informant four). informant three, maintained: that the federal government of nigeria had established many programs such operation feed the nation, green revolution, directorate food road and rural infrastructure, national fadama development project phase i, ii and iii. these programs were established to guarantee improved farming inputs both raining and dry season using modern techniques, irrigation and ensure food security across the thirty-six states of nigeria (informant six). state policies: these are the programs which cover all aspects of agriculture and agribusiness activities carried out by the state government through the ministries, agencies and local governments. the ministry of agriculture and water resources, facilitated these projects through the delivery of modern farming techniques; training and capacity building across the twenty local governments in the state (informant five). the bauchi state agricultural development programs (bsadp); have offices in the three senatorial zones and the local governments. the project is designed to smoothen the process of all aspects of farming activities, information dissemination, supply of farm implements and equipment. it also coordinates all agricultural schemes in the state. (informant ten). “the bauchi state government has established fertilizer blending company and sale to the farmers. the bauchi meat factory is a state government owned company which processed meat and distributed to the market for sale” ngos and private individuals: the non-governmental organizations such as farmers’ cooperative societies and associations accessed loans from the bank of industry, bank of agriculture in the state. the private individual farmers and businessmen partake in other activities, namely, the processing and product management, typically among include groundnut, rice and soybeans, beans, sesame in addition to the improvement of various products. other activities of the private operators include assorted milk drinks and locally processed meat et cetera (informant seven). the impediments to agribusiness in bauchi state for the purposes of this study, the challenges of agribusiness are classified into political, financial, shortage of agro-allied industries, marketing difficulties and low awareness and enlightenment for the farmers. political impediments, these include poor laudable policies on agribusiness, inadequacy of modern farm equipment and implements for mechanized and commercial farming. other farm inputs like improved breeds of seeds, fertilizers, pesticides and insecticides are grossly insufficient for the farmers in the state. most of our farmers are in rural areas and faces difficulty due to deplorable infrastructures such as roads, electricity, water for irrigation and veterinary centers. these circumstances led to the lost farm products (informant eleven). “i discovered that there is inadequate involvement of the local farmers during the commencement and the implementation of the projects. farmers are ordinarily expected to be part of the decision makers on programs that affect them” umar and musa / finance, accounting and business analisys 83 financial difficulty, most farmers in the state are subsistence and therefore find it very difficult to access soft loans from the banks of industry, agriculture and other financial institutions. the farmers had feeble resources to acquire farm machineries. these affected high farm production as well as distribution of these products. sometimes the farmers mismanaged and misapplied the resources meant for agribusiness (informant twelve). pitiable agro-allied industries: there are shortages of agro-allied industries in the state, which led to the damages and under-utilization most of the products such as tomatoes, fruits, groundnut, soybeans. the only existing meat factory owned by the state government is incapacitated to cater for numbers of beef products in the state (informant thirteen). marketing hitch: even though, farm produce is currently on sale, the local products have low market, due to poor processing methods. perishable got spoiled as results of low patronage and these affected future productions. for instance, tomatoes, pepper and other unprocessed products blemished. there are scanty marketing boards not only in the state, but the country at large (informant fourteen). “stumpy awareness and enlightenment: farmers and agro-allied businessmen in the state have insufficient technical skills, initiatives and modern agribusiness creativity as well as knowledge. hence, they had little information on the modern techniques” implementation of the programs implementation refers to the process of executing projects related to agribusiness through the various implementation mechanisms such as national programs, state ministries, agencies, companies and ngos respectively. informant one, said that: the state hosted national agricultural programs such as fadama farming project, phase i, ii and iii respectively. the bank of industry, bank of agriculture gives some financial package in the form of soft loans to farmers and entrepreneurs alike. the fadama projects trained farmers on irrigation and the processing of farm products such as rice, wheat, groundnut and other vegetables. locally processed products were on sale in their shops in bauchi, the state capital and other locations across the state (informant six). the ministries, agencies and state owned companies: the ministry of finance makes the disbursement of funds while agricultural ministry supply via its departments such as bauchi state agricultural development program (bsadp); the established farming zones across the three senatorial zones and the twenty local governments; farmers were given farm implements through the tractors hiring units, animals, local implements, insecticides and pesticides. the state agricultural supply company supplies improved seeds, farm implements ready for sale to the farmers. the fertilizer blending company and meat factory executed projects related to processing of meat and manufacturing of fertilizers (informant five). the role of extension workers and media stations. the media houses in the state, bauchi radio corporation and television station enlightens the farmers via the programs (akoma gona); meaning people should embrace farming in terms of plantation; cattle rearing and birds. while extension workers give practical training on the modern agricultural skills (informant two). non-governmental organizations and private companies: agriculture research projects such as (sasakawa farming projects), equally assisted farmers with technical skills and capacity building to improve agribusiness activities in the state. similarly, private companies such as sankache farms, vital feeds, animal care and other ngos sometimes do collaborate with the government on the development of agribusiness via the supply of products, processing as well as distribution in the state (informant fifteen). achievements of the programs in the state despite the challenges of agribusiness strategies in the state, the informants uphold that the venture yielded some remarkable success, such as creation of job opportunities, the unemployed have secured employment via the public projects, the ngos and other private practitioners. nearly 70 percent of the people are employed in the farming, processing, distribution and marketing of agricultural products in the state. utilization of the agricultural potentials in the state: the involvement of public, private and the ngos in agribusiness has accelerated the production of animals and crops. irrigation alone had exposed most farmers on the need to harness our abundant resources such as rice, sesame, maize, cotton, beans, soybeans, guinea corn, millet, groundnut, wheat and vegetables. the processing firms have explored production, processing and distribution of products to the market (informant five). umar and musa / finance, accounting and business analisys 84 increased food security and production: the state is harvesting crops during the dry and raining season, thereby making the products available for sale. for instance, fadama phase i, ii and iii had boosted the production, processing in addition to marketing of rice, wheat along with other farm products in the state (informant eight). accelerated revenue to the government, ngos and farmers: due to the bumper harvest, especially this year, many farmers had earned more income and as well the state revenue had increased. this generated income to the people via sales in various markets in the villages and other parts of the state (informant one). decline of crime rate, most of the misconducts and felonies in the study area among the youth have direct links with unemployment, therefore, an expansion of agribusiness novelty led to a drastic reduction in offenses in both the urban and rural areas in our state (informant three). strategies for the expansion agribusiness in the state the informants proposed for vibrant political will on agribusiness, expansion of capital resources, public and private collaboration on the business, improvement of infrastructures in the state, establishment of marketing boards, and mechanization of agriculture. “vibrant political will on agribusiness: it is therefore imperative for the government to allocate enough financial resource, capacity building and all the services required to make agriculture wholesome hence the potentialities shall be adequately explored” “expansion of financial support for farmers: the needs for expansion of capital resources through the bank of agriculture, industry and micro-finance banks shall augment the existing programs and accelerate agribusiness resourcefulness and innovation in the study area” farm credit facilities, the government, commercial and micro-credit schemes institutions should provide capital resources to specific aspects of farming so as to increase production and marketing. for instance, beans, soybeans, sesame, groundnut, cocoa, cotton and palm kernel” public and private collaboration on the business: partnership between the government and private operators will influence food production, poverty reduction and employment generation as the sector could accommodate wide areas such cattle rearing, crops and above all processing them for marketing (informant seven). “the establishment of marketing boards: the roles of marketing boards in terms of prices regulations and distribution will help the local farmers avoid the risk of seasonal fluctuations and loss of their products” “mechanization of agriculture: the process of large scale farming and commercial production requires modern equipment, implements and technical skills. therefore, i suggested for investment in the modern farming to enable our products have comparative advantage” improvement of infrastructures in the state: the need for good road network, electricity supply, construction of dams and storage facilities shall ease difficulties faced by the professional farmers especially in the rural areas. this will also attract many people into agribusiness (informant two). “improvement of the farm and land infrastructures, these include allocation of farm lands, farm machines, technical skills, farm security and up to date farming techniques” establishment of state owned agricultural institutions and training centers. the need to set up capacity building and agribusiness institutions shall have influenced farmers’ technical skills, innovations and expansion of the business to be result oriented. the institutions shall also influence research and development; the students, farmers will be trained, their expertise and competence will be developed. umar and musa / finance, accounting and business analisys 85 discussions the study employed a thematic analysis method in the articulation of results and achieved the stated objectives. the first research question supposed: what are the agribusiness policies and initiatives that alleviate poverty? agribusiness policies are designed plans of actions of the governments in the study area to accelerate agricultural development, employment generation and poverty reduction. the informants stipulated that such programs of actions include; the previous and current national programs such as operation feed the nation, ofn; national fadama development projects phases i, ii and iii. these projects collaborated with the state ministries, agencies; ngos and individual farmers in boosting agricultural activities in the state. literature attested that fadama iii project had influenced the production capacity, employment generation, income and living standard of the benefiting farmers in niger, akwa ibom, enugu, kogi, oyo and taraba states of nigeria (idris & yusof, 2016). the results of this study further indicated that projects such as the bauchi state agricultural development programs (bsadp); have been established to provide intervention in all aspects of agriculture. alongside the state agricultural supply company, the meat factory, fertilizer blending corporation were ventures, designed to push agribusiness activities in the state. ngos and private individuals, the informants testified that non-governmental organizations and individual farmers, the cooperative societies and associations accessed loans from the bank of industry, bank of agriculture in the state. the private individual farmers and businessmen partake in the production and processing in addition to management of farm activities typically groundnut, rice, soybeans, beans and sesame. previous studies in rivers state indicated that six ngos had accelerated facilitated agricultural programs, community development, industrial growth and commercial programs in the state (enyioko, 2012). despite the national, state, ngos and private individual projects as well as interventions; the informants substantiated some peril challenges affecting agribusiness in the study area such as the inadequate political will, financial constraints, scarcity of agro-allied industries, marketing difficulties and low awareness and enlightenment among the farmers. previous researches indicated that inadequate capital, poor managerial training, declining market for local products, unsatisfactory agro-based industries, infrastructures and multiple taxes are some of factors confronting agribusiness in the federal republic of nigeria (nwibo & okorie, 2013; igbokwuwe, essien & agunnanah, 2015). a study in malaysia corroborated that weak political will, scanty research, inadequate capital, limited market and low level of skills and knowledge sluggish straw agribusiness in the country (zainol, davies, rose, jabil, mazdi, wan toren & rosmawati, 2015). the interview session enables us to examine the implementation strategies of the agribusiness schemes, the results showcases that bauchi state accommodated the national fadama development project, phases i, ii, iii and other national projects respectively. the bank of industry, the bank of agriculture which facilitated the disbursement of capital and capacity building. the fadama projects trained farmers on irrigation and the processing of farm products such as rice, wheat, groundnut and other vegetables. the nigerian agricultural credit guarantee scheme (acgs); had increased funding of agriculture by sixty percent in the country (okorie, 1988). a study in gwagwalada, abuja, nigeria confirmed the results of this study that farmers accessed formal and informal financial interventions. the formal institutions include agricultural credit schemes (alabi, lawal & chiogor, 2016). findings from this exploration justified that the state ministries, agencies and companies make the disbursement of funds as well as farm inputs via the bauchi state agricultural development program (bsadp). the state agricultural supply company supplies improved seeds, farm implements ready for sale to the farmers. the fertilizer blending company along with meat factory executed projects related to supply of fertilizer and meat processing. literature, align that regional clusters accelerated the economy of poland in which agricultural and food processing enhances regional business, profits and comparative advantage (bojar, bojar & bojar, 2016). a survey on lean approach to food processing smes highlighted training and resourcefulness guarantee food safety and hygiene (dora & gellynck, 2015). furthermore, the extension workers and media stations such as the bauchi radio corporation and television stations enlightens the farmers via the programs (akoma gona and noma tushen arziki); meaning people should embrace farming for empowerment. at the same time extension workers give practical training on the modern agricultural proficiency. ejiogu-okereke, chikaire, ogueri and chikezie, 2016; concurred that radio, television, mobile phones and other information and communication technology played crucial roles on information exchange, market, knowledge sharing and monitoring illegal fish farming in rivers state, nigeria. the media exhibit essential roles in agricultural development through umar and musa / finance, accounting and business analisys 86 effective communication, promoting extension services, marketing of farm products, educating farmers on modern techniques and mobilization of the people in zimbabwe (mugwisi, 2015). non-governmental organizations and private companies: agriculture research projects such as (sasakawa farming projects), equally assisted farmers with technical skills and capacity building to improve agribusiness activities in the state. similarly, private companies such as sankache farms, vital feeds, animal care and other ngos sometimes do collaborate with the government on the development of agribusiness via the supply of products, processing as well as distribution in the state. the link between civil society organizations, development ngos and grassroots associations in promoting agriculture development in india indicated a remarkable achievement via the government, donor agencies, activist networks, rural elites and poor (brown, 2016). an empirical study in malaysia and indonesia juxtaposed that palm oil industries had contributed to the economic development and push agricultural services; thereby increasing the processing of the products with over seventy percent export in the two countries (jaafar, salleh, & manaf, 2015). answering the second research question which explored the effectiveness of agribusiness policies and initiatives to reduce poverty. literature, supposed that agribusiness policies in brazil contributed to higher foreign exchange, balance of trade and national employment. the results thus, confirmed in concrete terms the strong linkage between agricultural, livestock, services, industry and other sectors of the economy. these advancements imply its significance to the brazilian economic development policies (rodrigues moreira, kureski, & pereira da veiga, 2016). the results of this study supported and uphold solidly that agribusiness led to the creation of jobs via the public projects; the ngos and other private practitioners. nearly seventy percent of the people are employed in the farming, processing, distribution and marketing of agricultural products in the state. the informants firmly expressed that agribusiness policies had improved the utilization of agricultural potentials in the study area through the processing of farm products; cattle, distribution and marketing. the venture concurrently boosted food security, processing as well as production of variety of packaged pastries. we realized accelerated revenue to the government, ngos and individual practitioners alike. a reduction of crimes and wrongdoings was also witnessed in bauchi state. the literature suggested that agro-entrepreneurship had played key roles in the socioeconomic development of india via the creation of employment, increased national income, control rural urban migration and supported agro-allied industrial development. the study uncovered farm level production, services, inputs producers, processing and marketing (uplaonkar & biradar, 2015). in order to achieve the stated objectives, we examined the strategies required to boost agribusiness in the study area. the informants proposed for vivacious political will, increased capital resources, public and private collaboration on the business, expansion of infrastructures in the state, establishment of marketing boards, and mechanized agriculture. studies in latin america indicated the involvement of the government and private sector in developing strategic instruments and programs at the micro level. the public sector initiated plans for industrial development, innovation, investment, education, science and technology. industrial policies were applied and transform the economy, which further enhances sustainable growth. the chez republic for instance, introduces economic policy, human resources development, public administration and public services, thereby revitalizing the state (fernández-arias, sabel, stein & trejos, 2016). a study in manipur state of india ascertained that financial capital rendered a significant role in influencing entrepreneurial action and strategic decisions of rural women in the country. it also indicated the interrelationship between human, institutional and social capital for their development and poverty reduction (kungwansupaphan, kungwansupaphan leihaothabam & leihaothabam, 2016).capital resource is the backbone of agribusiness and meaningful economic development, therefore disbursement of funds shall accelerate the production as well as expansion of the sector. a study in canada, further attested that financing businesses should be the focal interest of policy makers, academics, business owners and practitioners. availability of capital buttress entrepreneurial capability, practicability, commercial innovations and wealth creation, thereby mitigating paucity of resources (orse, riding & manley, 2006). the expansion of infrastructures in the state, establishment of marketing boards, and mechanized agriculture. previous study in burma, indicated that infrastructure, the road, rail, electricity, telecommunications and other utilities have direct connections to effectiveness of governance, societal cohesion, employment and economic growth (walsh & amponstira, 2013). a study in south korea indicated that agricultural infrastructure such as farm roads, water development, farmland improvement, irrigation and drainage systems in yeongsan project led to an increase in agricultural productivity, environmental friendly farmland, regional income growth, transportation systems and cash crop production (im, lee, lee & kim, 2016). prior researches have associated that the british empire marketing board established in 1926; proved that trade stimulations, satisfaction of the colonial agricultural and industrial products. thus, promoted free trade, isolationism and preferences (kothari, 2014). a study umar and musa / finance, accounting and business analisys 87 on the comparative advantage of the marketing board of cocoa in ghana and nigeria reveals significant impact on production during the marketing board era in the two countries devoid of exploitative tendencies (ayinde, 2014). agricultural mechanization in brazil, canada and united states has significantly resharpen crops and animal production for a longer time. the innovation of mechanized farming such as tractors, zero tillage technology, rice, citrus, vegetable, cotton, sugarcane, potatoes mechanizations and milking equipments had improved farming size and agricultural productivity (spera, mustard & vanwey, 2014; schmitz & moss, 2016). conclusion and recommendations the study explored agribusiness policies as strategies for poverty reduction in bauchi state, nigeria. a qualitative methodological paradigm was applied using semi-structured interview and the results were thematically analyzed. the main objectives of this study are to discover the agribusiness potentials in the study area as well as to examine the effectiveness and initiatives to mitigate poverty. findings divulge in concrete terms that agribusiness policies in the state are usually categorized into national, state, ngos and private operators, activities for instance; the national policies include all projects initiated by the federal government and implemented the various states such as the operation feed the nation, directorate for food road and rural infrastructure and national fadama development projects phases i, ii and iii respectively. the state policies covered all agribusiness schemes executed by the ministries, agencies; local governments in the study area and the state-owned companies such as the bauchi state agricultural development programs (bsadp); fertilizer blending corporation, the meat processing factory and agricultural supply company. i realized the contributions of ngos, and private firms and individuals in accessing financial resources and agribusiness exercises in the study area. the results as well, stipulated that agribusiness is impeded by frail political will, inadequate financial resources, poor agro-allied industries, marketing hitch, unsatisfactory extension services and denial of the local farmers’ views and suggestions in relations to decisions. findings from the study shows that the implementation mechanisms of these projects were carried out by the federal establishments, state ministries, companies, agencies, the ngos, the media houses and other stakeholders respectively. however, we discovered the utilization of agribusiness potentials in the areas of employment generation, improved food security and production in the state. part of the success story of this study is the growth of revenue and income by the government and farmers. this implies other socioeconomic benefit related to felonies and crimes had depreciated, meaning if the venture is well explored much shall be achieved. the informant boldly advised and indicated the need for policy makers to accord priority to agribusiness through the mechanization of agriculture to attend high production, expansion of capital resources, improvement of infrastructure, and establishment of reliable marketing boards. a specific credit facilities and outright commercialization of some export products such as cotton, cocoa, sesame a s well as groundnut. the need for strong collaboration and memorandum of understanding between the public and private sector were articulated as the practical strategies for the expansion agribusiness in the study area. mechanized agriculture is the modern innovation and it yielded remarkable success in the united states, canada and holland. other fascinating line of action, the establishment of state owned agricultural institutions and training centers. agricultural projects required training and capacity building so as to harness the diverse fields, seed supply, crop production, animals breeding, farming machinery, agrichemicals, processing, distribution and marketing of the products. the study has paved a way for adequate utilization of agribusiness facility and added credence to the body of literature in policy studies. i, therefore, recommended for the provision of adequate capital resources through agricultural multi-channels credit schemes, establishment of farm centers across the twenty local areas in the state and agro-allied industries in each of the three senatorial zones. the need to revisit agricultural shows to exhibit farmer’s talents, appreciate their efforts and reward those with outstanding products shall be imperative. provision of infrastructure such as electricity, good road network, water facilities such as dams, borehole for irrigation deserves urgent attention. the introduction of agricultural insurance policy to cover and carry the risk that may occur in the process of production, processing, distribution and marketing of the commodities. this study is limited within its scope, hence poverty indices and agribusiness potentials of other states in the 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(2015). stagnation of rice straw agribusiness development in malaysia. mediterranean journal of social sciences, 6 (4), 523-530. ret rac ted 73 finance, accounting and business analysis volume 1 issue 1, 2019 corporate governance and accounting conservatism: the moderating role of family ownership nishtiman hashim mohammed1, ku nor izah ku ismail2, noor afza amran3 tunku puteri intan safinaz school of accountancy1, universiti utara malaysia2&3 info articles abstract history article: received 10 june 2018 accepted 15 december 2018 published 29 january 2019 this study objective is to investigate the influence of board characteristics and audit committee characteristics on accounting conservatism with respect to the influence of family ownership in turkey. the findings explained that clients’ demand for accounting conservatism improved because of board characteristics (e.g. board size, independence & women on board) and the audit committee characteristics (e.g. audit committee independence and audit committee expertise). hence, the family ownership undermines the impact of board characteristics and the audit committee characteristics to demand accounting conservatism, which will be unfavorable outcome for the minority shareholders. thus, this study suggests that regulators should increase law enforcement to improve corporate governance in turkey to accommodate the unique characteristics of family ownership and offer a protected environment for minority shareholders. keywords : corporate governance, accounting conservatism,and family ownership. address correspondence: e-mail : nishtimanmohammed87@gmail.com ret rac ted nishtiman, ku nor an noor afza / finance, accounting and business ananlisys 74 introduction accounting conservatism represents one of the significant features of the quality of financial information. conservatism is subjective in nature, and it is involved in most of accounting conceptual frameworks. numerous studies have examined accounting conservatism in different financial and economic environments (basu, 1997). in general, these studies focus on viewing conservatism as a practice of asymmetric recognition in which emphases on accounting norms with highest liabilities/expenses of lowest assets/revenues. conservatism accounting could be affected by features of each environment such as the set of accounting standards adopted in the country. for instance, ball, robin and wu (2003) revealed that accounting results of firms in countries with code law systems are less conservative than those of firms in common law legal systems. recently, although some studies have argued that family ownership is associated with higher earnings quality and firm performance (ali, chen, & radhakrishnan, 2007) accounting conservatism has become an important issue for family-controlled firms. family firms certainly have less serious agency problems because of their reduced separation of ownership and management; however, they do have more serious agency problems between the controlling family and minority shareholders (type-ii agency problem). corporate governance mechanisms have received substantial scholarly attention as a way to enhance accounting conservatism. there are a considerable number of studies (ahmed & duellman, 2007) which document that the effectiveness of corporate governance mechanisms affect accounting conservatism practices of widely held public firms, however there are relatively less studies (ren, 2014) which investigates whether the measures of corporate governance have the same effect on the level of accounting conservatism when ownership is not widely dispersed, and in particular when ownership is concentrated in the hands of families. this study contributes to the existing research by searching whether family ownership moderates the effectiveness of corporate governance mechanisms in enhancing the level of accounting conservatism practices on a sample of turkish firms. turkey has an ideal setting to handle issues related to accounting conservatism in family firms due to the presence of large number of family firms (mustafa, che-ahmad, & chandren, 2018). literature review and hypothesis development according to the positive accounting theory accounting conservatism can be exercised to control earnings management and reduce agency conflicts (watts & zimmerman, 1986). accounting conservatism is one of the corporate governance mechanisms. that is due to its role in restricting the opportunistic behaviours of managers (basu, 1997). due to the benefits of accounting conservatism, firms with strong corporate governance are more likely to adopt high levels of conservatism practices. corporate governance is an interrelated system; in a particular arrangement some practises of corporate governance mechanisms are more effective, leading to various patterns of corporate governance. in this regards, this study applies a contingent approach to investigate how family-owned firms influence board strategic behaviours in terms of adopting the levels of accounting conservatism. according to agency theory, internal corporate governance mechanisms such as board of directors and audit committee (ahmed & duellman, 2007) represent significant corporate governance mechanisms to limit the agency conflicts through improving the quality of reported earnings. this study is concentrating on family-owned businesses not only influence board incentives to monitor management, but also on board’s ability to demand accounting conservatism. the importance of clients’ incentive is addressed by agency theory while, the importance of clients’ ability to demand accounting conservatism is derived from resource dependency theory (hillman & dalziel, 2003). based on the above arguments, these study hypotheses are: h1: there is a relationship between board size and accounting conservatism. h2: there is a relationship between board independence and accounting conservatism. h3: there is a relationship between women on board and accounting conservatism. h4: there is a relationship between audit committee independence and accounting conservatism. h5: there is a relationship between audit committee expertise and accounting conservatism. h6: there is a relationship between family ownership and accounting conservatism. h7: family ownership moderates the relationship between board size and accounting conservatism. h8: family ownership moderates the relationship between board independence and accounting conservatism. h9: family ownership moderates the relationship between women on board and accounting conservatism. h10: family ownership moderates the relationship between audit committee independence and accounting conservatism. h11: family ownership moderates the relationship between audit committee expertise and accounting conservatism. ret rac ted nishtiman, ku nor an noor afza / finance, accounting and business ananlisys 75 methods turkish firms have been used as a population of this study. financial institutions are excluded from the sample because they apply different principles of corporate governance (zulkarnain, 2009). this study covers the five-year period starting from 2011 to 2015. the empirical analysis based on data collected from firms’ annual reports, complemented by datastream. multivariate analysis table 5 shows that there is a negative relationship between bsize and accr at the rate of 0.081. agency theory suggests that large corporate boards encourages directors’ domination and leads to complicate the process of decision making (jensen, 1993). hence, hypothesis h1 is supported. table 5 accounting conservatism regression models items model1 model2(ivs*fown) coefficient t-value coefficient t-value bsize -0.081 -2.39** -0.061 -1.79* bid -0.098 1.13 0.157 1.84* wob 0.170 2.62** 0.185 2.95** acci -0.062 -0.61 -0.125 -1.27 accex 0.297 4.55*** 0.276 4.33*** soti 0.452 4.11*** 0.416 3.79*** bsize*fown -0.035 -0.53 bid*fown 0.009 0.12 wob*fown -0.223 -4.47*** acci*fown 0.028 0.42 accex*fown -0.169 -3.42** fsize -0.095 -3.37** -0.088 -3.17** leve 2.790 2.17** 1.720 1.36 fage 0.007 2.65** 0.007 2.84** wald chi 2 105.88 173.05 prob<chi2 0.000 0.000 notes: * = significant at 10%, ** = significant at 5% and *** = significant at 1%. the influence of bid on accr is positive but not significant. its effect is about 0.98%. the implication of this finding is that for every increase in bid by one unit, accr would rise by 0.98%. the finding consistent with that of (ren, 2014). family related directors as independent directors satisfy the definitions set by the regulators, but these families related who represent them are not truly independent. hence, hypothesis h2 is rejected. wob has positive influence on accr to the tune of 17%. this implies that for every single increase in wob, the influence on the accr increase by 17% this align with that of (abdullah & ku ismail, 2013). a 62% medium relationship exists between acci and accr. this relationship which is also a direct relationship shows that the more independent the audit committee, the lower the chances of selecting a high accr even though this relationship is insignificant (-0.61). this study result align with the result of krishnan and visvanathan (2008). thus, hypothesis h4 is rejected. the finding displays that accex have a 29% influence on accr. a study by sultana and mitchell (2015) show positive association between accounting and financial expertise of audit committee members and accr. hence, hypothesis h5 is accepted. family ownership has a positive contribution to the accruals (t= 4.11). family owners are less likely to evolve in earning manipulation and this align with the result of (ball, robin, & wu, 2003). therefore, hypothesis h6 is accepted. the influence of bsize on accr turns insignificant with the introduction of the fown (t = -0.53). consistently, lipton and lorsch (1992) argued that large board of directors complicates decision making process as a consequence of tasks coordination problems. thus, hypothesis h7 is rejected. nevertheless, like the direct relationship that displays an insignificant negative relationship of about -0.98%, the moderated relationship gives a positive influence of about 0.09%. the insignificance of the moderating effect of bid is a concept deprived of its actual meaning. firms nominate directors that fulfil the legal definition of independence but are close to the management and act in the interest of the controlling shareholders. the finding does not support hypothesis h8. wob show a significant (t = -4.47) impact on accr with the introducing fown. the most interesting is that the moderating influence of fown on wob leads to a negative relationship. the same opinion is reported by wu et al. (2016). hence, hypothesis h9 is accepted. there is insignificant relationship between acci and accr in the presence of fown. however, the result is consistent with krishnan and visvsnsthsn (2008). the result doesn't support hypothesis h10. expertise directors have an adverse influence on accr in the ret rac ted nishtiman, ku nor an noor afza / finance, accounting and business ananlisys 76 presence of fown (t = -3.42). directors occupy a position in the audit committee might have low incentive to depend on accr in their monitoring role, because lawsuits against directors are much less common as a consequence of weak institutional setting such as turkey compared to the united states (fanto, 1998). the finding supports hypothesis h11. conclusion this study finding align with that of previous evidences that board characteristics and audit committee characteristics mitigate type ii agency problem through adopting high accounting conservatism. this study validates that family ownership undermines boards demand for accounting conservatism, a result which will be unfavourable to minority shareholders. to sum up, this paper contributes to providing a general understanding about board behaviour in engaging in monitoring function using accounting conservatism. based on the aforementioned, it is worth for more empirical studies on corporate governance, accounting conservatism and family-owned firms in turkey. ret rac ted nishtiman, ku nor an noor afza / finance, accounting and business ananlisys 77 references abdullah, s. n., & ku ismail, k. n. i. 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(2009). audit market competition: causes and consequences. icfai journal of audit practice, 6(1). 171 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg determinants of bounded rationality theory to the use of indonesian accounting standards for non-publicly-accountable entities in smes siti maghfiroh, dona primasari* jenderal soedirman university, indonesia info articles abstract keywords: indonesian accounting standards for non-publicly-accountable entities, sme, bounded rationality theory the long term purpose of this research is to enrich the development of knowledge, especially the development of smes related to the adoption of indonesian accounting standards for non-publicly-accountable entities using the concept of bounded rationality theory. the specific purpose of this research is to figure out the factors influencing the indonesian accounting standards for non-publiclyaccountable entities in smes in banyumas regency. the research data were collected by distributing questionnaires through online media to the sme actors in banyumas as the research respondents. a random sampling technique was used to collect the samples. the data were then analyzed using the statistical product and service solution (spss) version 22.0. the research results have empirically proved that the concept of bounded rationality theory can explain the factors influencing the adoption of indonesian accounting standards for non-publicly-accountable entities in smes in banyumas regency. *address correspondence: e-mail : dona_primasari@yahoo.com finance, accounting and business analysis 3 (2) 2021 172 introduction small and medium enterprises (smes) have an important role in indonesian economy. based on the data from the ministry of cooperatives and smes, there were more than 40 million smes or more than 90% of total business units. these segments have absorbed the workforce of 90 million people or more than 95% of the total workforce. moreover, the indonesian chamber of commerce and industry has predicted that the smses and cooperatives still grew 20%-25% during 2019 enhancing the investment growth (bisnis indonesia, 2019). having a strategic role, developing smes is not easy. smes have quite complex problems. dodge & john, xeeli & allan, (2009), and barbara et al. (2009), stated that problems in the field of financial transaction records and management greatly influence the development of smes. the financial transaction records in sme business activities deal with understanding the standards used in the financial records of sme operational activities. in 2009, the institute of indonesia chartered accountants (known as iai/ikatan akuntan indonesia) has published “indonesian accounting standards for non-publiclyaccountable entities (known as sak etap/ standar akuntansi keuangan untuk entitas tanpa akuntabilitas publik)”. this indonesian accounting standards for non-publicly-accountable entities is expected to facilitate smes in arranging their reports. the essential obstacle to reach success for a new system implementation is poor attention to behavioral factors during the implementation. besides, there were only few studies paying attention to the behavioral factors during the implementation stage of a new system and their influences to satisfaction and performance (cavallozo and ittner, 2004). review of theory bounded rationality theory simon's theory of bounded rationality (1957) explains why humans fail to think fully rationally. this is due to, 1. limited ability to obtain information, 2. use of judgmental heuristics. heuristics are basic rules or shorthand ways that a person uses to simplify the processing of information into memory (brain). there are two kinds of judgmental heuristics, namely the tendency to base on information in memory (availability heuristics) and the tendency to judge something based on what he already knows (representativeness heuristics). the fundamental principle of cognition states that our actions are determined by mental representations of the situation, not by the situation directly. the implications of the framing effect in making decisions, like other cognitive activities, all depend on the view of the situation we face ourselves, that is, our perception of the situation will determine our behavior. small and medium enterprises (smes) according to law no. 20 of 2008 the definition of smes is as follows:small business is a productive economic business that stands alone, which is carried out by individuals or business entities that are not subsidiaries or branches of companies that are owned, controlled or become a part either directly or indirectly of medium or large businesses. indonesian accounting standards for non-publicly-accountable entities according to iai in sak etap 1.1 (2009), accounting standards for entities without public accountability (sak etap) are intended for use by entities without public accountability. financial accounting standards for entities without public accountability (sak etap) or the indonesian accounting standards for non-publicly-accountable entities, and was approved by dsak iai on may 19, 2009. the bounded rationality theory developed by simon (1997) explained why humans failed to completely think rationally. the causes include: 1). limited ability to obtain information and 2). using the judgmental heuristics. heuristic is the basic rule or the shortcut used by someone to simplify processing information to the memory (brain). there are two judgmental heuristic types: tendency based on the information existing in the memory (availability heuristic) and tendency valuing something based on what he/she has known before (representativeness heuristic). this research tried to apply an alternative model expected to possibly explain the implementation process phenomena of indonesian accounting standards for non-publicly-accountable entities in smes in banyumas regency. according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: h1 : concept of rationality has an affects to the implementation of sak etap on smes in banyuma regency finance, accounting and business analysis 3 (2) 2021 173 h2 : limitations of obtaining information has an affect to the implementation of sak etap on smes in banyumsa regency h3 : availability heuristics and representativeness heuristics has an affect to the implementation of sak etap on smes in banyumas regency results and discussion the influence of rationality concept on the implementation of indonesian accounting standards for non-publicly-accountable entities the results of data analysis showed that rationality concept influenced the implementation of indonesian accounting standards for non-publicly-accountable entities. it means that the higher the rationality attitude of sme actors to the benefits of indonesian accounting standards for non-publiclyaccountable entities, the greater the influence on its acceptance to the use of indonesian accounting standards for non-publicly-accountable entities in managing the finance of smes in banyumas regency. the sme actors in banyumas regency felt that the easiness in learning and using the indonesian accounting standards for non-publicly-accountable entities can facilitate the efforts to manage their business finance. the easiness felt by the sme actors increased the confidence of sme actors in banyumas regency to use the indonesian accounting standards for non-publicly-accountable entities. the result of this research was in line with the concept of bounded rationality theory previously conducted by perrin et al. (2001), mclntosh (2003) explained that framing in bounded theory influenced someone’s decision since an individual perceived the profit and loss differently depending on conditions. this research supported the study conducted by candra (2009) analyzing the influence of individual investor’s competencies on investor’s trading behaviors in the stock markets, and that conducted by irwandi (2019) revealing the influence of rational thinking on auditor’s ability in detecting fraud. the influence of limited information to the implementation of indonesian accounting standards for non-publicly-accountable entities the results of data analysis showed that limited information negatively influenced the implementation of indonesian accounting standards for non-publicly-accountable entities. the bounded rationality theory developed by simon (1997) explained why humans failed to completely think rationally. one causing factor is someone’s limitation to obtain information. that result was in accordance with the facts found in the field experinced by the sme actors in banyumas regency. most sme actors in banyumas regency have not understood what the indonesian accounting standards for non-publiclyaccountable entities is. thus, it is greatly necessary to socialize the indonesian accounting standards for non-publicly-accountable entities. the sme actors have not completely understood that the implementation of indonesian accounting standards for non-publicly-accountable entities in arranging the sme financial reports will provide various benefits to the business management. one of the facilities is easiness in obtaining capital from the external parties (financial institutions) or investors. the limited information related to the indonesian accounting standards for non-publicly-accountable entities will inhibit the implementation processes of indonesian accounting standards for non-publicly-accountable entities. the result of this research supported the study conducted by wulandari (2011), prasetyani (2011) mentioning that the indonesian accounting standards for non-publicly-accountable entities has not been implemented as the guidance in arranging the sme financial reports in batik laweyan kampong areas. smes have not been able to present the financial reports in accordance with the indonesian accounting standards for non-publicly-accountable entities because smes have not known about the existence of indonesian accounting standards for non-publicly-accountable entities regulating the financial report standards for their managed entities. the influence of availability and representative heuristic factors to the implementation of indonesian accounting standards for non-publicly-accountable entities the results of data analysis showed that availability and representative heuristic influenced the implementation of indonesian accounting standards for non-publicly-accountable entities. this was in accordance with the concept of bounded rationality theory developed by simon (1997) explaining the use of judgmental heuristics. heuristic is the basic rule or the shortcut used by someone to simplify processing information to the memory (brain). there are two judgmental heuristic types: tendency based on the information existing in the memory (availability heuristic) and tendency valuing something based on what he/she has known before (representativeness heuristic). the tendency of availability and representative heuristic on sme actors in banyumas regency will support the acceptability of implementation proseses of indonesian accounting standards for nonfinance, accounting and business analysis 3 (2) 2021 174 publicly-accountable entities. the higher the tendency perception of availability and representative heuristic on sme actors in banyumas regency related to the indonesian accounting standards for nonpublicly-accountable entities, the higher the positive attitudes to use the indonesian accounting standards for non-publicly-accountable entities belonging to those smes. the sme actors in banyumas regency felt that the easiness in learning and using the indonesian accounting standards for nonpublicly-accountable entities can facilitate their efforts to manage the business finance. the easiness felt by the sme actors increased the positive attitudes of sme actors in banyumas regency to use the indonesian accounting standards for non-publicly-accountable entities. the result of this research supported the concept of bounded rationality theory developed by simon (1997). conclusion theoretically, the research results have proven that the concept of bounded rationality theory influences the intention in using the indonesian accounting standards for non-publicly-accountable entities in banyumas regency. the results of this research support the concept developed by simon (1997). the use of indonesian accounting standards for non-publicly-accountable entities has proven not completely understood by the sme actors in banyumas regency, due to their lack of understanding in arranging the financial reports and minimum information related to the indonesian accounting standards for non-publicly-accountable entities. this research suggests that the government, especially the workforce, cooperative, and sme offices should actively play their important role in socializing the benefits of indonesian accounting standards for non-publicly-accountable entities to the sme actors in banyumas regency. this study was only conducted in the banyumas regency area, so it cannot be generalized. in addition, the covid-19 pandemic situation has resulted in difficulties in communicating directly with the respondents. references ariantini, gede luh lih, dkk. 2014. penerapan sak etap dalam penyusunan laporan keuangan pada koperasi simpan pinjam lembing sejahtera mandiri. jurnal pendidikan ekonomi. indonesia : singaraja. bps.2016. statistik usaha kecil dan menengah 2016. badan pusat statistik edi susanto, 2011. analisis penerapan 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"how information systems influence user decisions: a research framework and literature review". international journal accountinginformation system, vol. 1, no., hlm: 178-203. orgad, m. s., dan m. toledano. 2011. "strategic framing : indigenous culture, identity, and politics". journal of public affairs, vol. 11, no. 4, hlm: 325-333. robbins, s. p., dan t. a. judge. 2015. organizational behavior, 16th ed. 16th ed. upper saddle river, new jersey, 07458: pearsen education, inc. rose, j. m. 2002. "behavioral decision aid research: decision aid use and effects.in researching accounting as an information systems discipline, arnold, v, sutton, sg (eds). ". american accounting association, vol., hlm: 111-133 rudiantoro, rizki. sylvia veronika siregar. 2012. kualitas laporan keuangan umkm serta prospek implementasi sak etap. jurnal akuntansi keuangan indonesia. volume 9 – no. 1. schwartz, s. h. 1992. 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(2008). evaluasi penerimaan wajib pajak terhadap penggunaan e-filling sebagai sarana pelaporan pajak secara online dan realtime. jurnal riset akuntansi indonesia. vol. 11, no. 2, pp. 117-132 wiyono, adrianto sugiarto; ancok, djamaludin dan hartono. 2008. aspek psikologis pada implementasi sistem teknologi informasi. konferensi dan temu nasional teknologi informasi dan komunikasi untuk indonesia 1 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg the bulgarian flat tax is no longer what it was brussarski rumen* department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 23 january 2021 revised 4 march 2021 accepted 17 april 2021 the idea of a flat tax dates to the middle of the last century. at the end of the 20th and the beginning of the 21st century it finds practical realization in many countries of central and eastern europe (including bulgaria). however, our tax is unique because it is proportional. the flat personal income tax in other countries is progressive. this article is dedicated to the application of this specific tax technique in europe and in our country. the article is structured in three parts. part one presents the pioneering theoretical ideas for flattening the multi-rate structures of the personal income tax and the practice of so-called flat tax in central and eastern europe (mainly in the member states of the european union) in recent decades. part two examines the specific model of flat personal income tax in bulgaria – proportional taxation of personal income from 01.01.2008. part three examines the effect of the introduction of a de facto tax-free threshold for families with minor children in bulgaria in 2021. keywords: personal income tax, flat tax *address correspondence: e-mail : rbrusarski@unwe.bg brussarski rumen / finance, accounting and business analysis 3 (1) 2021 2 introduction personal income tax is a key fiscal instrument and a powerful tool for socio-economic regulation in the developed world. the true history of the tax began in britain in 1798. to finance the napoleonic wars, as a temporary measure, prime minister william pitt jr. introduced a progressive personal income tax which was put in force in 1799. in 1802 the temporary tax was abolished, however a year later it was reintroduced. in 1816 the tax was abolished for the second time. finally, in 1842 prime minister sir robert peel introduced the personal income tax in the united kingdom for the third and final time. the british experiment was swiftly exported abroad and within a century the personal income tax "conquered" many developed countries – prussia in 1891, usa in 1913, france in 1914 and others. in bulgaria, the personal income tax was introduced by the total income tax act, adopted by the 19th ordinary national assembly on 30.06.1920 (promulgated, sg, no. 88 of 22.07.1920). these events gave rise to johannes popitz (1884-1945), professor of tax law and finance minister of prussia (1933-1944), to "crown" this tax as the queen of taxes. the genesis and development of the personal income tax has deep abstract theoretical roots. as early as the middle of the 18th century, the father of modern microeconomics, adam smith, defined the classic, pertinent to this day, principle of tax equity: “the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”1 today, almost all countries in the world have an income tax in one form or another. 1. genesis and development of the flat tax traditionally, the personal income tax is progressive – with the increase of the tax base the average tax rate2 increases.3 figure 1. hypothetical structure of marginal tax rates (mtr) the classic technique for progressive personal income taxation is the so-called multi-rate income tax 1 smith, a., an inquire into the nature and causes of the wealth of nations, methuen & co, london, 1904, vol. ii, book v, ch. ii, part ii, p. 310. 2 the average tax rate measures the share (quota) of the tax in the tax base: 𝐴𝑇𝑅 = 𝑇 𝐵 ∗ 100 definitions: atr is the average tax rate; t – the tax; b – the tax base. 3 in the event the average tax rate does not change when the tax base increases, i.e. it remains constant, the taxation is proportional. if the average tax rate decreases with the increase of the tax base, the taxation is regressive. brussarski rumen / finance, accounting and business analysis 3 (1) 2021 3 progression. wherein the tax base is divided into several tax brackets and a different marginal tax rate4 is applied to each bracket. generally, the income in each subsequent tax bracket is taxed at a higher marginal rate than in the previous one. figure 1 presents a hypothetical multi-rate progression of five tax brackets (from 0 to y1, from /over/ y1 to y2, from /over/ y2 to y3, etc.) and the five marginal tax rates related to them (from t0, t1, etc. to t4). in the 20th century, multi-rate structures with dozens of tax brackets and corresponding (rising) marginal tax rates became popular in the developed world. in the united states of america (usa), for instance, in 1953 the personal income tax rate for taxpayers and spouses who declared their income separately included 24 tax brackets5 with marginal tax rates of 22,2% (for the lowest, first tax bracket) up to 92% (for the highest, last tax bracket) – displayed on table 1. table 1. marginal income tax rates in the usa for single taxpayers and married couples, filing separately for 1953 tax brackets (usd) marginal tax rate (%) over but not over 0 2 000 22,2 2 000 4 000 24,6 4 000 6 000 29,0 6 000 8 000 34,0 8 000 10 000 38,0 10 000 12 000 42,0 12 000 14 000 48,0 14 000 16 000 53,0 16 000 18 000 56,0 18 000 20 000 59,0 20 000 22 000 62,0 22 000 26 000 66,0 26 000 32 000 67,0 32 000 38 000 68,0 38 000 44 000 72,0 44 000 50 000 75,0 50 000 60 000 77,0 60 000 70 000 80,0 70 000 80 000 83,0 80 000 90 000 85,0 90 000 100 000 88,0 100 000 150 000 90,0 150 000 200 000 91,0 200 000 92,0 source: https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf the united states is no exception. in the mid-1960s, the famous british musician george harrison wrote the song "taxman", included in the album "revolver" (1966) of the legendary band the beatles.6 the first verse of this song reads: „let me tell you how it will be 4 the marginal tax rate measures the share (quota) of the tax in the last (marginal) unit of the tax base: 𝑀𝑇𝑅 = ∆𝑇 ∆𝐵 ∗ 100 definitions: mtr is the marginal tax rate; δt – the change of the tax; δb – the change in the tax base. 5 excluding the tax-free threshold (the so called zero tax bracket). 6 the idea for the song came to harrison when he learned that under the current tax system in britain, a large part of the proceeds goes to pay taxes. brussarski rumen / finance, accounting and business analysis 3 (1) 2021 4 there's one for you, nineteen for me 'cause i'm the taxman yeah, i'm the taxman“ until 1971, one british pound sterling was divided into 20 shillings (and one shilling – into 12 pence). hence, (at the highest tax bracket with a marginal rate of 95% at the time) 20 shillings * 0,95 = 19 shillings tax and one shilling after-tax income, respectively – see figure 2. figure 2. one for you, nineteen for me in the uk in this environment, the nobel laureates in economics friedrich von hayek7 and milton friedman8 developed the idea of flattening (leveling, rolling) the multi-step structure of marginal tax rates increasing with income. their ideas are put to practice two to three decades later and the number of tax brackets and the maximum marginal tax rates are fall sharply.9 in the 1980s, american economists robert hall and alvin rabushka developed a concept for an "integrated flat tax" to replace personal income tax and corporate tax in the united states.10 the flat tax of hall and rabushka is a system of two taxes – payroll tax and business tax. personal income from salaries and other sources above a certain non-taxable minimum is taxed at a single (flat) rate – 19%. the income of the companies is reduced by the investment costs and is taxed with business tax of 19%.11 thus, in essence, the integrated flat tax proposed by hall and rabushka is a consumption tax, not an income tax. in macroeconomic terms, when investments (savings) are deducted from income, consumption (income that is consumed) remains. this is in effect the basis of the well-known and widely used value added tax (vat).12 the original idea of robert hall and alvin rabushka failed to make its way into practice. at the end of the 20th and the beginning of the 21st century, the theoretical concepts of a flat tax found practical application in central and eastern europe – first in estonia (1994) and then in many other former socialist countries. in eight years, eight (current) european union (eu) member states have introduced a flat personal income tax (see table 2). the baltic states (estonia, lithuania and latvia) and romania did so before joining the eu, slovakia in the first year of its membership in the union, and the remaining three countries (bulgaria, the czech republic and hungary) after that.13 7 hayek, f. a., progressive taxation reconsidered, in: mary sennholz (ed.) on freedom and free enterprise – essays in honor of ludwig von mises, 1956, pp. 265 – 284. 8 friedman, m., capitalism and freedom, per. with english, new publishing house, moscow, 2006, pp. 187 – 204. 9 at present (2021) the number of tax brackets in the united states is 7 and the maximum marginal tax rate is 37%. 10 hall, r. and a. rabushka, the flat tax, hoover institution press, 1985. (the monograph is preceded by two articles in the wall street journal, as follows: rabushka, a., “the attractions of a flat-rate tax system”, 25.03.1981 and hall, r. and a. rabushka, “a proposal to simplify our tax system”, 10.12.1981). 11 the cover of the second edition of hall and rabushka's book is decorated with a collage of a scary roller that crumples regulations and guides for personal income taxation. 12 there is no value added tax in the united states. 13 russia (2001), serbia (2003), bosnia and herzegovina (2004), ukraine (2004), georgia (2005), albania (2007), macedonia (2007), montenegro (2007) and other countries also introduced a flat tax. 1 19 for you for me brussarski rumen / finance, accounting and business analysis 3 (1) 2021 5 table 2. introduction of the flat tax in the eu country year of introduction estonia 1994 lithuania 1994 latvia 1995 slovakia 2004 romania 2005 bulgaria 2008 the czech republic 2008 hungary 2011 source: author's own research. there are various fiscal instruments behind the "flat tax" label. the tax function has the following general form: 𝑇(𝑌) = 𝑚𝑎𝑥⁡[𝑡 ∗ (𝑌 − 𝐴), 0] (1) definitions: t(y) is the tax; t – the flat marginal tax rate (t > 0); y – the tax base; a – the tax-free threshold (a ≥ 0). seven of the aforementioned eight eu member states (all but bulgaria) flattened the structure of positive marginal tax rates to a single rate and kept, in one form or another, the tax-free threshold, i.e. replaced multi-rate tax progression (two or more tax brackets, linked to positive marginal rates) with singlerate progression (flat tax rate on income above the respective tax-free threshold). when a > 0 and y ≤ a, the tax t(y) is bgn 0, and for a > 0 and y > a the tax t (y) is a product of the tax rate (t) and the excess of the tax base over the tax-free threshold (y – a) – see equation (1). the result is progressive personal income taxation – with the increase of the tax base (above the tax-free threshold) the average tax rate increases. figure 3 presents the functions of the marginal tax rate (mtr) and the average tax rate (atr) of this personal income tax technique. tax rates (%) t mtr atr 0 a tax base (bgn) figure 3. marginal and average tax rates in estonia, for instance, for incomes up to 1 200 euro/mo. the tax-free threshold in 2018 is 500 euro/mo. (the minimum monthly salary in the country). for incomes between 1 200 euro/mo. and 2 100 euro/mo. the tax-free threshold is calculated according to a formula, and for incomes of 2 100 euro/mo. and more there is no tax-free threshold (a = 0). the marginal tax rate is 20%. thus (in practice) the brussarski rumen / finance, accounting and business analysis 3 (1) 2021 6 estonian flat tax is progressively proportional – between the monthly tax-free threshold and 4,2 times the minimum monthly salary the tax is progressive (atr increases)14, and then – proportional (a = 0 and atr = t = 20% = const.). in 2018, the individual tax-free threshold in romania is a function of taxable income (tax base) and the number of family (household) members supported by the taxpayer. for incomes over 3 600 lei/mo.15 a = 0. the marginal tax rate is 10%. the flat tax in romania is also progressively proportional – between the respective monthly tax-free threshold and slightly below 1,9 times the minimum monthly salary, the tax is progressive (atr increases)16 and then – proportional (a = 0 and atr = t = 10% = const.). in hungary, the tax-free threshold in 2018 is the product of the number of children in the household entitled to a tax relief for children17 and certain fixed amounts for 1, 2, 3 or more children. for taxpayers without children entitled to a tax relief a = 0. the marginal tax rate is 15%. therefore, the flat tax in hungary is progressive for taxpayers with at least one child entitled to a tax relief (atr increases)18 and proportional for taxpayers without children entitled to a tax relief (a = 0 and atr = t = 15% = const.). after initial enthusiasm, the appeal of the flat income tax in some eu member states is weakening. seemingly dissatisfied with the results of this fiscal experiment, the czech republic (2013), slovakia (2013), latvia (2018) and lithuania (2019) abandoned the flat tax technique and returned to the tried and tested multi-rate progression. out of eight "flat" eu member states, there are four left – estonia, romania, bulgaria and hungary. 2. the bulgarian model in 200719, personal income tax in bulgaria is progressive – the result of the implementation of the four-rate tax structure (including the tax-free threshold), presented in table 3. table 3. marginal tax rates in bulgaria (2007) total annual tax base (bgn) tax (bgn) up to 2 400 0 over 2 400 but not over 3 000 20% for the excess over 2 400 over 3 000 but not over 7 200 120 + 22% for the excess over 3 000 over 7 200 1 044 + 24% for the excess over 7 200 source: law for the taxes on incomes of natural persons20 (promulgated, sg, no. 95 of 24.11.2006, effective 01.01.2007). the monthly tax-free threshold (bgn 200 = bgn 2 400 / 12 months) is 11% higher than the minimum monthly salary in the country for 2007 (bgn 180)21 and nearly 32% above the poverty line (bgn 152/mo.)22. the positive marginal tax rates increase in increments of 2 percentage points (20%, 22% and 24%) – see table 3. with a change in the law for the taxes on incomes of natural persons in december 2007 (as of 01.01.2008) the bulgarian state23 introduces a flat personal income tax of 10%, without tax-free threshold24 14 0% < atr < 20%. 15 the minimum monthly salary in the country for 2018 is 1 900 lei. 16 0% < atr < 10%. 17 the right to a tax relief for children is available:  after the 91st day of pregnancy;  when starting an adoption procedure;  for preschool children;  for students under the age of 20 (undergraduate students, full-time education are not entitled to a tax relief, but are counted for children in the family /household/ for tax purposes). 18 0% < atr < 15%. 19 this is the first year of our country's membership in the eu. 20 the bulgarian personal income tax act. 21 dcm №324 / 06.12.2006. 22 dcm №345 / 18.12.2006. 23 with a government dominated by the bulgarian socialist party. 24 § 35 of the law for amendment and supplement of the law for the taxes on incomes of natural persons (promulgated, sg, no. 113 of 28.12.2007). brussarski rumen / finance, accounting and business analysis 3 (1) 2021 7 (the four-rate tax structure is replaced by single-rate structure, but without zero tax bracket!). the era of proportional taxation of personal income in bulgaria begins (a = 0 and atr = mtr = 10% = const. for all levels of the tax base) – see figure 4. tax rates (%) 10 mtr=atr 0 tax base (bgn) figure 4. marginal and average tax rates in bulgaria from 01.01.200825 the tax-free threshold, knowns as the zero tax bracket, is a key element in the personal income tax system. both theoretically and in practice, it is determined by the subsistence minimum26 in the respective economy. the theory assumes that "for a level of income lower than the amount of existence, the marginal utility (of income – r.b.) tends to infinity."27 therefore, "the recipient of an income sufficient only for sustinance has a tax capacity (ability-to-pay taxes – r.b.) equal to zero; and any encroachment on his income will cost him his life.”28 in other words, the tax-free threshold is a kind of zero level of the tax capacity of the individual. this is the most popular understanding of the tax-free threshold, and its principled logic is not usually questioned. moreover, it is an essential component of the conceptual foundation of modern tax policy. figure 5 presents the functions of the average rate for 8 selected levels of the total annual tax base of the progressive personal income tax in bulgaria in 2007 and of the proportional personal income tax, effective from 01.01.2008. the result of the introduction of a flat proportional personal income tax in bulgaria is obvious – people with a total annual tax base of up to bgn 4 500 lose, and those with a total annual tax base of over bgn 4 500 win (see figure 5). for example, in 2007 the tax of a person with a total annual tax base of bgn 2 400 was bgn 0 (average tax rate 0%), and in 2008 – bgn 24029 (average tax rate 10%) . respectively, in 2007 a taxpayer with a total annual tax base of bgn 10 000 paid bgn 1 716 (average tax rate 17,16%), and in 2008 – a mere bgn 1 00030 (average tax rate 10%). 25 compare with figure 3. 26 according to §1, item 1 of the additional provisions of the social assistance act (promulgated, sg, no. 56 of 19.05.1998) “basic necessities of life” are sufficient food, clothing and housing, in accordance with the socio-economic development of the country." 27 fagan, e. d., recent and contemporary theories of progressive taxation, journal of political economy, vol. 46, 1938, p.459. 28 fagan, e. d., recent and contemporary theories of progressive taxation, journal of political economy, vol. 46, 1938, p. 460. 29 in 2008, the minimum monthly salary for the country was bgn 220 (dcm №1 / 11.01.2008), i.e. bgn 2 640 / year (= bgn 220 * 12 months). 30 according to nsi data, in 2008 the average monthly salary in the country was bgn 545, i.e. bgn 6 540 / year (= bgn 545 * 12 months). brussarski rumen / finance, accounting and business analysis 3 (1) 2021 8 figure 5. аverage tax rates in bulgaria in 2007 and from 01.01.2008 moreover, in relative terms, the poorest lose the most, and the richest gain the most. the average rate of people with a total annual tax base of bgn 4 500 in 2008 is exactly equal to their average tax rate for 2007 (= 10%) – see table 4. with a total annual tax base below bgn 4 500, the difference between the average tax rate in 2008 and the average rate for 2007 is a positive value31, which increases with the decrease of the total annual tax base and reaches its maximum with a total annual tax base ≤ bgn 2 400 (10 percentage points = 10% – 0%) – see the last column of table 4. accordingly, for a total annual tax base above bgn 4 500, the difference between the average rate in 2008 and the average tax rate for 2007 is a negative value32, the absolute value of which increases with the increase of the total annual tax base (see the last column of table 4) and tends to 14 percentage points.33 for a total annual tax base of bgn 15 000, for instnce, this difference is –9,44 percentage points. table 4. change in average tax rates total annual tax base (bgn) average tax rates (%) change (p.p.) 2007 2008 (1) (2) (3) (4) = (3) – (2) 2 000 0,00 10,00 +10,00 2 400 0,00 10,00 +10,00 3 000 4,00 10,00 +6,00 4 000 8,50 10,00 +1,50 4 500 10,00 10,00 0,00 5 000 11,20 10,00 –1,20 7 200 14,50 10,00 –4,50 10 000 17,16 10,00 –7,16 15 000 19,44 10,00 –9,44 source: author's own calculations. 31 the average tax rate in 2008 is higher than the average tax rate in 2007. 32 the average tax rate in 2008 is lower than the average tax rate in 2007. 33 at very high levels of the total annual tax base, the average tax rate approaches the maximum marginal tax rate (in this case 24% for 2007). brussarski rumen / finance, accounting and business analysis 3 (1) 2021 9 in brief, replacing the progressive personal income tax with a proportional one makes the poor even poorer and the rich even richer!? 3. renaissance of the tax-free threshold in our country in december 2020, under the conditions of the covid-19 pandemic, the bulgarian state worked up courage and after 13 years encroached on the proportional flat personal income tax. the tax relief for children under the law for the taxes on incomes of natural persons has been drastically increased and is becoming an effective tax-free threshold for all families with minor children.34 in 202135, individuals in bulgaria will deduct from their total annual tax base as follows:  bgn 4 500 for one minor child;  bgn 9 000 for two minor children;  bgn 13 500 for three or more minor children.36 the tax relief is used by one of the parents up to the amount of his total annual tax base. when the amount of the relief is higher than the total annual tax base of this parent, the difference can be used by the other parent.37 table 5 presents the main results of taxation at 12 selected levels of the sum of the total annual tax bases of parents for different numbers of minors. table 5. taxation at 12 selected levels of the sum of the total annual tax bases of parents with different number of minor children in 2021 sum of the total annual tax bases of parents (bgn) sum of the total annual tax bases of parents, reduced by the tax relief for children38 (bgn) total tax of parents under the personal income tax act (bgn) average tax rate (%) with 1 child with 2 children with 3 or more children with 1 child with 2 children with 3 or more children with 1 child with 2 children with 3 or more children (1) (2) = (1) – 4 500 lv. (3) = (1) – 9 000 lv. (4) = (1) – 13 500 lv. (5) = (2) * 10% (6) = (3) * 10% (7) = (4) * 10% (8) = (5) / (1) (9) = (6) / (1) (10) = (7) / (1) 3 000 0 0 0 0 0 0 0,00 0,00 0,00 4 500 0 0 0 0 0 0 0,00 0,00 0,00 9 000 4 500 0 0 450 0 0 5,00 0,00 0,00 13 500 9 000 4 500 0 900 450 0 6,67 3,33 0,00 20 000 15 500 11 000 6 500 1 550 1 100 650 7,75 5,50 3,25 30 000 25 500 21 000 16 500 2 550 2 100 1 650 8,50 7,00 5,50 50 000 45 500 41 000 36 500 4 550 4 100 3 650 9,10 8,20 7,30 100 000 95 500 91 000 86 500 9 550 9 100 8 650 9,55 9,10 8,65 150 000 145 500 141 000 136 500 14 550 14 100 13 650 9,70 9,40 9,10 240 000 235 500 231 000 226 500 23 550 23 100 22 650 9,81 9,63 9,44 350 000 345 500 341 000 336 500 34 550 34 100 33 650 9,87 9,74 9,61 500 000 495 500 491 000 486 500 49 550 49 100 48 650 9,91 9,82 9,73 source: author's own calculations. in 2021, families with a total annual tax base of up to bgn 4 500 will not pay any tax (regardless of the number of children) – see table 5. for 2020, families with a total annual tax base of bgn 4 500 pay:  bgn 430 for one child (= /4 500 – 200/ * 10%);  bgn 410 for two children (= /4 500 – 400/ * 10%);  bgn 390 for three or more children (= /4 500 – 600/ * 10%). provide both parents receive a minimum wage, for instance, the sum of the total annual tax bases 34 see: § 9 of the transitional and final provisions of the law for the state budget of the republic of bulgaria for 2021 (promulgated, sg, no. 104 of 08.12.2020). 35 the increase in tax relief for children is valid only for 2021. 36 for 2020, these reliefs are bgn 200, bgn 400 and bgn 600, respectively!? 37 this is essentially the hungarian model of a flat personal income tax (see part 1 of the article). 38 the tax relief is used up to the amount of the total annual tax bases of the persons. brussarski rumen / finance, accounting and business analysis 3 (1) 2021 10 is approximately bgn 13 500. in 2021, such a family will pay (see table 5):  bgn 900 for one child (for bgn 13 500 in 2020 the tax is bgn 1 330);  bgn 450 for two children (for bgn 13 500 in 2020 the tax is bgn 1 310);  bgn 0 for three or more children (for bgn 13 500 in 2020 the tax is bgn 1 290). when the sum of the total annual tax bases is bgn 30 000 (the income of each parent is around the level of the average salary for the country) the family will pay (see table 5):  bgn 2 550 for one child (for bgn 30 000 in 2020 the tax is bgn 2 980);  bgn 2 100 for two children (for bgn 30 000 in 2020 the tax is bgn 2 960);  bgn 1 650 for three or more children (for bgn 30 000 in 2020 the tax is bgn 2 940). by design, parents of minor children with relatively low incomes will be significantly relieved. as income increases, the effect of new tax reliefs for children weakens. with a total annual tax base over bgn 45 000 for families with 1 child, bgn 90 000 for families with 2 children and bgn 135 000 for families with 3 or more children, the average tax rate enters the bracket between 9% and 10%. the relative tax burden on parents of minor children with hight incomes is approaching the level of the proportional flat tax of 10% for 2020. in summary, figure 6 shows the functions of the average tax rate of families with different number of minor children (and the sum of the total annual tax bases up to bgn 200 000) for 2021. figure 6. average tax rates of families with minor children in 2021 the introduction of a tax-free threshold for parents of minor children will affect many people (over 2,5 million citizens). according to the national statistical institute (nsi), the total number of families in bulgaria is 2 123 224, including 1 309 229 families with children (62%). of these, 755 946 are families with minor children (58%), including:  478 550 families with 1 child (63%);  239 880 families with 2 children (32%);  37 516 families with 3 or more children (5%).39 a final point, the latest change in the law for the taxes on incomes of natural persons (promulgated, sg, no. 104 of 08.12.2020, effective from 01.01.2021) is significant. the introduction of a de facto tax-free threshold for parents of minors puts an end to the hegemony of proportional personal income taxation in bulgaria over the last 13 years. the income of families with minor children in 2021 will be taxed progressively (see figure 6). for other taxpayers, personal income tax remains proportional – an average rate of 10% (equal to the marginal rate) for all levels of the total annual tax base. 39 national statistical institute, census of population and housing in the republic of bulgaria 2011. brussarski rumen / finance, accounting and business analysis 3 (1) 2021 11 conclusion based on theoretical ideas from the recent past, at the end of the 20th and the beginning of the 21st century, many countries in central and eastern europe introduced a flat progressive personal income tax (a combination of a tax-free threshold and a flat marginal tax rate). out of a total of eight eu member states that have used this technique, four have already given up and resumed multi-rate progression. bulgaria chooses something else – a flat proportional income tax of 10% (effective from 01.01.2008). the relative tax burden of low-income people is rising and that of high-income people is declining. for thirteen years, proportional taxation in our country has harmed the poor and benefited the rich. in 2021, the bulgarian state will restore the tax-free threshold for some of the taxpayers (parents of minor children) by drastically increasing the tax relief for children under the law for the taxes on incomes of natural persons. the relative tax burden of all families with minor children is decreasing. low-income parents benefit the most. as income increases, the effect of new tax reliefs for children weakens. proportional taxation of the income of parents of minor children is replaced by progressive taxation. this change in the law for the taxes on incomes of natural persons, at present, is valid only for 2021. in our opinion, however, the twilight of the proportional personal income tax is near. this is very good news for tax equity in bulgaria! references fagan, e. d., recent and contemporary theories of progressive taxation, journal of political economy, vol. 46, 1938. friedman, m., capitalism and freedom, per. with english., new publishing house, m., 2006. hall, r. and a. rabushka, a proposal to simplify our tax system, the wall street journal, 10.12.1981. hall, r. and a. rabushka, the flat tax, hoover institution press, 1985. hayek, f. a., progressive taxation reconsidered, in: mary sennholz (ed.), on freedom and free enterprise – essays in honor of ludwig von mises, 1956. rabushka, a., the attractions of a flat-rate tax system, the wall street journal, 25.03.1981. smith, a., an inquire into the nature and causes of the wealth of nations, methuen & co, london, 1904. decree of the council of ministers №324 / 06.12.2006. decree of the council of ministers №345 / 18.12.2006. decree of the council of ministers №1 / 11.01.2008. law for amendment and supplement of the law for the taxes on incomes of natural persons (promulgated, sg, no. 113 of 28.12.2007). law for the state budget of the republic of bulgaria for 2021 (promulgated, sg, no. 104 of 08.12.2020). law for the taxes on incomes of natural persons (promulgated, sg, no. 95 of 24.11.2006, effective 01.01.2007). national statistical institute, census of population and housing in the republic of bulgaria 2011. social assistance act (promulgated, sg, no. 56 of 19 may 1998). https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf 60 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg the role of accounting information systems in supporting work from home policy during the covid-19 pandemic ayi astuti*, indri utami, mentari puteri, tamy ali januarty universitas langlangbuana, indonesia info articles abstract keywords: accounting information systems, work from home, corona virus the accounting information system is the main formal system in most companies. a formal information system is a system that describes in writing the responsibility for making information. work from home is a work concept where employees can do their work from home. coronavirus or severe acute respiratory syndrome coronavirus 2 (sars-cov-2) is a virus that attacks the respiratory system. this disease is more commonly known as covid-19. with the existence of covid-19, the role of information technology is a challenge and opportunity for business owners to adapt so that their businesses can remain productive and effective, both for daily activities, administrative, and supporting other activities. the purpose of this study was to determine the role of the accounting information system in supporting the work from home policy during the covid-19 pandemic. this study used descriptive qual-itative method. the results show that the accounting information system in supporting the work from home policy has played a good role even in the conditions during the covid-19 pandemic. it is hoped that it is necessary to im-prove the quality of existing human resources in the company because this also affects the effectiveness of the exist-ing system implementation. *address correspondence: e-mail: hristina_ayivhuvhu@gmail.com finance, accounting and business analysis 4 (1) 2022 61 introduction the accounting information system is the main formal system in most companies. a formal information system is a system that describes in writing the responsibilities of making information. financial events that occur are communicated through the accounting information system to interested parties in the form of activity reports. in profit-oriented companies, sales are the main activity to achieve the main goal. in order to support sales activities, a manager is very interested in information related to sales, to present information about sales so that it can be used to make further decisions.the purpose of the accounting system is to improve internal control and to improve better information, in addition to reducing administrative costs or administrative costs, and to determine the implementation of the production process so that it is easier to carry out planning and prevent unhealthy company operations. the accounting system is also a company control tool in saving company assets. this accounting information system plays an important role for a company. with a good accounting information system, companies can carry out operations and information processes more effectively and efficiently because of controls that are able to control these processes so that they can produce goals that are in accordance with what the company wants. in addition, the accounting information generated in the system can be accounted for to be used later in making a decision regarding the company's finances or used by external parties of the company to relate to business activities. this is the importance of implementing ais in the company so that in any situation the company can face and can avoid losses. therefore, the implementation of ais is very necessary in the business world. especially during the covid '19 pandemic so that every business actor can continue to generate turnover and avoid losses. there are so many benefits that can be felt by entrepreneurs after implementing an accounting information system, for example the success of continuing to survive in the midst of the covid '19 outbreak. by implementing an accounting information system, it is easier for companies to manage business operational activities and can maintain the company under any conditions, so that the company will be ready to face all changes in the unpredictable business environment. the business environment is running slowly even in some countries that have implemented a lockdown system. lockdown system is a situation where people are not allowed to enter or leave a building or area freely for reasons of something emergency. the stability of the business environment cannot be predicted at any time, to overcome all possibilities that occur in the business world, entrepreneurs must be able to observe all opportunities that exist and the potential for failure. prior to the covid-19 outbreak, business stability continued to change rapidly, because the business environment had entered the era of globalization. however, after the covid '19 outbreak, the business environment was running slowly, thus requiring entrepreneurs to think and innovate on products and adapt to current conditions. the existence of a work from home lockdown system was also implemented, this is a follow-up to president joko widodo's appeal at a press conference at the bogor palace, west java (15 march 2020). the president appealed that in order to minimize the spread of the new type of corona virus (sars-cov2) that causes covid-19, people are asked to work, study, and worship from home, one of which is creating a system of working from home. this appeal, especially for the state civil apparatus, has been followed up by the minister for empowerment of state apparatus and bureaucratic reform through circular letter no. 19 of 2020 concerning adjustment of the work system of state civil apparatus in efforts to prevent covid-19 in government agencies. the content is that asn can work at home/residence, but it is certain that there are two highest levels of structural officials working in the office. the application of the accounting information system is not only carried out when problems occur such as the current covid-19 pandemic, but must be applied at all times to face competition in the business world, when implementing the accounting information system make sure the company has quality human resources to avoid any risks that may occur. every entrepreneur must be able to apply an accounting information system in order to survive in an uncertain business environment, so that if conditions are normal, entrepreneurs will have no difficulty facing competition in the global business world and can continue to earn profits. method this study uses a type of qualitative research method. the research was carried out in natural conditions directly to the data source, data collection using research instruments and data collected in the form of organizational structure, job description, company history, company vision and mission, work reporting during the covid-19 pandemic. the research was conducted at pt. nagamas putera jaya which is a fuel oil company (bbm) which is often known as spbu 34,40244 which is located on jl. h. nasution no. 940. conducted on december 4, 2020. the steps of data analysis carried out in the implementation of finance, accounting and business analysis 4 (1) 2022 62 research at pt. nagamas putera jaya are as follows: 1. collecting information regarding work reporting during the covid-19 pandemic 2. analysis of research data by comparing existing theories with their application related to the success of information systems, qualitative characteristics of information, as well as achieving the goals and benefits of the work from home system at pt. nagamas putera jaya. 3. draw conclusions and provide suggestions to pt. nagamas putera jaya. method of collecting data based on its nature, the data can be divided into qualitative and quantitative data (sugiyono 2014:12): 1. qualitative data is data obtained from artistic methods, because research is more artistic (less patterned), this research data is more pleasing to the interpretation of the data found in the field. 2. quantitative data is research data in the form of numbers and analysis using statistics. the data used in this study is qualitative data, namely the general description of the company, information on company operations, and library data. this data will be processed using descriptive methods so that conclusions can be drawn that will answer the formulation of the problem. data source sources of data in this study are: 1. primary data: is data that comes from the first source that is collected specifically and is directly related to the researched. in this study, the primary data used were data in the form of company history, branch office reporting formats to the examiner's office, subject's opinion from direct observation and the results of employee interviews as well as leaders. 2. secondary data: is a source of research data obtained by researchers indirectly through intermediary media (obtained and recorded by other parties). secondary data is generally in the form of historical evidence, records or reports that have been compiled in published and unpublished archives. in this study, secondary data used were several journals and articles made by third parties and have relevance to this research. data collection technique data collection techniques used in this study are as follows: 1. library research, namely research that uses data obtained from existing scientific writings, other literature books that are needed as a theoretical basis in this research. 2. field research (field work research), which is direct research conducted on the company concerned, where most of the data taken are obtained using the following data collection techniques: a. interviews are data collection in a survey method that uses questions orally to the subject. this interview technique is carried out formally and intensively so that it will be able to obtain information as much information as possible honestly and in detail. interviews in the study were addressed to the manager of pt. nagamas putera jaya. b. observation, namely reviewing and observing directly how to report and how managers report work from home accounting information during the covid-19 pandemic. c. documentation, namely by collecting data through archives/prints available at the pt manager. nagamas putera jaya. data analysis method the analysis is done by comparing the existing theories with the data obtained from the case studies. in this analysis, the writer experiences directly and understands the conditions that exist within the company (ethnography), then analyzes the differences that occur, and determines whether the differences involve fundamental matters, from this analysis it can be concluded about the role of accounting information system in supporting the work from home policy at pt. nagamas putera jaya and provide appropriate suggestions regarding the implementation of the system in the company. the method used to analyze the data is descriptive analysis method, which is a method of discussing problems that are describing, describing, comparing and explaining a data or situation in such a way that conclusions can be drawn, namely achieving the desired goal. results and discussion results availability of accounting information systems pt. nagamas putera jaya the accounting information system applied to pt. nagamas putera jaya is divided into 2: system with finance, accounting and business analysis 4 (1) 2022 63 manual process and online system. the implementation of the system is inseparable from the elements of the existing accounting information system, as follows: 1. human tesources pt. nagamas putera jaya recruiting employees only requires a few individuals (not many) to help run the company's operations. employees who are recruited do not immediately become employees, first they try out for 2 months if they fulfill a contract for 1 year, if in 1 year the work is good the contract is extended. based on observations that have been made of the qualifications of human resources placed in certain sections, sometimes there are delays/errors in reporting performance, especially in this covid-19 pandemic system, but the system built is able to improve this. 2. tools a. computer the reporting process is also supported by computers to recap data and perform calculations and data storage so that it is more accurate. in times of a pandemic, computers play an important role because work for reporting, even though work from home, accounting information must still be reported and in real time. b. form in reporting several models of forms/invoices which are the outputs of transactions and systems in operation, however for reporting accounting information there is one form for receipts and expenditures coded inv.275, for example, depending on the transaction. then the softcopy form that is already available in ms. excel. c. notes recording in the form of a balance at the time of receipt and expenditure is then processed and entered into the form according to the transaction. furthermore, it is recorded in the cost book for further processing to the finance and accounting department. 3. method the method in this case is the system procedure used in the accounting information system process, there are two methods, namely offline by submitting a hardcopy and online. during the pandemic, because there was a policy that had been lowered, the work from home system was also carried out, so the work report system was sent online. therefore, the role of accounting information systems is very useful in companies, especially during a pandemic, by implementing an accounting information system the company will be able to control and manage company finances well, so that they can make decisions for business continuity as well as possible. the application of an accounting information system is needed in the business world so that every business actor can continue to generate turnover and avoid losses. the stability of the business environment before the covid '19 outbreak continued to change rapidly, because the business environment had entered the era of globalization. however, after the outbreak of covid '19, the business environment was running slowly, even in some countries that implemented a lockdown system, which required everyone to stay at home. staying at home does not mean that as an entrepreneur you will be silent, but you must remain productive so that the company can survive and not suffer losses. accounting information system in supporting work from home at pt nagamas putera jaya to be able to realize a productive work from home, good communication and cooperation is needed from all parties, especially superiors and subordinates, in order to minimize the constraint factors that may occur. by carrying out the same intentions and goals, namely breaking the chain of covid-19 spread, it is hoped that the implementation of work from home will not reduce the achievement of the performance targets that have been mandated by the organization. the internal compliance unit as the second line of defense can still function optimally in monitoring the first line of defense (all levels of management) which is fully responsible for carrying out all organizational policies by carrying out internal control continuously in all stages of activities. in order to function properly and optimally in the implementation of work from home, you must ensure the following: 1. organized division of tasks between divisions by providing organized tasks to employees, it is hoped that the company can continue to run optimally. this is also done so that communication between divisions is maintained so that it does not affect the office atmosphere when the company returns to normal. 2. employee work checks this is done to find out how far the work is completed by each employee every day. 3. periodic performance evaluation although company activities are carried out at home, meetings can still be held if necessary to evaluate employee performance, namely online via video conference. this is done so that employee performance does not decrease even though work is done at home. finance, accounting and business analysis 4 (1) 2022 64 4. clear division of work targets work targets are given with the aim of maintaining a sense of responsibility for each employee towards his work even though he is working at home. 5. periodic checking of company data this is done with the intention of minimizing the possibility of fraud committed by employees so that the company avoids things that can harm the company. these steps need to be implemented in the internal control of the company's accounting information system, which must still be carried out carefully to avoid various deviant acts and fraud that may occur. in this way, it is hoped that employees will maintain the level of performance and productivity of the company so that the company can run optimally. 6. checking employee attendance. employee attendance checks must still be carried out even if employees work from home. this is done with the aim that employees remain productive in carrying out their obligations and duties even though they work from home. discussion the role of accounting information systems at pt nagamas putera jaya according to the results of interviews addressed to company managers, it is stated that to achieve good results between organizational activities, companies need to collect data from all activities carried out by the organization. information systems must also collect and integrate both financial and non-financial data. the use of accounting information systems in determining business strategies can help companies choose the best strategy. during the covid-19 pandemic or not, information systems are very important for companies and accounting information systems can be the main weapon for taking and deciding strategic steps. the use of information systems during the covid-19 pandemic from several existing sectors provides convenience in the buying and selling process and the process of collecting data on the spread of covid-19 can be more effective and efficient in the process of suppressing the current spread of covid-19, with managed data records. must be verified and valid for truth. in the uncertain business conditions during the corona pandemic, an information system is absolutely necessary in making logical decisions so that it really requires an understanding of the problems and knowledge of strategies and alternative solutions so that their business can continue to run. a more precise information system will produce a better decision, besides that the quality of information is more precise and quality, and the reliability of the quality of information depends on three things, namely; information must be accurate, timely and relevant. the elements in decision making that must be considered are: the purpose of decision making, identification of decision alternatives to solve the problem, calculation of factors that cannot be known beforehand or are beyond human reach (uncontrolled events) and the means or tools used to evaluate or measuring the results of decisions will affect business continuity in certain situations. work from home during the covid-19 pandemic at pt. nagamas putera jaya the work schedule (shift) at the office during the corona virus pandemic, which is also known as the new normal period, is certainly different from before the pandemic period. this is because the number of employees in the office needs to be limited so that physical distancing is maintained in order to prevent the spread of the covid-19 virus, especially in the office area. then how to regulate the proportion of employees who work from home (wfh) compared to those who work from office (wfo) so that productivity is maintained and company operations run smoothly. the results of interviews with managers of pt. nagamas putera jaya, said that what must be considered in implementing this work pattern is that the covid-19 prevention protocol must be enforced in a disciplined manner to prevent transmission of the corona virus in the office. in addition, communication and collaboration between teams who work at home (wfh) and work in offices (wfo) must run smoothly, considering that the work locations are not close to each other. one way to ensure that this method of working in different locations (wfh versus wfo) has minimal obstacles is to ensure that all employees maintain the same work routine. the use of employee attendance applications such as attendance can ensure that work routines between teams run smoothly as well as build trust between teams. assessment of the role of accounting information systems in supporting work from home policies during the covid-19 pandemic at pt. nagamas putera jaya. at the end of the system, it produces output in the form of an information system report work from home during the pandemic, including: 1. organized division of tasks between divisions: information generated so that the company can run finance, accounting and business analysis 4 (1) 2022 65 smoothly and optimally. 2. checking the work of employees: so that work can be monitored and completed every day even though work from home. 3. periodic performance evaluation: information generated so that performance does not decrease even though working at home. 4. clear division of work targets: information generated so that employees continue to work optimally and not be lazy 5. checking employee attendance: information generated so that they can be monitored during work hours and when they go home even though they are working at home so that employees remain productive in their work obligations and duties. benefits of the role of accounting information systems in supporting work from home policies during the covid-19 pandemic at pt. nagamas putera jaya. in implementing work from home, companies need to carry out periodic evaluations, especially for companies that are just implementing wfh for the first time. give workers tips on increasing productivity when working from home so that the results are not different when working on site in the office. companies that implement a work from home system get several benefits, including: 1. flexibility in work. by working from home, you can be more flexible when boredom strikes. for example, moving to the dining table, terrace, living room, or any room that is comfortable for work. you also don't have to worry about choosing clothes for work. still in nightgowns and immediately opening the laptop is not a problem. 2. improve work life balance. work life balance, or the balance between work and daily life, is what workers are looking for today. people are increasingly realizing the importance of balancing work with other things, such as spending time with family and loved ones. with the wfh system, this can be more easily achieved because we spend more time at home. 3. increase productivity. how much time is wasted on the way to and from work. spending time on the road can be very tiring and increase stress. by working from home, workers can use their time more productively and avoid things like problems at work. this makes workers complete their work better thereby increasing job satisfaction and loyalty to the company. conclusion the shift from working face-to-face to online or wfh requires a change in attitude. we can easily face this change if we focus on the schedule, focus on managing emotions, focus on how to run technology, focus and focus on every job that is given to us, don't forget life goes on with every activity that is given its respective role and status. working from home or work from home is a system chosen by the government to reduce the spread of the new type of corona virus (sars-cov-2) that causes covid-19. by working from home, it is hoped that social distancing will be maintained, namely reducing people's mobility, maintaining physical distance, and reducing crowds. the work from home system can provide several advantages, both for companies and employees. there are several things that must be prepared by the company before implementing wfh, one of which is the use of supporting software. references abdul kadir. 2014. pengenalan sistem informasi. edisirevisi. andi.yogyakarta bodnar, george h. and hopwood, william s., (2014), accounting information systems, eleventh edition, pearson education. crosbie, t & moore, j (2014), “work-life balance and working from home”, teesside university darmawan, deni.,& kunkunnurfauzi. (2013). sistem informasi manajemen.bandung: pt remajarosdakarya https://nasional.kompas.com/read/2020/04/26/19130971/kebijakan-presiden-terkaitpenanganancovid-19-disebut-bisa-berubah https://www.jurnal.id/id/blog/tips-agar-bisnis-ukm-mampu-bertahan-di-masa-pandemi-corona/. https://www.kompas.com/tren/read/2020/03/13/160500265/sejumlah-negara-berlakukan lockdown-karena-virus-corona-apa-artinya https://www.who.int/indonesia/news/novel-coronavirus/qa-for-public sugiyono, 2014. metode penelitian bisnis. alfabeta, bandung. finance, accounting and business analysis 4 (1) 2022 66 susanto, azhar. 2013. sistem informasi akuntansi. lingga jaya, bandung. 107 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg behavior finance perspectives for climate investments on bulgarian market – empirical study nikoleta karamileva* university of national and world economy, bulgaria info articles abstract keywords: climate finance, behavior finance, climate investments the current study examines the behavior predisposition of bulgarian investors to imply their resources in climate financial instruments. it starts from the theory settlement and puts in action the principles of behavior finance testing investor preferences and attitudes towards climate financial instruments. the aim of the empirical study is to be identified the financial preferences that are to create the critical investor’s mass for a “green” financial market in bulgaria. thus, all the newly born risks from the changing environmental scene could be implemented and “bought” on the financial market. *address correspondence: e-mail: n.karamileva@unwe.bg finance, accounting and business analysis 3 (2) 2021 108 introduction environmental changes and disasters have a significant impact on the population and economic life of the earth nowadays. it is for this reason that in the last two decades the socially responsible investments (sris) has emerged, being defined as those with goals related to the environment and social activities and achieving a return on invested capital close to the market one1. the financial sector is increasingly trying to accept climate change as a factor in building its products, but there are still gaps in adapting to emerging uncertainty and enriching the complexity of existing ones. the importance of this problem is enhanced by the lack of unambiguous empirical studies in the field of green finance (whether their results are positively or negatively correlated with the traditional ones) and the development of the primary and secondary markets for climate derivatives. in this new kind of responsible investing major factor, is human behavior, defining expectations, attitude, experiencing biases and thus, creating an ecosystem with critical mass of investors. this kind of establishment is the subject of the current empirical study, based in bulgaria. that is why we will look at some of the behavioral and ethical aspects of green investment to see if investors are investing in environmentally responsible projects because: 1. they would like the investment to have an added value for the society 2. they do realize that that the green financial instruments are less corelated with the traditional financial instruments and suggest an alternative return in periods of declines because of the higher risks that tend to cover. based on the two questions above, two hypothesis are going to be established: the investors are being guided by their ethical principles and values, taking green investment instruments in their portfolios investors include green instruments, as they believe, that it will take them to increased returns at times of crisis and declines registered for traditional financial instruments. theory framework which are the factors that define investor’s predisposition through selection of green/climate investments? on first place, these are the variables of the investment itself: inherent to the investment risk, the price of the product, the perceived "added" value for the environment, the amount of trust in the issuer, transparency of company actions are just a few from the variables in the assessment.2 secondly, there are to be noted the demographic characteristics of the economic agents taking decision for investment in a climate financial instrument. literature review in the area can outline the following framework: straughan and roberts3 through their empirical research came to the conclusion that the young investors are significantly correlated with environmentally conscious attitude. as of gender, laroche4 came to the conclusion that women are more associated with green idea than men demographically. this is most likely due to their stronger emotionality in decision-making and the activation of the mechanisms that "anchor" their behavior to socially significant activities and investments dictated by socially responsible affiliation. the results of the study by herath, renuka & wanninayke5, obtained after a structured representative survey of 200 people, lead to several conclusions: • respondents assess the risk in green investments as increased compared to conventional investments; • the greater choice of instruments offered by companies favors the attitude of investors to investing in climate finance instruments; • the transparency of the company's policy does not favor the attitude of investors to climate investment; 1 sparkes, r. 2001., ethical investment: whose ethics, which investment?. business ethics: a european review, 10, p: 201 2 herath, renuka & wanninayke, w.m.c.b.. 2009. the attitudes of customers towards green investments. journal of management. 5. 22-30. 3 straughan, robert & roberts, james. 1999. environmental segmentation alternatives: a look at green consumer behavior in the new millennium. journal of consumer marketing. 16. p:558-575. 4 laroche, michel & bergeron, jasmin & barbaro-forleo, guido. 2001. targeting consumers who are willing to pay more for environmentally friendly products. journal of consumer marketing. 18. p: 503-520. 5 as 2. finance, accounting and business analysis 3 (2) 2021 109 • the relationship between the coverage of the investment different insurance packages that the company provides for its customers does not have a significant impact on the perception of socially responsible investment; • the price paid for climate finance instruments is indicated as unreasonably high; the main conclusion of the survey of attitudes discussed above the negative attitude of consumers to climate investment, mainly due to the high level of risk and higher prices, which could not be offset even by the transparency of the company and additional security, which is demonstrated by additional insurance instruments on the offered green ones. in the present paper, a similar study will be executed on the attitudes of bulgarian investors, the results and analysis of which will be presented in the next chapter. how investor behavior could be guided in considering climate investments? starting from the fundamental theory in behavior finance kahneman and tversky's prospect theory (nobel prize in economics), we will place the fundamental elements in the study of investment behavior for the socially responsible type of instruments. we will start with the two main motives driving the theory of climate investment limitation and adaptation to climate change. they are the ones that relate climate investment and the behavior of economic agents from prospect theory. this is also the opinion of osberghaus6, according to which there are three main lines of communication: • the perception of whether the results of an investment strategy are evaluated as profits or losses, related to the main line of analysis of the theory of kahneman and tversky and the willingness of the economic agent to accept them. here the connection is the complex dependence between the perception of profit and loss, given the socially responsible target and the success of a funded "green" initiative against the actual results achieved by holding the security. • security effect, which affects the lack of normal distribution of the results obtained from the exercise of financial instrument. this is one of the principles that contradicts to the theory of efficient markets, proving that consumers are not rational and identical in their investment perceptions. • isolation effect as a special case of the security effect for solutions in non-transparent environment. it affects the transparency of spending the accumulated funds collected from climate financial instruments, while also being part of the future motivation of investors to continue in the same segment. another useful view in this analysis is the theory of planned behavior. founded by eisen and fishbein in 19807, this theory defines behavioral intent as a harbinger of decision making. behavioral intent is defined as dependent on three variables: • attitude • the subjective norm • perceived behavioral control the attitude is influenced by the perceived benefit and the perceived risk8 or social responsibility in the choice of climate financial instrument and the higher risk associated with it; the subjective norm is influenced by the normative belief and the moral obligation represented by government incentives or a supranational regulatory framework that would encourage the investments in question; and perceived behavioral control is influenced by the power of it. all of these factors work together to determine the deviation of actual behavior from behavioral intent9. this behavioral theory could shed light on how the investor's personal attitude (ethical norms and internal attitudes) is influenced or whether it is influenced at all by the existence of a subjective norm (external regulation) and how these two elements "coexist" together with perceived behavioral control (social environment or perceived social norms). in this bermuda triangle of internal attitude, normativeness set by official bodies and social conditioning, the investor must make a decision based on the available market information with a minimum value of moral hazard and minimal psychological deviations in his behavior. all the elements from the prospect theory as well as the theory of planned behavior are to be the guidelines how to treat the investor’s behavior and demographic characteristics that are to be collected with the current study below. 6 daniel osberghaus. 2017. prospect theory, mitigation and adaptation to climate change, journal of risk research, 20:7, 909-930 7 ajzen, i., & fishbein, m. 1980. understanding attitudes and predicting social behavior. prentice-hall press 8 mehrens, j., cragg, p. b., & mills, a. m. 2001. a model of internet adoption by smes. information and management, 39, 165-176. 9 wu, shwu-ing & chen, jia-yi. 2014. a model of green consumption behavior constructed by the theory of planned behavior. international journal of marketing studies. 6. finance, accounting and business analysis 3 (2) 2021 110 in conclusion, from the considered elements of influence of agency characteristics and the application of behavioral finance theories in socially responsible and climate investment, it is clear that there is no unambiguous answer to the motives of investors whether they are ethical (willingness to finance restrictive activities and adaptation to climate change) or rational (seeking a maximized return) caused by a variety of instruments and investment objectives. this basic review of the behavioral framework for climate investment analysis will be continued in next chapter, with specific accent on the inclinations and deviations of economic agents. empirical study for bulgarian investors and their behavior predisposition to invest in climate financial instruments characteristics for empirical study the collection of data it is related to the filling in of a survey by the respondents individual investors, with questions aiming to see what is the behavior of bulgarian investors to climate financial instruments. primary data the primary information consists of the results obtained from the survey conducted with 30 active individual investors in bulgaria. they are being assumed as suitable for the examined focus group since their investor’s expertise is considered as greater than the averaged one for the bulgarian market. the questionnaire consists of 16 questions that address the fundamental factors affecting investment decisions and issues related to climate finance instruments. critics of the initially collected information the questionnaire is related to the subjective and personal opinions of the respondents. if the question is related to a past event, the answers are exposed to the tendency to subjectively attribute qualities or circumstances to a decision. thus, the answers given by the respondents may deviate from what they think would be correct if they were given the same choice today instead of thinking about the same decision that was made in the past. in a behavioral-psychological aspect, this is called a retrospective tendency. the purpose of this empirical study is to reveal which factors, investment characteristics and processes are related to decision-making by individual investors in bulgaria when deciding for climate financial instruments. on the other hand, in a narrow context, we will examine the prerequisites for choosing a green financial instrument and diversifying the portfolio. the study is limited to the behavioral mechanisms of active individual investors in bulgaria. the condition-definition set at the beginning of the survey is that a climate financial instrument (cfi) means a stock, bond (green, catastrophic / governmental, municipal) or derivative (option), the basic value of which is related to activities limiting or adapting to changes in the environment and in particular climate change. we will make a statistical analysis in the search for connections and dependencies between the influencing decision-making factors for individual investors within climate financial instruments. the objectives of the survey among investors are several: • outline the investment behavior towards cfis • outline the general behavioral attitudes of investors towards risk / return / time preferences / rational inattention in the economy / self-control / decision-making • generate “food for thought” how such climate emissions can be positioned based on behavioral finance characteristics demonstrated all the analysis presented below is made via spss. profile of the respondents number of responses received from individual investors: 30 % of men participated 56.7% -% of women 43.3% age groups: finance, accounting and business analysis 3 (2) 2021 111 figure 1. percentage of age groups participating in the survey we will start with the analysis of the obtained results. to the first question from the survey "would you invest in a climate finance instrument?" (cfi) 63% of respondents answered "yes", 13.3% with "no" and 23.3% with i cannot judge, and we will look for the reason for these results in subsequent questions examining investors' predisposition to take risks. depending on gender, the results are as follows: 82% of male investors in the study would invest in climate finance instruments, and the percentage for women was 38.5%. 11.8% of men and 38.5% of women could not say. we can conclude that women are much more insecure about this type of investment, divided between investing and not being able to judge. this confirms the results obtained from the socio-demographic section of one of the studies discussed above. what is the relationship between the expected return on a climate finance instrument (climate financial instrument) and the willingness to invest in one? "higher" (coded as “1”) reflects the expectation of sampled investors that the return of cfis will be higher than that of conventional instruments. "lower" (coded as “2”) reflects the expectation of sampled investors that the return of cfis will be lower than that of conventional instruments. "no difference" (coded as “3”) reflects the expectation of sampled investors that the return of cfis will be similar to that of conventional instruments. return_expect * inv_will crosstabulation inv_will total no yes i cannot say return_expect 1 count 1 9 2 12 expected count 1,6 7,6 2,8 12,0 % within return_expect 8,3% 75,0% 16,7% 100,0% % within inv_will 25,0% 47,4% 28,6% 40,0% % of total 3,3% 30,0% 6,7% 40,0% 2 count 3 7 4 14 expected count 1,9 8,9 3,3 14,0 % within return_expect 21,4% 50,0% 28,6% 100,0% % within inv_will 75,0% 36,8% 57,1% 46,7% % of total 10,0% 23,3% 13,3% 46,7% 3 count 0 3 1 4 expected count ,5 2,5 ,9 4,0 % within return_expect ,0% 75,0% 25,0% 100,0% % within inv_will ,0% 15,8% 14,3% 13,3% % of total ,0% 10,0% 3,3% 13,3% total count 4 19 7 30 under 25 years 26-35 years 36-50 years 51-65 years 6.7% finance, accounting and business analysis 3 (2) 2021 112 expected count 4,0 19,0 7,0 30,0 % within return_expect 13,3% 63,3% 23,3% 100,0% % within inv_will 100,0% 100,0% 100,0% 100,0% % of total 13,3% 63,3% 23,3% 100,0% 75% of investors who believe that the return of cfis is higher than traditional ones would invest in them. an interesting fact is that 75% of those who do not see difference between the returns of the two types of instruments would also invest in them. and only 21.4% of those who think that cfis have lower returns would not invest in them. from the data presented in this way, it seems that the investors in the sample would invest in cfis, regardless of their expectations for their return. if we hypothesize the relationship between the expectations of profitability and willingness to invest, they would be: h0: there is no statistically significant relationship between the expected return of the cfi and the willingness to invest in such an instrument h1: there is a statistically significant relationship between the expected return of the cfi and the willingness to invest in such chi-square tests value df asymp. sig. (2-sided) pearson chi-square 2,581a 4 ,630 likelihood ratio 3,067 4 ,547 n of valid cases 30 a. 7 cells (77,8%) have expected count less than 5. the minimum expected count is ,53. symmetric measures value approx. sig. nominal by nominal phi ,293 ,630 cramer's v ,207 ,630 n of valid cases 30 given the available data and perceived risk of first-order error α = 0.05, there is reason to accept the null hypothesis there is no statistically significant relationship between the expected return for cfis and the willingness of the respondents to invest in the sample. this means the favorable attitude of investors to the profitability of this type of instruments to their overall willingness to include them in their portfolios. is there a statistically significant relationship between the expected risk of a climate finance instrument and the willingness to invest in one? we will do this test based on the hypotheses: h0: there is no statistically significant relationship between the risk expectations of an cfi and the willingness to invest in one h1: there is a statistically significant relationship between the risk expectations of an cfi and the willingness to invest in one chi-square tests value df asymp. sig. (2sided) pearson chi-square 3,711a 4 ,446 likelihood ratio 4,585 4 ,333 linear-by-linear association 1,159 1 ,282 n of valid cases 30 a. 7 cells (77,8%) have expected count less than 5. the minimum expected count is ,40. symmetric measures value approx. sig. nominal by nominal phi ,352 ,446 finance, accounting and business analysis 3 (2) 2021 113 cramer's v ,249 ,446 n of valid cases 30 after the chi-square test, it turns out that with the available data and perceived risk of first type error α = 0.05, there is reason to accept the null hypothesis. there is no statistically significant relationship between the risk expectations of the cfi and the willingness to invest in one. in other words, regardless of the amount of uncertainty associated with holding an cfi, potential bulgarian investors would choose it. this, in addition to neutrality in terms of expected returns, speaks on the one hand to investors' curiosity about financial market innovations and, on the other hand, to the potential of socially responsible investment aimed at limiting or adapting to climate change. factors that would affect investing in a climate finance instrument these factors on the part of investors can be grouped as follows: a. related to the financial indicators of the investment itself b. related to the nature of the investment and its objectives c. personal qualities of the investor awareness and preparation about the type of investment and its specifics d. related to system factors such as regulations, government policy, business cycle phase the influencing factors indicated by the respondents for the selection of cfis as an integral part of the investment portfolio are the following: figure 2. cfi selection factors are climate financial instruments considered a good diversification instrument and what percentage of the portfolio would they set aside on an annual basis for such investments? uncertainty price business cycle, market expectations long term return time for gain generati on security, accurate informati on time for gain generation the social impact diversific ation regulat ions compan y mission finance, accounting and business analysis 3 (2) 2021 114 figure 3. desired% of cfis for diversification on an annual basis the largest percentage of respondents would allocate between 5 and 20% of the contents of their portfolio in order to diversify and tend to do it more if there are government regulations or incentives to support investment in this direction. in addition, if they are confident in the business of companies and their ethical goals, as well as the transparency of the spending of funds issued by green bonds, for example, this percentage would also increase. 33% of respondents believe that cfis are a good diversification tool, 10% do not think so, and 57% cannot judge. we could relate this fact to the lack of sufficient information and the unpopularity of this type of tools nowadays. which climate financial instruments are known among potential investors? figure 4. scope of known cfi in the sample it is being observed that the largest percentage of investors do not know specific instruments labeled as cfis, but they are familiar with green bonds, trading co2 quotas and shares of companies in the field of green energy. that is, there is room for the development of awareness and marketing of socially responsible behavior, as an opportunity for investment in certain financial instruments. is there a statistically significant relationship between the preference for investing in climate finance instruments and the time preferences of investors (short-term / long-term)? the purpose of this test is to identify whether the time horizon of investors' preferences depends on the willingness to invest in cfis. this would be useful information when marketing a "green" issue to the appropriate behavioral contingent. for this purpose, we will use the mann-whitney test, examining the hypotheses: h0: there is no statistically significant relationship between willingness to invest in cfis and preferences for long-term / short-term investments 0 1 2 3 4 5 6 7 8 9 10 7% 13% 47% 7% 7% 13% въобновяема енергия (акции) зелени облигации не познавам въглеродни емисии/квоти акции и облигации на зелени компании други renewable energy i don’t know any stocks and bonds of green companies other carbon emissions/ quotas green bonds finance, accounting and business analysis 3 (2) 2021 115 h1: there is a statistically significant relationship between the willingness to invest in cfis and the preference for long-term / short-term investments results for long-term investment preferences are: ranks inv_will n mean rank sum of ranks long_perc no 4 8,50 34,00 yes 19 12,74 242,00 total 23 test statisticsb long_perc mann-whitney u 24,000 wilcoxon w 34,000 z -1,151 asymp. sig. (2-tailed) ,250 exact sig. [2*(1-tailed sig.)] ,286a a. not corrected for ties. b. grouping variable: inv_will the results show that a higher percentage of investors who would invest in cfis do have preferences and invest more in long-term investments. we could conclude that cfis are perceived by investors with long-term preferences favorably and most likely as those with long-term potential. however, the significance level is 0.286, which is higher than the accepted theoretical characteristic α = 0.05, so we must accept the null hypothesis that there is no statistically significant relationship between the willingness to invest in cfis and long-term investment preferences. results for short-term investment preferences are analogical to what we received for long-term investments the sampled investors, with a preference for short-term investments would not invest in cfis. that is, cfis are not perceived as a short-term solution, most likely due to the need for time to achieve the desired changes both in the real sphere (change in environmental conditions) and in the financial one the achievement of the expected return. the statistical hypothesis test states that there is no statistically significant relationship between the willingness to invest in cfis and the preference for short-term investments. what is the relationship between the willingness to invest in climate finance instruments and the longterm / short-term investment strategy of investors? the investment strategy is defined as a set of preferences for the elements of the risk-return ratio, the size of the companies in whose financial instruments are invested, their origin, and the degree of targeted diversification. the biggest impact on the long-term investment strategy for the sampled investors who would invest in cfi are: • assets with low risk and low expected return (31.6%) • large companies (21.1%) for those who would not invest in cfis, preferences for assets with low risk and low expected return have the greatest impact (75%). for the sampled investors, who could not say, the most important element is again low risk-low return (71.4%). in summary, it can be said that the leading factor in the strategy for choosing long-term investments is the low level of return and the low risk of achieving it, regardless of whether investors would or would not invest in the cfi. the biggest impact on the short-term investment strategy for investors who would invest in cfis are: • assets with low risk and low expected return (26.3%) • assets that are uncertain but with high expected returns (21.1%) • international origin (21.1%) the greatest impact on the short-term investment strategy for investors who would not invest in finance, accounting and business analysis 3 (2) 2021 116 cfis have: • assets with low risk and low expected return (50%) • assets that are uncertain but with a high expected return (25%) • large companies (25%) for the group of investors who could not say, the most important element (by 71.4%) are assets with low risk and low expected return the conclusion of this section of the analysis is that the leading factor in the strategy for choosing short-term and long-term investments is the low level of return and the low risk for its achievement, regardless of whether investors would or would not invest in the cfi. thus, according to this criterion, there is no statistically significant relationship in the sampled investors' view of the intersection between the time horizon and the willingness to invest in cfis. what is the relationship between the factors that determine an investment and the willingness to invest in climate finance instruments? figure 5. factors for making an investment decision among the respondents here, the statistical analysis will focus on the search for significant variables for investors in making financial decisions and the willingness to invest in cfis. is there a relationship between factors influencing investment choice and whether investors will choose cfis? the hypotheses are as follows: h0: there is no statistically significant relationship between cfi preferences and the factors indicated by investors as influencing their investment choice h1: there is a statistically significant relationship between cfi preferences and the factors identified by investors as influencing their investment choices chi-square tests value df asymp. sig. (2-sided) pearson chi-square 19,456a 10 ,035 likelihood ratio 17,658 10 ,061 linear-by-linear association 4,395 1 ,036 n of valid cases 30 a. 18 cells (100,0%) have expected count less than 5. the minimum expected count is ,27. symmetric measures value approx. sig. nominal by nominal phi ,805 ,035 cramer's v ,569 ,035 n of valid cases 30 18.99% 24.05% 7.59% 20.25% 18.99% 10.13% информация от компанията като база за фундаментален анализ препоръки, прогнози от професионални инвеститори технически анализ лична интуиция информация от медии и интернет информация от колеги и приятели company information as basis for fundamental analysis recommendations/ forecasts from professional investors technical analysis personal intuition media colleagues and friends advise finance, accounting and business analysis 3 (2) 2021 117 the significance level is 0.035, which is less than the perceived risk of a first-order error, giving us reason to reject the null hypothesis – i.e there is a statistically significant relationship between the factors influencing investment choice and preference for cfis. for those who would invest in cfi, the most important factor is "personal intuition" with 26.3%. for those who would not invest "information from colleagues and friends" by 50%. those who do not have an opinion on the issue the main factor is the information from the company as a basis for fundamental analysis with 57.1%. the main role of personal expertise, knowledge and informal information can be mentioned, which confirms the theory of the widespread presence of behavioral factors and tendencies in making investment decisions. the information obtained could be used in targeting cfis to potential investors and using appropriate marketing channels to inform them. what is the relationship between the investment decision factors and the stated reasons for the failure of the investment? the purpose of this test is to examine the incoming expectations and the outgoing result of the investment. we set the following hypotheses: h0: there is no statistically significant relationship between the investment decision factors and the stated reasons for the failure of the investments already made h1: there is a statistically significant relationship between the investment decision factors and the stated reasons for the failure of the investments already made the dependencies found are the following: • investors who prefer the method of fundamental analysis to make an investment decision tend to cite as "own mistakes" the reasons for their failed investments • 100% of respondents that they make a decision based on recommendations and forecasts from professional investors, as well as based on technical analysis, say that the reason for their failure is a bad strategy because of their own mistakes • 50% of respondents said that they made their decisions based on personal intuition and 83.3% of those who trusted the media and the internet felt that they were failing again because of a bad strategy as a result of their own mistakes. • investors, for whom a factor is the opinion of friends and colleagues about making an investment decision in 66.7% of the surveyed group believe that the reason for their failure was that the market was just going down and nothing depended on them from the test it seems that the obtained data and perceived risk of first-class error = 0.05% and there is reason to reject the null hypothesis and accept the alternative, according to which there is a statistically significant relationship between investment decision factors and the reasons for failure course of the investments already made. this in behavioral language means that the incoming attitudes of investors predetermine the result obtained from the realization of the investment. from the test it seems that the data obtained and the perceived risk of first type error= 0.05% has grounds for accepting the null hypothesis, according to which there is no statistically significant relationship between investment decision factors and the perceived satisfaction from investments made. this result is relevant to the confirmation of the behavioral decision-making elements and in particular, what cfi issuers can expect when targeting investors. what is the relationship between decision making investment factors and the understanding of overvaluation of the market according to investors? factors being outlined for overevaluating the market are : herd behavior, media, over confidence among stock market investors, government intervention with fiscal instruments, analyst forecasts. we set the following hypotheses: h0: there is no statistically significant relationship between the investment decision factors and the stated reasons for overvaluation of the market h1: there is a statistically significant relationship between investment decision factors and the stated reasons for market overvaluation the dependencies that were found are the following: • investors who rely on a fundamental analysis for investor decision-making believe that the market is overvalued due to herd behavior in 50% of cases • 57.1% of investors who rely on recommendations, forecasts from professional investors, say that the market is overvalued because of the media • 50% of those who rely on personal intuition say that the market is overvalued due to overconfidence among stock market investors • 66.7% of those who rely on the media and the internet say that the market is overvalued finance, accounting and business analysis 3 (2) 2021 118 precisely because of the media from the test it seems that the data obtained and the perceived risk of first type error = 0.05% has grounds for accepting the null hypothesis, according to which there is no statistically significant relationship between investment decision factors and the reasons for the successful course of already the investments made. conclusion for results found: the empirical study of investors' behavioral characteristics specifically towards cfis and in a more general context regarding their preferences and attitudes leads us to the following conclusions: • bulgarian women are more insecure than men in their willingness to invest in cfis • sample investors would invest in cfis, regardless of their expectations for the return • there is no statistically significant relationship between risk expectations of cfis and the willingness to invest in them • cfi are considered a good diversification tool by respondents to the current study • there is no statistically significant relationship between the willingness to invest in cfis and the preference for long-term investments • the leading factor in the strategy for choosing long-term investments is the low level of return and the low risk for its achievement, regardless of whether investors would or would not invest in the cfi • there is a statistically significant relationship between the factors influencing the investment choice and the preference for cfis contributions and future studies current empirical study is part from a greater at volume and scope project, named “the influence of climate change over portfolio investments and the opportunities for bulgarian market”. it includes the evaluation and analysis of both traditional finance, behavior and neurofinance aspects, focused at climate investments. that is to say that empirically testing the potential investors behavior is the first step to elaborate on the potential of climate financial instruments market that can cover environmental risks. the main contribution of the empirical study above is to outline the behavior predisposition of potential investors so as to analyze which are the prerequisites for having such market developed in bulgaria. future studies are to make more profound analysis of the practical implications over climate derivatives over their application at climate vulnerable industries like agriculture for example. conclusion in conclusion, climate financial instruments are aimed at reducing costs as a result of noncatastrophic, correlated climate change events for the society if incentives and a financial ecosystem for their use are properly identified. thus, it is important to increase investors’ knowledge and awareness of these tools as to reduce risks and potential losses. once this happens, a critical mass of investors would be created, which will be the basis for the formation of an over-the-counter market for cfis in bulgaria. thus, we should outline that a study of investor’s attitude and behavior towards the variables defining cfis is a crucial part from identifying, managing and setting the marketing plan to target the right group of investors and spread the market of this type socially responsible instruments. this was achieved with the current study in setting investors’ expectations for risk, profitability ratios, terms, etc. references ajzen, i., & fishbein, m. (1980). understanding attitudes and predicting social behavior. prentice-hall press beerbaum dr., dirk and puaschunder, julia m. (october 1, 2018). a behavioral economics approach to a sustainable finance architecture – development of a sustainability taxonomy for investor decision usefulness. daniel osberghaus (2017) prospect theory, mitigation and adaptation to climate change, journal of risk research, 20:7, 909-930 herath, renuka & wanninayke, w.m.c.b.. (2009). the attitudes of customers towards green investments. journal of management. 5. 22-30. kahneman, daniel & tversky, amos, 1979. "prospect theory: an analysis of decision under risk," econometrica, econometric society, vol. 47(2), pages 263-291 laroche, michel & bergeron, jasmin & barbaro-forleo, guido. (2001). targeting consumers who are finance, accounting and business analysis 3 (1) 2021 119 willing to pay more for environmentally friendly products. journal of consumer marketing. 18. p: 503-520. mehrens, j., cragg, p. b., & mills, a. m. (2001). a model of internet adoption by smes. information and management, 39, 165-176. sparkes, r. (2001), ethical investment: whose ethics, which investment?. business ethics: a european review, 10, p: 201 straughan, robert & roberts, james. (1999). environmental segmentation alternatives: a look at green consumer behavior in the new millennium. journal of consumer marketing. 16. p:558-575. von neumann and morgenstern. (2007). theory of games and economic behavior. von neumann, j., morgenstern, o. (1953). theory of games and economic behavior. princeton: princeton university press. wu, chen. (2014). a model of green consumption behavior constructed by the theory of planned behavior. international journal of marketing studies; vol. 6, no. 5; p.119-132. wu, shwu-ing & chen, jia-yi. (2014). a model of green consumption behavior constructed by the theory of planned behavior. international journal of marketing studies. 6. 152 volume 1. issue 2. july 2019 issn 2603-5324 http://faba.bg integration between voice and silence in human resource management (hrm) perspective, a literature review imam suwandi, sam’un jaja raharja, rusdin tahir department of business administration, faculty of social and political sciences, padjadjaran university, indonesia info articles ________________ history articles: submited 12 march 2019 revised 30 april 2019 accepted 1 july 2019 ________________ keywords: voice and silence, human management management, organizational behavior, industrial relations, labor process abstract ___________________________________________________________________ many developments from studies on the concept of employee voice actualization in various theoretical disciplines including human resource management ( hrm ) , organizational behavior ( ob ), industrial relations (ir) and labor process (lp) are approaching phenomena from various ontological points. however, very few study the antithesis of employee voice, namely employee silence. this article aims to develop a conceptual framework of voice and silence employees based on interdisciplinary integration from the perspective of ob, ir, and lp. an integrated approach like this can offer a more reflective understanding of the social and psychological antecedents of employee voice and silence to academics, policymakers, and human resource management practitioners. this framework is critical to promote a pluralist view of the " silence " of employees which is illustrated by the concept of 'antagonism structured', which is rarely used in the study of hrm and ob. research continues suggested outlined to help integrate a more diverse approach to the vase of employees.  address correspondence: jl. raya bandung sumedang km 21, jatinangor 45363 retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 153 introduction analysis of employee voice can be traced in hirschman's research (1970: 30), where voice is seen as a vehicle for "changing unpleasant circumstances". however, the employee's " silence " is not part of the analysis, even though the employee's silence can be a manifestation of 'leaving' under the hirschman framework. hrm tends to use ob insights to explain vas (for example, kwon, farndale, & park, 2016; morrison, wheeler-smith, & kamdar, 2011; farndale et al., 2011; park & nawakitphaitoon, 2018; rees, alfes, & gatenby, 2013; wang, wu, liu, hao, & wu, 2016). in this article it is proposed that the hr audience can gain greater insight into the depth of integration approaches that are often opposed to each other, that is the perspective of organizational behavior (ob), industrial relations (ir) and the work process (lp). wilkinson et al. (2014: 5) defines voice as "an opportunity for employees to have a voice and potentially influence organizational affairs related to issues that affect their work and the interests of managers and owners ". silence can reflect a situation in a company where employees do not have the opportunity to vote or do not use it for various reasons (donaghey, cullinane, dundon, & wilkinson, 2011). this article provides a conceptual framework of multi-dimensional and multilayers voice and silence, based on interdisciplinary integration from the perspective of ob, ir, and lp. this article contributes to advancing hr knowledge in four important ways. first, the integrated framework encourages hr academics to expand hrm beyond any paradigm by including forms of indirect, direct, informal and formal social dialogue. approaches in a way that can capture how the vase reflects a relationship centered on strength; that is, relationships formed by unequal power exchanges. second, a framework that integrates allow academics hr to connect the various levels, layers, and dimensions silence different employees to describe more fully why the employees do not speak. while ob provides more useful insights into understanding such as collective reasoning, managerial behavior, individual traits, and psychological security, ir helps understand the institutional context for voice, and lp informs a deeper appreciation of the influence of agents connecting wider social structures of accumulation. with the political process of hr decision making at the company level. third, this article builds on the hrm literature (farndale et al., 2011; morrison et al., 2011; rees et al., 2013; knoll and redman, 2011; avery, mckay, wilson, volpone, & killham, 2011) for building critical pluralist perspectives on employees ' " voice " and " silence " in various workplace settings (godard, 2014; ramsay, scholarios, & harley, 2000; wright, 2000). specifically, this article develops the critical pluralist concept of 'structured antagonism' (edwards, 1986), which is ignored in most hrm studies (for example, knoll and redman, 2016; morrison et al., 2011; avery et al., 2011; kwon et al., 2016; farndale et al., 2011; park & nawakitphaitoon, 2018; wang et al., 2016). 'structured antagonism' explains how structural strength imbalances can damage employees ' ' voice ' and ' silence ', depending on the formation and articulation of conflicting interests between employers and employees (eg cooperation vs. conflict and control vs. approval tension). finally, the proposed integrative framework can support public, managerial and broader policy debates. for example, this article highlights the human hearing that silence its employees may occur because of the mechanism of voice that effectively inaccessible; or employees whose silence alone may be a form of rejection and / or bad behavior. hr practices can then be critically evaluated using understanding from a variety of disciplinary perspectives to help move beyond narrow performance-driven metrics that have little meaning to employees. this review literature compares the intersection of ob, ir, and lp analyze regarding employee voice and silence. furthermore, a brief description of " voice " on the concept of hrm will be described, the contribution of ob in " voice " and " silence " of employees and then reviewed, and incorporated retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 154 from the viewpoint of hrm when necessary. after that, the relevance of structured antagonism to employees' " voice " and " silence " is considered and extended to section four to be developed into an integrated ob-ir-lp sensitivity framework. theoretical review voice and silence in human resource management perspective the main focus of the literature hrm typically discusses how the opportunities for the mechanism of voice directly to help improve organizational processes (fu et al., 2017; huselid, 1995; knoll & redman, 2016). for example, knoll and redman (2016: 832) ber focus on voice upward sponsored by a company where employees "to express the idea that aims for process improvement and innovation". rees et al., (2013: 2782) tested employee perceptions about the extent to which they were involved in voice behavior aimed at improving the functioning of their workgroups ". fu et al., (2017: 344) encouraged" hr practices that are easily implemented focusing on the process of creating opportunities for employees to get involved, as a medium to improve higher performance ". fu et al., (2017: 344) suggest making an internal bulletin, or social media, where employees can exchange knowledge, information, and ideas to improve existing practice. hrm interpretation is often assumed that the mechanism of voice employees can align employee goals and organization through increased commitment and involvement (farndale et al., 2011: 115). holland, pyman, cooper, & teicher, 2011 (2011: 97) a union "has been accompanied by direct voice diffusion, with priority placed on voice as a means of increasing employee productivity and commitment to the organization." rees et al., 2013 (2013: 2780) claim a positive relationship between employee voice and engagement, where the engagement strategy is a way of "aligning employee interests more closely with organizational goals, which is predicted assuming that employee voice will, in turn, improve organizational performance". such narratives present a unified focus on a direct voice where employees share ideas to benefit from organizational goals. however, this can disregard the different (or conflicting) interests of managers and employees and the imbalance of structural forces between them (cullinane & dundon, 2014; kaufman, 2015; marchington, 2015). researchers previously found the scheme voice that is facilitated by the employer provides the voice of employees on management requirements, which may be very limited in communication at lower levels and has a shortage of inclusion for decision-making (barry, dundon, & wilkinson, 2018). examining 'depth' (ie, level of influence), 'scope' (ie, about what problems), 'level' (ie, department, team or company) and 'form' (ie, direct, formal, informal) voice mechanism very important for academics and hr practitioners (wilkinson et al., 2014). holland et al. (2011: 106-107) said that they measure the presence of the mechanism of voice, which is not too embedded depth and breadth pettings voice which is in the level of early-stage at the workplace ". rees et al., 2013 (2013: 2793) further cautions: "we have considered voice perception, not voice reality ." likewise, farndale et al., (2011: 124) noted, "this study has used indirect voice measures, exploring how many employees believe that their managers provide opportunities for voice, not a real voice. " it can be said that hrm is very focused on generating employee voice perception, rather than providing insight into the depth of voice. for example, farndale et al., (2011: 116 ) states: " voice can lead to long-term positive attitudes because employees see the potential to influence decisions, regardless of whether the impact of employee voices on the outcome of decisions is realized". also, they conclude that voice perceptions build trust relationships "regardless of whether the outcome of the decision is beneficial for employees or not". ' voice perception ' without a broad voice can "motivate employees to respond according to the wishes of retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 155 the organization" (kwon et al., 2016: 3) and legitimate decisions with negative employee outcomes in the short term, but this is not sustainable. so, overall, the danger is that hrm's view of voice is based on the erroneous idea of the voice mechanism as evidence of shared interests and shared goals. furthermore, this becomes a pro-market orientation where voice is mainly based on values deemed to be in the interests of shareholders and organizations, rather than the right to expand or enhance democracy in the workplace (boxall, purcell, & wright, 2008; dundon & rafferty, 2018). the hrm literature on voice and silence often evokes insight into ob (for example, goldberg, clark, & henley, 2011; kwon et al., 2016; knoll and redman, 2011; avery et al., 2011; farndale et al., 2011; wang et al., 2016 park & nawakitphaitoon, 2018; rees et al., 2013) voice and silence in the perspective of organizational behavior (ob) likewise, with hrm, ob research strongly emphasizes how 'opportunities to have voice are provided by direct voice mechanisms based on unitary, oriented-oriented assumptions (ashford & barton, 2007; burris, detert, & chiaburu, 2008; detert, burris, harrison, & martin, 2013; fast, burris, & bartel, 2014; grant, 2013; liu, tangirala, & ramanujam, 2013; tangirala & ramanujam, 2008). for example, constructing several definitions of the ob voice, morrison (2011: 375,) conceptualizes it as "communicating ideas or suggestions about work-related problems to improve the functioning of an organization or unit". likewise, grant (2013: 1703) defines voice as "proactive behavior that involves talking with suggestions for improvement". detert et al. (2013: 626) explains that the voice is a challenging organizational citizenship behavior, prosocial, and aimed a specific role in improving the performance of the organization by changing existing practices. they investigated three "different voice flow ideas or proposals to attract more business, increase customer satisfaction, and increase effectiveness" ( detert et al. 2013: 659). the voice flow includes employee voice for 1) partners, 2) direct managers and 3) other managers. they aim to "see what and how differences exist in ways that are relevant to predictions that might be made about their impact on performance". reflecting unitary perspectives where conflict is seen as dysfunctional, employee complaints and complaints are usually not considered voice because employee complaints do not directly support organizational goals (barry & wilkinson, 2016; mowbray, wilkinson, & tse, 2015). according to detert et al. (2013: 641), the weakness of voice among coworkers is that it will be "coded by outside observers or internal leaders as" ventilation, "blowing steam, "or even" complaining "and that" while such communication can make the speaker feel better in the short term, it might just reduce the climate and unit performance over time ”. morrison (2014: 179-180) states that "the main intention of " voice " is to bring positive change, improvement, and not just to complain or get positive results for yourself." tangirala & ramanujam, 2008 by arguing that employees with autonomous, less expressing voice. but they see voice as "ideas and suggestions that are change-oriented about work-related issues " rather than "personal complaints resulting from perceived injustice." the ob voice mechanism is usually a direct channel that builds performance around the organizational climate and socially shared cognition between workers and leaders (lepine & van dyne, 1998; morrison et al., 2011). morrison (2011: 386) explains that recent ob research "has not yet considered the role of formal communication mechanisms much, perhaps because of the conceptualization of voice as extra-discretionary role behavior that occurs in face-to-face contexts. "exceptions include morrison and milliken (2000), who encourage formal upward communication channels to promote voice, and miceli, near, and dworkin (2008), which state that complaints are more likely to occur if internal reporting procedures exist. retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 156 silence its employees in the ob literature is "cutting ideas, questions, concerns, information or opinions deliberate by employees on issues related to the job and the organization they work" (van dyne, ang, and botero, 2003: 1389). silence is described as things that are not desirable because the employees are not clicking to communicate their ideas so it may damage the interests of the organization. for example, silence has "significant implications for the team and organizational performance" because, "key decision-makers or teams may not have the information they need to make the right decision or to fix potentially serious problems" (morrison, 2011: 374). fast et. al., (2014: 1028) states that "holding back voices that are oriented to improvement can deny an organization's access to ideas that trigger growth, learning, and adaptation." likewise, with hrm research that highlights employee involvement, morrison (2014: 88) notes how employee silence can stimulate "high levels of stress, dissatisfaction, and loss or loss of potential employees, which can damage performance and retention". research in the field of ob addresses two important issues that shape whether or not employees speak up (morrison, 2011, 2014). first, employees value ' voice efficacy ', therefore, they can remain silent if they consider the conversation useless and/or no one will listen (detert & trevino, 2010; milliken, morrison, & hewlin, 2003; pinder & harlos, 2001; van dyne et al., 2003). second, voice is formed by 'psychological security', "people's perceptions about the consequences of taking interpersonal risks in certain contexts such as the workplace" (edmondson & lei, 2014). silence in such contexts is labeled silence (pinder & harlos, 2001) and ' silence ' (van dyne et al., 2003). negative impacts might involve how others perceive their image, colleague relations, identity, social capital, termination of employment, restrictions on career development, and unattractive work assignments (ashford & barton, 2007; bowen & blackmon, 2003; grant, 2013; liang, crystal, farh, & farh, 2012; miceli et al., 2008; milliken et al., 2003; morrison & milliken, 2003). these ob ideas are applied in hr studies; for example, goldberg et al. (2011) evoke psychological security and the efficacy of voice (see also kwon et al., 2011; farndale et al., 2011; park & nawakitphaitoon, 2018; rees et al., 2013). 'organizational identification' is a prominent idea in voice and silence in the ob perspective, developing ideas about commitment and involvement with unitary postures for common goals and shared interests. organizational identification is "the extent to which employees feel unity or ownership with their organization and include organizational attributes in their self-definition" (tangriala and ramunjam, 2008: 1190). this reflects "the amount of interest felt by individuals and organizations" (smidts, pruyn, & van riel, 2001: 1051). ashford and barton (2007: 231) assert that organizational identification fosters voice by creating "motives to try and help and improve those organizations." liu et al. (2013: 199) argue that "managers who want to encourage voice behavior need to build or strengthen employee identification." they found a positive relationship between transformational leaders and voice. such leaders "emphasize the collective identity and values and vision of the whole organization (or group)" and make "organizational or group goals meaningful to employees" (: 192). organizational identification is also considered a positive byproduct of voice. smidts et al. (2001) argue that when employees perceive voice opportunities, organizational identification is enhanced. besides, as stated by morrison and milliken (2000), if employees evaluate the voice opportunities they feel valued, thereby increasing organizational commitment and identification. what is interesting is the argument that organizational identification can also trigger silence, because attachment to the organization overrides employee dissatisfaction (tangirala & ramanujam, 2008). related, ashford and barton (2007) argue that employees may not speak up because it can threaten their identity (and organization). highly identified employees do not always recognize problems outside the organization's current framework of reference retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 157 and they tend not to conflict with applicable norms, so they remain silent. research by burris et al. (2008: 914) do not support the hypothesis that the more employees are psychologically attached to the organization (ie, "identify with their organization's goals and values"), the more they are involved in voice-oriented improvement. they argue this may be due to employees who are very bound like organizations. similar arguments are made in the hrm literature. for example, knoll and redman (2011: 833) find that employees who feel "a sense of belonging to the organization" and show a "strong psychological relationship with their organization", tend to be involved in voice promotions. however, they conclude that the employee can also engage in silence it is prosocial where they "hold the views that can disrupt the functioning of the workplace without hindrance" ( knoll and redman 2011: 832) and "hold opinions or concerns them if they thinking to express them will challenge relationships at work ”( knoll and redman, 2011: 833). from the perspective of hrm, perspective ob on the voice and silence research is strongly based on the views of unity of purpose and common interests, where employees speak to fulfill a common goal, and perhaps silence for the identification of a strong organization. morrison & milliken, 2000 acknowledged that reduces silence its employees is very important to create a pluralist organization, which they define as "an organization that respects and reflects the difference between the employee and which allows the disclosure of a range of perspectives and opinions". however, as fox (1979) notes, although pluralism is in principle attractive, it can also be aspirational and difficult in practice because of various external forces and because management has structural strength advantages. furthermore, pluralist organizations that provide mechanisms for expressing alternative concerns are different from pluralist organizations that facilitate the distribution of power in decision making through these mechanisms. there seems to be more focus on ob that observes the perception of voice than building democracy in the workplace. for example, milliken et al. (2003: 5) note that when top management is "considered willing to listen", this motivates the voice, but this is not the same as assessing whether managers share power over the outcome of decision making when a voice is expressed. ob insights indeed draw attention to how positional and hierarchical power relations shape voice and silence (morrison & milliken, 2000; fast et al., 2013; kish-gephart, detert, trevino, & edmondson, 2009; detert & trevino, 2010). kish-gephart et al. (2009: 174) argue that the emotion of 'fear' has a significant effect when employees consider facing an authoritative individual. in this context, "contemplating voice triggers fear of being ready to anger other people of higher status, which automatically triggers recognition of potential negative consequences." likewise, detert and trevino (2010: 263) found that fear prevents employees from using voice to managers and that "this fear can originate from the idea of speaking to more senior authority figures". furthermore, morrison and milliken (2000) and fast et al. (2013) asserted that managerial perceptions of employee voices as threats and suspicions were largely shaped by the strength of positions and hierarchical relationships. in short, ob and hrm perspectives are generally biased toward direct voice mechanisms, not overly recommending indirect forms of voice. while ob research focuses on informal voice behavior (morrison, 2011), the hrm literature examines formal and informal practices (mowbray et al., 2015). ob offers a range of employee motivations that are useful for speaking or maintaining silence, including the efficacy of voice, psychological security, leader-member exchange, identity, emotions and position and hierarchical resources (detert & edmondson, 2011; detert & trevino, 2010; kish-gephart et al., 2009; morrison, 2014). this idea is presented in hrm research with different psychological differences (eg, goldberg et al., 2011; kwon et al., 2011; knoll and redman, 2011; avery et al., 2011). however, ob retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 158 drawbacks include paying too much attention to individual-level factors and ignoring broader socio-economic, political and institutional forces (godard, 2014; barry et al., 2018), also, weaknesses in many obs and hrm related research are the premise of unitary shared goals and aligning the interests of employees and organizations (for example, ashford & barton, 2007; liu et al., 2013; tangirala & ramanujam, 2008; farndale et al., 2011; rees et al., 2013). this creates a bias towards voice 'oriented improvements' (detert et al., 2013; grant, 2013; burris et al., 2008; fast et al., 2014; liu et al., 2013; tangriala and ramanujam, 2008; ashford & barton, 2007; morrison, 2011; knoll & redman, 2016; fu et al., 2017) and ignore how the interests of different employer-employees in power relationships that are structurally unbalanced shape the results of voice and silence. finally, the focus in ob and hrm focuses on the presence and perception of behavior and voice mechanisms, rather than whether they provide democracy in the workplace or how deeply these arrangements are embedded (holland et al., 2011; farndale et al., 2011; rees et al. , 2013; morrison & milliken, 2000; milliken et al., 2003). similarities in the interpretation of ir and lp following the definition of voice as 'an opportunity to have a voice ', employees can use this opportunity to support organizational goals; but importantly, they can also challenge hr management and practices by attempting to influence alternative outcomes. most importantly, 'opportunities to have a voice reflect' structured antagonism 'are permanently embedded in people management systems (edwards, 1986; kaufman, 2014). while the different positions adopted in the flow ir / lp, including dialectical pluralist discourse, marxist, post-modernist and critical framework for this support pluralist orientation critical in supporting the inclusion and integration (dundon & dobbins, 2015; edwards, 1986). powered by antagonism structured political and economic theory, the framework seeks to map the phenomenon around silence its employees to capture better how and why workers remain silence, knowing the context and external processes and endogenous. the hrm approach builds a critical pluralist view to recognize that aligning shared goals may be desirable but problematic. although there is a degree of mutual dependence between employers and employees, inherent power imbalances usually favor employers. the power here is more rooted structurally and extends deeper than the 'position' and 'hierarchical' power relations presented in several ob / hr studies (detert & trevino, 2010; fast et al., 2014; kish-gephart et al., 2009). both parties have interests that are structurally conflicting because employers and employees will always seek control. there is a potential for tension, where employees can pursue the interests and beliefs of individuals who differ from management, which can trigger conflicts. however, both parties also seek to secure potential joint goals, for example, the survival of the company (edwards, bélanger, & wright, 2006), generating opportunities for cooperation (dobbins & dundon, 2017; edwards & ram, 2009) and organizational efficiency ( johnstone & wilkinson, 2016). furthermore, employers not only actively seek to control workers' efforts and work tasks but also try to support employee commitment and loyalty (edwards, 1986; fox, 1966; johnstone & wilkinson, 2016). employee costs and benefits including social and monetary rewards reflect the uncertainty in which employee exchange efforts are unbalanced, unpredictable, varied and can be felt differently by workers when comparing with other groups (baldamus, 1961; fox, 1966). therefore, employers and employees engage in ongoing effort-reward bargains and their respective concerns can be unified or distorted day by day. but how managers can adopt or engage in voice relationships is a complex thing. managers are under pressure to achieve company goals and are limited by the interests of owners and shareholders, especially under retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 159 financial capitalism (thompson, 2003, 2013). this is proven in the hr literature, ulrich (1998: 125-126) states: "line managers have primary responsibility for the processes and outcomes of a company". however, as jaros reminds (2005: 8), managers may have "a level of discretion that is independent of profit or mandatory value maximization", which can determine the nature and quality of voice or the level of structured antagonism. the manager is the employees themselves, but also the owner's agent, and thus can pursue their own goals that may conflict with interelict-cooperation and controlagreement tensions are important, as described in the following section. based on the view that employment instills 'structured antagonism', the ir / lp perspective can help explain the three main issues surrounding " voice " and " silence " that are ignored in the hrm / ob perspective discussed in the previous section. first, given the relationship of power imbalances and the potential interests of different employersemployees, the ir / lp perspective provides a thicker explanation of why employees do not always express a voice to benefit the organization, but rather to advance the interests of individuals and/or their collective, who can compete with organizational goals. what is important for the hr audience, providing employees with effective mechanisms to express potentially conflicting interests can be beneficial to the organization in the long run (dundon & rafferty, 2018; mowbray et al., 2015). second, employees can withhold potentially valuable information to reject managerial authority or improve degrading work. the idea has a long and established pedigree in the study of sociology and policy theory on employment relations and employment (eg braverman, 1974; burawoy, 1979; thompson, 1989). it recognizes cooperative and conflictual debates about how human resource practices can change work practices that expose exploitative results or increase sustainability and protect workers and organizations from time and space. third, recognizing the complex tensions that underlie people who manage, " silence " can manifest as a form of cooperation and compromise, which can be manipulated or coerced by management actions (burawoy, 2013). for example, macmahon, o'sullivan, murphy, ryan, and maccurtain (2018) report incidents in which hr procedures to combat intimidation at work are sometimes in vain and management actions give rise to a culture of employee silence due to the perception of fear about possible retaliation against them. although the ir / lp perspective combines a more socio-political world view of workplace relations based on 'structured antagonism', their explanations of voice and silence differ in several key aspects, which are found in the sections to come. voice and silence in the perspective of industrial relations ir analysis develops many disciplines such as history, economics, law, politics, sociology, and psychology, and focuses broadly on all labor actors, including management, labor, workers '/ employers' associations and government agents (kaufman, 2014). various levels of analysis are explored in ir, examining external influences on the behavior of 'actors', 'institutions' of the labor market, on ir 'processes' (eg bargaining, rewards, commitments, etc.), and 'outcomes' (such as voice and silence )). ir research for decades has contributed to public policy; from the wagner act (1935) us new deal and the uk donovan commission (1968), to the display of economic employee rights, or the implications of robot technology on work (ackers, 2010; berg, 2016; kochan, 2015). while ir examining managerial behavior, the way he connects workplace relationships with macro-level factors, such as labor laws and institutional rules, helping inform a broader understanding of contextual diversity in contemporary hrm vis-à-vis the voice and silence "of his employees (wilkinson, gollan, kalfa, & xu, 2018). in contrast to hrm / ob, irs build a unique agency-focus focus on employee voices that are oriented in direct and indirect forms, including unions, work councils, consultative committees and civil society retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 160 organizations (csos) (williams, abbott, & heery, 2011). the results of institutional voices are learned in ir. for example, the workers' council has been proven to support two benefit claims. the first is the rent-producing effect: when workers have a collective voice through the work board, the rate of employee resignation is lower (nienhüser, 2014). the effect is sharing information and supporting organizational efficiency. the second is rent-seeking outcomes, trough compulsory collective dialogue, workers can organize the supply of labor and support a higher income than under the competitive labor market that was charity (nienhüser, 2014: 247). besides, institutional economists have shown that collective bargaining has proven the effects of positive income distribution, along with social and ethical values regarding greater justice support (kaufman, 2007). the study also examined the relationship between the mechanism of employee voice and non-union (willman, bryson, & gomez, 2009.). for example, dundon, wilkinson, marchington, and ackers (2004) found the mechanism of union and non-union hrm voice in multifactory organizations in the united kingdom and ireland to be complex, involving joint contestation of coexistence. the findings that are well cited in union settings are those reported by black and lynch (2004), which show a positive relationship between bargaining and labor productivity. likewise, dobbins and gunnigle (2009) report, in making capital-intensive, that union-management negotiation systems can help reconcile different interests that support new and innovative hr arrangements. contrary to ob, ir analysis seeks to capture the 'depth' of the influence of voice, where employee problems can contribute, and at what level in the organization (wilkinson et al., 2014). this is important because research shows that " silence " may be a byproduct of a shallow voice system, and managers force decisions unilaterally. according to cullinane and donaghey (2014: 402), ' accidental silence ' can occur when 'there is no voice ' in the organization. subsequently, dobbins, dundon, cullinane, hickland, and donaghey (2017) examined the results of organizational-level voice mechanisms established under the information and consultation (ice) regulations (2004) in the united kingdom and ireland. they found that weak and minimalistic regulations gave employers high-level policies. contrary to ob, ir analysis seeks to capture the 'depth' of the influence of voice, where employee problems can contribute, and at what level in the organization (wilkinson et al., 2014). this is important because research shows that silence may be a by-product of shallow voice systems, and managers force decisions unilaterally. according to cullinane and donaghey (2014: 402), ' accidental silence ' may arise when 'there is no voice ' in the organization. furthermore, dobbins, dundon, cullinane, hickland, and donaghey (2017) examined the results of organizational-level voice mechanisms established under information and consultation regulations (ice) (2004) in the united kingdom and ireland. they find that weak and minimalistic regulations provide employers with a high level of discretion when responding to legal regulations for voice that result in shallow employee participation in small matters. for this purpose, relevant contextual factors recognized in ir research are socioeconomic and political characteristics in various labor regimes (see also barry, wilkinson, & gollan, 2014). for example, voices are generally shallower in liberal market economies (lme), such as the uk, us, australia or ireland, where voices and labor regulations do not have a legal support mandate (see also gallie, 2011). conversely, voice may be more expansive in coordinated market economics (cme), such as germany, when voice is supported by tougher institutional support for social dialogue (dobbins et al., 2017). ir also recognizes that institutional structures can be very different. for example, artus (2013) discusses the shallow voices found in the critical service sector in germany. important here is that the divergence of institutional labor regimes is important in retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 161 terms of labor practices and hr design (holman & rafferty, 2018). therefore, you could say, the contribution of ir has a lot to offer in troubleshooting voice and silence its employees. some ob studies analyze outside the organizational level (eg, morrison & milliken, 2000). ir research connects voice and silence in the workplace with institutional arrangements such as trade unions, labor laws and regulations, civil society organizations and employers' associations. however, the exclusive ir approach can be seen partially for several reasons. first, despite shifting to direct forms and employee engagement (ackers, 2010), ir studies generally focussed indirect employee voices by ignoring individual or hybrid voice systems that combine trade unions and non-union mechanisms (barry & wilkinson, 2016). only a few studies highlight the increasing importance of informal voice (marchington & suter, 2013; townsend, wilkinson, & burgess, 2013). for example, nonunion sme workers can use family and friendship relationships to modify work conditions (edwards & ram, 2009). associated, irs often prioritize the level of institutional analysis, especially employment regulation, collective bargaining and recent non-union representation (wilkinson et al., 2014). this can cause ir to understate the influence of individual-level factors that ob conveys insight into; for example, employees may feel they are not treated with dignity, even if they are satisfied with other conditions (hodson, 2001) similar to ob / hrm, pluralist ir strains do not always recognize structural contradictions that are rooted to the same extent with more radical perspectives (dundon & dobbins, 2015; edwards, 1986, 2014). voice widely regarded as a good thing for employees because it will be good for the union and managerial effectiveness (goodman, earnshaw, marchington, & harrison, 1998). however, this view may not fully appreciate that employees can remain silence even when the voice mechanism is very broad, perhaps as a form of pressure (eg suffering in silence ) or to correct the effects of inherent power imbalances (eg changing current circumstances) as discussed in the following section (burawoy, 1979; van den broek & dundon, 2012; woodcock, 2017). therefore, pluralist irs underestimate silence as a benefit for employees or as rational and deliberate workers' actions. furthermore, the recent neural "-pluralist" ir (ackers, 2014) lacks coverage when describing situations where employee voices suppress the interests of workers; for example, employees who share knowledge about organizational improvement and processes with management can trigger exploitation through increased workload, reduced autonomy, or job insecurity (adler, 1993). in short, ir research may lack respect for individual-level social processes and psychological traits, informal voice and line management involvement that underlies hrm. that is indeed interesting insights about institutional structures, regulations and other macro-level context factors that can exploit or break patterns. lp voice and silent research offer additional explanatory utilities in these areas, discussed in the next section. voice and silence in the labor process perspective antecedents of sociological lp can help with a more integrative approach by examining the contradictions and tensions in human resource management, by including community strengths and the implications that accompany them on the voice of workers at the organizational level. lp emphasizes that because of labor uncertainty and the potential for conflicting interests, voice and silence can be evident in the form of resistance from individual and / or collective workers (ackroyd & thompson, 1999: 31). theory lp adding that the silence of his employees may manifest in various forms of resistance, bad behavior, or damage, to oppose hr practices is believed to damage the interests of their workers. resistance may stem from concerns surrounding autonomy, skills, manager limits, reconfigured managers, organizational structure and job design. this may involve retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 162 employees who seek 'retaliation' in management for some previous decisions or conditions imposed by withholding information or ideas that can improve work or organizational results, or increase management's ability to control or intensify employee efforts. for example, graham (1993) points out that subaru-isuzu employees deliberately refuse to share work improvement information with management. here, silence effectively limits management's ability to accelerate production lines. thompson (1989: 137) discusses silence by chrysler workers, who follow management's instructions to fit the door on the vehicle, despite knowing that management is sending the vehicle on the telephone in the wrong order. that mistake means expensive correction. van den broek and dundon (2012) found that workers at non-union call centers regulate the flow of information and feedback to customers and management as different actions from employee silence, to 'get back' to managers for tight supervision. woodcock (2017) makes a similar observation. importantly, these may or may not be the actions that employees want to take, but they are embedded in economic and social relationships that are centered on power. in addition to trying to "get-by" in management, " silence " can help workers overcome and 'get-by' in reducing work capacity. for example, employees may feel 'alienated' because they have limited job autonomy and ownership of decisions that affect them and their work (donovan, o'sullivan, doyle, & garvey, 2016; woodcock, 2017). while ob research discusses the influence of managerial beliefs with concern for organizational effectiveness, lp assumes that managerial beliefs can have overall ideological value, so that voice can be considered by managers as an "unwanted barrier of effective work processes" (kaufman, 2014: 19). thus, employers can actively limit the opportunity for employees to air noise as a way to actively consolidate the power of the employer and silence its workers can gain control of managerial standpoint (macmahon et al., 2018: 14). reflecting some extent the ob "psychological safety", workers who recognize negative managerial attitudes towards voice or trade unions can remain silent for 'fear' of retaliation should management view them as troublemakers (artus, 2013). however, unlike ob, lp places these ideas within a broader political economy framework that recognizes structured antagonism related to how people are managed in the workplace. for example, the perceived consequences of voicing to employers are influenced by workers' views of management style, job identity, gender, contract status and job security, legal rights together with the interests of employees at a certain point in time (artus, 2013). for example, at nippon ctv in the delbridge factory study (1998: 132), workers believe management "does not want to hear questions" at meetings. under lp, the uncertainty of labor uncertainty embedded in unbalanced work relationships means that conflict and cooperation coexist (dundon & dobbins, 2015; edwards, 1986; edwards et al., 2006; wright, 2000). the cooperative relationship can motivate employees to suggest ideas to support organizational goals, which reflect ob's notion of a good quality leadermember exchange. however, recognizing structured antagonism also reveals other implications. managers can create a more favorable environment for voicing in certain contexts, even if this is against the manager's interests, to get employee cooperation on other matters. for example, dobbins (2010) describes how managers relax direct control in anguish alumina and give voice work teams a variety of things, ranging from small issues such as vacation scheduling to larger budgeting problems. however, enabling employee voice allows managers to introduce indirect control measures such as performance targets and technical controls. furthermore, silence can occur because employees 'get along' with their work experience through a compromise relationship and cooperation. in dobbins' research (2010), giving a voice to the team (which also included union representatives) triggered fewer conflicts and reduced complaints from 150 per year to 3-4 retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 163 years. besides, staying silence about issues that compete with organizational goals can mean other future assistance from management relating to career development, work-life balance, work assignments or other facilities. in the macmahon et al (2018: 13) study, employees did not speak out against acts of intimidation when they had previous negative experiences about hr procedures that failed to protect employees who voiced their complaints. nevertheless, employees who are 'active' with their work can show the making of a silence attitude: that is, employees do not need to view hr policies as damaging their interests or forming shallow participation. for example, in the study of plant burawoy (1979, 2013), bargaining concession-union workers to give " the illusion " about the involvement of employees. the unit-wage system makes workers compete with coworkers, but also allows them to determine how they carry out their work duties (eg. how much effort is expanded using the piece rate system). however, this system divides workers, damages collective employee representation, and ultimately hides the fact that companies enjoy increased productivity while paying workers very little. nyberg and sewell (2014) also found evidence of an illusory compromise, in which a 'happy family' culture was built to persuade employees that union voice was not needed, which further legitimized managerial control over workers. therefore, lp theory shows a deeper insight into power dynamics that are less visible and how they can be played through hr policies for voice. an important point for ob / hr audiences is that manager-employee collaboration must be understood in the context of different structural strengths and employeremployee interests (edwards et al., 2006; belanger and edwards, 2007). for example, silence as a form of 'cooperation' does not indicate that conflict has been eliminated, and when the interests of employers and employees are harmonized, the conflict persists. likewise, if employees voice concerns cooperatively in supporting organizational goals, the underlying conflict of interest can persist, which can trigger voice in other contexts that damage the organization's goals. likewise, if managers provide deeper employee voices and participation to secure cooperation, structural strength imbalances can persist. as dobbins and gunnigle (2009: 23) note, giving more voice to workers "is a new way to manage contradictions in work relationships and negotiate workplace order. management control is not displaced but re-uses new guises. " lp further adds to the conceptualization of voice and silence by considering broader forces in the capital circuit, such as financialization and globalization. as stated in thompson's (2003) disconnected capitalism thesis (dct), due to volatile markets and economic uncertainties, management's emphasis shifts to financialization, which tends to intensify hr around performance metrics driven by narrow markets (cushen & thompson, 2016). as a result, managers often fail to give their side of the expected agreement (aka psychological contract violations), including denial or simply not being able to provide opportunities for employees to voice. this can trigger collective counter mobilization (eg, through trade unions), or produce a culture of silence either as a form of resistance or withdrawal of employees for fear of managerial retaliation. for example, in artus (2013: 416) temporary workers have little access to union protection, and non-standard contract employees are more likely to remain silence because of insecurity and "permanent fear of opening their mouths". to some extent, silence can be seen as a way to correct erratic conditions and poor working conditions. ramsay's 'cycle of control' (1977: 481) argues that "participation did not evolve from the humanization of capitalism, but appeared cyclically based on tightening conditions in the labor market". therefore, managers are more likely to implement employee voice initiatives to ensure labor compliance when employer authority can be challenged by organized labor, such as during periods of increased union membership. however, ackers, marchington, retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 164 wilkinson, and goodman (1992) questioned ramsay's thesis (1977) because of macro-level social focus. they found that because the organizational level managerial approach was reconfigured from time to time by interactions between many micro and macro-level forces, employee voice initiatives appeared in fluid 'waves' rather than cycles. therefore, when examining how employee voice and silence are shaped by a broader balance of social, political and economic power under capitalism, it is not the only approach and analysis of intraorganization that remains important, including individual values, management choices and institutional regulations. overall, lp analysis has a rich explanation of the contested nature of people management under contemporary capitalism, which adds to the utility of examining silence and voice. it interweaves and integrates with an ir perspective (especially a radical and critical pluralist frame), while also signifying discrete points of intellectual difference. lp helps explain how voice and silence can be an outcome and also the process that employees use to improve the exchange of reward-degrading efforts. amelioration can include workers 'getting back' in management by hiding information; they are willing to 'hang out' with their coworkers and/or employers because of compromise or 'artificial agreement', or they may find themselves 'hanging out' when facing a difficult job. some of the influential forces discussed in lp research relate to ob, for example, managerial attitudes/perceptions, voice impact, voice vanity, and manager-employee exchanges. but, lp adds a valuable analytical lens, based on dynamic contestation of micro and macro-level strength, in antagonistic and unbalanced social relations. one possible way to integrate this debate and problem into a multi-layered voice and silence sensitivity framework is considered next. discussion integrate ir, lp and ob perspectives: into a multi-layered voice and silence framework this article tries to give an overview of the position of ob, ir, and lp on the voice and silence of employees, showing their strengths and weaknesses. in advancing the research agenda in the future, we invite critical pluralist work that integrates ob, ir and lp perspectives to help develop hrm perspectives that are more heuristic than ease of voice and silence. expanding hrm research on " voice " and " silence " research shows that a weak voice system allows the influence of workers that are shallow and narrow, prevents organizations from reaping the full benefits of worker's voice, and can trigger ' silence ' in the long term (cullinane & donaghey, 2014). recognizing variations around the depth, scope, level, and shape of voice mechanisms can help the hr audience, including managers (wilkinson et al., 2014). voice formal and informal often occur simultaneously within the organization (marchington & suter, 2013). hrm, ir and lp perspectives can give more attention to face-toface informal voice, as is more captured in ob research (morrison, 2011). likewise, the ob literature can focus more on the behavior of actors in formal institutions that influence direct and representative voices, including trade unions, work councils, and civil society agents, as discussed in ir / lp. besides, the hrm approach is generally biased towards the voice system initiated by management, but employees are more likely to secure a deeper voice by influencing voice initiation and requirements (barry et al., 2018). combining direct, formal, indirect and informal mechanisms can produce deeper conceptualizations of workers' voices, motives, and variable contested outcomes. finally, the tradition of ir / lp does not need to be an impartial voice of non-union, classified the voice unions as effective and the voice of non-union is not effective, which has been deemed too simple (cullinane & dundon, 2014). although hrm discusses 'employee complaint procedures' and ob research considers alternative voice motives (burris, retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 165 2012; klaas, olson-buchanan, & ward, 2012), this focus is mainly based on the unitary assumptions about the improvement-based voice that support shared interests (barry & wilkinson, 2016). several ob studies note 'organizational pluralism' that reflects the interests of different employer-employees (morrison & milliken, 2000), but too often the ob literature does not integrate cooperatives with conflict dynamics or combine internal and external factors around 'structured antagonism' (dundon & dobbins, 2015; edwards, 1986). conversely, a more critical pluralist perspective emphasizes how employee voice and silence reflect long-lasting structural determinants, which are potentially at odds with employeremployee interests, relational power imbalances, and changes in institutional and legal contexts that affect hr policies and practices. a further consideration is needed in the hrm ob flow from these fundamental structural factors to better explain why employees express voice, regardless of what is deemed necessary to maintain organizational goals, and how employees can challenge management goals with resistance, damage or silence. seeing voice and silence in this way can be considered by the hr audience as undermining management goals, but this depends on the context and, indeed, it can stimulate positive results for the long-term organization. deepening hrm theory about the power that forms " voice " and " silence " the proposed sensitivity framework is graphically depicted in figs. 1, silence bil of goodrich's (1920) 'frontier of control'. this builds and expands the "silence" which is debated by donaghey et al. (2011: 61) through potentially integrative synergies in ob, hrm, ir, and lp, as discussed in the previous section so far. as noted in fig. 1, some of these dimensions overlap between disciplinary boundaries, while others remain distinct and separate. phase 1 describes the formation of interest 'and' antagonism structured 'as the basic principles that form the attitude of " silence " retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 166 and hr practices. ob's contributions include insights into pro-socialbehavior, informal voice, efficacy and safety, making common sense, emotions and the nature and behavior of individuals. also, lp helps understand a variety of contextual influences including market and capitalism influences, management beliefs, depth and scope of voice, skills and gender identity (among others). most important, lp theory links this with structured antagonism and the diverse interests of manager-employees. contributions ir provides a canvas institutional smooth, unpack the dynamic interactions between contexts (eg markets, financialization), actor (eg, unions, management style, country, etc.), process (for example, talks of trade unions, the depth and scope voice, etc.) and results (for example, feminization of work, temporary employment contracts, involvement or satisfaction). this idea encouraged a debate on hr that discussed how managers could balance internal and external forces that compete better under contemporary capitalism, to provide deeper employee voices and protect the sustainability of work practices. factors that influence stage 1 join hr practices between organizations to form the formation of manager or employee interest, voice and silence. most importantly, the effect of such mediation can coexist in the organization simultaneously, depending on the problem (for example, whether it is an employee's concern about wages, hours, etc . ; and suggestions that will make employee work more intense and repetitive), management or supervisory resources (including more latent powers) and the interests of employers or employees. what is important for hr viewers, depends on the unique configuration of phase 1 (eg, management support or opposition to trade unions, market changes, employee supervision support, etc.), the type of hr practice that is applied can differ in various contexts. the interaction between the forces of phase 1 helps explain the voice of sense, the attitude of " silence " the intentional and unintentional, and workers 'return', 'hang out' and 'hang out', as illustrated in phases 2 and 3. voice shallow or weak may cause 'intentional' and 'accidental' silence episodes or cultures. it is this can lead to an attitude of " silence " where workers are trying to 'get back' on their employer; for example by withholding information in various ways. such silence can improve work experience that can be derived but can also reduce productivity and cooperation. collaboration often occurs and coexists alongside dissatisfaction: if not, the relationship will stop over time (johnstone & wilkinson, 2016). thus, employees can pro-actively 'get along' with their work through compromise relationships, without contributing ideas or expressing complaints and being compliant, but do not have to commit to organizational goals. furthermore, workers can deliberately withhold information or be emotionally and psychologically attractive but remain compliant. fear, the potential for retribution and / or vanity in speaking can lead to employee silence (macmahon et al., 2018). to some extent, silence can function as a rational coping mechanism for employees to 'survive' in their work. similarly, employees can engage in ' meaningful voice ' through union bargaining and / or non-union employee representative channels (kaufman, 2014). however, the scope and level of such voices are not static or universal, but elastic and supported by structured antagonism. hr hearings will benefit from a more critical pluralist and integrative approach to explain whether, and if so why, silence workers to 'get back', 'get back' and / or 'get with'. all three actions show that the various interests of workers are not fulfilled and tend to prevent organizations from fully fulfilling their goals either now, or in the future. the task for the policymakers, hr practitioners, and academics ob / ir / lp, is to explore how to meet the interests of a better worker, for example by giving a voice that was initiated by workers more effectively and make the job is not degrading and unsafe. to this end, the sensitivity framework has the potential for broader public policies and the implications of organizational practice. retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 167 the last column, phase 4, describes the results of voice and silence formed by how manager/employee interests, structural antagonisms, and hr policy interventions subsequently mediate the interaction of social relations mentioned earlier in stages 1, 2 and 3. recognizing structural antagonisms can arguably add insight deeper understanding of hr. why employees can express " voice " to challenge management as a dynamic force, as well as to support organizational goals. this is not to judge whether the behavior of employees (or indeed hr managers) is good or bad in mobilizing resources for certain interests. integrative contributions are based on the knowledge generation social science paradigm to develop a heuristic picture of why workers can speak or not by placing hr voice and silence in a multi-level political economy and institutional framework (kaufman, 2014; thompson, 2013; wilkinson et al., 2018). the last column, phase 4, review of voice and silence results compiled by the interests of managers or employees, structural antagonisms, and hr policy interventions then mediate the social relationships discussed earlier in stages 1, 2 and 3. recognize antagonisms that can be said to embellish hr dialogue the deeper. why employees can support voice to challenge management, as well as to support organizational goals. this is not to judge whether employees (or indeed hr managers) are good or bad in mobilizing resources for certain purposes. integrative contributions are based on the social science paradigm of knowledge generation to develop heuristic classifications of workers' speeches that can speak or not by using " voice " and " silence " on the perspective of hr in multi-level political economy and improving work safety (kaufman, 2014; thompson, 2013; wilkinson et al., 2018). conclusions this article reviews the perspectives of ob, ir, and lp to develop a multi-layer and multi-level conceptual framework that can be used by hr academics and practitioners to better understand employee voices, and more important is employee silence. " voice " and " silence " research in the perspective of ob has used, but can be integrated with ir-lp fusion, which connects actors, processes, and institutions, while instilling micro-relationships in the workplace with contexts of change and socio-political continuity and meso-social politics. our framework contributes to understanding " voice " and " silence " as a dynamic interface that combines formal and informal, direct or indirect and structures or institutions in the context of imbalance structural forces and diverse interests. designing a system of " voice " that is effective to provide benefits to workers and organizations in the future requires conceptualization more in what the " voice ", and understand the impact the attitude of " silence " for a different purpose in its own right. this framework discusses voice and " silence " from the perspective of hrm by considering how it reflects 'structured antagonism' as an imbalance of deeply rooted forces that are formed in layers. related, work talks also encourage hr hearings for critical voice criticism given to employees. this includes a discussion of their level, level, and discussion space, how indirect and informal voices can be approved in the form of direct hr and whether employees can start voice practices (barry et al., 2018). second, the framework seeks to explain the situational factors internal and external multi-dimensional and social relationships that form the shape and pattern of silence employees in the context (ie., silence deliberate silence unintentional, voice meaningful). these include ob ideas around pro-social motivation, psychological security, identity, images, group norms, position strength, perceptions, emotions, leadership and colleague relations (morrison, 2011, 2014; morrison & milliken, 2000, 2003 ). nonetheless, the ir / lp's insights on 'structured antagonism' embedded in the management process of people capture the broader external political-economic forces operating under capitalism (thompson, 2013). retracted imam suwandi / finance, accounting and business analysis 1 (2) (2019) 168 this framework also offers deeper meanings of silence, for example, perhaps reflecting the strategies of workers 'getting back', 'getting along' and 'getting-by'. hopefully, this will trigger debate among hr hearings about how to better meet the problems of different workers, for the benefit of employees, organizations, and society. this analysis calls for a future research agenda that examines, refutes and adjusts the source of the influence of the relationship about voice and silence as a resource that can be silence and more veiled. to gain a fuller and deeper insight, future research can be based on a critical pluralist approach that links the actions of micro individuals with the context of meso organization and broader macroeconomic political forces. examining how workers, trade unions, local, state managers, shareholders, consumers and civil society groups form " voices " and " silences " can further enrich the more reflective hr knowledge base. such research can use qualitative and / or quantitative instruments designed to investigate 'why' employees remain silence or 'how' employers limit the voice of employees who socially regulate the form of silence attitudes generated or systematically. ignoring the internal and external challenges facing hr managers about voice and silence also deserves attention to stimulate debate around how to better balance this tension without suppressing employee interests. although ob unitary posture that supports the goals of the organization has been criticized, it does not mean that well-established psychological research methodology has limited appeal. indeed, capturing employee and management attitudes about silence is important and has a valuable contribution to make, but it can benefit from relationships with structured antagonism and macro-level political economy power. a challenge here is still about how to encourage rich interdisciplinary research using a disciplined approach that addresses related phenomena but speak in alternative dialects of meaning and understanding. to this end, future research may explore the " silence " of his employees in connection with the issue and inter-disciplinary methodology that reflects the fragmentation of work, the pressures and demands precarious, flexible working arrangements, the determination of remuneration or wages and the extent to which employers enter, or exclude workers when designing voice settings. we hope this framework offers future research pathways for hr / ob / ir / lp scholars and practitioners to better explore empirical nuances about employee silence . references ackers, p. 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(2000). working-class power, capitalist class interests, and class compromise. american journal of sociology, 105, 957– 1002 retracted 81 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg effect of good corporate governance audit quality management and earnings as a moderating variable wati aris astuti*, sekar mayangsari trisakti university, indonesia info articles abstract history article: submitted 4 january 2021 revised 29 march 2021 accepted 26 april 2021 the purpose of this study to determine the quality of audits in industry companies related to institutional ownership, managerial ownership, independent board, the size of independent commissioner board and audit committee. and also, how earnings management moderate' institutional ownership, managerial ownership, independent commissioner board, the size of the independent commissioner board and the audit committee on audit quality. the design or method in this study uses univariate and multivariate (regression) methods to determine the relationship between good corporate governance and audit quality and earnings management moderation. population and samples from the financial statements of 105 industrial companies listed on the indonesia stock exchange, 2015-2019. the presented findings show that earnings management does not strengthen or weaken good corporate governance on audit quality. keywords: good corporate governance, audit quality and earning management *address correspondence: e-mail: watiaa19@gmail.com wati aris astuti, sekar mayangsari / finance, accounting and business analysis 3 (1) 2021 82 introduction statements of income are reports that represent the company's operating activities in financial terms during a period. this report can be used as a measure of the company's financial performance during a certain period, which is usually one year or one period (subramanyan, 2014: 19). in the financial statements there is information about profit, where profit for investors is an increase in economic t value be distributed through dividend distribution. profit also can be used to measure the performance of company management in a certain period as well as to hold responsibility for managing the resources that have been entrusted to company management or company managers (ardiyansyah, 2014). the importance of earnings information encourages management to pay more attention to the reported earnings figures. earnings information often becomes the target of management's opportunistic actions to maximize its welfare by manipulating the appearance of earnings as desired. this opportunistic action is known as earnings management (setiawati and na'im, 2000). earnings management is a choice of accounting method that is deliberately chosen by management for a specific purpose. earning management is the potential for accrual management to make a profit. the efforts by companies or certain parties to manipulate, such as manipulate information, even take earnings management actions that can cause financial reports to no longer reflect their fundamental value, because financial reports should function as a medium for management communication with external parties or between companies and stakeholders. (halim , 2007). earnings management occurs when managers use their judgment in preparing financial reports which can mislead stakeholders regarding the basic conditions that exist in a company. several studies have shown the possibility of management intervention in the financial reporting process not only through estimation and accounting methods used but also through operational decisions. healy and wahlen (1999), fudenberg and tirole (1995), and dechow and skinner (2000) show earnings management that can be done by managers, that is accelerating sales, changing the delivery schedule, slowing down spending on research and development and spending on maintenance. in the early 21st century, there have been several accounting scandals across europe and the united states such as enron, worldcom and xerox (bassiouny et al. 2016: 91). in enron's case, the company announced a net income for 2001 of $ 393 million, an increase of $ 100 million from the previous period. yet enron did not report any debt of $ 1 billion. this case had a long tail with enron's bankruptcy filing to court and the verdict that kap arthur andersen, the kap that audited enron, was guilty of obstructing the judicial process by destroying enron's bankruptcy documentary evidence (healy and palepu, 2003: 3-26). although in principle, this earnings management does not violate generally accepted accounting principles, this practice can erode public trust in external financial reporting and blocking the competence of capital flows in the capital market (scott: 2015). the manager's actions provide a view that earnings management problems can be minimized by monitoring through good corporate governance. (afifa 2013; prabaningrat 2015). good corporate governance is a set of regulations governing the relationship between shareholders, company managers, creditors, government, employees and other internal and external stakeholders relating to their rights and obligations, or in other words a system that regulates and controls the company. (cadbury committee of united kingdom 1992). since the start of the financial crisis in various countries, especially indonesia in 1997, which eventually turned into the asian financial crisis, which is seen as the result of weak good corporate governance practices in asian countries. tjager, et al., (2003). the failure of several companies and the emergence of financial malpractice cases is an unexpected practice of corporate governance. therefore, in the end gcg became an important issue, especially in indonesia which was felt the worst due to the crisis. also the number of violations committed by issuers in the capital market handled by the capital market and financial institutions supervisory agency (bapepam-lk) shows the low quality of gcg practices in our country. the indonesian gcg general guidelines state that one of the objectives of implementing this guideline will be a reference for companies to implement gcg in order to encourage awareness and corporate social responsibility towards society and environmental sustainability, especially the corporate sector (knkg, 2006). the concept of gcg which is based on agency theory, is motivated by the separation between ownership and control of the company. this separation will cause problems due to differences in interests between shareholders (as principals) and management (as agents) (jensen and meckling, 1976). the mechanism for good corporate governance according to dennis and mc.connel (2003) consists of: managerial ownership is shares held by management personally and shares held by subsidiaries of the company concerned and its affiliates (sudibyo 2013). shleifer and vishny (1986) stated that large share ownership, in terms of economic value, has an incentive to be monitored (sudibyo 2013). institutional dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 83 ownership is share ownership by the government, financial institutions, legal entities, foreign institutions, trust funds and other institutions (alves 2012). institutional ownership has a significant interest in monitoring management because the existence of institutional ownership will encourage more optimal supervision. independent commissioners are one of the cores of good corporate governance who are responsible and responsible for ensuring the implementation of corporate strategy, supervising management in running the company, providing advice to directors, and requiring the implementation of accountability. independent commissioners usually consist of independent commissioners from outside the company (nccg 2001). the existence of an audit committee is accepted as part of corporate governance. even in assessing the implementation of good corporate governance in a company, the existence of an effective audit committee is one aspect of the assessment criteria (purwandari 2011). the blue ribbon committee (1999) recommends that a large number of audit committees is a good step to evaluate management. and financial reporting practices. this has been proven by the research results of rajgopal et al. (1999) and darmawati (2003). the audit committee is responsible for supervising the interests of the company's shareholders and the quality of audits and company financial reports. in conducting supervision in the company, the audit committee requires the role of an external auditor to audit and detect misstatements in the financial statements prepared by company management. jensen and meckling (1976) argue that the audit functions as an important engagement mechanism within the company that can reduce the distance between the interests of the company's shareholders and the company's management. both the audit committee and external auditor are important oversight mechanisms that can weaken the agency costs, manage conflicts of interest, and reduce earnings management. the audit committee and external auditors must be able to exercise effective controls that can reduce the desire of management to manipulate earnings (zgarni et al., 2016). the practice of earnings manipulation in the form of earnings management is carried out by management so that the financial statements look good so that they are able to attract more and bigger investment in company shares. therefore, the role of corporate governance actors such as audit quality is needed to provide a supervisory function within the company in order to limit management behavior to carry out earnings management (chen et al., 2007). although many factors are thought to influence earnings management, the most important thing is the quality of auditors. because the auditor will judge whether a company's financial statements are presented fairly or not. therefore, the role of the auditor is very important in limiting the practice of earnings management. so it can be said that, the better the quality of auditors used by a company, the less likely it is that earnings management practices will occur in that company. this is because, the better the quality of the auditor, the higher the expertise and reputation, and this will encourage the auditor to be more professional in disclosing material misstatements that indicate earnings management practices in a company. this is in line with the research results of nanok, et al. (2008), and guna and herawaty (2010). the quality of audits carried out by public accountants is proxied by the size of the audit firm. the audit quality can affect earnings management (sari and wahidawahti, 2016). the size of audit firm proxied by big six and non big six, with the argument that large audit firm have more superior knowledge, technical experience, capacity, and reputation than smaller audit firms. so, they can prevent profit management from occurring (herustya, 2012). auditors who are specialized in certain industries have a better understanding of the characteristics of the industry, are more compliant with audited auditing standards, and have the ability to detect errors better so that they can reduce accrual earnings management than non-specialized industry auditors (sari and wahidahwati, 2016) . according to jhonson et al. (2002) in nihlati (2014) states that working period will be associated with an increase in discretionary accruals and real earnings management, this is because auditors who have a shorter tenure tend to have higher independence than auditors who have a longer working tenure. from the results of research conducted by johnson et al. (2002), gul et al. (2009), and francis and yu (2009) in sari and wahidahwati (2016), it can be concluded that auditors can gain sufficient understanding of the client's business and industry if the audit assignment period is in the medium period, namely 4-8 years, so that it will be more able to detect if there is earnings management carried out by management in the company because auditors are able to understand the characteristics of management in preparing financial reports. rusmin (2010) examines the relationship between earnings management and auditor quality in singapore by using a cross-sectional modified jones model asmeasuring instrument discretionary accruals. this study was successful in proving a negative relationship between earnings management indicators and auditor quality in singapore. in other words, a better-quality auditor is able to detect the existence of earnings management, which results in a lower level of earnings management. chi, lisic, and pevzner (2011) with a sample using the compustat database found that auditors with industry expertise and belonging to the big n group (large audit firm) generally have higher earnings management. huang and liang (2014) in taiwan found empirical evidence that big 5 audit firm in general has no influence and cannot control the occurrence of earnings management. another way that dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 84 can be used to monitor earnings management is to see the use of good corporate governance in a company. good corporate governance in this case aims to align various interests. referring to several previous studies that until now there has been no single conclusion on the relationship between earnings management and auditor quality with audit opinion there is still no similar conclusion. bartov et al. (2001) stated that there was no significant relationship between auditor quality and audit opinion. whereas johl et al. (2007) stated the opposite, namely that there is a significant relationship between auditor quality and audit opinion. in addition, auditor quality as a moderating variable according to johl et al. (2007) significantly strengthens the possibility of issuing a qualified opinion audit opinion, in contrast rusmanto et al. (2014) stated that the quality of auditors did not strengthen significantly. this gap becomes a challenge for researchers to further test and prove the existence of a significant relationship between earnings management and audit quality. therefore, it can be said that there is still a research gap or there is no similar conclusion from previous studies related to the relationship between earnings management and auditor quality. another development in this research is the use of the good corporate governance mechanism under study. the author uses the mechanism of good corporate governance which is proxied by the variables of institutional ownership, managerial ownership, the proportion of the independent commissioners board, the size of the board of commissioners, and the audit committee. then analyze the effect of these mechanisms on earnings management and their impact on audit quality, whereas the previous research did not examine the five mechanisms of good corporate governance but only examined several mechanisms. like ridlo's (2016) research on the effect of auditor quality and corporate governance on earnings management. independent variables are divided into 3 variables, namely managerial ownership, institutional ownership and the proportion of independent board of commissioners, while the dependent variable is earnings management. this study uses samples from manufacturing companies listed on the indonesia stock exchange (ise) in 2008-2010. the results showed that auditor quality has a significant positive effect on earnings management, managerial ownership and institutional ownership have no significant effect on earnings management. meanwhile, the proportion of the board of commissioners has a significant effect on earnings management. and for audit quality, the writer chose big six and non-big six audit firm while the previous research was conducted in big four and nonbig four audit firms. the benefit of this research is expected to be able to better improve company performance so that earnings management practices can be avoided. in addition, the company can increase the level of confidence of the stakeholders not to carry out earnings management. investors and users of financial statements can provide input to pay more attention to financial statements when investing their capital. for future researchers, it is hoped that these researchers will become a source of knowledge to be useful for the advancement of education and the advancement of the business world. review of theory agency theory according to anthony and govindarajan (2005), principals employ agents to perform tasks for the principal's interests, including delegating authorization for decision making from principals to agents. if the agent does not act in the interests of the principal, there will be conflicts agency(agencyconflict),thus triggering the agency costs(agencycost).one of the obstacles that will arise between agents and principals is the asymmetry of information. according to rahmawati (2007), information asymmetry is a condition in which managers have access to information on company prospects that are not owned by outsiders. corporate governance is based on agency theory. corporate governance is expected to function as a tool to give investors’ confidence that they will receive a return on the funds they have invested. corporate governance is closely related to how to make investors believe that managers will provide benefits for them, where managers will not embezzle or invest into projects that are not profitable due to the capital invested by investors. in addition, corporate governance is also related to how investors control managers. in other words, corporate governance is used to reduce agency costs. (shleifer and vishny, 1997). freeman (1984) concluded that the true purpose of a company is to meet the needs of stakeholders, those who are affected by the decisions made by the company. gray et al. (1995) said that the survival of a company depends on the support of stakeholders, and that support must be sought so that the company must seek that support and influenced by company activities, such as management accountability to stakeholders and audit quality. good corporate governance scott (2015) divides the understanding of earnings management into two. first, see it as the opportunistic behavior of managers to maximize their utility in the face of compensation contracts, debt contracts and political costs. second, by looking at earnings management from the perspective of efficient dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 85 contracting (efficient earnings management), where earnings management gives managers the flexibility to protect themselves and the company in anticipating unforeseen events for the benefit of the parties involved in the contract.mechanisms good corporate governance : institutional ownership (beiner, et al., 2003 (faizal, 2004), managerial ownership (tunggal, 2002: 13), proportion of independent commissioners and board of commissioners size (tunggal, 2002: 25: jensen, 1993), audit committee in accordance with kep. 29 / pm / 2004 earnings management scott, 2015: healy and wahlen, 2001, the concept of earnings management has two accrual concepts, those are the discretionary accrual concept and the non-discretionary accrual concept. recognition of accruals of profit or expense which is free and unregulated and is the choice of management policy non-discretionary accrual is the recognition of accruals of profit that is reasonable and subject to a generally accepted accounting standard or principle. referring to the risks arising from earnings management, previous research has trying to formulate a detection model for earnings management. several previous researchers as summarized in dechow et al. (1995), namely: 1. healy model healy (1985) conducted a test of earnings management by comparing the average total accruals against earnings management variables, which then divided the sample into three groups. 2. deangelo model deangelo (1986) conducted a test on earnings management by calculating the first differences in total accruals, and assuming the first differences have zero expectation values with the initial hypothesis that there is no earnings management. this model uses total accruals from the previous period as a measure of non-discretionary accruals. 3. jones model jones (1991) proposed a model in which non-discretionary accruals are not assumed to be constant. the model tries to take into account the effect of changes in the company's economic conditions on nondiscretionary accruals. 4. modified jones model dechow et al. (1995) this model is designed to eliminate the tendency of the jones model (jones, 1991) which measures discretionary accruals with error when discretion is executed with revenue. apart from the four models above, there are still several other model modifications such as the ross-sectional modified jones model (dechow et al., 1995), the cfo modified jones model (kasznik, 1999), the performance-matched discretionary accruals model (kothari et al., 2005) and the f-score by dechow et al. (2011). measuring and calculating accrual earnings management using the revenue discretionary model approach (stubben 2010). audit quality becker, 1998: ahadiat, 2011; watts and zimmerman, 1986, companies with higher audit quality are expected to be able to employ professionals who can develop more effective tests to detect earnings management. auditors are expected to limit and reduce earnings management and help to increase the confidence of shareholders and users of financial statements. company size. according to sabrinna (2010) institutional ownership is the ownership of shares by the government, financial institutions, legal entities, foreign institutions, trust funds and other institutions at the end of the year. generally, the percentage of ownership of institutions will be higher than individual ownership, so that institutional ownership has a greater influence than other individual ownership. with a high share of ownership, institutional ownership can monitor the audit process. institutional investors will demand high quality information from companies, besides that investors tend to choose quality auditors to ensure that the invested funds are used appropriately. according to (sharma, 2004) in pratama (2013), an increase in the presentation of institutional ownership will tend to lowering the cheating rate. so the higher the percentage of ownership by an institution to a company. based on the description above, the hypothesis is as follows: h1: institutional ownership has a positive effect on audit quality. based on agency theory, problems often occur between company owners and company management due to differences in interests within the company. this problem of interest causes the importance of a mechanism that is useful for protecting the interests of shareholders (jensen and meckling, 1976) in liftiani (2014). managerial ownership is a company investment by company management, company directors, or parties who have the authority to carry out company operations. this type of ownership is not as popular as the other holdings. as a result, not many companies are found to have this type of ownership in their ownership structure (pratama, 2013). based on the description above, the hypothesis is as follows: dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 86 h2: managerial ownership has a negative effect on audit quality the ‘proportion of independent board of commissioners’ who is separated from the party management has the main responsibility to supervise management performance. many independent commissioners boards will demand higher quality from external auditors, resulting in higher audit costs. this suggests that companies with strong governance structures tend to seek higher quality audit services to protect the reputation of the company and protect shareholder wealth. higher audit quality demands higher audit fees (rizqiasih, 2010). based on the description above, the hypothesis is as follows: h3: the proportion of the board of independent commissioners has a negative effect on audit quality. the size of the board of commissioners plays an important role in monitoring and supervising management (jensen in yatim et al 2006). beasley (1996) suggests that the number of commissioners will significantly influence the possibility of fraud in financial statements. if the number of commissioners increases, the possibility of fraud in financial statements also increases. this is in line with jensen's (1993) research in hazmi and suharno (2013) which argues that there are difficulties in organizing and coordinating a large number of commissioners. based on the description above, the hypothesis that is formed is as follows: h4: the proportion of the board of commissioners has a positive influence on audit quality according to soliman and elsalam, 2012: manita et al., 2010, in fahmi. 2011, regarding the quality of the audit process which is an empirical study with the audit committee, it was found that there are 4 indicators that influence the audit process, namely: communication and collaboration with the audit committee, understanding of the company's business scope, reliability in identifying risks, and relevance to existing risks. so that it can be explained that companies that have an audit committee with good financial reports or experience in conducting a good audit process generally provide the effectiveness of the audit committee so as to produce adequate audit quality compared to an audit committee that does not have similar experience. based on the description above, the hypothesis that is formed is as follows: h5: the audit committee has a positive influence on audit quality. institutional investors have the ability to provide effective supervision so as to reduce the opportunistic attitude of management to carry out earnings management (putri and sofyan, 2013: 3), the manager's motivation to do earnings management will also decrease if the auditor who will audit the company's financial reporting is a specialized auditor. amijaya and prastiwi (2013) found that industry specialist auditors as financial report supervisors can hinder earnings management. based on the description above, the hypothesis is as follows: h6: earnings management strengthens the relationship between institutional ownership and audit quality. hidayati and ratnasari, 2012, ownership of shares owned by management is believed to be effective in making managers display financial conditions in accordance with reality (natalia, 2013). indriani (2010) in their research shows that managerial ownership has a negative effect on earnings management. anggi and nazar (2015) in their research show that managerial ownership has a negative effect on earnings management. it is believed that the participation of qualified auditors who audit the company's financial reports can minimize earnings management practices. setiawan and fitiriany (2011) found that auditor specialization has a negative effect on the number of discretionary accruals (earnings management). based on the description above, the hypothesis that is formed is as follows: h7: earnings management strengthens the relationship between managerial ownership and audit quality. national committee for governance policy, 2006: 13, the board of commissioners has the responsibility to oversee the quality of the information contained in the financial statements (agustia 2013: 29). the more the number of independent commissioners boards, the better the quality of the financial statements, which means the less likely there is earnings management (susanto, 2013: 160). high quality auditors are more trusted than unqualified auditors due to the assumption that qualified auditors will maintain their creditability so that they are more effective in carrying out the audit process (naftalia and marsono, 2013). based on the description above, the hypothesis is as follows: h8: earnings management strengthens the relationship between the independent board of commissioners and audit quality. boediono (2005) explains that based on agency theory, the board of commissioners is considered dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 87 the highest internal control mechanism, which is responsible for monitoring the actions of top management. supervision is carried out so that the tendency of managers to perform earnings management is reduced so that investors will continue to give confidence to invest in the company. midiastuty and machfoedz (2003), nasution and setiawan (2007), kusumawati et al. (2013) provide empirical evidence that the size of the board of commissioners has an effect on earnings management practices carried out by management. based on the description above, the hypothesis is as follows: h9: earning management strengthens the relationship between board size and audit quality. wedari, 2004, examining the effect of the audit committee on earnings management, it was found that the audit committee had a positive effect on earnings management, which means that the audit committee had not succeeded in reducing earnings management. several previous empirical studies (palmrose, 1988; teoh and wong, 1993; bauwhede et ai., 2000) have concluded that auditors with high reputations are able to limit earnings management behavior by managers. based on the description above, the hypothesis that is formed is as follows: h10: earning management strengthens the relationship between the audit committee and audit quality. research design sample collection the population in this study are manufacturing companies listed on the indonesia stock exchange (ise) for the period 2015 2019. sampling in this study was taken based on certain criteria that are thought to represent the population in the study. the sampling technique used in this study was purposive sampling technique. this study is a company that has the following criteria: 1. manufacturing companies listed on the indonesia stock exchange 2. companies publish audited financial reports 3. companies use rupiah currency in their financial statements 4. the company has complete data related to measurement variable good corporate governance, earning management and qualification audit. the type of data used in this study is secondary data, those are manufacturing companies that publish financial reports in the 2015-2019 period. collecting data in this study using the documentary method, by collecting data in the form of financial report documents published in www.idx.co.id measurement of variables the independent variables in this study are institutional ownership, managerial ownership, the proportion of independent board of commissioners, size the board of commissioners and the audit committee. 1.institutional ownership institutional ownership is the proportion of shares owned by institutions such as insurance companies, pension funds or other companies which is measured by a percentage calculated at the end of the year. number of shares owned by institution total shares outstanding 2.managerial ownership managerial ownership is the shareholder of management who actively participates in company decision making (directors and commissioners). managerial ownership is measured by the percentage of shares owned by managers. number of shares owned by management total shares outstanding 3.proportion of the board of independent commissioners independent commissioners are members of the board of commissioners who are not affiliated with management, members of the board of commissioners and controlling shareholders, and are free from business or other relationships that may affect their ability to act independent or acting solely for the benefit of the company according to knkg (2004). the proportion of independent commissioners is calculated using the percentage of independent commissioners compared to the total number of commissioners. http://www.idx.co.id/ dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 88 members of the board of commissioners from outside the company all members of the board of commissioners of the company number of independent commissioners must represent at least 30% of the total number of commissioners in the board of commissioners (bapepam-lk regulation number ix.i.5). 4. board of commissioners the size of the board of commissioners is the number of members of the company's board of commissioners. the board of commissioners is measured using an indicator of the number of commissioners of a company (beiner et. al.) 5.audit committee based on the jse circular, se-008 / bej / 12-2001, the membership of the audit committee consists of at least three people including the chairman audit committee. there is only one member of this committee who comes from the commissioner, the committee member who comes from the commissioner is an independent commissioner of a listed company as well as the chairman of the audit committee. other members who are not independent commissioners must come from external independent parties. dependent variable the dependent variable is auditor quality. an auditor is someone who has certain qualifications in auditing the financial statements and activities of a company. audit quality in this study is measured by proxy for the size of the audit firm where the auditor works, which is divided into big six and non-big six audit firm as in the study (susiana and herawaty 2007). audit quality is measured on a nominal scale through dummy variables. number 1 is used to represent companies that were audited by big six audit firm and number 0 is used to represent companies that were not audited by non-big six audit firm. moderation variable the moderating variable in this study is earnings management, which is deliberate errors or omissions in making reports on material facts or accounting data so that it is misleading when all the information is used to make judgments that will eventually cause the person reading it to change or change their opinion or decision. the indicator that the author uses to measure this variable is the jones model developed by stuben (2010), measuring and calculating accrual earnings management using the revenue discretionary model approach (stubben 2010). the following is the formula for the revenue discretionary model (stubben 2010): revenue model δarit = α + β1 δr1_3it + β2 δr4it + e in this case: δar = receivables in the fourth quarter δr1_3 = revenue in the first three quarters δr4 = fourth quarter income. ε = error control variable control variable is a variable used as a comparison whose function is almost the same as the independent variable. a. the company size motivation for researchers to enter firm size is the political cost hypothesis (watts and zimmerman, 1986), that several large companies are often the target of political action that may incur costs, this condition encourages managers to choose accounting methods that avoid or reduce costs arising from these political actions. the firm size variable is measured using the natural logarithm of total assets (rajgopal., 1999; peasnell, 2000; chtourou, 2001). 𝑆𝑖𝑧𝑒 = ln (𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡) b. the leverage motivation for the researcher to include leverage is the debt covenant hypothesis (watts and zimmerman, 1986), that earnings management is carried out to avoid breaching debt covenants which may cause costs to the company. the leverage variable is measured by the ratio of total debt to total assets (deanggelo et al., 1994; defond and jiambalvo, 1994; peasnell, 2000; chtourou, 2001). this variable is a dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 89 mechanism that can be used to reduce opportunistic management behavior. jensen (1976) states that corporate debt is a mechanism to unify the interests of managers and shareholders, debt provides a signal about the status of the company's financial condition to meet its obligations. debt.ratio = 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡/𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 c. profitability sudarmadji and sularto, 2007 stated that profitability is an aspect of manager performance when managing assets intended to generate profits. a high level of profitability indicates the success and monitoring of the company is carried out well, so that with low profitability it identifies the company's performance is not good in the eyes of principal. so, it can be said that the higher profitability ratio the better management of its assets to generate profits. in the future, it is hoped that it can attract investors' interest, besides that the amount of return is considered to be greater and the higher the ratio obtained the better the management asset. the analysis data the analysis used in this study is a linear regression analysis model using hypothesis testing. linear regression analysis is to determine the direction of the relationship and the amount of influence between the independent variable and the dependent variable and to predict the value of the dependent variable if the independent variable experiences an increase or decrease (suharyadi and purwanto, 2009). for determining the effect, it can be made in a multiple regression equation. the multiple regression model equations in this study are as follows: hypothesis 1,2,3,4,5: ka = β0 + β1ki + β2km + β3dki + β4dk + β5km + β6lv + β7up + β8 roe + e hypothesis 6,7,8 , 9,10 ka = β0 + β1ki + β2km + β3dki + β4dk + β5km + β6ki * ml + β7km * ml + β8 dki * ml + β9dk * ml + β10km * ml + β11lv + β12up + β13roe + e description: ka: audit qualification β0: constant β1-5: independent variable coefficient β1-5: moderate variable coefficient β6-10: moderated regression coefficient for independent variables β6-8: control variable coefficient β11-13: control variable coefficient e: error descriptive statistics are part from statistics that study the collection and presentation of data so that it is easy to understand. classical assumption test, normality test, multicollinearity test, autocorrelation test and heteroscedasticity test, regression feasibility test, and hypothesis test. results table 1. descriptive statistics variable obs mean st. dev min max institutional ownership 505 .2619 .19161 .00 1.00 managerial ownership 505 .7381 .19161 .00 1.00 independent commissioners 505 .8768 .31921 .30 1.67 board of commissioners 505 4.0297 1.77871 2.00 10.00 audit committee 3.0495 505 .43132 2:00 5:00 audit quality .9802 .13946 505 .00 1.00 earnings management 1.9138 1.70731 -8.20 505 20.44 leverage 4.4838 79.25594 -225.04 1763.79 505 profitability 505 .0414 .09811 -.55 .72 company size 28.2806 1.64214 22.76 33.51 505 the main variable used in this research is institutional ownership, which has a value of 505 observations of data, with a minimum value of 0.00, a maximum value of 1.00, this shows that the dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 90 company in this study has institutional shares with a minimum of 0.00 and a maximum of 1.00, and an average value of 0.2619. and the standard deviation value of 0.19161, this means that the institutional company has an average of 0.2619 of all shares company. share ownership by large institutional parties can accelerate company management to provide voluntary disclosures, because institutional investors are considered as sophisticated investors so that they can perform their monitoring function more effectively and do not easily believe in manipulation. managerial ownership has an observational value of 505 data, with a minimum value of 0.00, a maximum value of 1.00, this shows that the company in this study has managerial shares with a minimum of 0.00 and a maximum of 1.00 and an average value of 0.7381 and a standard deviation of 0.19161. this means that the managerial company owns an average of 0.7381 of all company shares. share ownership by large managerial parties can accelerate the presentation of voluntary disclosures because investors are considered. the proportion of the independent board of commissioners has an observational value of 505 data, with a minimum value of 0.30, a maximum value of 1.67, this shows that the company in this study has a board. independent commissioners with a minimum of 0.30 and a maximum of 1.67 and an average value of 0.8768 and a standard deviation of 0.31921, this means that the company has an independent board of commissioners on average 0.8768 of the total number of commissioners. this shows that the sample companies have complied with bapepam regulations which require that a percentage of the presence of independent commissioners is 0.8768 on the board. the large number of independent commissioners in the company can be a control over company policy. the size of the board of commissioners has an observational value of 505 data, with a minimum value of 2.00, a maximum value of 10.00, this shows that the company in this study has a board of commissioners with a minimum of 2.00 and a maximum of 10.00 and an average value of 4.0297 and a standard deviation value of 1.77871. , this means that the company has an average board of commissioners of 4.0297 of the total number of members of the existing commissioners board . this shows that the sample companies have met bapepam regulations which require a percentage of the presence of a board of commissioners to be 4.0297. the audit committee has an observation value of 505 data, with a minimum value of 2.00, a maximum value of 5.00, this shows that the company in this study uses an audit committee with a minimum of 2.00 and a maximum of 5.00 and an average value of 3.0495 and a standard deviation of 0.43132. this means that the companies in the sample of this study were only 3.0495 companies that held audit committee reports the most. audit quality has an observation value of 505 data, with a minimum value of 00, a maximum value of 1.00, and an average value of 0.9802 and a standard deviation value of 0.13946. (out of 505, there are 495 companies that have a value of 1 and the remaining 10 companies have a value of 0). this means that the companies in the sample of this study are only 0.9802 companies that use quality auditors or are included in the big six group, while the rest still use non big six auditors. the use of qualified auditors will reduce the company's opportunity to commit fraud in presenting inaccurate information. earnings management is carried out using the stuben model which has an observational value of 505 data, with a minimum value of -8.20, a maximum value of 20.44, with a negative minimum value and a positive maximum, this shows that there is an increase in profit that occurs in the companies in this study sample. this shows that the major management actions taken by companies in reporting earnings are by choosing accounting methods that can increase profits. the average value is 1.9138 and the standard deviation value is 1.70731. leverage has an observational value of 505 data, with a minimum value of -225.04, a maximum value of 1763.79, this shows that the company has a total long-term debt that is smaller than total assets, this means that the company's ability to pay off long-term liabilities using assets is quite high and the average value of 4.4838 and the standard deviation value of 79.25594. the average value of 4.4838 shows that on average the company has total long-term debt less than total assets, which means the company has the ability to pay off its obligations using assets. profitability has an observational value of 505 data, with a minimum value of –0.55, a maximum value of 0.72 and an average value of 0.0414 and a standard deviation of 0.09811. this shows that the company has profitability with a minimum value of 0.55 and a maximum of 0.72. company size has an observational value of 505 data, with a minimum value of 22.76, a maximum value of 33.51 and an average value of 28.2806 and a standard deviation value of 1.64214. this value shows that the average company in the sample of this study has assets of 28,2806 billion in rupiah. there is a sample that has the highest assets of 33.51 billion in rupiah and the sample has the lowest assets of 22.76 billion in rupiah. companies in the sample of this study are classified as small companies, because according to nurkhin (2009) a company is categorized as large if it has total assets of more than 1 trillion, and medium companies have total assets greater than 100 billion and smaller than 1 trillion, while small dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 91 companies have assets in below 100 billion. table 2. regression results ka = β0 + β1ki + β2km + β3dki + β4dk + β5km + β6ki * ml + β7km * ml + β8 dki * ml + β9dk * ml + β10km * ml + β11lev + β12size + β13roe + e variable pred.sign coefisient t count sign. ki (+) .106 3,267 .001 * km (-) -.106 -3.299 .001 * dki (-) -.033 -1.474 .141 dk (+) .011 2,449 .015 * km (-) .006 . 424 .672 ki * ml (+) . 032 1,218 .224 km * ml (-) -.032 -1,218 .224 dki * ml (-) -.016 -1,212 .226 dk * ml (+) .001 .595 .552 km * ml (-) -. 002 -.280 .779 lv (-) -1.974 -.245 .807 up (-) -.001 -.151 .880 roe (-) -.025 -.377 .706 prob (statistic) 1.964 adj r square 0.18 std.error .13818 n 505 * significance at 5% level information: ki : institutional ownership ka : audit quality km : managerial ownership ml : profit management dki : independent board of commissioners lv : leverage dk : board of commissioners up : company size km : committee audit roe : return on earning by using the 0.05 value obtainedt is tarithmetic with ttable amounted to 1,964, thus the significance t value is greater than ttable or 3,267> 1,964, this means that significantly influence the institutional ownership audit quality. institutional ownership has a very low relationship with audit quality. the positive correlation coefficient indicates that adequate institutional ownership tends to be followed by an increase in audit quality. while the control variable, namely leverage, shows a t value of -.245 with a significance level of .807, profitability shows a t value of -.377 with a significance level. 706 and company size which shows the t value of -.151 with a significance level of .880. both leverage, profitability and firm size do not have a significant effect on audit quality because the level of significance is greater than 0.05. by using the 0.05 obtained t value with ttable amounted to -1964, thus the significance t value is greater than ttable or -3267> -1.964. this shows that managerial ownership has a significant effect. the managerial ownership has very low correlation on audit quality. the correlation coefficient is negative, indicating that more adequate managerial ownership tends to be followed by a decrease in audit quality. while the control variable, namely leverage shows a t value of -.245 with a significance level of .807, profitability shows a t value of -.377 with a significance level of .706 and company size which shows a t value of -.151 with a significance level of .880. both leverage, profitability and firm size do not have a significant effect on audit quality because the level of significance is greater than 0.05. by using the 0.05 obtained t value with ttable amounted to 1,964, thus the significance valuet is smaller than ttable or -1474 <-1964, this means that the independent commissioner board does not affect the quality. the independent board of commissioners has a very low relationship with audit quality, meaning that the correlation coefficient is negative, indicating that a more adequate independent board tends to be followed by a decrease in audit quality, while the control variable, namely leverage, shows a t value of -036 with a significance level of .971, the profitability shows the t value of -.670 with a significance level of .503 and the size of the company which shows the t value of -.606 with a significance level of .545. both leverage, profitability and firm size do not have a significant effect on audit quality because the level of significance is greater than 0.05. by using the 0.05 obtained t value with ttable amounted to 1,964, thus the significance valuet is greater than ttable or 2,449> 1,964, this means that boc significant effect on audit quality. the board of commissioners has a very low relationship with audit quality. the correlation coefficient is positive, this is because the more commissioners, the better the quality of the supervisory process carried out by the board dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 92 in a company that demands quality audit results with qualified auditors in the company, while the control variable, namely leverage, shows a t value of -. .036 with a significance level of .971, profitability shows a t value of -.670 with a significance level of .503 and company size showing a t value of -.606 with a significance level of .545. both leverage, profitability and firm size do not have a significant effect on audit quality because the level of significance is greater than 0.05. by using the 0.05 obtained t value with ttable amounted to 1,964, thus the significance t value is smaller than ttable or 0424 <1964, this means that the audit committee no significant effect on audit quality. audit committees have a very low relationship with audit quality. the positive correlation coefficient indicates that an adequate audit committee tends to be followed by an increase in audit quality. while the control variable, namely leverage shows a t value of -.119 with a significance level of .905, profitability shows a t value of -703 with a significance level of .483 and company size which shows a t value of -1.422 with a significance level of .156. both leverage, profitability and firm size do not have a significant effect on audit quality because the level of significance is greater than 0.05. from the results of the spss output above, it shows that the influence of the influence of earning management on audit quality and moderate influence is not significant (<0.05), which means that earnings management is not suitable to be a moderating variable (not a moderating variable). this shows that earning management is not able to be a moderating variable between the independent variables, namely: institutional ownership, managerial ownership, independent board of commissioners, board of commissioners and audit committee with the dependent variable, it is audit quality. these results indicate that good or bad earning management will not be able to strengthen or weaken the relationship between institutional ownership, managerial ownership, independent board of commissioners, board of commissioners and audit committee with audit quality. discussion from the results of hypothesis testing that has been conducted, there are found as follows: 1. institutional ownership has a significant positive effect on audit quality. this shows that institutional ownership has an effect on audit quality, meaning that the existence of share ownership by the institution is able to produce quality audits. 2. managerial ownership has a significant negative effect on audit quality. this shows that managerial ownership has an inverse effect on audit quality, it means that adequate managerial ownership of shares tends to result in reduced audit quality. 3. the independent commissioners board has no effect on the quality of the audit, this shows that the independent board of commissioners is not influenced by quality audits 4. the board of commissioners has a significant positive effect on audit quality, this shows that the presence of the board of commissioners can produce quality audits, this is because the more commissioners, the supervisory process carried out by this board will have higher quality in a company that demands quality audit results with qualified auditors in the company. 5. the audit committee has no effect on audit quality, this is because although the audit committee in the company exists it will not affect the use of qualified auditors. 6. hypothesis testing shows that the moderating variable states that earning management is unable to be a moderating variable between the independent variables, such as institutional ownership, managerial ownership, independent commissioners board, board of commissioners and audit committee with the dependent variable, audit quality. these results indicate that good or bad earning management will not be able to strengthen or weaken the relationship between institutional ownership, managerial ownership, independent commissioners board, board of commissioners and audit committee with audit quality. conclusion this study aims to obtain empirical evidence of the effect of good corporate governance on audit quality with earnings management as a moderating variable. this study used a sample of 105 manufacturing companies listed on the indonesia stock exchange for the period 2015-2019. the companies with institutional ownership, managerial ownership and board of commissioners are proven to have a significant effect on audit quality, while independent boards of commissioners and audit committee have no effect on audit quality. companies that apply good corporate governance to audit quality with earnings management as a moderating variable cannot be a moderating variable. companies that apply good corporate to audit quality with control variables have no effect on audit quality. this research will be very useful, if the results of the analysis can be used as a consideration for improvement academics, companies, investors, and future researchers are expected to re-test the same research by adding a larger number of samples and not only using manufacturing companies and using a dimiter nenkov / finance, accounting and business analysis 3 (1) 2021 93 longer period so as to provide evidence that the company's goals can be achieved, one of which is improve the quality of 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(2016). effective audit committee, audit quality and earnings management. journal of accounting in emerging economies, 6(2), 138–155. https://doi.org/10.1108/jaee-09-2013-0048 18 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg covid-19 influence on the digitalization of travel agencies' training policy nikola tanakov1, daniel parushev2, angel stoykov3 1department of regional development, university of national and world economy, sofia, bulgaria 2department of management, university of national and world economy, sofia, bulgaria 3department of economy of tourism, university of national and world economy, sofia, bulgaria info articles abstract keywords: tourism, covid-19, impacts, recovery, sustainability, crisis, digitalization, transformation objective: the article authors aim to make an extensive review of the current literature to clarify the conceptual apparatus and the difference between travel agencies and their users, as well as to trace the extent to which digitalization supports the communication between them from the covid -19 transformation opportunities impact. to achieve this, the authors will first look at why and how covid-19 can be an opportunity for transformation, discussing the circumstances and issues which are raised by the pandemic. methodology: the article authors use a questionnaire to show in percentage terms the extent to which digitalization transforms and whether it improves communication between stakeholders. this type of research is the most widespread, because the feedback from the respondents can be assessed the fastest and to measure their satisfaction with the services in all areas of tourism, but especially in terms of tourist communication. the popularity of this method is due on the one hand to the different forms of conducting a survey (classic questionnaire, graphic questionnaire, mobile application), as well as the variety of means by which the method can be applied (electronic survey, paper survey, telephone survey). surveys are widely recognizable among consumers, and they are generally open and willing to answer questions, especially if they are popular, attractively designed, timeconsuming and easy to complete. the survey is among the methods that are suitable for constant, daily receiving feedback and measuring satisfaction. in order the survey to be effective, the authors of the article make an electronic version in which the risk of making a statistical error that would divert or change the rate of regression or decline is reduced. the survey was successfully conducted due to the current topic of the article and the motivation of the respondents. correctly filled in questionnaires are 100 in number and they include not only travel agents but also their long-term users, the results are illustrated in the form of graphs, cakes, and are calculated in percentage so that one can confirm from the hypotheses that the authors set at the beginning of the study. results: the article will also look at the main impacts, behaviors and experiences by three major tourism stakeholders (tourism demand, supply and destination management organizations and politicians) during the three phases of covid-19 (response, recovery and reset). implication: in this way, this article identifies the basic values, institutions and suggestions which the tourism industry and the scientific community must challenge and break in order to advance and zero the boundaries of research and practice. this provides an overview of the type and scale of tourism impacts and the covid19 implications in the tourism field. *address correspondence: e-mail: ntanakov@unwe.bg1, d.parushev@unwe.bg2 angel.stoykov@unwe.bg3 finance, accounting and business analysis 4 (1) 2022 19 introduction covid-19 (declared as a pandemic by the who, march 12, 2020) has a significant impact on global economic, political, socio-cultural systems. health communication strategies and measures (e.g. social distancing, travel and mobility prohibitions, community blocking, stay-at-home campaigns, self or compulsory quarantine, congestion reduction) have stopped global travel, tourism and leisure. as a highly vulnerable industry to numerous environmental, political, socio-economic risks, tourism has become accustomed and has become resilient to recovery (novelli, gussing burgess, jones, & ritchie, 2018) from various crises and outbreaks (e.g., terrorism, earthquakes, ebola)., tors, zika). however, the nature unprecedented circumstances and impacts of covid-19 shows the signs that this crisis is not only different but may have profound and long-term structural and transformational changes in tourism such as socio-economic activity and industry. in fact, this global and enormous scale, multidimensional and interconnected impacts challenging current values and systems leading to a global recession and depression are the most distinctive features of this pandemic. the covid-19 impact on tourism will be uneven in the space and time, and in addition to the human tool, estimates show a huge and international economic impact: international tourist arrivals are estimated to fall to 78%, leading to a loss of $ 1.2 trillion from tourism export earnings and 120 million direct redundancies in tourism, a sevenfold impact from 11th september and the biggest drop in history (unwto, 2020). as one of the most important global employers (1 in 10 jobs are directly related to tourism, unwto, 2020) and the main contributor to gdp for several countries, tourism and covid-19 are the epicenter of all international discussions and economies. within the thriving industry discussions and tourism and covid-19 research, there is a unanimous invocation to see and use the pandemic as an opportunity for transformation (mair, 2020). the industry must not only recover, but also rethink and reform the next normal and economic order, while researchers must not use covid-19 solely as another context to replicate existing knowledge to measure and forecast the impact of tourism (gössling, scott , & hall, 2020; hall, scott and gossling, 2020). although, such studies are important for pandemic management, they do not increase knowledge and / or take the industry a step further. in addition, due to the interrelated socio-cultural, economic, psychological and political impacts of covid-19 on such a scale, unforeseen trajectories are instead expected historical trends and the predictable strength of "old" explanatory models may not work. in addition, there is sufficient evidence to argue that both the tourism industry and research have matured well, providing sufficient knowledge on how to study and effectively: (1) design and implement recovery and response strategies in crisis (e.g., mckercher & chon, 2004); (2) building resilience to deal with future crises (hall, prayag, & amore, 2017). literature review the authors of the article give a brief retrospective of the basic theoretical concepts in this field "tourism" and "travel" which are synonymous and are often used to carry out activities related to recreation, but they have a different meaning. the generally accepted definition by the academic community of the term "travel" is a word that implies moving from one point to another for a specific purpose, be it work or any other. the term 'tourism', on the other hand, implies travel from one point to another, but includes residence for a certain period or includes several trips to certain destinations, which takes place outside the usual place of residence. "every type of tourism is a trip, but not every trip is a type of tourism" this predetermines the difference between the two concepts. a person may be sent on business to a certain destination, which may have various attractions, historical sites, lakes, but his main task is work. such a person is defined as a “potential tourist” (velikova, elenita, kaleychev, svetoslav (2016) introduction in tourism pp. 19-22.) there is one peculiarity in the field of the tourism industry for the most part the tourist product reaches the end user through intermediaries. in their turn, form a distribution channel that aims to transform goods, services, experiences and also from one form that would not be attractive to consumers, to another that they would prefer. unlike other industries in tourism, the enterprises connecting the site (tourist place) and the subject (tourist) are part of the tourist industry. the active functioning of the considered economic entities on the tourist market is a consequence of the massification of tourism and the intensive relations between supply and demand on the tourist market. the need for intermediaries in tourism is determined by: • the territorial remoteness and remoteness between the demand and supply of tourist services; • lack of market transparency; • lack of sufficient time, real opportunities and accumulated experience on the part of the finance, accounting and business analysis 4 (1) 2022 20 majority of users; • need for advance booking due to limited capacity; • immobility, etc. "spatial and temporal fortification" of the tourist service. this need `has an objective in nature and can be met only in an organized manner with strict consideration and real combination of economic interests of different participants in market relations. (neshkov, marin. travel agency and transport in tourism, varna, 2007, p.12 ) travel intermediaries can be divided into two main types in the difference of their activity tour operator, abbreviated tour operator and travel agent, abbreviated travel agent. after a brief theoretical review of scientific authors such as m. coltmant, m. neshkov, m. yaneva and others and considering the basic definitions and set features of tourism activities, for the needs of current research, the authors define the travel agent as a "business unit (natural or legal person") mainly intermediary activity, which is realized by paying commissions for the sale of package services ("produced" by the tour operator or single trips, use of leisure time, tourism, etc.) hypotheses development and research methods according to the mentioned theoretical and conceptual framework and based on the study’s problem, questions and objectives, our hypotheses are placed as follows: hypotheses (1): the covid-19 consequences build a barrier and mistrust between consumers and travel agents in the last two years and do not provide tourists with the opportunity to freely express their views on the bulgarian tourism business and actively use complaints as a source of information to improve service or product. hypotheses (2): successful digital communication from the impact of covid-19 creates conditions and opportunities for improving the presentation of products and services that enhance the image of the tourism business in bulgaria. findings the tourism industry has become one of the fastest growing sectors of the economy worldwide. it is identified as a key factor in developing countries and as a key element in shaping socio economic progress. (lam, jason m.s., tan, seng huat, oh, yit leng (2013) exploring internet influence towards travel satisfaction, 1-3.) much of the rapid development of the tourism sector is due to several key factors, namely higher income of the population, increased use of free time, decreasing travel costs, easy access to tourist destinations, digitalization of tourist services, etc. in the last few years, the unprecedented epidemiological situation has confronted the tourism industry, both in bulgaria and worldwide, with one of its biggest crises. according to the world travel & tourism council and their survey of 185 countries and 25 world regions in 2020. employed in the field of tourism are about 272 million people, compared to 2019, where they were about 334 million, which shows a decline in jobs by nearly 62 million people. before 2019 the tourism industry accounts for 10.4% of global gdp, while in 2020. the percentage drops to 5.5, which is nearly 50% drop caused by covid 19. according to the world travel & tourism council, the total loss to the tourism industry in one year was $ 4.5 trillion. this crisis has set a huge start for a shift in the tourism industry towards sustainable tourism and crisis management. during one of the worst crises for the tourism industry in the last 20 years, in addition to threats, many opportunities were opened to create preconditions for the development of the tourism product and ways to reach end users. undoubtedly, the incredible speed of new events, technological changes and non human circumstances, such as the covid 19 pandemic, have made society and the tourism industry better able to cope with the challenges unknown to them. (sharma et al., 2020) / p. sharma, t.y. leung, r.p. kingshott, n.s. davcik, s. cardinalimanaging uncertainty during a global pandemic: an international business perspective j. bus. res., 116 (2020), pp. 188-192 /. the role of technology and digitalization in supporting a number of countries, industries, organizations and even social contacts is becoming vital for future development. the digitalisation has had a major impact on the tourism product and the tourism industry as a whole since the 1990s. rapid development in this sector and innovation create preconditions for the creation of new business models, which allow a large part of the end users to have easier access to information and choice. the huge variety of electronically based tourist sites and entities has led to a change in the marketing policy of presentation of tourist products and increase their sales. this puts tourism as a leading e-commerce industry. undoubtedly, if travel agents want to be competitive, they must accept the possibilities of digitalisation and the role of technological development. industry 4.0 is a revolution that brings with it an unlimited number of opportunities. defined as a trend for automation, data exchange and production of finance, accounting and business analysis 4 (1) 2022 21 technologies, including robotic ones and artificial intelligence, travel agents must undoubtedly change their course of development. smart technologies play a huge role in the social life of the end user of the tourism industry and this trend will continue to develop and the use of technology will become an integral part of our lives. travel agencies must continue to follow the innovations and trends of the dynamic tourism market and the desires of the end user, which are related to facilitating the accessibility of the desired tourism product. in recent years and especially after the influence of covid-19, the main trends that are followed by consumers stand out. travel agents are increasingly resorting to the possibilities of mobile applications (applications) which provide a huge opportunity to characterize the end user and determine his desired products. through mobile devices, the user can fully plan their trip booking a hotel in the desired destination until a time for a guided tour, and even opening the hotel room via your mobile phone. artificial intelligence (ai) and chatbots are also used in the tourism industry. in most cases, chatbots are used by travel companies for faster and easier communication with the end user through preprogrammed artificial intelligence. there are two main types of chatbots audio and text. the advantages of chatbots is the opportunity they give to travel companies to communicate with an unlimited number of end users for various types of issues related to reservations, upcoming weather forecast, local attractions and more. reporting consumer ratings through various platforms on the internet has a huge impact on the demand and supply of various tourism products. this method motivates the business to pay attention to every detail and the quality of the offered products undoubtedly increases. on the other hand, the end user has the opportunity to research in advance the desired destination and obtain information that would help in choosing the desired product. the limitations which are caused by covid-19 and the rapid development of digital technologies have set new notions for a virtual tour. despite its first appearance in 1994, over the years virtual reality has become increasingly popular among tourist users. in recent years, due to the huge restrictions on travel, tourists have increasingly resorted to the possibilities of virtual reality. many travel agents are vying to ensure their safety, employees, customers, brand image and liquidity, so they made virtual tours of their sites, and in addition to the 360-degree tour, some included text fields and some audio descriptions of the sites. this has allowed tourist users to reach long distances through virtual walks that provide emotions and adventures different from the standard ones so far and could attract more tourists. one thing is for sure the change in business models is happening extremely fast and the main reason for this is technological progress and high levels of digitalization. new opportunities open up every day and the number of new technologies produced grows with each passing day. the tourism industry fails to fully implement all the possibilities of current technological progress and digitalization. tourism needs to embrace digitalisation quickly if it is to be sustainable. business models and investments in travel agents must be focused on new technological opportunities. the industry transformation of covid-19 following effects should help the industry to rethink and implement a human-oriented and responsible environment for sustainability and well-being. therefore, mobile applications (for accommodation, check-out, room keys, mobile payments, bookingspurchases), self-service kiosks, in-room entertainment and e-shopping technologies in the destination (eg virtual reality for virtual visits to destination museums, attractions and destinations , movies), robots (reception and concierge services, food delivery museums), websites with activated artificial intelligence and a chat box for communication and customer service, digital payments (eg digital wallets, paypal, credit cards). in addition, the new operational environment imposed by the covid-19 measures requires companies to adopt new technologies and applications to ensure crowd management and the number of people gathered in public places (eg airports, shopping malls, museums, restaurants, hotels), human disinfectors and hand disinfection equipment, applications for identification and management of human health identity and profiles. as a result, covid-19 has led to greater government intervention in the functioning and activities of the tourism industry. the government has also become a much bigger player in the tourism economy (for example, the renationalisation of airlines and other travel companies and tourism infrastructure such as airports). this is very unique as previous crises have generated research and institutional interest, but they have not had an impact on policy, especially in tourism (hall et al., 2020). however, systems theory and crisis management argue that crises must be considered collectively. covid-19 seems to have raised political, geopolitical and managerial issues that will need to use frameworks and concepts from these disciplines to enlighten such research. for the purposes of the study for the current article, the research team has developed its own survey, which includes questions aimed at examining the attitudes of both consumers and employees of travel agencies towards the digitalization of communication policy in tourism. the survey reached 100 finance, accounting and business analysis 4 (1) 2022 22 respondents, with over 65% of the participants being employed in the field of tourism. the main target groups of people who participated in the survey are respectively 70% aged between 18 and 30 years. and 24% between the ages of 31 and 40. the outlined age groups will clearly show the attitudes of the generations directly involved in the fourth technological revolution, as direct users of the capabilities of digital devices and digital communication, both in tourism and socially. point. after reviewing the questionnaires, the authors of the current article notice a growing trend in the use of social networks as a source of information and an opportunity for marketing tools for travel agencies. as can be seen in fig. 1, in general, the users of social networks as an opportunity to offer tourist services are 71%, distributed respectively in different frequencies, as can be seen in the figure. do you use social networks to advertise / offer travel services? yes always yes, often yes, rarely no figure 1 finance, accounting and business analysis 4 (1) 2022 23 almost all respondents find social networks as a way to reach travel opportunities with only 1% of respondents answering negatively. this is due to the age groups outlined earlier and digital devices that have become part of people's lives. the figure shows the clear impact of digitalization on tourism demand, which will be reflected in the demand from travel users to travel agencies. figure 3 shows that social media is a reliable source, but you need to check the information in several different sources. this is more due to the low control of fake news in bulgaria. the media is one of the last places in the eu for media freedom. respondents find it difficult to distinguish between real offers for tourist products. do you find it easier to access travel opportunities through social networks? yes, definitely yes, but not always i cant say no figure 2 0 10 20 30 40 50 60 70 yes, completely yes, but i always check the information through several information sources i cant say no do you consider social networks to be a reliable source when taking a trip? figure 3 0 10 20 30 40 50 yes, definitely yes, but not always i can not decide no is it successful to offer your travel services on social networks? figure 4 finance, accounting and business analysis 4 (1) 2022 24 the attached figure 4 clearly shows the opinion of travel agencies on the services offered on social networks. it can be clearly seen that a total of 63% consider the successful implementation of tourist services on social networks, distributed in different strengths of confirmation. 18% cannot judge whether reaching the end user is a success, and 16% completely deny that their placement on social media services is a success. this, according to the authors, is due to the fact that for some travel agencies and end users it is difficult to transform from offline to online services. this study aims to find out the extent of the change in the communication policy of travel agencies and the attitudes of travel consumers towards the products offered and the way they present themselves through the new digital opportunities. the results of it show changes in agencies and high levels of digitalization. many tourists are starting to plan their tourist trips through social networks, online booking sites, websites and more. digital opportunities, which must completely change the understanding of travel agencies' necessary levels of digitalization in order to reach end users as successfully as possible. consumer attitudes consumers after kovid 19 is a clear sign of a necessary change in the presentation of tourism products by travel agencies. after the sharp introduction of distance communication, tourist users realize the need for easy access to choose their travel products. something very important is related to the flow of information that reaches the end users after the surveys. the results of figure 3 reveal that 14% of people consider social networks to be a reliable source, and 64% check the information through several information sources, which reveals the need for wellpositioned in various digital platforms, but also quality service to be reflected in them. discussion and conclusions covid-19 has led to many socio-cultural, economic and psychological impacts on various tourism stakeholders, some of which will remain for years. although studies examining the reality of impacts, forecasting tourism demand and benchmarking good and best practices are very useful and contextually interesting for assessing the impact of covid-19 on different geographical sectors and stakeholders. digitalization offers to expand our knowledge of crisis management, as well as to potentiate the pandemic's potential to expand the challenges facing the tourism industry. this article purpose has to inspire tourism scientists to consider and use covid-19 as a transformational opportunity to reform their thinking when designing and conducting research, and for tourism institutions to change their standards and indicators to motivate and evaluate purpose, role and impact. of research in the field of tourism. in addition, crises also accelerate technological innovation and change (colombo, piva, quas and rossi-lamastra, 2016). however, they should not be seen as inevitable, indisputable and impossible to reshape and readjust in order to serve real needs and significant values. the analysis is not exhaustive with regard to covid-19 impacts while the impacts may not be the same for all participants from the same group of tourism stakeholders. for example, covid-19 has different impacts on travel agents based on their characteristics, such as the nature of the travel sector (intermediaries, event transport organizers, type of accommodation or attraction provider), their size, location, management and ownership style. similarly, highly diverse tourist demand (e.g., leisure and business travel, group and independent tourists, tourists with special interests such as religious, gay and 0 5 10 15 20 25 30 active work with social networks easy access to booking sites (booking, hotels.com, airbnb, etc.) reservations via mobile applications more frequent use of travel agency websites less frequent use of travel agencies to choose a destination i do not find changes in consumer attitudes what are the main changes you notice after the pandemic in the attitudes of consumers towards the way they search for tourist products? figure 5 finance, accounting and business analysis 4 (1) 2022 25 lesbian, corporate travelers) also means that the different impacts and consequences of covid-19 are expected and deserve to be explored for different market segments. covid-19 tourism research should not only reveal such differentiated impacts of covid-19 but should also provide an enriched explanatory force on the roots of such differences with the scope for anticipating and / or testing any suggestions on how to deal with any inequalities and shortcomings that may be caused to different groups of tourism stakeholders. the current paradigms and trends of this `causal link` of employment in tourism (due to the forthcoming economic recession and higher operating costs of tourism companies) are expected to continue and strengthen, covid-19 tourism research needs to urgently explore the problems of employees' psychological, mental and physical health, commitment, working conditions (e.g., remote work, virtual teams and virtual leadership) and other human resources problems in the context of covid19. for example, traditional incentives for leadership, recruitment, management, and motivation may not inspire, engage, motivate, and attract employees who have recalibrated their personal values and priorities during the covid-19 block and remote work. the covid-19 impact on tourism employment puts additional pressure on tourism education, which is severely affected by the pandemic. in addition to the virtualization of teaching and learning processes tourism students and graduates must also deal with the interruption of internships in industry, staff recruitment and questionable career paths. tourism programs and universities face reduced student admissions, industry and government sponsorship and research funding. tourism researchers need to find new ways and sources to conduct research aimed at social distancing, respect for communication issues and the privacy of covid-19 stakeholders. the research team makes the following recommendations to improve communication with stakeholders: 1. travel agencies should focus on actively positioning their travel products on different digital platforms: active website; work with social networks positioning services in reservation sites creating mobile applications blogs, etc.; 2. active work with people who form opinions on social networks (influencers), which will allow easy access to the already created audience. 3. travel agents must keep 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(2020). communication related health crisis on social media: a case of covid-19 outbreak. current issues in tourism. https://doi.org/10 https://doi.org/10.1080/14616688 https://linkinghub.elsevier.com/retrieve/pii/s0160738304000283 1 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg effect of earnings quality properties on the performance of companies: empirical evidence from south africa nyanine chuele fonou dombeu1, josue mbonigaba1 , bomi nomlala1, magret odunayo2 1school of accounting, economics and finance, university of kwazulu-natal, south africa 2departments of accounting & informatics, durban university of technology, south africa info articles abstract keywords: earnings, earnings quality, performance, jse listed companies objective: this paper examines the effect of earnings quality properties on the performance of johannesburg stock exchange (jse) listed companies. the earnings quality properties considered include the accrual quality, conservatism, earnings persistence, earnings predictability and earnings smoothness. the five properties are examined individually as well as aggregately. each property is further separated into its innate and discretionary components and the effect of each component on the company’s performance is examined. methodology: the quantitative method and purposive sampling is used in this study. the sample consists of 800 observations obtained from 80 non-financial companies listed in the jse during the period of 2009-2018. the performance is measured using the return on asset (roa) and tobin q. the multilevel linear regression is used to test the formulated hypotheses. results: it was found that, for both measures of performance, each earnings quality property as well the aggregate earnings quality property influence the performance of companies. some exceptions included the accrual quality, predictability and smoothness which were found not to be significantly related to tobin q. furthermore, it was found that both the innate and discretionary components of earnings quality properties influence the performance of companies. however, the innate component had a greater impact on the performance of companies than the discretionary component. implication: the study will provide guidelines to investors and other capital market participants on which property of earnings could be used to assess the current performance of jse listed companies and make prediction about their future performance. this in turn will assist in improving investors’ resource allocation decisions and allow policy makers to develop policies that will lead to more transparent accounting information in order to promote efficiency of the capital market. in addition, the study will inform capital market participants on how managers’ actions (discretionary component) and factors beyond the control of manager (innate component) affect the companies’ performance. *address correspondence: e-mail: mawempombo@gmail.com finance, accounting and business analysis 4 (1) 2022 2 introduction this paper examines the impact of five earnings quality properties, namely, accrual quality, conservatism, earnings smoothness, persistence and predictability, on the performance of the companies listed in the johannesburg stock exchange (jse). in fact, previous studies (chan et al., 2006; salerno, 2014) documented that reported earnings plays a vital role in the functioning of the capital market and earnings quality properties are factors that capture the capability of accounting data to represent faithfully a company’s operations (domingues et al., 2016). understanding the relation between the factors that affect reported earnings and the performance of a company is fundamental to investors and others capital market participants. this may help to improve the way the capital market functions as well as the efficient allocation of resources and economic growth. several studies (francis et al., 2004; dichev, 2006; salerno, 2014; sodan, 2015) have indicated that financial reports provide relevant information that help capital market participants to make decisions. furthermore, it is argued that users of financial reports rely on reported earnings more than any other item in the financial statements to make decisions (francis et al., 2004; chan et al., 2006), since earnings is seen as the most important indicator of the firm’s performance. because the users of accounting information depend largely on earnings to make economic decisions, managers of companies may be tempted to manipulate earnings numbers in order to mislead the capital market participants (chan et., 2006; domingues et al., 2016). earnings manipulation is a deliberate alteration of financial reports with intend to distort accounting information. earnings manipulation thus, lowers the quality of firm’s reported earnings. manager’s motives for earnings manipulation include: a desire to hide firm’s cash flow problems, inability to meet loan contractual agreement, and desire to fulfil the expectations of capital market (lisboa and kacharava, 2018; persakis and iatridis, 2015; dechow et al., 2003). examples of big companies that misrepresented earnings to deceive the capital market participants include parmalat, enron, worldcom, more specifically in south africa, leisurenet and fidentia (chan et al., 2006; smit, 2015). these financial scandals have raised concerns about the quality of the companies’ reported earnings. the quality of reported earnings has thus become the focus of attention in accounting and finance research (chan et al., 2006). researchers have developed several earnings properties to assess the quality of accounting information. however, no agreement has been reached within the earnings quality research community on how to choose the earnings properties. for some authors (francis et al., 2004; dechow et al., 2010), the research questions being examined should guide which earnings properties to choose; while others like (perotti and wagenhofer, 2014; lyimo, 2014) believe that research questions should be addressed with a variety of earnings properties in order to obtain consistent results. in this paper five earnings properties including the accrual quality, persistence, predictability, smoothness and conservatism are used to answer the question of how do various properties of earnings quality affect the performance of the companies listed in the jse? the reason is that each of these properties is unique and irreplaceable by any other property. in fact, it is argued that earnings properties are unrelated and that it would be useful to utilize several properties to evaluate a firm’s reported earnings (dechow et al., 2010; gutierrez and rodriguez, 2017). each of the five properties of earnings considered is driven by both the firm’s business model and operating environment (innate component) and manager’s action (discretionary component) (athanasakou and olsson, 2016; francis et al., 2004); therefore, the study focuses on two dimensions. firstly, each property is considered separately and the combined effects of these properties on the performance of companies are investigated. in order words, each property is considered as a whole, that is, without any separation of its components and its effect on performance is investigated. furthermore, an aggregate earnings quality property is formed (sodan et al., 2015) based on the five properties being investigated, to alleviate the measurement errors associated with the individual properties, and its effect on companies’ performance is tested. the use of individual properties as well as the aggregate property allow for the reduction in the measurement errors and generalisation of the results in the south african (sa) context. secondly, each property is separated into its innate and discretionary components and it is investigated how each component affect the performance of companies. such partition is important because it provide insights on which factors (components) influence the most the performance of companies. this study addresses some shortcomings of the current earnings quality research. in fact, although the literature on earnings quality research is abundant, studies that specifically focus on the association between earnings quality properties and the company’s performance are few. in addition, most of related studies have examined earnings properties as a whole and have mainly used single earnings property to measure the quality of earnings (gutierrez and rodriguez, 2017). furthermore, existing related studies have been conducted in developed nations and some asian countries, where the capital market is finance, accounting and business analysis 4 (1) 2022 3 well organised compared to developing nations such as south africa. beside the above, the results achieved by the existing related studies were mixed. for instance, the study by ayu and ahmar (2013) found a positive relationship between accrual quality and the company’s performance, whereas, hejazi et al., (2014) found no relationship at all. therefore, the results of these studies cannot be generalised. apart from that, the quality of accounting information in a country is affected by a set of conventions such as the constitutional system, government regulations, ownership and capital structure, accounting standards and tax legislations. each country has its own conventional setting; thus, the information on earnings changes according to different capital markets. moreover, dechow et al. (2010) and dichev et al. (2013) reported that the earnings quality research had focused mainly on the earnings quality driven by reporting choice of managers (discretionary earnings quality) and has neglected earnings quality driven by the firm business models (innate earnings quality), although the quality of reported earnings is affected by both discretionary and innate earnings quality dimensions. south african studies on earnings quality in particularly (ames, 2013; smit, 2015; sellami and slimi , 2016) focus on determining whether the new accounting standards (ifrs) in the country has improved the quality of financial reports since its inception. furthermore, some of these studies looked at the association between accounting quality and corporate governance, earnings management and firm’s value (yeboach and yeboach, 2015; jordaan et al., 2018). most of these studies used accrual quality as the measure of accounting quality although there are several others properties of earnings that can be used to measure the quality of financial reports. from the above, it is apparent that there is a lack of research that examines the effect of various measures of earnings quality on the performance of the companies in south africa’s context. therefore this paper aim at answering the following research questions: (1) how do individuals and aggregate measures of earnings quality influence the performance of the jse listed companies? (2) how do the innate and discretionary components of each earnings quality property affect the performance of the jse listed companies? the answer to these questions will provide guidelines to investors and other users in assessing whether the performance of a company, as represented in its financial statement truly reflect the company’s actual operations. this in turn will improve investors’ resource allocation decision and helps standard setters in south africa to recommend or formulate policy that will improve the transparency of financial reports. the remainder of the paper is organised as follows. section 2 discusses the literature review and formulates the hypotheses of the study. the methodology of the study is explained in terms of the sample selection, data collection and variables measurements in section 3. section 4 reports and discusses the empirical results. lastly, the conclusion is drawn in section 5. literature review and hypotheses development this section discusses prior studies on earnings quality and the company’s performance and the theoretical framework. furthermore, it presents the hypotheses of the study after a discussion of the individuals and the aggregate earnings quality properties. earnings quality and the performance of the company the quality of the reported earnings impacts the results of the assessment of a company’s performance. earnings that are of higher quality provide accurate information about the firm‘s current and future performance to the users (dechow et al., 2010). furthermore, high earnings quality also minimises information risk and prevents managers from exercising discretion at their own advantage. in contrast, low-quality earnings portray a false picture of the firm’s activities and increase information asymmetric between stakeholders (ferrero, 2014). therefore, high earnings quality illustrates the quality of the accounting system used by the firm. it has been empirically measured how related the earnings quality and some aspects of the company’s performance are (barth et al., 2001; francis et al., 2004; bowen et al., 2008; gray et al., 2009). madhumathi and ranganatham (2011) examined the association between earnings quality (measured by discretionary accruals), corporate governance and firm performance. the study revealed that transparent financial reports and good governance methods have a positive impact on company’s performance. similarly, mahmud et al. (2009) and ayu and ahmar (2013) investigated the relationship between earnings quality and firm’s performance, using the malaysia and indonesia data, respectively. their study found that earnings quality is positively related to performance. in contrast, the study of hejazi et al. (2014) found no relationship between earnings quality and performance, using iran data. in general, these authors stressed the impact of a high earnings quality on the better performance of the company. this comes from the notion that accounting numbers provide accurate and useful information to the capital market. finance, accounting and business analysis 4 (1) 2022 4 however, some studies have demonstrated that accounting numbers do not always reflect value relevant information. for instance, the study of negash (2008) revealed that the value relevance of accounting information did not ameliorate due to ifrs adoption. francis et al. (2005) documented that accrual quality increases information risk and reflects earnings that do not represent the company’s operations. some studies also examined the link between earnings quality and the cost of equity capital (francis et al., 2004; core et al., 2008; gray et al., 2009; dakhaoui et al., 2017). these studies found that earnings quality is negatively related to the cost of equity capital in the sense that, poor earnings quality leads to high cost of equity capital and hence weak company performance. on the contrary, lambert et al. (2012) argued that, the companies with low cost of equity capital are less risky and display a higher earnings quality (more transparent financial report); as such, investors in their resource allocation decisions also consider the cost of equity, since the latter affects the performance of the company. overall, mixed results are obtained in the literature with regard to the relationship between earnings quality and some aspect of the firm. nevertheless, not many empirical studies have addressed the question of how related various earnings quality properties and some aspects of the companies such as the performance are. furthermore, it is unknown how the innate and discretionary components of each earnings quality property affect the performance of the company. these questions are addressed in this study as contributions to the body of knowledge. theoretical framework two commonly used theories in earnings quality research are the capital need and decision usefulness theories. the capital need theory has been used to assess the changes in the quality of the accounting information provided to the market. it explains the reasons for companies wanting to provide high quality accounting information to the market (shehata, 2014; choi, 1973). high quality accounting information reduces information asymmetry between stakeholders and lowers the company’s cost of equity capital (yeh et al., 2014:239). furthermore, it allows companies to easily obtain finances (both debt and equity), since the investors believe that these companies are less risky (shehata, 2014). shehata (2014) asserted that high quality financial reports also allow the capital market participants to predict accurately the future prospect of companies. furthermore, the accurate determination of share prices depends on the quality of accounting information. then, because investors are interested in companies with high share prices due to the high return they may get, the companies with high quality accounting information may easily raise capital. the decision usefulness theory is based on the iasb and fasb conceptual frameworks (dunne et al., 2008). these frameworks state that the purpose of financial reports is the provision of useful information about the financial position, performance and changes in financial status of an entity, to investors, lenders and others users (ifrs, 2010). accounting information is useful if it is relevant and reliable. ifrs (2010) emphasizes that such information should facilitate the decision making process of the users. in fact, accounting information is used by users for different purposes and is useful if it allows them to achieve their goals. furthermore, information is useful if its communication to the market leads to the reactions of users (chan et al., 2006). such reactions can be observed through changes in security prices or trade volumes. the decision usefulness theory further stresses that useful accounting information supplies knowledge about the past performance of the company and allows for the accurate forecast of its future performance. this study lean on the decision usefulness and capital needs theories since they allow for the examination of accounting information provided to the capital market participants using factors that may influence that information. furthermore, these theories have been successfully applied in related studies to answer research questions (dunne et al., 2008; tollerson, 2012; eliwa, 2015). hypotheses development earnings quality is a multidimensional concept, as such, it is measured with many properties (perotti and wagenhofer, 2014). the different earnings quality properties attempt to portray the quality of financial reports as well as their relevance and usefulness to the users. in this study, five properties of earnings quality, namely, accrual quality, conservatism, earnings persistence, earnings predictability and earnings smoothness are considered. these properties are examined individually as well as aggregately. since each property of earnings is unique, unrelated to others properties and captures a specific aspect of the firm’s reported earnings, it is conjectured that each property differently affects the performance of the company as compared to the combined effect of the properties. therefore the following hypothesis is formulated: h1: the individuals and aggregate measures of earnings quality influence the company’s performance. finance, accounting and business analysis 4 (1) 2022 5 to support h1, each of the properties considered is briefly discussed to illustration its effect on the company’s performance. furthermore, specific hypotheses are formulated for each earnings quality property as well as for the aggregate earnings quality property, in support of the corresponding hypothesis. accrual quality accrual quality is described by dechow and dichev (2002) as “the extent to which working capital accrual maps into cash flow realization”. this definition of accrual highlights one of the functions of accrual accounting, which is the adjustment in recognition of cash flow over time. the authors demonstrated that a “poor matching” means that the quality of earnings is lower. this function of accrual (adjustment in recognition of revenue over time) allowed some studies to argue that accrual is a desirable property of earnings quality, since it measures the earnings better as compared to cash flow (dechow et al., 1994; kim et al., 2005; barth et al., 2016). however, it is also argued that high accrual quality lowers the quality of reported earnings (dechow and dichev, 2002; dechow and shrang, 2004). this is because accrual is subjective in nature and is subject to the managers’ judgments and estimations. if these estimations are wrong, the true performance of the firm will be distorted. furthermore, chan et al. (2006) explained that earnings manipulation is done through the accrual process and francis et al. (2005) claimed that accrual quality increases information risk. the authors demonstrated empirically that investors assign a price to accrual quality, since they perceive the accrual quality as providing information that cannot be diversified. moreover, dechow et al. (2010) explained that, even in the absence of intentional earnings manipulation, accrual could provide false information about the financial reports, since it is subject to unintentional errors that emanate from the improper application of the accounting system. in light of the above, it can be concluded that accrual quality negatively affects the company’s performance. this results in the following hypothesis. h1a: accrual quality has a negative effect on the performance of a company. conservatism conservatism is a desirable property of earnings, since it is a qualitative characteristic of highquality financial reports (xu and lu, 2008; kan and watts, 2009). it is a principle that allows accountants to be prudent in recognition of revenues and losses. in fact, under this principle, a loss should be recognized when there is a probability that the loss will occur in the future and that the loss can be measured reliably, whereas, the recognition of a gain is postponed until realization. furthermore, watts (2003) believed that market participants prefer underestimated earnings compared to overestimated earnings, since the former occur in rare circumstances. therefore, conservatism is useful for decisionmaking because it “captures the reliability of earnings” and reduces management incentives to manipulate reported earnings (lafond and watts, 2008). there are two types of conservatism, including conditional and unconditional conservatisms (beaver and ryan, 2005; xu and lu, 2008); both types of conservatism lead to the understatement of earnings (beaver and ryan, 2005) and have different impact of financial reports (ruch and taylor, 2015). to examine the effect of conservatism on the firm’s performance, the following hypothesis is formulated. h1b: conservatism has a negative effect on the performance of a company. persistence and predictability persistence and predictability capture the ability of reported earnings to provide useful information to the users. persistence refers to the stability of earnings (dechow and ge, 2006), whereas, predictability refers to past earnings’ ability to predict future earnings (lipe, 1990). according to francis (2004) and dichev and tang (2009), earnings that are more persistent and predictable reduce forecasting errors and allow financial analysts to determine the value of the firm more accurately. assuming that more persistent and predictable earnings improve earnings quality, the following hypotheses can be formulated. h1c: earnings persistence has a positive effect on the performance of a company. h1d: earnings predictability has a positive effect on the performance of a company earnings smoothness earnings smoothness is a technique used by managers’ to avoid the fluctuation of earnings. it is believed that smoothness reduces the earnings volatility, making it more stable (beidleman, 1973; subramanyam, 1996; tucker and zarowin, 2006). in turn, stable earnings facilitate the prediction of future earnings based on the past and current earnings. goel & thakor (2003) and leuz et al. (2003) argued that finance, accounting and business analysis 4 (1) 2022 6 earnings smoothness decreases earnings quality, since managers take action to gain the capital market’s advantage. leuz et al. (2003) further asserted that smoothness is a form of earnings management, which indicates a poor earnings quality. mcinnis (2010) and erickson et al. (2017) argued that investors assess their investment risks based on the smoothing of operating cash flow instead of the smoothing of earnings. in fact, the smoothing of cash flow cannot be sustained over the long run, as is the case with earnings. it is further argued that opaque financial reports reduce the quality of reported earnings, thereby, increasing the information risk. taking the above into consideration, it can be inferred that earnings smoothness negatively affects the company’s performance and that a company with a great level of earnings smoothness displays a performance that does not represent its true operations. therefore, the following hypothesis can be formulated. h1e: earnings smoothness has a negative effect on the performance of a company. aggregate earnings quality properties an aggregate earnings quality property (aeqp) is formed based on the five properties discussed in the previous subsections, namely, accrual quality, conservatism, earnings persistence, predictability and smoothness. a similar procedure was also adopted in sodan (2015). since each of the individual measure of earnings quality is expected to affect the performance of company, as demonstrated in the previous subsections, it is also expected the aggregate earnings quality properties to influence the company’s performance. however, no sign is assigned to the direction of such an effect, since each individual property affects differently the performance of company. therefore, the following hypothesis is formulated: h1f: aggregate earnings quality property has a significant effect on the performance of a company innate and discretionary components of earnings quality property the quality of earnings is affected by two distinct components, namely, the innate and discretionary components (francis et al., 2005). the innate component of earnings quality properties refers to the aspects of the companies that are uncontrollable by managers and is linked to the companies’ characteristics and operating environments. on the contrary, the discretionary component is under the control of managers and is related to the firms’ accounting systems, corporate governance and managers’ decisions (francis, 2005; athanasakou, 2016). in fact, the classification of earnings quality properties into innate and discretionary components stems from the fact that each earnings quality property is affected by both managers’ actions and factors beyond the control of managers, such as the business models and operating environments. since the innate component of earnings quality is related to the uncertainty in the firm’s economic environment, it is expected the innate component to impact the performance of a firm more than the discretionary component. therefore, the following hypothesis can be formulated. h2: innate component of earnings quality properties have a more significant impact on the company’s performance than the discretionary component. methods this section presents the methodology of the study in terms of the sample selection, data analysis techniques and measurement of the variables of the study. sample and data analysis techniques the sample for this study consists of all non-financial companies listed in the jse limited, for the period of 2009 to 2018. financial companies were excluded from the sample in this study because they are well regulated industries with accounting rules that differ from that of other industries (peasnell et al., 2005; persakis and iatridis, 2015). the inclusion of a listed non-financial company in the sample was guided by the following conditions: (1) the financial statements of the company must be available for the whole sample period, (2) the company must have all relevant information for the measurement of the dependent, independent and control variables, and (3) the company must have 5 past consecutive years of data from the beginning of the sample period, because the computation of accrual quality is based on the standard deviation of residual calculated over rolling 5 years period (gray et al., 2009). after the applications of the above requirements, the final sample includes 800 observations, obtained from 80 companies, drawn from an initial sample of 225 companies. the financial statements of the listed companies and the price data reports were extracted from the iress research domain database. the financial statements retrieved include the statements of financial position, the income, change in equity, cash flow and value added statements. these statements finance, accounting and business analysis 4 (1) 2022 7 were analysed to extract relevant information to calculate the variables of the study. all the variables of the study were winsorized to the 1st and 99th percentile to reduce the effect of outliers. the spss software version 27 was employed to obtain all the statistics. a number of tests including the collinearity, heteroskedasticity, normality and linearity were performed on the data before the analysis, to check the assumptions of linear regression. the correlation and multilevel regression analysis were applied to analyze the collected data. variables measurements this subsection presents the models used to measure the dependent, independent and control variables of the study. measurement of the dependent variable the dependent variable of the study is the company performance. this study uses both the return on asset (roa) and the tobin q to measure the firm’s performance. the roa and tobin q are calculated in equations 1 and 2, respectively. assets total taxandinterest before earnings =roa (1) assets of book value debts)firm of lue(market va q tobin + = (2) measurement of the independent variables the independent variables of the study are the earnings quality properties including the accrual quality, conservatism, earnings persistence, predictability and smoothness. the models for measuring these variables are presented next. accrual quality accrual quality (aq) is measured using the modified dechow and dichev (2002) model as in francis et al. (2008) and sodan (2015). the modified dechow and dichev (2002) model is given in equation 3. ttitititititi ppesalescfocfocfowc  ++++++= +− ,,1,3,21,10, (3) where, twc is the change in the working capital in the year t minus the year t-1; tcfo the cash flow from the operation in the year t; tsales is the change in sales in year t ; tppe is the property, plant and equipment in year t ; the prediction error, ti, the firm and year, respectively; and  is obtained from the regression model used. all variables are scaled by total assets at the beginning of the year t . the standard deviation of the residual, which is the proxy used for aq, is computed over 5 years periods as titiaq ,, )(= . conservatism as stated earlier, there are two types of conservatisms, namely, conditional and unconditional conservatism. the basu (1997) model is used to measure the conditional conservatism (conser1) due to its popularity (khan and watts, 2009). the basu (1997) model relies on the relationship between earnings and return to illustrate the timeliness recognition of losses and gains. the basu (1997) model is provided in equation 4. tititititi drrdpeps ,,1,0101,, /  ++++=− (4) where, tieps , is the earnings per share of firm i in the period t; d the indicator variable which is equal to 1 if tir , is negative ( tir , <0) and 0 otherwise. tir , is the stock return of firm i in the period t . 0 reflects the incorporation of goods news into the current earnings period, 1 measures the difference of the sensitivity of earnings to positive and negative returns and ti , is the error term of firm i in the year t. finance, accounting and business analysis 4 (1) 2022 8 from equation (4), conser1 is estimated with the formula: 010 /)(  + . if the value of this ratio is high, it means that the loss is recognised timely, that is, the company practices conservatism accounting. a low value indicates a less conservatism practice. the unconditional conservatism (conser2) is measured using the book to market ratio, computed as book value of company divided by its market value (beaver and ryan, 2000; ahmed and duellman, 2007; persakis and iatridis, 2015). earnings persistence the earnings persistence is measured with the model described in dechow et al. (2010). the model assumes that the present earnings are used to estimate the future earnings; the model also assumes that companies that are sustainable, display earnings that are more persistent. the model shows the correlation between the current and future earnings as in equation 5. tititi earningsearnings ,,101,  ++= + (5) where, t is the period t and ti , the error term that incorporates the information that was not captured by the earnings in the period t, to explain the earnings in the period t+1. 1 measures the persistence of earnings. a high value of 1 indicates that the earnings is more persistent, a 1 close to or higher than one, indicates highly persistent earnings and 1 close to zero indicates a less or non-persistent earnings (persakis & iatridis, 2015). earnings predictability the earnings predictability is commonly measured using the square root of the error variance from the earnings persistence model (francis et al., 2004). equation 6 defines the earnings predictability model. )(pr , 2 , titiedict = (6) where, tiedict ,pr is the firm’s i earnings predictability in the year t. the term )( , 2 ti is the estimated error variance of the firm i in the year t calculated from the earnings persistence (equation 5). if the square root of the error variance is high, the predictability is low, and the earnings is of low quality and vice versa. earnings smoothness earnings smoothness is measured using the leuz et al. (2003) model as in perotti and wagenhoffer (2014) and sodan (2015). the model consists of dividing the standard deviation of operating income by the standard deviation of cash flow from operations as in equation 7. the operating income and cash flow from operations are scaled by total assets at the beginning of year t . tititi cfooismooth ,,, /= (7) where, smooth is the earnings smoothness, oi the standard deviation of operating income, cfo the standard deviation of cash flow from operation, and ti, the firm and year, respectively. the standard deviation is calculated for each firm over rolling five-years windows. a high value of smooth, indicates a less earnings smoothness and a low value implies smoother earnings. measurement of control variables firm’s characteristics such as the size, leverage and growth have been found in to affect the performance of a company. the logarithm of total assets is used to measure firm’s size as in mahmud et al. (2009), gaio and raposo (2011) and kuncova et al. (2016). leverage is measured using the ratio of debt to total assets (bowen, 2008; ahmad et al., 2015), whereas, growth is measured using growth rate in revenues (mahmud et al., 2009; ahmed and duellman, 2011). finance, accounting and business analysis 4 (1) 2022 9 findings the empirical results of the study are presented and discussed in this section, to explain the correlation amongst the earnings quality properties, the relationships between the earnings quality properties and the firm’s performance as well as the relationships between the innate and discretionary components of earnings quality properties and the firm’s performance. correlation analysis table 1 reports the pearson correlation matrix amongst the earnings quality properties. table 1. correlation amongst earnings quality properties aq conser1 conser2 persist predict smooth aq 1 conser1 0.003 1 conser2 0.043 0.087* 1 persist -0.045 0.144** -0.047 1 predict 0.075* 0.111** -0.118* 0.664** 1 smooth -0.199** 0.013 0.063 -0.118** -0.136** 1 notes: *. ** correlation is significant at the 0.05 and 0.01 levels (2-tailed), respectively. see appendix 1 for the description of variables the analysis of the correlation results in table 1 reveals that, there is a low correlation amongst earnings quality properties, except for persistence and predictability which display a correlation of 0.66. a related study in perroti and wagenhofer (2014) also reported a high correlation between persistence and predictability. the low correlation illustrates that, each property is unique and distinct and that one property cannot be used as a substitute of others. furthermore, the low correlation also means that multicollinearity is not a problem in the regression analysis. moreover, the correlation amongst earnings quality properties is positive for most of the cases, except for few properties which display negative correlations; this finding is corroborated by perroti and wagenhofer (2014), who reported a negative correlation amongst some earnings quality properties. the relation between earnings quality properties and company’s performance to determine, the association between earnings quality properties and performance, equation 8 was used to illustrate the effect of individual earnings quality properties on performance. thereafter, the effect of the aggregate earnings quality properties on performance was measured with equation 9. each earnings quality property was added individually to equation 8. titititititi growthleveragesizeeqpeperformanc ,,4,3,2,10,  +++++= (8) titititititi growthleveragesizeaeqpeperformanc ,,4,3,2,10,  +++++= (9) where, performance is either roa or tobin q; eqp represents the earnings quality properties and is either accrual quality, conservatism, persistence, predictability or earnings smoothness; i and t the firm i at period t, respectively;  are the regression coefficients;  is the error term; aeqp is the aggregate earnings quality property, computed by averaging each of the five individual measures of earnings quality (gaio, 2010). equation 8 was estimated using the multilevel linear regression model (mlm) with fixed effect. mlm is an appropriate estimating technique for the analysis of panel data as compared to traditional models such as ordinary least square. furthermore, mlm does not require the assumption of independence of observations to be met as it is the case with the traditional models (hox, 2010; field, 2013; hair and favero, 2019). the results of the estimations of equation 8 and 9 are presented in tables 2 and 3, respectively. starting with aq, the second and third column of table 2 shows that aq has the coefficients (t-statistics) of 0.121 (6.275) and -0.350 (-0.574), for roa and tobinq, respectively. the results are statistically significant only when the performance is measured by roa. this means that aq finance, accounting and business analysis 4 (1) 2022 10 positively affects the performance of a company when the performance is measured using roa. when the performance is measured by tobinq, there is no association between aq and tobinq. the results indicate that an increase in aq will lead to an increase in roa. these findings imply that the companies with high aq display a high profitability than the companies with low aq. since accrual is subject to judgement and estimates by managers, the results can further suggest that management estimates and judgements lead to increase in performance. for the conditional conservatism (conser1), table 2 shows that the coefficients for conser1 are -0.003 (t-statistic=-1.567) for roa and -0.009 (t-statistic=-0.511) for tobin q, but the association is not statistically significant. this result implies that the conditional conservatism is not related to performance. with regard to the unconditional conservatism (conser2), table 2 displays the coefficient values of 0.005 (t-statistic=-10.539) and -0.039 (t-statistic=-9.336) for roa and tobinq, respectively. these results are statistically significant. this indicates that there is a negative association between performance and conser2. the unconditional conservatism implies the understatement of net asset value through for example, the recognition of accelerated depreciation, immediate recognition of research and development costs as expenses (ryan, 2006; beaver and ryan, 2005). unlike the conditional conservatism, the unconditional conservatism is not subject to the occurrence of an event (beaver and ryan, 2005). therefore, the unconditional conservatism practice impacts the performance of company. the hypothesis h1b is confirmed only for unconditional conservatism. for the earnings persistence (pesist), table 2 indicates a positive significant relation between persist and roa, with a coefficient of 0.024 (t-statistic=3.962) and a negative insignificant relation between persist and tobinq, with a coefficient of -0.044 (t-statistic=-0.829). these results suggest that earnings persistence directly influence the performance of companies when it is measured by roa and that companies with higher persistent earnings display a high performance as compared to those with less persistent earnings. concerning the earnings predictability (predict), table 2 displays that predictability has coefficients of 0.070 (t-statistic=6.380) and 0.162 (t-statistic=1.552) for roa and tobin q, respectively. this means that the earnings predictability significantly influences the performance of a company when such performance is measured by roa. however, the association is not significant when the performance is measured by tobinq. these results imply that, the earnings predictability is positively related to roa and companies with higher earnings predictability (low value of predict) do not display a high performance as compared to those with low earnings predictability (high value of predict). this may be due to the fact that earnings predictability is also affected by accounting factors such as management’s involvement (dichev & tang, 2009); this makes it difficult to accurately predict current/future earnings based on past/current earnings. this conclusion was also drawn by holt (2013) who found no noticeable pattern with regard to the ability of current earnings per share to accurately predict future earnings per share. with regard to the earnings smoothness, table 2, portrays the estimated coefficients of -0.013 (tstatistic=-4.588) and 0.061 (t-statistic=2.361) for roa and tobinq, respectively. this result indicates that, the earnings smoothness is negatively related to roa and positively related to tobinq. it can be concluded that, the earnings smoothness influences the performance of a company and the positive or negative effect, depends on the indicators used in the measurement of performance. the results of estimation of the aggregate earnings quality property (aeqp) are presented in table 3. finance, accounting and business analysis 4 (1) 2022 11 table 2. results of the regression of performance on each earnings quality property and control variables notes: *** and ** denote significance at 1% and 5% level, respectively. t-statistics are in parentheses. the descriptions of the variables are provided in appendix 1. roa tobinq roa tobinq roa tobinq roa tobinq roa tobinq roa tobinq intercept 0.127*** -1.208*** 0.247*** -1.300*** 0.347*** -0.453 0.249*** -1.316*** 0.229*** -1.340*** 0.252*** -1.334*** (-3.761) (-3.922) (-8.516) (-4.997) (-11.993) (-1.72) -8.668 (-5.061) (-8.08) (-5.146) (-8.759) (-5.135) size -0.000678 0.115*** -0.007*** 0.119*** -0.011*** 0.081*** -0.058*** 0.122*** -0.007** 0.120*** -0.005*** 0.115*** (-0.326) (-6.079) (-3.622) (-7.029) (-6.208) -4.816 (-3.999) (-7.126) (-3.65) (-7.074) (-2.992) (-6.724) leverage -0.00794*** -0.691*** -0.065*** 0.684*** -0.057*** 0.772*** -0.077*** 0.699*** -0.090*** 0.634*** -0.079*** 0.742*** (-4.4) -4.19 (-3.527) (-4.165) (-3.305) -4.93 (-4.189) (-4.22) (-4.797) (-3.823) (-4.338) (-4.486) growth 0.045*** -0.111 0.049*** -0.111 0.030** -0.294** 0.047*** -0.106 0.036** -0.145 0.043*** -0.095 -2.936 (-0.777) 3.092 -1.776 -2.008 (-2.132) (-2.98) (-0.741) (-2.324) (-1.008) -2.758 (-0.661) aq 0.421*** -0.35 (-6.275) (-0.574) conser1 -0.003 -0.009 (-1.567) (-0.511) conser2 -0.005*** -0.039*** (-10.539) (-9.336) persist 0.024*** -0.044 -3.962 (-0.829) predict 0.072*** 0.162 (-6.38) (-1.532) smooth -0.013*** 0.061** (-4.588) (-2.361) finance, accounting and business analysis 4 (1) 2022 12 table 3. results of the regression of performance on aeqp and control variables roa tobinq coefficient t-statistic coefficient t-statistic intercept 0.346*** 11.898 -0.543** -2.045 aeqp -0.0264*** -10.314 -0.197*** -8.361 size -0.011*** -5.924 0.089*** 5.3 leverage -0.056*** -3.222 0.764*** 4.841 growth 0.031** 2.055 -0.256* -1.843 n 800 800 notes: ***, ** and * denote significance at 1%, 5% and 10%, respectively. the description of the variables is provided in appendix 1 table 3 displays that the estimated coefficients of aeqp are -0.0264 (t-statistic=-10.314) and 0.197 (t=-8.361) for roa and tobinq, respectively. this indicates that aeqp is significantly related to the performance of company. this result is consistent with h1f. the above findings can be summarized as follows: (1) each individual earnings quality property is related to performance, except for the conditional conservatism; furthermore, the interpretations of the results are different from one property to another, (2) aeqp is related to performance, with the estimated coefficients different from those obtained in individual regression of earnings quality measures and (3) there is a low correlation between earnings quality properties, which indicates that each property is distinct and captures different economic concepts, as explained in subsection 4.1. in light of the above, it can be concluded that the individuals and aggregate measures of earnings quality influence the performance of company, which supports the hypothesis h1. therefore, investors can use various properties of earnings to assess the company’s performance and make prediction about future performance. with regard to control variables, in tables 2 and 3, the majority of the regression indicates that the size and leverage have an inverse relation with performance, whereas, growth has a direct effect on performance. similar findings were reported in (dogan, 2013; quand and xim, 2014; kuncova et al., 2016; karuma et al., 2018). in particular, it was reported a negative association between leverage and performance in (quan and xin, 2014), a positive association between size and performance in (dogan, 2013; kuncova et al., 2016) and a positive relation between leverage and performance in ( karuma et al., 2018). to check the robustness of the aforementioned results, the study uses the bootstrapping estimation technique and found the results consistent with that of the multilevel regression discussed above. the relation between innate and discretionary components of earnings quality properties and performance to partition each earnings quality property into innate and discretionary components, a procedure or model used by francis et al. (2005) was utilized. the model regresses each property of earnings quality into innate factors, as in equation 10. titii tiitiitiitiitiiiti ci negearnopercyclesalescfosizeeqp ,,,6 ,,5,,4,,3,,2,,1,0, )()(   + ++++++= (10) where tieqp , represents the earnings quality properties including accrual quality, conservatism, persistence, predictability or earnings smoothness; ti cfo , )( the standard deviation of the cash flow from the companies’ operations calculated over rolling five year period; tisales ,)( the standard deviation of sales calculated over rolling five years period; tiopercycle . the operating cycle, computed as the log of sum of account receivables days and inventory days; ci is the capital intensity; tinegearn , the negative earnings; ti, the residual, which measures the discretionary component of earnings quality property and finance, accounting and business analysis 4 (1) 2022 13 ti, the firm and year, respectively. the predicted or estimated value, obtained from equation 10, represents the innate component of earnings quality property. equation 10 is used to compute the innate and discretionary components of eqp. in order to test the effect of innate and discretionary components of each eqp on the performance, equation 11 is used, where performance is regressed on innate and discretional eqp. control variables (size, leverage and growth) that have been found to influence the firm performance are included in equation 11. tititititititi growthlevsizearyeqpdiscretioninnateeqpeperformanc ,,5,4,3,2,10,  ++++++= (11) where, performance is either roa of tobinq. equation 11 is used to test the hypothesis h2, where each earnings property is added individually to the model. the results of estimating equation 11, using multilevel regression are reported in table 4. it is shown in table 4 that, for accrual quality (aq), unconditional conservatism (conser2) and earnings predictability (predict), both the innate and discretionary portions of these properties affect the performance of company, measured by roa. however, no association was found between these properties and tobinq. the results indicate that the discretionary accrual and predictability positively affect the performance (roa); this is in line with bowen et al. (2008)’s view that the discretionary action of managers in the application of accounting rules, table 4. results of the regression of performance on innate and discretionary components of each property of earnings quality aq conser1 conser2 persist predict smooth roa tobinq roa tobinq roa tobinq roa tobinq roa tobinq roa tobinq intercep t 0.3975*** 1.5317*** 0.3124*** 0.9449*** 0.7956*** 3.7125*** 0.2646*** 1.4411*** 0.139729** * -0.5865** 0.3057*** 1.3517*** (-4.758) (-1.938) (-10.114) (-3.35) (-14.967) (-7.607) (-9.521) (-5.763) (-4.795) (-2.184) (-10.967) (-5.073) innate 2.2983*** 0.8148 0.0823*** 0.4243*** 0.0277*** 0.1274*** 0.1639*** 1.1587*** 0.4262*** 2.8274*** 0.0843*** 0.0819 (-8.145) (-0.305) (-5.624) (-3.172) (-11.62) (-5.814) (-8.904) (-6.953) (-10.084) (-7.278) (-10.333) (-1.044) discr e 0.2966*** -0.4211 -0.0009 -0.0106 -0.005*** 0.0542*** 0.0084 0.0633 0.4262*** 2.8274*** -0.0043 0.0599** (-4.434) (-0.671) (-0.308) (-0.397) (-10.139) (-11.892) (-1.39) (-1.191) (-10.084) (-7.278) (-1.484) (-2.139) size 0.0245*** 0.1305*** 0.0102*** 0.1007*** 0.0292*** 0.2128*** -0.014*** 0.1718*** -0.0091*** 0.1417*** 0.0053*** 0.1149*** (-5.822) (-3.285) (-5.194) (-5.623) (-11.664) (-9.264) (-6.904) (-9.763) (-5.077) (-8.701) (-2.975) (-6.723) leverag e 0.0688*** 0.6997*** 0.0767*** 0.6399*** 0.0858*** 0.8624*** 0.0796*** 0.6735*** -0.0937*** 0.6378*** 0.0651*** 0.7371*** (-3.94) (-4.228) (-4.25) (-3.88) (-5.293) (-5.772) (-4.514) (-4.228) (-5.413) (-4.028) (-3.764) (-4.437) growth 0.0479*** -0.1092 0.0428*** -0.1457 0.0053 -0.1358 0.0414*** -0.0427 0.0298*** -0.0768 0.0410*** -0.0943 (-3.172) (-0.76) (-2.742) (-1.018) (-0.373) (-1.034) (-2.731) (-0.311) (-1.993) (-0.56) (-2.758) (-0.658) n 800 800 800 800 800 800 800 800 800 800 800 800 notes: *** and ** denote significance at 1% and 5% level, respectively. t-statistics are in parentheses. the descriptions of the variables are provided in appendix 1. provides an advantage to shareholders, due to the reporting of an increase in performance for the conditional conservatism (conser1), earnings persistence (persist) and smoothness (smooth), only the innate component influences the performance, when measured by roa. but when the performance is measured with tobinq, insignificant association was found. the exception was meet with the earnings smoothness; it was found that both the innate and discretionary smoothness are associated with performance, when measured by tobin q. these results illustrate that each component of earnings quality property affect differently the performance of companies, emphasizing the need to partition each earnings quality property into its parts. in addition, the direction of effect depends on the measurement used to evaluate the performance; this indicates that each measure of performance reflects a specific business outcome or aspect of the company. this is in line with hamann et al. (2013) who refer to performance as a multidimensional concept. these results further suggest that the performance of companies is affected by either (1) the innate component of earnings quality property, (2) the discretionary component of earnings quality property and/or (3) both the innate and discretionary components of earnings quality properties, depending on the property used. however, in most of the cases, the innate components have a greater impact on performance than the discretionary component. therefore, the results support h2. therefore, it can be finance, accounting and business analysis 3 (1) 2021 14 concluded that the quality of reported earnings is mostly affected by companies’ characteristics and operational environment; which emphasizes the need to separate each property into its innate and discretionary components. furthermore, the accounting standards applied in south africa (ifrs) have improved the accounting quality by reducing managers’ opportunistic reporting decisions. therefore, investors need to pay more attention to the companies’ business models and the operating environments, when evaluating earnings quality. nevertheless, because the accounting discretion of manager may change from one reporting period to the next, investors must also pay attention to the accounting discretion. conclusion this paper investigated the association between various properties of earnings including accrual quality, conservatism, earnings persistence, predictability and smoothness and the performance of jse listed companies. the findings indicate a statistically significant association between the earnings quality properties and the performance of these companies. an exception was noted for the conditional conservatism, which was found to be unrelated with performance. the paper further separated each earnings property into its innate and discretionary parts and examined the effect of each part on the companies’ performance. the results revealed that both components influence the performance of the companies, in most of the cases. however the innate component displays a higher impact on performance than the discretionary component. this result suggests that, in south africa, the operational environments of the companies had a greater impact on performance compared to the accounting discretions excised by the managers of these companies. furthermore, for some properties such as the conditional conservatisms, their separation into the innate and discretionary components has shift the statistical insignificance to the statistically significance; this emphasize the advantage of partitioning the properties into their innate and discretionary parts. overall, the results achieved in this paper emphasize the importance of earnings quality in the evaluation and prediction of companies’ performance. the results show that the choice of the measurement for the evaluation of performance matter, as different results may be obtained with different measurements of performance references ahmed, s. & duellman, s. 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(2014). can information transparency improve earnings quality attribute? evidence from an enhanced disclosure regime in taiwan, emerging market finance and trade, 50(4): 237 -253. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1867869 finance, accounting and business analysis 3 (1) 2021 17 appendix 1 description of variables variable symbol variable definition aq accrual quality the standard deviation of the residual from a regression of working capital, on prior, current and future cash flow from operations, sales and properties plants and equipment; all variables are scaled by asset at beginning of the year conser1 conditional conservatism the ratio of coefficient of bad news to the coefficient of good news, obtained from a regression of earnings per share deflated by prior price per share on return conser2 unconditional conservatism the book to market ratio persist earnings persistence the slope coefficient from a regression of profit before extraordinary item, scaled by asset beginning of the year, on previous profit before extraordinary item scaled by asset beginning of the year predict earnings predictability the square root of the error variance from earnings persistence model smooth earnings smoothness the ratio of operating income deflated by asset beginning of the year to the standard deviation of cash flow, scaled by asset beginning of the year; the standard deviation is computed over 5-years period roa return on assets the ratio of earnings before interest and tax and total assets tobinq tobinq the market value of firm plus debts divided by total assets. size size the natural logarithm of total assets leverage leverage the ratio of debts over total asset growth growth the growth rate in revenue. aeqp aggregate earnings quality property average of aq, conser, persist, predict and smooth. innate innate innate component of earnings quality property discre discretionary discretionary component of earnings quality property 149 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg the influence of audit tenure and audit market concentration on sharia audit quality fadhila rizki afifah, tulus suryanto*, yetri martika sari uin raden intan lampung, indonesia info articles abstract keywords: audit tenure, audit market concentration , sharia audit quality purpose: the research is aimed to determine how the influence of audit tenure and audit market concentration on sharia audit quality, study in listed companies at jakarta islamic index period 2016-2020. design/methodology/approach: associative method and quantitative approach. use logistic regression models and purposive sampling to collect the data, and secondary data sources from annual financial statement and literature related to the topics. findings: the results are audit tenure has negative influence with low significance, it was shown by sig value 0.083>0.05, audit market concentration has negative influence with low significance, it was shown by sig value 0.196>0.05, and audit tenure and audit market concentration have negative influence with low significance, it was shown by sig value 0.097>0.05. practical implications: the research provides a good starting point for deregulation about audit tenure and also recommendations for auditor to maintain their independence, the company give actual information and not overly restrict auditor in first engagement, and recommendations for next research are research period is longer, expand the object research, use moderation or intervening variable, and use other audit market concentration proxy. originality/value: the research contributes to the scientific literature related to the sharia audit, audit tenure, and audit market concentration topics. *address correspondence: e-mail : tulus_suryan70@yahoo.co.id finance, accounting and business analysis 3 (2) 2021 150 introduction audit quality is the important thing for the external and internal financial statement users in conventional and sharia companies because good audit quality is going to give great opportunity to company to grow up. it because independent auditor’s in an entity as detector of unusual in financial statement, they must be able to find fraud which possible done by manager and avoid principal from loss as shareholders in the company (pramesti and wiratmaja 2017). sharia audit quality becomes important spotlight because nowadays, sharia system is interested by public and there is great market opportunity, so that many kinds of companies start to involve in sharia scope, then the sharia audit quality must be good and correct so the products used by consumers are accordance with sharia principles. sharia principles do not contains of maysir (gambling), gharar (unclear), and riba. the difference of conventional audit and sharia: if conventional audit is limited to financial statement and if sharia audit is financial statement and sharia compliance tests in system or product of company. based on that, auditor must concentrate in client market as well in sharia scope because in ethics’ code of sharia auditor there is faith values, that means the auditor must responsible to allah as god and financial statement users (bambang 2017) but there is limitation of audit tenure as regulated by peraturan menteri keuangan no.17/pmk.01/2008, it is feared that will reduce audit quality. that means, audit has limitation in this case that is audit market concentration and audit tenure (nurdin and suyudi 2019). audit tenure is related to sharia audit quality because there is tenure makes auditor can have more comprehensive knowledge and lower emotional bonds between auditor and client, but in other side, short tenure causes limited the information acquisition, which allows data to be intentionally omitted by manager and difficult to find (hamid 2013). so, the sharia audit quality result can also be better or worse. audit market concentration is related to sharia audit quality because has impact which reduce the opportunity for big 4 client to switch auditor and limiting the auditor’s choice for big company, so it resulting in a more lenient audit approach and fear that the audit quality result will be lower. based on professional standards of public accountants, audit can be said high quality if the implementation in financial statement audit has complied with the provisions and auditing standards. meanwhile according to aaoifi, sharia audit quality is presenting actual information, the other definition of sharia audit quality is watching and supervising, controlling and reporting transactions according to islamic rules and laws which useful, accurate and on time, and fair report to take decision (yazid and suryanto 2016). related cases to audit quality is enron scandal, in sharia audit quality that is global sukuk 85% are not sharia non-compliant, and cases in this object research are pt jasa marga persero (jsmr) that is bribe to auditor to influence the result of audit from badan pemeriksa keuangan audit team and pt waskita karya that is manipulating financial statement and fictitious subcontractor projects. sharia audit basis that is quran surah al-hujurat verse 6, it shows the importance of careful examination of information because it can cause calamity (bambang 2017) and it also shows that by examining carefully, information’s quality can be known and become a consideration for the recipient of information to trust and share it, because if this is not done, it will harm others, as in the case example above. research topics about audit tenure, audit market concentration, and sharia audit quality have been many researched with different results. research about audit tenure has been researched by (kurniasih and rohman 2014), (febriyanti and mertha 2014), and (andriani and nursiam 2018) the results shown that audit tenure has negative influence on audit quality but, different result with (mislinawati 2017) and (mujiyati, rohmah, and kusumo 2020). audit market concentration has been researched by (eguasa and urhoghide 2019), (nurdin and widiasari 2016), (huang, chang, and chiou 2016), and (clarina and fitriany 2019) the results shown that audit market concentration has positive influence on audit quality but, different result with (gunn, kawada, and michas 2019). sharia audit quality has been researched by (mujiyati, rohmah, and kusumo 2020) and the sharia audit quality research still rare to find. there were phenomenon of frauds and unprofessional in sharia audit makes sharia audit quality must be maintained and this research focus is external sharia audit quality factors those are audit tenure and audit market concentration. so the aim of this research is to determine how the influence of audit tenure and audit market concentration on sharia audit quality, study in listed companies at jakarta islamic index period 2016-2020. literature review company theory company theory is an organization which combines and organizes various resources with the aim of producing goods or services for sale. in long-run their existence is not only give benefit for the owners shareholders but will also give benefit to publics and government through a process called the circular flow finance, accounting and business analysis 3 (2) 2021 151 of economic activity (setiono 2015). agency theory agency theory is defined as contractual network between principal and agent (jensen and meckling 1976), principal is person give mandate to agent to acts on behalf principal to carry out company and report information of financial company in form financial statement (arifin 2005). there is separation between company owner and manager tend to cause agency conflict between principal and agent (jensen and meckling 1976) due to moral hazard which can cause imbalance of information (kurniasih and rohman 2014). this can lead to unwanted variations risk such as, use wealth which is not in accordance with the rule, the manager is not inadequate competence, and fraud (aldona and trisnawati 2018), in order to avoid fraud and to ensure alignment with the company’s objectiveness, in this case an independent third person (auditor) is needed to examine and provide assurance on the financial statement made (ittonen 2010). stakeholders theory stakeholder theory is a theory which describes to parties about company’s responsibility, stakeholders are divide into two categories that is inside stakeholders (stockholders, manager, and employer) and outside stakeholder (customer, supplier, government, and people) (solihin 2009). that parties need information about financial statement of company as the one of consideration to take decision (maulida and adam 2012). in sharia enterprise theory concept, stakeholders are divided into three categories those are allah swt as the highest stakeholder, people, and planet (triyuwono 2011). based on this focus research, it can be conclusion that the parties are aimed as stakeholders are allah swt, principal, agent, regulator, and people. contract theory contract theory is learning how economic agents in developing efficient or optimal contract agreement, commonly in uncertain situation and there is asymmetric information (laffont and tirole 1993). in contract theory, the one of kinds is complete contract theory which is used to explain that public accounting firm is collection of contract among various interests (tandiontong 2015). in this case, between agent and principal want to maximize their need with information they have, related to this matter, so the third party is needed that is auditor as examiner and disclosure of information in order to avoid asymmetric information, this is because the auditor is a party which is considered capable of bridging the interest of principal with agent in managing company’s finance (pratama 2012). sharia audit quality sharia audit is one of way to maintain and ensure integrity of sharia financial institutions in carrying out sharia principles, so it can provide assurance to stakeholders (akbar, mardian, and anwar 2015). according to aaoifi sharia audit quality is presenting actual information, the other definition of sharia audit quality is watching and supervising, controlling and reporting transactions according to islamic rules and laws which useful, accurate and on time, and fair report to take decision (yazid and suryanto 2016). sharia audit standards by aaoifi that is objective and principles of auditing, the auditor’s report, terms of audit engagement, sharia supervisory board: appointment, composition, and report, and sharia review (abdel and rifaat 1999). there are four things which have relation with audit quality those are length of time auditor to conducted examination of company, the number of clients, financial health client, and reviewed by the third parties (hamid 2013). in islam, audit sharia basis is quran surah al hujurat verse 6, it show the importance of careful examination of information because it can lead to calamity (bambang 2017). audit tenure audit tenure is the length of auditor’s engagement with client (andriani and nursiam 2018). short tenure causes limited information about data and evidence, so, if there is data intentionally omitted by manager, it will difficult to find. audit tenure is measured by count number of years auditor’s engagement in same company consecutively (hamid 2013). tenure can have impact on auditor performance with client such as, emotional relationship between auditor and client, independence, fee, compensation, and others (hamid 2013) long tenure will increase quality and effective auditor about client business knowledge but, short tenure can causes delay information, audit failures often occur in early period of auditor carrying out his audit duties (geiger and raghunandan 2002), and financial statement fraud usually occur in early years of audit (carcello and nagy 2004). audit tenure is carried out because to avoid auditor from interacting too close with client, avoid auditor from commitment escalation to client deviation (nurdin and widiasari finance, accounting and business analysis 3 (2) 2021 152 2016), there is not over familiarity which will make collusion between auditor with client, lack of innovation, audit procedure is weak, and lack of critical and auditor independence (carey and simnett 2006). audit market concentration audit market concentration is audit market share control from each company in each industry in certain period (mardiana and anggraita 2015). the aimed concentration is centered in competition in the same industry (kallapur, sankaraguruswamy, and zang 2010). the consequence from increased concentration of audit market is a bigger gap between first-tier public accounting firm (paf) and smaller paf (willekens and achmadi 2003) and concentrate has harmful impact to others because it has reduced chance to big 4 client to change auditor, especially remember about independence auditor requirement in sarbanes oxley 2002 (boone, khurana, and raman 2012), so that resulting softer audit approach and lower audit quality but, audit market concentration also can increase audit quality (rahmah and apandi 2020). if it is seen by other side, audit market concentration can trigger audit quality to decline due to the large number of engagement with client and dominate market and it will be tendency to change behavior because they feel better and powerful so, it motivate to reduce audit quality such as reduction of audit time or opinion shopping (rahmah and apandi 2020) methods the research used in this study is associative method with quantitative approach. research type is library research and the data source is secondary data which gotten by e-journal, e-book, book, article or symposium related to this topic research and website to download financial statement of listed company at jii period 2016-2020 that is www.idx.co.id. the population is all listed companies at jii period 2016-2020. data collection technique is research library and field data is annual financial report of listed company at jii period 2016-2020. dependent variable is sharia audit quality, the proxy is company activities on sharia rules, generally accepted principles, report to financial statement users, and auditor independence in terms to test sharia compliance test, that proxy is taken from audit opinion such as previous research (yazid and suryanto 2016). this dependent variable is measured by variable dummy where, 0= not sharia compliant and 1= sharia compliant. independent variables are audit tenure and audit market concentration. audit tenure uses proxy that is first audit engagement is starting by number one and plus one for the next year, this proxy same with previous researches are (andriani and nursiam 2018), (kurniasih and rohman 2014), and (werastuti 2013). audit market concentration uses proxy herfindahl-hirschman index (hhi) as used in previous researches those are (gunn, kawada, and michas 2019) and (mardiana and anggraita 2015). hhi formula is: hhi= ∑(a/a) (1) where: ∑ : summation over all big 4 auditors that perform audits within that group a : total client asset a : total value of asset audited in that group by all public accounting firms auditors data analyze method in this research is regression logistic analysis, it is used to examine dependent variable can be predicted with independent variable (ghozali 2018) and this research uses spps apps verse 25 to process data. in this research uses some tests those are 1) statistics descriptive analysis to show maximum and minimum score, mean, and standard deviation, 2) classic assumption test to know probability habituation has bias consequence, so to know it happen or not, we did multicollinearity test (ghozali 2016), multicollinearity test is aimed to examine about does regression model there is correlation between independent variable, to detect it by attention variance inflation factor (vif) score and tolerance (ghozali 2018). the score used to indicate existence of multicollinearity factor if tolerance score > 0.10 and vif so, multicollinearity does not occur (riswandi 2014), and 3) hypothesis tests ares used logistic regression analysis as model to predict and learn relation between independent variable and dependent variable. in this research we did with use significance level 0.05 (α=5%) (ghozali 2012). this research analysis use five tests those are hosmer and lemeshow’s goodnes of fit test, overall model fit, nagelkerke r square, logistic regression analysis, and wald test. hosmer and lemeshow’s goodnes of fit test is used to examine empirical data match or fit with the model, that means, there is not difference between data and model so, it can be said fit. if statistic score of hosmer and lemeshow’s = or < 0.05, so there is significant difference between model with observation score, so, goodnes of fit model is bad because model can not predict the observation score. if score of http://www.idx.co.id/ finance, accounting and business analysis 3 (2) 2021 153 hosmer and lemeshow’s > 0.05 so, model can predict observation score or it can be said model be able to accept because fit with observation data (ghozali 2009) over all model fit is used to examine: does all independent variable in logistic regression analysis simultaneously influence dependent variable. over all model fit based on statistic score -2ll or lr score (widarjono 2010). this test did with compare difference score -2 log likehood (chi square test), if score of chi square test is bigger than chi square table or significance score is smaller from alpha, so it can be said that there is influence of independent variable on dependent variable simultaneously. nagelkerke r square is used to get determination coefficient interpretable by dividing cox and snell r2 score with maximum score (ghozali 2009). logistic regression model in this research is: saq= α+β1at+ β2 amc+е (2) where: saq = sharia audit quality α = constant β1… βn = regression coefficient at = audit tenure amc = audit market concentration е = error wald test is used to examine there is or not influence of variable dependent on independent variable partially by comparing wald statistic score with comparison chi square in freedom degree (fd)=1 alpha 5% or with compare significance score (p-value) with alpha 5% where smaller p-value from alpha shows that hypotheses is accepted or there is significance influence from dependent variable on independent variable partially (widarjono 2010). results and discussion the following table present sample selection procedure: table 1. sample selection procedure defined criteria numbers of company numbers of listed companies at jii period 2016-2020 150 incomplete data (60) numbers of research sample 90 source: authors' own calculations, 2021 the following tables present research result and the analysis table 2. descriptive statistics analysis result descriptive statistics n minimum maximum mean std. deviation at 90 1 3 1.50 0,675 amc 90 0,003911784 1,568005860 0,390536923 0,374260023 valid n (listwise) 90 source: processed spss output, 2021 the data in table 1 is known that numbers of sample (n) are 90 companies sample, audit tenure has minimum score is 1 and maximum is 3 that means each listed companies at jii during june-november period 2016-2020 have done audit at least 1 tenure and the most is 3 tenure audit engagements with the same paf and average score is 1.5 that means, average companies have audit engagements with the same paf is 1 until 2 times. audit market concentration has minimum score is 0.003911784, it is from inco company and maximum score is 1.568005860 and it is from ptba company. the companies are mining sector, that score is shown that based on total asset client, start from minimum score until maximum score of audit market concentration there is in mining sector and the average score for audit market concentration is 0.390536923. table 3. classical assume test: multicollinearity test. coefficientsα model collinearity statistic finance, accounting and business analysis 3 (2) 2021 154 tolerance vif 1. (constant) 0.999 1.001 amc 0.999 1.001 at a. dependent variable: saq source: processed spss output, 2021 based on table 3, it showed that no one independent variable have tolerance score less than 0.1 and no one independent variable have vif score more than 10 or score tolerance >0.1 and vif <10. so the conclusion is there were not multicollinearity between independent variable in this research. table 4. hypothesis test: hosmer and lemeshow’s goodnes of fit test step chi-square df sig. 1 9.316 8 0.315 source: processed spss output, 2021 based on table 4, it knew that chi-square 9.316 and significance is 0.315. the significance score is bigger than 0.005 so, h0 is accepted that means, the model can predict observation score or can be said model be able to accept because it according to the observation data. table 5. hypothesis test: overall model fit -2 log likehood first -2 log likehood (block number=0) 87.229 final -2 log likehood (block number=1) 82.560 source: processed spss output, 2021 based on table 5, it knew first -2 log likehood has decrease if it compare with final -2 log likehood, that means, addition of 2 independent variables into regression model was repairing model fit and showing better regression model. table 6. hypothesis test: the result of comparison -2ll score omnibus test model coefficients chi-square df sig. step 1 step 4.669 2 0.097 block 4.669 2 0.097 model 4.669 2 0.097 source: processed spss output, 2021 table 6 shows the comparison of -2log likehood which the comparison follows chi-square distribution, from that table was known that significance score 0.097 or 9.7%, that means 0.097 score is bigger than α that is 0.05 (α= 0.05 or 5%) due to significance value in that test is bigger than α, so it can be interpreted that audit tenure and audit market concentration have negative influence on sharia audit quality with low significance. table 7. hypothesis test: test result of nagelkerke r square model summary step -2 log likehood cox & snell r square nagelkerke r square 1 82.560a 0.051 0.081 source: processed spss output, 2021 based on table 7 knew that nagelkerke r square score is 0.081, that means 8.1% variability of dependent variable can be explained by variability of independent variables, that means in this research, variability of audit tenure variable and audit market concentration variable explain dependent variable (sharia audit quality) is 8.1% and 91.9% is explained by outside of research variables. table 7. hypothesis test: logistic regression model result b s.e wald df sig. exp(b) at -0.658 0.379 3.011 1 0.083 0.518 amc -0.891 0.689 1.672 1 0.196 0.410 finance, accounting and business analysis 3 (2) 2021 155 constant 2.887 0.769 14.081 1 0.00 17.933 source: processed spss output, 2021 so the result model from the test on logistic regression model is: saq=2.887-0.658 at-0.891 amc interpretations of logistic regression model above are: 1) constanta score is 2.887 with positive coefficient direction showed if audit tenure variable and audit market concentration variable changed in positive direction so sharia audit quality will increase and if changed in negative direction so sharia audit quality will decrease. 2) audit tenure (at) variable regression coefficient score is -0.658 with negative direction has meant that every there is increase of 1 on audit tenure so the probability sharia audit quality occurs will decrease. 3) audit market concentration (amc) regression coefficient score is -0.891 with negative direction has means that every there is increase of 1 on audit market concentration so the probability sharia audit quality occurs will decrease. table 8. hypothesis test: wald test result. wald sig. at 3.001 0.083 amc 1.672 0.196 constant 0.00 0.00 source: processed spss output, 2021 based on wald test result above, so the interpretations from wald test are: 1) audit tenure variable in wald test got score 3.011 with significance level 0.083 or 8.3% that means, it bigger than α (5%) so, audit tenure did not influence on sharia audit quality. 2) audit market concentration in wald test got score 1.672 with significance level 0.196 or 19.6% that means, it bigger than α (5%) so, audit market concentration did not influence on sharia audit quality. discussion audit tenure has negative influece and significance on sharia audit quality based on the tests result above so, h1 is accepted but low significance. this result support previous researches from (andriani and nursiam 2018), (kurniasih and rohman 2014), and (febriyanti and mertha 2014). this hypothesis is accepted because there is limited information, data, and evidence related to company, then, audit failure often occur when first audit engagement and financial statement fraud often occur in first years audit. audit market concentration has positive infulence and significance on sharia audit quality based on the tests result above so, h2 is rejected, that means audit market concentration has negative influence with low significance on sharia audit quality. this result supported previous research from (gunn, kawada, and michas 2019). this rejection because of high market concentration causes few paf choices, so the paf has many engagements. audit tenure and audit market concentration has positive infulence and significance on sharia audit quality based on the tests result above so, h3 is rejected, that means audit tenure and audit market concentration have negative influence with low significance on sharia audit quality. this result is novelty from this research. this rejection because there is limited information, data, and evidence related to company, then, audit failure often occur when first audit engagement, financial statement fraud often occur in first years audit, and high market concentration causes few paf choices, so the paf has many engagements. conclusion based on the tests result, audit tenure has negative influence with low significance, audit market finance, accounting and business 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3 issue 2, 2021 http://faba.bg non-performing loans in bulgaria and alleviations for debtors in times of covid-19 pandemic violeta todorova* university of national and world economy, bulgaria info articles abstract keywords: bulgarian banking system, capital adequacy, non-performing loans, covid-19 pandemic, moratoria on loan payments objective: this paper is focused on examining the condition of non-performing loans (npls) in bulgaria in the light of the covid-19 pandemic. its purpose is to present the serious threat that npls can be for economic and financial stability and to prove that adequate measures are taken in bulgaria for reducing the share of bad loans during the pandemic. methodology: the study presents the dynamics in lending and share of nonperforming loans (npls) in bulgaria by examining monetary statistics data for the period 2016-2021. тhe statement presents basic measures and policies taken in bulgaria for alleviation of borrowers in times of crisis and impaired economic stability. the empirical study is based on econometric model a multiple linear regression model is performed for checking the correlation between npls and three key macroeconomic indices which are very tangible in times of crisis: government deficit/surplus, unemployment, gdp growth. for illustration of essential tendencies and results are used tables and graphs based on observations, comparative analysis and systematization. results: the results show that up to the middle of 2021 the amount of npls in bulgaria has not increased considerably as a result of the pandemic. it is due to the adequate measures taken by the government and the financial authorities which give the obligors the possibility to postpone their payments in future. suspension of the payment moratoria and increase of unemployment may lead to higher amount of npls in bulgarian banking system. *address correspondence: e-mail: vtodorova3@gmail.com finance, accounting and business analysis 3 (2) 2021 132 introduction the covid-19 pandemic inevitably has slowed down the economic performance of bulgaria. the gross domestic product (gdp) has contracted to 4.2 % in 2020 as a result of the lockdown.1 the fiscal deficit widens to -3,4%2. the number of granted credits is smaller. despite the decrease оf nonperforming loans ratio in recent years, this situation may change due to the pandemic-driven economic contraction. though, banks are generally well-capitalized and liquid. new waves of infections and new restrictive measures are expected. there is a big uncertainty in the course of the pandemic – uncertainty about health and life, jobs and wages, and of course, about loans. the increasing number of non-performing loans (npls) in the banks` portfolio can induce economic and financial distress. there is a broad consensus among researchers and scientists that the great value of npls has negative impact on the economy of the country concerned because they affect banks` balance sheet stability and profitability and put limitation on bank lending activities. non-performing loans influence macroeconomic indicators such as gdp growth, unemployment and inflation, and their acceleration adversely affects the real economy (klein 2013). minimization of npls is necessary for a stable economic growth. deteriorated loan portfolio of banks causes problems in the banking system and is a prerequisite for financial crisis (messai and jouini 2013). example for serious crisis caused by npls is those of 2007-2009. in 2007, the citizens of one of the richest countries in the world, the united states, live well over their financial possibilities and this influences the whole world economy. the growing consumption forces americans to borrow and consume as if their income has increased. as a result, savings are replaced by debts. interest rates, taxes and increasing housing prices are very profitable for creditors while borrowers take new loans, not facing the reality. this credit boom is based on the presumption that housing prices will be increasing continuously in future (stiglitz 2010). when the bubble bursts, the united states face serious financial and economic crisis, which extends over the whole world due to the domino effect. high economic growth combined with a credit boom can be interpreted as a signal of economic "overheating" and therefore as a potential threat to the stability of the banking sector (festic et al. 2009). in prospering economic times creditors grant many loans, including bad loans, result of the prevailing optimistic mood and expectations. in the next phase of the boom people believe that the economic cycle is eternal and are tempted to invest money which they do not actually own (otte 2006). their investments can survive if the expansion is endless. this may happen in a perfect world but the reality is different and such investments should be directed to a healthy and stable growth. loans are expensive commodities bound up with taking certain economic risks. their future is always unsure. for this reason both lenders and borrowers should be cautious. after the serious damages caused by the crisis of 2007-2009, npls have been observed carefully by policymakers and supervisory bodies. in the european union, the european banking authority together with other eu bodies and institutions is responsible for the creation and implementation of an action plan for solving the problem with non-performing loans in the member states and keeping the value of npls to the reference level. nevertheless, a number of banks in the eu member states have been experiencing high levels of nonperforming loans.3 unfortunately, the covid-19 pandemic raises expectations for growth of non-performing loans. the confinement of the population leads to serious social and economic consequences. many businesses and individuals are expected to face liquidity problems and difficulties in timely payment of their financial obligations. this could affect the stability of the credit institutions due to the possibility for additional expenditures, large number of defaults and increased capital requirements. this paper examines the actual situation with the amount of npls in bulgaria after the development of the covid-19 pandemic and tests the effect of key economic indicators on their value. the second section includes statistical information for the amount of npls in the countries of the european union and comparative information for bulgaria, multiple linear regression model showing the influence of macroeconomic variables on npls and description of measures taken in bulgaria by banking and non-banking financial institutions for reducing debt burden. the results are summarized in the conclusion. methods lending behavior of banks is related to economic activity and to key economic indicators. the 1,2 eurostat official statistics data 3 european central bank, banking supervision, 2017. guidance to banks on non-performing loans finance, accounting and business analysis 3 (2) 2021 133 supply of loans is influenced by the capital adequacy requirements for the credit institutions – a downturn in economic activity shrinks lending and increases capital adequacy ratios. this research includes information for the capital adequacy of the bulgarian banking system, statistical information for the values of npls in bulgaria before and after the burst of the covid-19 pandemic, measures taken by the bulgarian government and bulgarian national bank for alleviation of borrowers and multiple regression analysis presenting the effect on npls of gdp growth, unemployment and government deficit/surplus. the independent variables are selected after literature review of the factors which influence npls. the effect of gdp growth and unemployment is proved in number of researches (klein 2013; beck, jakubík и piloiu 2013; kupčinskas and paškevičius 2017; kuzucu & kuzucu 2019). there is a consensus on the negative effect of gdp growth on npls higher gdp presumes fewer bad loans and vice versa. an economic slowdown increases unemployment rate and bad loans increase as well. the positive correlation between public debt and npls is also found which suggests that fiscal problems may lead to a rise of problem loans (makri , tsagkanos and bellas 2014). public debt increases fiscal burdens imposed on citizens and this deteriorates their repayment capacity (ciukaj and kil 2020). the quantitative data is in the form of numbers showing percentage annual values for bulgaria of the following variables gross non-performing loans, domestic and foreign entities % of gross loans; government deficit/surplus, debt and associated data as percentage of gdp; unemployment rate; gdp growth rate – percentage change on the previous period. the data is in the form of time series derived from eurostat database. the multiple linear regression model is performed by using spss. banking system in bulgaria and share of npls. the covid-19 pandemic finds the bulgarian banking system in very good condition with very high capital adequacy ratios, decreasing amount of non-performing loans and high profits in the period 2017-2019. the state of emergency in the country is announced on 13 march 2020. data published by bnb supervisory statistics shows that the capital adequacy for the whole banking system in bulgaria in march 2020 is as follows: 19.44% common equity tier 1, 19,82% tier 1 capital and 20,45 % total capital adequacy. according to the capital adequacy requirements of basel iii, the minimum level of common equity tier 1 should be at least 4.5% of risk-weighted assets (rwa) , tier 1 capital at least 6% of rwa and total capital adequacy at least 8.0% of rwa. in december 2020 and in june 2021 the capital adequacy indices of the bulgarian banking system are again at very high level which exceeds substantially the regulatory requirements. (see table 1and figure 1). table 1 source: bnb march 2020 june 2020 september 2020 december 2020 march 2021 june 2021 minimum required level under basel iii common equity tier 1 (%) 19,44% 22,10% 21,86% 21,69% 21,53% 21,96% 4,50% tier 1 capital (%) 19,82% 22,51% 22,27% 22,10% 21,92% 22,35% 6% total capital adequacy(%) 20,45% 23,14% 22,93% 22,74% 22,54% 22,94% 8% capital adequacy of the bulgarian banking system finance, accounting and business analysis 3 (2) 2021 134 figure 1 analysis made by the bulgarian credit rating agency (bcra) in april 20204 presents both optimistic and pessimistic scenarios with expectations for a decline of the bulgarian economy in 2020 in the range of 2-10%. the government expects 3% decline in gdp when updating the state budget. as mentioned before – the real decline in gdp is somewhere in the middle -4.2 % according to data from eurostat. bcra predicts a serious negative impact on the cash flows of both individuals and legal entities. payment disruptions in a number of economic sectors, receivables cycle extension, delays in debt obligations service, limited consumption and job losses, increase in defaults on households’ loans – all these expected consequences of the covid-9 pandemic could enhance the risk for financial institutions. at the beginning of 2021 the banking sector in bulgaria operates in an environment of restricted measures initiated against the covid-19 pandemic. there is a partial recovery of the economic activity, which remains significantly lower compared to the same period of the previous year. the bulgarian national bank (bnb) warns5 in an address on the occasion of the banker`s day that there is high uncertainty for the financial position of corporations and households in the following months. the significant uncertainty surrounding the economic situation leads to an increase in the accrued impairments6 according to information from bnb this is among the major factors behind the decreased profits and lower profitability indicators of the banks compared with the previous year.7 the national bank also recognizes the possibility of deepening the coronavirus crisis. this would worsen the economy and reverse the trend of decreasing the share of non-performing loans in bank portfolios. lending in bulgaria increases in the last five years as it can be seen in table 2. there is a continuous tendency for an increase in the number and amount of the loans granted through the years. data shows that the pandemic has decreased the number of the granted loans by the banking financial institutions with 204 900 at the end of 2020 compared to the end of 2019. though, the value of the granted loans in 2020 is up with more than 2,5 mln. bgn. in 2021 lending in bulgaria continues to rise. 4 bcra, 2020. expected impact of the covid-19 pandemic: financial sector in bulgaria 5 association of banks in bulgaria, 2020. quarterly bulletin, issue № 64 6 impairment means reduction in the value of an asset because the asset no longer generates the benefits expected earlier due to changes in market value of the asset, business environment, government regulations, etc. impairment occurs when an asset suffers a depreciation in fair market value. impaired assets must be recognized as a loss on an income statement. the technical definition of impairment loss is a decrease in net carrying value of an asset and this decrease is greater than the future undisclosed cash flow of the impaired asset. (n.d.) in investopedia.com dictionary. retrieved from https://www.investopedia.com/terms/i/impairment.asp 7 association of banks in bulgaria, 2021. the economy and the banking sector in bulgaria, fourth quarter of 2020 march 2020 december 2020 march 2021 june 2021 min level 19.44% 21.69% 21.53% 21.96% 4.50% 19.82% 22.10% 21.92% 22.35% 6% 20.45% 22.74% 22.54% 22.94% 8% capital adequacy of the bulgarian banking system total capital adequacy(%) tier 1 capital (%) common equity tier 1 (%) https://financial-dictionary.thefreedictionary.com/asset https://financial-dictionary.thefreedictionary.com/market+value https://www.investopedia.com/terms/i/impairment.asp https://www.investopedia.com/terms/f/fairmarketvalue.asp https://www.investopedia.com/terms/f/fairmarketvalue.asp finance, accounting and business analysis 3 (2) 2021 135 table 2 source:bnb аt the background of increased lending activity in the period 2016-2020 the share of nonperforming loans in bulgaria has decreased significantly (see figure 2). as it can be seen from figure 3, in 2016 bulgaria is among the leaders of non-performing loans in eu, according to data from eurostat. in 2019 bulgaria takes the fourth place with a share of 6,5% gross npls (figure 4). trying to fulfill the recommendations of the european authorities, the country initiates amendments in bank capital adequacy and insolvency framework. the share of non-performing loans to total gross loans in bulgaria decreases from 12,8% in 2016 to 5,9% in 2020. the report of the european commission from 2020 european semester: assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances notes that there has been “progress in banking sector and non-performing loans” in bulgaria. banking sector has strengthened, banks are profitable and well capitalized and the share of non-performing loans has decreased. nevertheless, bulgaria is still among the countries with highest levels of npls in the eu. data: eurostat figure 2 12.2016 12.2017 12.2018 12.2019 12.2020 06.2021 number 2 741 743 2 746 507 3 065 552 3 117 690 2 912 790 2 919 616 thousand lv/bgn 49 176 457 50 828 566 54 739 350 58 826 557 61 503 859 67 761 797 loans to non-financial corporations, households and non-commercial organizations serving households 12.8 10.2 7.7 6.5 5.9 2016 2017 2018 2019 2020 gross non-performing loans, domestic and foreign entities % of gross loans, bulgaria gross non-performing loans, domestic and foreign entities % of gross loans finance, accounting and business analysis 3 (2) 2021 136 data: eurostat figure 3. the level of the npls in european union countries in 2016 data: eurostat figure 4. the level of the npls in european union countries in 2019 the reference level of npls in eu is determined by the european central bank on the basis of consolidated banking data from domestic banking groups and stand-alone banks in the eu member states. data for the reference levels of npls at the end of the year for the period 2014-2020 is presented in table 3. at the end of 2020 the reference level of gross non-performing loans and advances (% of total gross loans and advances) is 2.59 %. bulgaria always surpasses the reference level. nevertheless, from 2016 to 2020 there is a significant decrease in the amount of npls and endeavour for reaching the reference level. finance, accounting and business analysis 3 (2) 2021 137 table 3 gross non-performing loans and advances [% of total gross loans and advances] consolidated banking data 2014-q4 2015-q4 2016-q4 2017-q4 2018-q4 2019-q4 2020-q4 6.7155 6.8432 5.2916 4.0601 3.2059 2.7815 2.5865 source: european central bank regression model the simple model of the multiple linear regression is generalized in equation 1.1. the dependent variable is npls. the explanatory variables are gov deficit/surplus, unemployment and gdp growth. after calculating the coefficients via spss is received equation 2.2 for a linear regression. the whole regression analysis is presented in appendix 1. npls = b0 + b1* gov deficit/surplus + b2* unemployment + b3* gdp growth + ei (1.1) npls = 0,782 – 0,117* gov deficit/surplus + 1,232* unemployment + 0,414* gdp growth (2.2) coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) ,782 ,805 ,971 ,369 gov deficit/surplus -,117 ,146 -,066 -,802 ,453 unemployment 1,232 ,093 ,954 13,208 ,000 gdp growth ,414 ,123 ,245 3,353 ,015 a. dependent variable: npls the f-test shows that there is a regular multiple dependence between npls and gov deficit/surplus, unemployment, gdp growth. the model is adequate and it can be used for research. the coefficient of correlation r=0.988, 0,7 < r=0.988<1 determines that there is very strong multiple dependence of npls upon gov deficit/surplus, unemployment, gdp growth. the tests for statistical significance of coefficients (t-test) show that coefficients gdp growth and unemployment are statistically significant. the coefficient gov deficit/surplus is statistically insignificant. both coefficients gdp growth and unemployment are positive, consequently there is a straight one-way dependence – increase of unemployment and gdp growth leads to an increase of npls. increase of unemployment with 1% leads to 1,232% increase of npls. increase of gdp growth with 1% leads to 0,414 % increase of npls. based on the regression analysis it can be inferred that an increase of unemployment and increase of gdp growth in bulgaria may lead to а growth of the amount of npls in the country. the influence of the government deficit/surplus on npls is not significant and it can be assumed that the growing deficit as a result of the pandemic will not lead to a burst of bad loans. measures taken by the financial authorities for debt burden relief during the pandemic. measures taken by the european authorities. european and national financial authorities play a crucial role in ensuring financial stability. in march 2020 the european central bank announces a new pandemic emergency purchase program (pepp) intended specifically for addressing the effects of the covid-19 pandemic. this is a new temporary asset purchase programme of private and public sector securities which aims to counter the serious risks to the monetary policy transmission mechanism. the european central bank recommends that banks should restrict dividend distribution and enhance their loss absorption capacity through their capital buffers. as a result of the expectation for possible imbalances in the economic and financial stability, the finance, accounting and business analysis 3 (2) 2021 138 european banking authority issues guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the covid-19 crisis (eba/gl/2020/02)8. the aim of the guidelines is to clarify that payment moratoria applied before 31 march 2021 do not trigger forbearance classification if they are based on applicable national law or on an approved industry-wide measures. risk measurement is crucial in this situation of difficult economic circumstances, so the obligors expected to face longer-term financial difficulties and the quality of banks` portfolios should be observed carefully. according to the general payment moratoria „forbearance“ means temporarily postponement of capital payments and/or interest payments of a loan for borrowers in financial difficulty. credit institutions are required to categorize the exposures as performing or non-performing according to the requirements. very important issue is the performance of individual assessment of the payment capacity of the borrower and granting forbearance measures for each specific case with no consideration of diminished financial obligation. the following conditions must be fulfilled: • the reason for the moratorium is a response to a financial problem created as a result of the covid19 pandemic and it is announced and applied before 31 march 2021. • both legislative and non-legislative moratoria have to be based on a broad initiative. institutions are encouraged to coordinate their activities. • countries which have banking associations may delegate the coordination of the moratorium scheme to such association. • the moratorium has to be applicable for a large number of obligors affected by the crises caused by the pandemic, regardless of their creditworthiness. • the creditworthiness of the obligors is not decisive for applying the general payment moratoria because it should be in force for those who faced financial difficulties before the pandemic and for those who didn`t have faced such difficulties as well. the forborne exposures must maintain this classification. • the moratorium is not obligatory and can be applied after request from the obligor presenting the consequences from the pandemic for the debt. the decision of the application must be taken before 31 march 2021. • the conditions of the moratorium are standardized for all obligors affected by the pandemic. separate moratorium scheme with different conditions can be elaborated for specific group of obligations, for example consumer loans, mortgage loans, etc. • the moratorium makes amendments only in the schedule of the payments. its objective is to resolve problems with short-term liquidity shortages. it can postpone or reduce payments for specified period of time. this may extend the duration of the loan payment or may lead to higher payments after the end of the moratorium. the other conditions of the loan should stay unchanged, especially the interest rate. the only reason for changes in the interest rate of the loan payment scheme can be the need of compensation for losses due to payment delays as a result of applying the moratorium. such changes in the interest rate would neutralize the impact of the net present value of the credit obligation. change in the interest rate related to changes in the benchmark rate is not considered a change in the terms and conditions of the loan. • the moratorium is not applicable for new loans granted after the date of the moratorium. in this context, the use of existing credit lines and renewal of revolving loans is not a new loan. this constraint aims to ensure that the moratorium is used for payment problems arising as e result of the covid-19 pandemic. the original date on which the moratorium was launched should be used for making the decision for treatment of the loan according to the conditions of the general payment moratoria. • regardless of the application of the conditions of the moratorium for obligors with payment delays as a result of the pandemic, credit institutions are allowed and encouraged to grant new loans to both new and existing clients. the new lending should be based on adequate individual assessment of the creditworthiness of the borrower. the application of the moratorium for the new loans should not be necessary. the postponement of the loan payments in the future means higher risk of insolvency for the borrower. this can influence bank`s capital adequacy and overall stability. the exceptional circumstances created by the lockdowns strengthen the need for proper risk assessment. for limitation of the risk faced by banks, the eba puts constraint on the length of the postponement of the payments in future – the general payment moratoria can be up to 9 months. this means that loan payments can be postponed several times but totally for 9 months. the institutions have to identify all obligors who make use of the moratorium. institutions should 8 european banking authority, 2020 finance, accounting and business analysis 3 (2) 2021 139 also assess borrower`s unlikeliness to pay in relation to the general payment moratoria because this would indicate the obligors under a moratorium that have long term solvency issues. all actions taken by institutions under the general payment moratoria should be made in a transparent public manner. other measures recommended by the european banking authority are: guidelines on covid -19 measures reporting and disclosure presenting reporting and disclosure requirements to monitor the use of payment moratoria; guidelines on loan origination and monitoring – their aim is to present standards for credit risk taking and granting loans of high credit quality; guidelines on credit risk mitigation for institutions applying the internal ratingbased approach with own estimates of loss given defaults (lgds) – clarifying the credit risk mitigation framework. in december 2020 the european commission publishes an action plan for “tackling nonperforming loans (npls) in the aftermath of the covid-19 pandemic”. the focus of this plan is on development of the secondary markets for distressed assets. this will allow banks to move the npls off their balance sheets into asset management companies (amcs). the cooperation of national asset management companies at eu level is encouraged. measures taken in bulgaria. the first version of the guidelines on legislative and non-legislative moratoria on loan repayments is published on 4 april 2020, amended on 26 june 2020 and on 2 december 2020. the emergency status in bulgaria is announced on 13 march 2020. тhe bulgarian legislator creates measures for alleviation of the debtors immediately after the announcement of the emergency status. according to the bulgarian act on the measures and actions during the state of emergency declared with the decision of the national assembly of 13 march 20209 no statutory interest is accrued for debtors in credit agreements and other forms of financing and consequences from payment delays are not applied until cancellation of the state of emergency. the decision of the national assembly of the republic of bulgaria specifies that the state of emergency is until 13 april 2020 10 and later this term is extended until 13 may 2020. 11 simultaneously, the non-accumulation of statutory interest for debtors is prolonged – up to two months after the cancellation of the state of emergency which means until 13 july 2020. debtors are exempted from the statutory interest but not from the interest rates according to their credit contracts. the statutory interest is moratory, punitive interest; it is not agreed but is provided for by law. it is regulated in the obligations and contracts act: “in case of non-performance of a monetary obligation, the debtor shall be liable for damages to the amount of the interest accrued from the date of default … the rate of interest is set forth by the council of ministers. ”12 the statutory interest gives compensation to the lender for payment delays from the debtor. the annual amount of the statutory interest for overdue monetary liabilities in bulgaria is the amount of the base interest rate of the bulgarian national bank plus 10 percentage points. the daily amount of the statutory interest for overdue monetary obligations is equal to 1/360 part of the annual amount.13 the base interest rate of bulgarian national bank for 2020 is 0,00%14 which means that the annual statutory punitive interest for debtors is 10%. other government measures for the period of the state of emergency in the country and up to two months after its cancellation with particular importance for the stability of the financial sector are: the enforcement proceedings are suspended; all announced public sales and introductions into possession announced by public and private bailiffs are suspended; distrains are not allowed either upon individuals' bank accounts or to salaries and pensions. on 19 march 2020, the bulgarian national bank announces a package of measures aimed primarily at further strengthening the capital and liquidity of banks in the context of the covid-19 pandemic estimated at bgn 9.3 billion. they include: capitalization of the profit generated in the banking system in 2019 at the amount of bgn 1.6 billion. as a result, some of the banks in the bulgarian banking system will not be able to distribute dividends to their shareholders and will have to reinvest all their profits; 9 act on the measures and actions during the state of emergency declared with the decision of the national assembly of march 13th, 2020, and on overcoming the consequences, 2020 10 decision to declare a state of emergency, sg 22/ 13 march 2020 г., 11 decision for extension of the term of the declared state of emergency, sg 33/ & april 2020 г. 12 obligations and contracts act, 1950, art. 86 , 13 resolution № 426 of the council of ministers of 18 december 2014 to determine the amount of statutory interest on overdue monetary obligations, sg 106/ 23 december 2014 г. 14 bulgarian national bank statistics, base interest rate, 2020. finance, accounting and business analysis 3 (2) 2021 140 a cancellation of the planned increases of the countercyclical capital buffer applicable to local credit risk exposures, and maintaining its level of 0.5% in the second half of 2020 and in 2021. maintaining the current level of the buffer aims to contribute to maintaining the resilience of the banking system against potential adverse trends in the economic environment, credit risk losses and pressure on the profitability and capital position of credit institutions ; reduction in commercial banks’ foreign exposures which will strenghthen the liquidiy of the bulgarian banking system with bgn 7 billion . the preparation and coordination of general payment moratorium in bulgaria is performed by the association of banks in bulgaria (abb) which currently represents the banks in bulgaria. on 3 april 2020 the governing council of the bulgarian national bank (bnb) makes a decision15 for compliance with the adopted by the european banking authority (eba) guidelines on legislative and non-legislative moratoria on loan repayments (eba/ gl/2020/02). bnb requires from the commercial banks to propose in five working days a draft of rules on private moratorium on bank loan payments in relation to the covid-19 situation. on 9 april 2020 bnb approves the “procedure for deferral and settlement of liabilities payable to banks and their subsidiaries – financial institutions in relation to the state of emergency enforced by the national assembly on 13 march 2020 as a result of the covid-19 pandemic” /procedure for deferral/.16,17 with decisions made on 9 july 2020 and on 11 december 2020, after a proposal made by the association of banks in bulgaria, bnb twice approves extension of the deadline for submitting requests by bank clients for deferral of their liabilities. for deferral of liabilities in bulgaria can apply borrowers with difficulties in payment of their obligations as a result of the covid-19 pandemic. all borrower`s obligations before 1 march 2020 should have been regularly paid and with no more than 90 days past due. loan payments can be postponed for up to 9 months. the period of postponement should expire not later than 31 december 2021. requests for deferral can be made by bank clients until 23 march 2021 and the creditor must take its decision not later than 31 march 2021. the procedure offers three deferral mechanisms: mechanism 1 – deferral of principal and interest payments for up to 9 months, but not later than 31 december 2021. after the period of postponement of credit payments, a new payment plan should be elaborated and the outstanding debt should be repaid in a term up to 9 months longer than the initial one. mechanism 2 – deferral of principal payments for up to 9 months but not later than 31 december 2021. the bank client makes interest payments according to the loan contract. after the period of postponement of principal payments, a new payment plan is prepared and the outstanding debt should be repaid in a term up to 9 months longer than the initial one. mechanism 3, applicable to revolving products – payments and limits concerning revolving products can be postponed for up to 9 months but not later than 31 december 2021. the type of liability deferral mechanism is chosen with common decision of both parties. the creditors can also elaborate individual deferral schemes for the individual needs of their customers. according to data from bnb reflecting the state of the banking system in bulgaria up to the end of march 202118, totally of 131 576 applications are submitted under the procedure for deferral and settlement of liabilities payable to banks and their subsidiaries financial institutions, with a gross value of liabilities of bgn 9,7 billion. from these 110 849 applications are approved and the gross value of the approved deferrals is 92,6% of the total value (see table 6.) the value of npls decreases on yearly basis but their share in the gross book value of all credits and advances increases to 7,4% at the end of 2020. the share of npls in the gross book value in june 2021 slightly decreases to 6,7 %. (see table 7) 15 bulgarian national bank, 2020, press release_3 april 2020 16 bulgarian national bank, 2020, press release_10 april 2020 17 association of bank in bulgaria, 2020 18bulgarian national bank supervision statistics, 2020 finance, accounting and business analysis 3 (2) 2021 141 table 6. information under the procedure for deferral and settlement of liabilities payable to banks and their subsidiaries (procedure for defferal) 30.6.2020 30.9.2020 31.12.2020 31.3.2021 number value (thousand lv.) number value (thousand lv.) number value (thousand lv.) number value (thou sand lv.) submitted requests 118 584 9 771 986 124 950 9 997 531 108 211 8 759 762 131 576 9 700 951 approved requests 98 499 8 117 145 106 481 9 023 161 89 478 8 073 698 110 849 8 983 106 % approved 83,1 83,1 85,2 90,3 82,7 92,2 84,2 92,6 source: bnb table 7 source: bnb this official statistic of npls in bulgarian banking system does not include the value of the loans approved under the procedure for deferral according to the moratoria on loan repayments. excluded are also the non-performing “fast loans” granted by non-banking financial institutions. the percentage of approved requests under the procedure of deferral is continuously growing and reaches 84,2 % in march 2021. according to the application of the international financial reporting standard 9 (ifrs 9), the banks by using their own models make forecasts for potential impairments for the expected credit losses due to covid-19 and accumulate preliminary provisions before the potential negative effect on the loan impairments occurs. those actions, in accordance with ifrs, affect the amount of the impairments, made by banks in the course of 2020. bulgarian national bank accepts decisions for applying the guidelines issued by the european banking auhority: guidelines on covid -19 measures reporting and disclosure; guidelines on loan origination and monitoring; guidelines on credit risk mitigation for institutions applying the internal ratingbased approach with own estimates of loss given defaults (lgds). moreover, as a result of the continuing uncertainty and the challenges related to the economic effects of the spread of covid-19 and the imposed restrictive measures, bnb adopts a decision to maintain the macroprudential measure for capitalization of the full profit of banks for 2020. loans granted by non-bank financial institutions. the bnb credit statistics presents data about the number and amount of granted loans and nonperforming loans concerning only credit institutions (commercial banks). in bulgaria, a significant share of short-term loans, the so-called "fast loans", are granted by non-bank financial institutions. these are companies specialized in lending, which provide loans with funds that are not raised through public december 2016 december 2017 december 2018 december 2019 december 2020 march 2021 june 2021 gross book value 77 517 396 81 547 552 89 028 962 94 454 735 76 678 451 80 231 080 82 083 843 performing 67 556 371 73 255 301 82 234 014 88 334 418 70 967 310 74 533 323 76 570 400 non-performing 9 961 025 8 292 251 6 794 948 6 120 317 5 711 141 5 697 757 5 513 443 with possibility of nonpayment, which are regular or overdue < = 90 days 2 966 597 2 638 392 2 247 295 2 185 552 2 388 803 2 376 069 2 240 751 overdue > 90 days <= 180 days 519 109 373 257 359 799 454 544 302 170 354 726 436 089 overdue > 180 дни 6 475 319 5 280 602 4 187 854 3 480 221 3 020 168 2 966 962 2 836 603 non-performing loans as % of the gross book value 12,9 10,2 7,6 6,5 7,4 7,1 6,7 accumulated impairment, accumulated changes in fair value due to credit risk and provisions -5 270 585 -4 379 368 -4 090 453 -3 617 288 -3 586 062 -3 586 079 -3 598 029 credits and advances non-performing loans and advances and accumulated impairment (thousand lv./bgn) finance, accounting and business analysis 3 (2) 2021 142 charging of deposits or other repayable funds. there is a public register of these non-bank financial institutions operating on the territory of the republic of bulgaria, supported by the bulgarian national bank. usually, clients of such companies are people with bad credit history, who cannot apply for significantly cheaper financing from the commercial banks, or do not want long-term financial commitment. banks also will not give financing to these clients because they do not meet the creditworthiness requirements. often the clients of the non-banking financial institutions for “fast loans” are in the "shadow economy" sector. in the national charter of undeclared employment the bulgarian association of industrial capital (bica, 2021) indicates that the undeclared employment in the bulgarian economy according to employers is 25.3%, and according to employees about 33%. many employees pay their insurances on the basis of much lower wage than they actually receive, thus paying lower social security payments by the employee and the employer. a large number of employees cannot prove their official income and therefore cannot meet bank requirements. the reported statistics about the “fast loans” is published by bnb and formed on the basis of data provided by the companies specialized in lending. the volume of the granted "fast loans" has a tendency to increase over the last five years. at the same time, in the period 2016-2019 the volume of non-performing fast loans decreases. it is the increase in the volume of fast loans and the decline in the share of nonperforming fast loans that indicates that there is a large share of solvent borrowers who, upon different reasons, prefer non-banking financial institutions to cover their needs for additional funds. at the end of december 2020, the loan receivables of the companies specialized in lending are bgn 3.073 billion (2.6% of gdp) compared to bgn 2.898 billion (2.4% of gdp) at the end of december 2019. at the end of december 2020, the amount of non-performing fast loans is bgn 297.4 million. it increases by 57.8% (bgn 109.0 million) compared to the end of december 2019.19 in the first half of 2021 lending of non-banking financial institutions in bulgaria is growing and the percentage ratio of their npls is too high – 9.1%. (see table 8) table 8 source: bnb the companies specialized in lending have developed and applied a unified approach to their borrowers affected by covid-19 from the very beginning of the state of emergency in the country. some of the measures include full or partial deferral of contributions, as well as renegotiation of terms of repayment, for clients affected by the pandemic, in particular: customers sick with covid-19, customers that have lost their job as a result of the pandemic, or are in unpaid leave. the measures are valid for the period of state of emergency in the country and applied on the basis of providing documents certifying the existence of reasons for deferral of contributions. the measures are available to customers who have regularly repaid their loans until the state of emergency. if the non-performing loans of bulgarian banking and non-banking institutions are summed, the result shows that the total value of npls continuously decreases over the years. even at the end of 2020, after the burst and the development of the pandemic, the total value of npls is over bgn 300 million less than their value at the end of 2019. in 2021 the amount of npls decreases. (see table 9) 19 bulgarian national bank statistics, 2020. companies specialized in lending 31.12.2016 31.12.2017 31.12.2018 31.12.2019 31.12.2020 31.3.2021 30.6.2021 total 2 508 929 2 747 987 2 436 082 2 897 822 3 072 541 3 128 493 3 346 439 with maturity 2 100 247 2 405 561 2 231 120 2 709 350 2 775 021 2 834 658 3 043 213 up to 1 year 488 263 564 918 495 597 672 812 708 899 703 568 792 793 1 to 5 years 727 559 787 822 663 891 755 539 747 174 752 140 769 576 over 5 years 884 425 1 052 821 1 071 632 1 280 999 1 318 948 1 378 950 1 480 844 non-performing 2 408 682 342 426 204 962 188 472 297 520 293 835 303 226 % npls 16,3 12,5 8,4 6,5 9,7 9,4 9,1 1 the list of reporting is updated in accordance with the register of financial institutions under art. 3a. of the credit institutions act. 2 non-performing loans under regulation (eu) № 680/2014 in relation to applicable accounting standards. receivables of companies specialized in lending 1 thousand lv. /bgn finance, accounting and business analysis 3 (2) 2021 143 table 9 source: bnb conclusion bulgarian authorities the government and the bulgarian national bank – have taken adequate and timely measures for alleviation of debtors in the break-out of the covid-19 pandemic and the following economic crisis. new waves of infection and new measures lie ahead. there are enormous uncertainties and expected big risks about the solvency of individuals and legal entities. nevertheless, the bulgarian financial system exceeds the capital adequacy requirements. the amount of npls in bulgaria has not increased significantly from the beginning of the pandemic. undoubtedly, the reason for this is the provided payment relief for obligors affected by the covid-19 pandemic. the procedure for deferral and settlement of liabilities allowes suspension or postponement of payments within a specified limited period of time and not later than 31 december 2021. the obligors have opportunity to return to regular payments after the situation is back to normal. the european banking authority defined this moratorium as a general preventive measure that applies to a large group of obligors. bulgarian national bank together with the association of banks in bulgaria takes into consideration all provisions of the moratoria. furthermore, bnb has adopted all guidelines addressed by the european authorities to credit institutions concerning debt burden relief and mitigating risk in times of covid-19 pandemic. the official position of the nonbanking financial institutions in bulgaria is that they apply an individual approach to each obligor who faces payment problems. the payment moratoria introduced in bulgaria and in other eu countries is a temporary decision which hides the actual amount of npls caused by insolvency during the pandemic. therefore, no definite conclusions can be made in terms of the npls formation. after the expiration of the moratorium an increase in the amount of npls is expected. the performed analysis proves that if unemployment in bulgaria increases, bad loans will rise. unlike other countries, the performed regression analysis proves that gdp growth in bulgaria leads to an increase of non-performing loans, albeit by a small percentage. this can be explained with ineffective risk measurement and too long insolvency procedures. in these challenging times bulgaria successfully joins the european exchange rate mechanism (erm ii) in july 2020, taking another step toward adopting the euro. it is expected that erm ii membership and the next generation eu funds will facilitate further reforms in bulgaria. facilitation may come not only for the country but also for bulgarian obligors. the capital adequacy ratios in bulgaria significantly surpass eu requirements. though, the unsatisfactory insolvency framework is one of the reasons for relatively high values of non-performing loans in the country. bulgaria needs to follow the best practices in insolvency regimes in order to guarantee efficiently functioning financial system. references act on the measures and actions during the state of emergency declared with the decision of the national assembly of march 13th, 2020, and on overcoming the consequences, 2020 (prom. sg. 28/24 mar 2020, amend. and suppl. sg. 34/9 apr 2020, suppl. sg. 38/24 apr 2020, amend. and suppl. sg. 44/13 may 2020, suppl. sg. 55/19 jun 2020, amend. sg. 60/7 jul 2020, amend. and suppl. sg. 64/18 jul 2020, amend. sg. 71/11 aug 2020, amend. and suppl. sg. 92/27 oct 2020, amend. and suppl. sg. 98/17 nov 2020, amend. sg. 101/27 nov 2020, suppl. sg. 103/4 dec 2020, suppl. sg. 105/11 dec 2020, suppl. sg. 107/18 dec 2020, amend. and suppl. sg. 109/22 dec 2020, amend. and suppl. sg. 11/9 feb 2021, amend. and suppl. sg. 14/17 feb 2021) association of banks in bulgaria, (2020). procedure for deferral and settlement of liabilities payable to banks and their subsidiaries – financial institutions in relation to the state of emergency enforced by the national assembly on 13 march 2020 as a result of the covid-19 pandemic, abb, available at: https://abanksb.bg/en/procedure-deferral-and-settlement-liabilities-payable-to-banks-andtheir-subsidiaries-financial-institutions-relation-the-state-of-emergency-covid-19-pandemic/, accessed: 04.03.2021 december 2016 december 2017 december 2018 december 2019 december 2020 march 2021 june 2021 non-performing loans credits of commercial banks 9 961 025 8 292 251 6 794 948 6 120 317 5 711 141 5 697 757 5 513 443 non-performing loans companies specialized in crediting 408682 342426 204962 188472 297 520 293 835 303 226 total 10 369 707 8 634 677 6 999 910 6 308 789 6 008 661 5 991 592 5 816 669 non-performing loans banks and non-banking institutions (thousand lv./bgn) https://web6.ciela.net/document?documentid=2137201355&dbid=0&edition=0 https://web6.ciela.net/document?documentid=2137201355&dbid=0&edition=1 https://web6.ciela.net/document?documentid=2137201355&dbid=0&edition=2 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(2006). der crash kommt, econ verlag, january 1, 2006 resolution № 426 of the council of ministers of 18 december 2014 to determine the amount of statutory interest on overdue monetary obligations, sg 106/ 23 december 2014 г. , available at: https://dv.parliament.bg/dvweb/showmaterialdv.jsp?idmat=90830, accessed: 19.02.2021 retrieved from: https://www.bnb.bg/statistics/stbirandindices/stbibaseinterestrate/index.htm retrieved from: https://www.bnb.bg/statistics/stotherfinancialinstitutions/stlendingcorporations/index.htm? foryear=2020 stiglitz, j. (2010), freefall: america, free markets, and the sinking of the world, new york times https://www.imf.org/en/news/articles/2021/02/01/pr2128-bulgaria-imf-executive-board-concludes-2020-article-iv-consultation https://www.imf.org/en/news/articles/2021/02/01/pr2128-bulgaria-imf-executive-board-concludes-2020-article-iv-consultation http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2247224## https://core.ac.uk/display/25934815?utm_source=pdf&utm_medium=banner&utm_campaign=pdf-decoration-v1 https://core.ac.uk/display/25934815?utm_source=pdf&utm_medium=banner&utm_campaign=pdf-decoration-v1 https://www.econjournals.com/index.php/ijefi/article/view/517 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=15 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=16 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=17 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=18 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=19 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=20 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=21 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=22 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=23 https://web6.ciela.net/document?documentid=2135459110&dbid=0&edition=24 https://dv.parliament.bg/dvweb/showmaterialdv.jsp?idmat=90830 https://www.bnb.bg/statistics/stbirandindices/stbibaseinterestrate/index.htm https://www.bnb.bg/statistics/stotherfinancialinstitutions/stlendingcorporations/index.htm?foryear=2020 https://www.bnb.bg/statistics/stotherfinancialinstitutions/stlendingcorporations/index.htm?foryear=2020 finance, accounting and business analysis 3 (2) 2021 146 appendix 1 get data /type=xlsx /file='c:\users\violeta todorova\desktop\wf faba\eurostat data – копие.xlsx' /sheet=name 'лист1' /cellrange=full /readnames=on /assumedstrwidth=32767. execute. dataset name dataset1 window=front. regression /missing listwise /statistics coeff outs r anova /criteria=pin(.05) pout(.10) /noorigin /dependent npls /method=enter govdeficitsurplus unemployment gdpgrowth. variables entered/removedb model variables entered variables removed method 1 gdp growth, unemploym ent , gov deficit/sur plus . enter a. all requested variables entered. b. dependent variable: npl model summary model r r square adjusted r square std. error of the estimate 1 ,988a ,976 ,964 ,8129 a. predictors: (constant), gdp growth, unemployment , gov deficit/surplus anovab model sum of squares df mean square f sig. 1 regression 160,364 3 53,455 80,890 ,000a residual 3,965 6 ,661 total 164,329 9 a. predictors: (constant), gdp growth, unemployment , gov deficit/surplus b. dependent variable: npls coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) ,782 ,805 ,971 ,369 gov deficit/surplus -,117 ,146 -,066 -,802 ,453 unemployment 1,232 ,093 ,954 13,208 ,000 gdp growth ,414 ,123 ,245 3,353 ,015 finance, accounting and business analysis 3 (2) 2021 147 anovab model sum of squares df mean square f sig. 1 regression 160,364 3 53,455 80,890 ,000a residual 3,965 6 ,661 total 164,329 9 a. dependent variable: npls multiple regression model npls = b0 + b1* gov deficit/surplus + b2* unemployment + b3* gdp growth + ei h0: there is not linear dependence between npls and gov deficit/surplus, unemployment, gdp growth. the model is not adequate. h1: there is a regular multiple dependence between npls and gov deficit/surplus, unemployment, gdp growth. the model is adequate. α=0,05 f=80,890 sig=0,000 sig=0,000 < α=0,05 → h0 is rejected there is a regular multiple dependence between npls and gov deficit/surplus, unemployment, gdp growth. the model is adequate and it can be used for research. npls = 0,782 – 0,117* gov deficit/surplus + 1,232* unemployment + 0,414* gdp growth r=0.988, 0,7< r=0.988<1, → strong multiple dependence of npls of gov deficit/surplus, unemployment, gdp growth. statistical significance of coefficients: gov deficit/surplus h0: the coefficient gov deficit/surplus is statistically insignificant. h1: the coefficient gov deficit/surplus is statistically significant. α =0,05 t = -0,802 sig = 0,453> α =0,05 → h0 is accepted and the coefficient gov deficit/surplus is statistically insignificant. unemployment h0: the coefficient unemployment is statistically insignificant. h1: the coefficient unemployment is statistically significant. α =0,05 t = 13,208 sig = 0,000 < α =0,05 → h0 is rejected and the coefficient unemployment is statistically significant. gdp growth h0: the coefficient gdp growth is statistically insignificant. h1: the coefficient gdp growth is statistically significant. α =0,05 t = 3,353 sig = 0,015< α =0,05 → h0 is rejected and the coefficient gdp growth is statistically significant. both coefficients unemployment and gdp growth are positive, consequently there is a straight one-way dependence – increase of unemployment and gdp growth leads to an increase of npls. increase of unemployment with 1% leads to 1,232% increase of npls. increase of gdp growth with 1% leads to 0,414 % increase of npls. finance, accounting and business analysis 3 (2) 2021 148 appendix 2 statistical data npls % gov deficit/surplus % unemployment % gdp growth % 2011 14,9* -2 11,3 2,4 2012 16,6* -0,3 12,3 0,4 2013 16,8* -0,5 13 0,3 2014 16 -5,4 11,4 1,9 2015 14,5 -1,7 9,2 4 2016 12,8 0,2 7,6 3,8 2017 10,2 1,2 6,2 3,5 2018 7,7 2 5,2 3,1 2019 6,5 2,1 4,2 3,7 2020 5,9 -3,4 5,1 -4,2 source: eurostat* *npls for 2011, 2012, 2013 world bank data, no data in eurostat statistics 34 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg the reform of the european union system of own resources – challenges and prospects nelly popova university of national and world economy, sofia, bulgaria info articles abstract keywords: eu budget, own resources, reforms, economic integration the present article is devoted to the reform of the system of own resources undertaken in the context of adoption of the long-term eu budget for 2021-2027. although the introduction of these reforms was a result of exceptional circumstances, the necessity to modernise the revenue side of the eu has been acknowledged for a long time. the changes in the system of own resources in 20212027 were driven mainly by the necessity to provide new sources of revenue to ensure the repayment of the debts incurred in relation to the post-pandemic recovery of the member states. the second objective of the reforms was to diversify the revenue structure of the budget. the new instruments to finance the eu budget agreed by the member states and the european commission can be considered as “genuine” own resources since they are related to eu policy priorities. however, given the strong increase of eu expenditure after the pandemic and the imminent repayment of the common debt, the system of own resources faces important challenges. *address correspondence: e-mail: npopova@unwe.bg finance, accounting and business analysis 4 (1) 2022 35 introduction the eu budget has been the basis of the integration process. it has as a main purpose to fund eu policies and programmes and it is financed entirely with own resources. over the past decades, however, the integration on the revenue side of the budget has considerably lacked behind with the last major reforms dating back to the end of the 1980s. moreover, the predominant share of national contributions in the revenue structure has limited the capacity of the budget to adjust to changing context and to finance new eu priorities and policies. although the necessity to reform the revenue side of the budget has been acknowledged for a long time, actions for reforms were taken only recently. the main driving forces have been the withdrawal of the united kingdom from the eu and especially the severe economic crisis caused by the covid-19 pandemic. the latter event influenced the outcome of the negotiations on the long-term budget of the eu for 2021-2027 in favour of more fiscal federalism, including the issuance of common debt to finance eu expenditure. the reforms in the system of own resources involved some changes in the already existing financing methods as well as the introduction of new types of own resources that are closely related to eu policies and priorities related to green transition and digitalisation. against this background, the present article is devoted to the reforms in the system of own resources agreed during the preparation of the eu long-term budget for 2021-2027. the purpose of the article is to analyse the main components of the reform package and to address some potential challenges and risks related to their implementation. special attention is given to the proposed new types of own resources. the rest of the article is structured as follows: the second part outlines the main characteristics and developments of the revenue side of the eu budget since the beginning of the integration process; the third part analyses the main changes in the own resource system after 2021 and their prospects; and the fourth part concludes. main characteristics of the revenue side of the eu budget the eu budget differs in many respects from national budgets and its fundamental principles are laid out in the treaty on the functioning of the eu (tfeu). in particular, tfeu stipulates that the revenue and expenditure in the budget are to be in balance, which rules out the possibility to finance the budget with borrowing. the treaty requires also that the union provides itself with the means necessary to attain its objectives and carry through its policies and that the budget is financed wholly from own resources (official journal of the european union 2012). the aim of these principles is to ensure fiscal discipline at an eu level. additionally, the basic rules for the own resources system are laid down periodically in a council decision adopted unanimously by the eu council (european commission 2022a). as can be seen in figure 1, the revenue structure of the eu budget has undergone significant changes since the beginning of the integration process. at the onset of the european communities, their expenditures were covered entirely with financial contributions by the six founding member states. the development of the first common policies led to diversification of the financing methods. the adoption in 1970 of the decision on the replacement of financial contributions from the member states by the european communities’ own resources was of key importance as the european community was to be gradually given financial autonomy through the provision of own resources (european communities 2000, 25). throughout the 1970s, the main own resources were the agricultural levies (including on the imports of agricultural goods from third countries) and the customs duties, which together raised almost 56% of total revenue. the remaining part of the revenue was covered by financial contributions from the member states (under the heading miscellaneous). in the following decades, however, receipts from customs tariffs and agricultural levies declined sharply, due to trade liberalisation on a global scale. therefore, new financing sources were necessary to cover the increasing expenditure. revenues from customs tariffs are referred to as traditional own resources.1 they are considered to be genuine own resources for the eu budget as they are derived from the common policies and they accrue directly to the eu budget (european commission, 2017, p. 8). the area of customs duties falls under the exclusive competence of the union. member states retain, as collection costs, a certain part of the established amounts of traditional own resources. in the past, this share was 10%, but in 2001 it was increased to 25% and in 2014 it was set at 20% (european commission 2014, 191). at the end of the 1970’s, a new budget-balancing own resource was introduced on the basis of vat revenue. it was calculated by applying a uniform rate (initially 1% and subsequently increased to 1.4%) to the vat base of each member state, also determined in a uniform method (european 1 subsequently, agricultural levies were incorporated into customs duties. finance, accounting and business analysis 4 (1) 2022 36 communities 2000, 16). between 1980 and 1990s the vat-based own resource was the most important financing method as its share in total budget revenue reached almost 60%. the significant decline in the revenue from vat-based contributions observed after 1990 is a result of several reductions of the call rate used to calculate the member states’ contributions (european parliament 2019). furthermore, the system for determining the vat-based own resource has been criticised repeatedly by the court of auditors, the european parliament and member states as overly complex. the european council of july 2020 has therefore concluded that it is appropriate to simplify the calculation of that own resource (official journal of the european union 2020). the system of own resources underwent its most important reform in 1988 after the establishment of the single market and the territorial expansion of the european community. to avoid yearly difficult discussions maximum ceilings by categories of expenditure are determined for a longer period, usually seven years, in multiannual financial frameworks (bisciari et al. 2021, 30). the reform introduced for the first time a ceiling of own resources (as well as expenditure) so as to contain the larger budget. initially, the ceiling of the own resources was set at 1.3% of gnp; then, in early 1990s it was raised to 1.335% of gnp to support higher expenditure on the internal market and preparation for the euro. the own resources ceiling is normally much higher than the annual expenditure ceilings, thus allowing the eu to meet its payment commitments, even in the event of an unexpected economic downturn. in addition, there is a certain amount of scope to mobilise additional expenditure over and above the annual expenditure ceilings in the face of unforeseen circumstances, without impinging on the own resources ceiling (deutsche bundesbank 2020). the 1988 reform involved also the introduction of a new own resource which was derived directly from the gross national product (gnp) of the member states. at the end of 2000s the basis for calculating the member states’ contributions as well as own resources ceiling was changed from gross national product to gross national income. the gni-based contributions (also known as national contributions) were established as a residual element of the system of own resources to ensure that all agreed expenditures in the annual budgets are sufficiently covered and to guarantee that the eu budget is always balanced at the stage if its adoption (european commission 2022b). nevertheless, they gradually became the most important financing method of the eu budget. in 2010, national contributions reached almost 76% of total eu revenue and, although afterwards their share has decreased, as of 2020 they accounted for around 72% of total receipts. when combined with vat-based contributions, the share of national contributions in the eu budget exceeds 80%. source: own calculations based on european commission data figure 1. revenue structure of the eu budget the original aim of the gni-based contributions was to guarantee that the eu budget would be in balance. another advantage of this financing method is that gross national income is an objective welfare indicator and thus it reflects the member states’ ability to pay. moreover, as the contributions are fixed as percentage of gni, their amount automatically adjusts in accordance with the business cycle stage. finance, accounting and business analysis 4 (1) 2022 37 finally, gni-based contributions ensure stability and regularity of budget revenue. on the other hand, the gni-based contributions are not a “genuine” own resource for the eu budget, as they constitute a part of member states’ public revenue. as a result of their introduction, member states increasingly measured the benefits from their eu membership by simply comparing the contributions to the eu to the direct cash receipts coming from eu programmes, ignoring the substantive benefits of joint action (european commission 2017, 5). furthermore, the reliance on this source limited the union’s possibilities to provide public goods with european dimension. finally, several member states from northern europe became net donors in the eu budget because their annual contributions exceeded the amount of the funds received under the common agricultural policy. the claims for “fair return” led to the introduction of a financial rebate of 66% of united kingdom’s net contribution to the budget, which had to be financed by other member states’ contributions (european parliament, 2019, p. 15). subsequently, five other member states from northern europe were also entitled to financial corrections of their contributions. the aim of these rebates has been to limit the financial burden on individual member states which receive relatively low returns from the eu budget. however, all other things being equal, rebates for individual member states increase the general gni-based own resource, which all countries contribute on a pro rata basis (deutsche bundesbank 2020). moreover, the complex system of corrections reduces the transparency of eu budget financing and creates recurrent tensions among the member states. after the introduction of the gni-based own resource, progress to reform the revenue side of the budget was quite limited (european commission 2021a, p. 5). there were changes only with respect to the ceiling of the own resources, which was gradually reduced to 1.31% in 2007 of gross national income (gni) and then to 1.29% of gni in 2014 (cite). according to buti and nava (2003) the lack of any significant reforms can be attributed to the “budgetary peace” achieved in late 1980s between the institutions involved in the eu budget procedure, the commission, the council and the european parliament achieved. the improved stability of the budget procedure reduced the flexibility of the budget and increased the complexity of its governing rules (buti and nava 2003 18). another reason for the impasse is rooted in the limited competences of the eu in tax affairs. as begg (2016) pointed out, the fact that the european parliament has only a consultative role in the procedure for adoption of own resources decisions is in contrast to its co-decision role in expenditure and means that revenue raising in the eu is essentially an inter-governmental deal. at the same time, the difficulties for the member states to agree on new financing methods are well-known. most of them oppose to the introduction of “eu taxes” due to fears of loss of tax sovereignty. in successive rounds of mff negotiations, attempts have been made by the european commission, usually with support from the european parliament, to assign particular taxes to the eu. however, despite extensive efforts to identify and justify suitable new own resources, the member states have consistently rejected these initiatives on the grounds that tax setting is a power reserved to them. in practice, the eu has only pretty limited powers in relation to harmonisation of value added tax designed to prevent distortion of competition, but has little influence other indirect taxes and none on direct taxes (begg 2016, 5). in recent years, the european commission has emphasised the necessity to modernise and difersify the revenue side of the eu budget in order to strengthen its alignment with eu policies and priorities. other important arguments in favour of reforms have been to design new own resources that bring also additional benefits alongside new income streams, to bring more proportionality, fairness and stabilising impact to the eu budget, and reducing the weight of the gni-based own resource in the eu budget. the proposals to introduce new sources of revenue in the 2014-2020 mff did not receive the necessary unanimous support (european commission, 2021, p. 5). during the preparation of the multiannual financial framework (mff) for 2021-2027, the commission proposed a number of reforms to the system of own resources. among these was an elimination of all corrections on the revenue side of the budget as well simplification of the vat-based own resource. the reform package suggested also the introduction of three new own resources, namely revenue from the emissions trading system, the common consolidated corporate tax base and national contributions based on the amount of nonrecycled plastic packaging waste. according to the commission’s calculations these new financing methods could amount to about 12% of total eu budget revenue which would allow reductions of the national contributions (european commission, 2018, p. 27). reforms of the own resource system in 2021-2027 and prospects for the future the negotiations on the eu long-term budget for 2021-2027 coincided with united kingdom’s withdrawal from the eu and the covid-19 pandemic and were strongly influenced by them. both events https://ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/2021-2027/revenue/own-resources/national-contributions_en finance, accounting and business analysis 4 (1) 2022 38 gave an incentive for significant reforms on the revenue side of the budget. the most important change, in response to the economic crisis triggered by the pandemic, was the start of borrowing by the european commission on the financial markets to finance the expenditure under the recovery programme next generation eu (ngeu). although ngeu is not a formal part of the multiannual financial framework, it will have important implications on eu public finances in the future, because the loans will have to be repaid. to ensure that the ec will be able to cover all liabilities resulting from the ngeu, as a guarantee, the ceiling for payments has been raised to 2% of gni. the need to resort to this additional allocation is temporary since the relevant financial obligations and contingent liabilities will decline over time as the borrowed funds are repaid and the loans mature. the increase should expire when all borrowed funds have been repaid, i.e. by 31 december 2058 at the latest (bisciari et al. 2021 39). the capacity of the eu to repay the debt incurred under ngeu will require either the introduction of new own resources or an increase in gni-based contributions. therefore, the member states committed to reform the system of own resources (european commission 2021a, 14). in order to better align the union’s financing instruments with its policy priorities, to better reflect the role of the union budget in the functioning of the single market, to better support the objectives of union policies and to reduce member states’ contributions based on gross national income (gni), the european council of july 2020 concluded that over the coming years the union would work towards reforming the system of own resources and introduce new own resources (official journal of the european union 2020). the reforms on the revenue side of the budget were specified in the decision on the system of own resources adopted from december 2020.2 among the most important changes was the introduction of a new type of own resource to finance the eu budget from the beginning of 2021, namely the national contributions based on the quantity of non-recycled plastic waste. member states pay a levy of eur 0.8 per kilogram of non-recycled plastic packaging waste, but a correction mechanism ensures that poorer member states do not pay disproportionately high levies. its objective is to create incentives for member states to reduce waste and increase recycling (körner 2020). the adoption of the new own resource was symbolic as it broke a stalemate of more than 30 years (reininger 2021). in terms of fiscal revenue, however, it is expected to have modest effects since the projected receipts amount to only eur 5.9 billion or around 3.5% of total revenue in 2022 budget (european commission 2021c). source: own calculations based on european commission data figure 2: revenue structure of the eu budget in 2022 the reform of the own resources system included also a number of changes in the existing own resources, but most of them were not as ambitious as initially planned. most importantly, the gni-based contributions will not be subject to any significant changes in 2021-2027. the budget discounts for five member states3 will be kept despite the end of the united kingdom rebate. while there was a general agreement to transform all existing corrections into lump sum discounts to some member states’ gnibased contributions, the member states could not reach a consensus on their reduction over time (european commission, 2021a, p. 14). with regard to the vat-based own resource, the uniform call rate will be kept at 0.3% in 2021-2027. however, the reform involved a simplification of the definition of the tax base used for the calculation of the vat-based national contributions. additionally, the reduced call rates applied previously for three member states were abolished (körner 2020). on the other hand, the 2 council decision (eu, euratom) 2020/2053 of 14 december 2020 on the system of own resources of the european union and repealing decision 2014/335/eu, euratom 3 austria, denmark, germany, the netherlands and sweden 11% 11% 67% 7% 4% customs duties vat-based own resource gni-based own resource other revenue plastic packaging waste own resource finance, accounting and business analysis 4 (1) 2022 39 amount of the contributions was capped at 50% of gni, contrary to the commission’s proposal (reininger 2021, 34) and implies less revenue from this resource in the eu budget. the most important change in the traditional own resources was an increase of the retention rate of customs duties revenue for the member states with 5 percentage points to 25%. the increase was in contradiction with the initial proposal, which envisaged the retention rate to be set at 10%, ant it will further reduce the share of customs duties in the eu budget after 2021. in compliance with the decision on the system of own resources, at the end of 2021 the european commission put forward a proposal with three new sources of revenue to the eu budget, namely: an own resource based on the eu emissions trading system (eu ets); an own resource based on the carbon border adjustment mechanism (cbam); and an own resource based on the taxation of the residual profits of multinational enterprises (european commission 2021b). their introduction aims to bring in line the financing of the eu budget with the union’s long-term priorities, but also to help repaying the debt under ngeu. in particular, the establishment of the own resources based on eu ets and cbam is directly linked to the goals set in the european green deal to reduce net greenhouse emissions by at least 55% by 2030 and become climate neutral by 2050 (european commission 2021c). on its part, the own resource based on the taxation of the profits of multinational enterprises reflects the efforts to adapt company taxation to digitalisation and reduce the possibilities for tax avoidance. the entry into force of the three new resources is scheduled at the beginning of 2023. additionally, the european commission will propose further own resources by june 2024, including a financial transaction tax, a financial contribution linked to the corporate sector or a new consolidated corporate income tax base. table 1: new own resources to finance the eu budget type of own resource description projected revenue per year own resource based on the emissions trading system application of a uniform rate of 25% to the revenues generated from the auctioning of allowances by the member states under the emissions trading system eur 12 billion on average in 2026-2030 own resource based on the carbon border adjustment mechanism application of a uniform call rate equal to 75% of the revenues from the sale of certificates of the carbon border adjustment mechanism eur 1 billion on average in 2026-2030 own resource based on the reallocated profits of very large multinational enterprises application of a uniform call rate of 15% to the share of residual profit of multinational enterprises reallocated to member states between eur 2.5 and eur 4 billion source: european commission 2021d, 2021b at this stage, the exact amount of the revenue from these new financial instruments in the eu budget cannot be determined with precision, but according to the european commission’s preliminary assessments, as presented in table 1, the receipts would be relatively low. it should be noted also that the receipts from eu ets and cbam will completely deplete until 2050 if the targets of the green deal are met by the deadline. on the other hand, the repayment of the debt incurred under ngeu is scheduled until 2058. therefore, new financing methods would be required in the future to cover the expenditure of the union. the practical application of these new financing methods is surrounded with uncertainties because of the technical complexities involved and mainly because they affect third countries. in case that these own resources are not introduced in the following years, or if the revenue that they raise is insufficient, the repayment of the loans under ngeu would require increases in member states’ gnibased contributions. the own resource based on eu’s emissions trading system (eu ets) is the only new financing method that can be introduced relatively fast as this system already exists and it involves only the member states. eu ets sets an absolute cap on the greenhouse gas emissions from the activities under its scope and allows tradability of allowance. currently, the revenues from emission trading accrue to national budgets, but part of them will be redirected to the eu budget after the entry into force of the new finance, accounting and business analysis 4 (1) 2022 40 financing method. fuest and pisani-ferry (2020) argue that the revenues generated under eu ets are the best possible option for a new own resource and recommend that the entire amount of revenues accrue to the eu budget, rather than to the member states where the emissions occur, to better reflect the negative externalities from pollution. these authors assess that under a realistic decarbonisation scenario, revenues from the emission trading system over the 2020-2050 would be sufficient to repay the ngeu debt. however, according to the own resources decision, only 25% of member states’ revenues from the auctioning of allowances will be directed to the eu budget with the remaining part left to national budgets. to avoid an excessively regressive impact on contributions from the emissions trading, a maximum contribution will be established for eligible member states (european commission 2021b). the own resource based on the carbon border adjustment mechanism (cbam) will consist in the application of a uniform call rate of 75% of the revenues from the sale of certificates to companies from third countries for the imports of carbon-intensive products. its main objective is to avoid the so-called carbon leakage by charging additional prices on the imports of carbon-intensive products from third countries. cbam is designed to function in parallel to the eu’s emissions trading system (eu ets) to complement its functioning on imported goods and the ultimate goal is to replace the existing eu mechanisms, in particular the free allocation of eu ets allowances (council of the european union 2022a). unlike eu ets, the border adjustment mechanism will not establish quantitative limits to import, so as to ensure that trade flows are not restricted. another difference between the two regimes is that the eu ets applies to installations in the union, while the cbam should be applied to certain goods imported into the customs territory of the eu (council of the european union 2022 8). thus, the cba is comparable to custom duties (körner 2020). the mechanism is expected to start raising revenue only after 2026, due to a necessary transition and information gathering period. furthermore, the war in ukraine could impact the stability of the mechanism as an own resource for the eu budget (bray 2022). in an empirical study bellora and fontagne (2022) concluded that cbam would be more efficient than free allowances in reducing carbon leakages. these authors argued also that there is a tension between two polar approaches in designing the european cbam: on the one hand, a more conservative approach that minimises the risk of retaliation by trading partners but has a smaller environmental impact; on the other hand, a more complex design that reduces the leakages to a much greater extent, that limits the cost for eu exporters of ets products, but discriminates more between trading partners. the third new own resource proposed by the european commission involves the application of a uniform call rate of 15% to the share of residual profit of the largest multinational enterprises reallocated to the member states (european commission 2021b). the introduction of this instrument is related to eu’s objective to modernise the rules for taxation of the profits generated by the largest multinational companies operating in the digital economy. over the past years, there have been several proposals for reforms in the field of company taxation on an eu level, but none of them has obtained the necessary unanimous consent of the member states. the introduction of this own resource, however, depends on the implementation on a global scale of a minimum tax rate of 15% on the profits of multinational enterprises. over 130 countries worldwide have reached a principal agreement on the implementation of such a tax from the beginning of 2023 within the base erosion and profit shifting (beps) project of oecd/g20 (oecd 2022), but the formal adoption of a multilateral convention is still pending. overall, the changes in the own resource system have been much more limited in comparison to the significant increase in expenditure after 2021. the uneven development of the revenue and expenditure sides of the eu budget gives rise to risks to fiscal sustainability. conclusion despite the deepening integration in the european union, the revenue side of the union budget has evolved in the opposite direction with the share of the “genuine” own resources, such as customs duties, decreasing at the expense of national contributions. the lack of significant progress towards the development of new financing methods can be attributed to the rigid procedures related to the adoption of the long-term eu budget as well as to the reluctance of the member states to renounce sovereignty in taxation. the reforms in the system of own resources introduced with mff 2021-2027 constitute an important advance given the lack of any major reforms in the past decades. moreover, they diversify the revenue structure of the eu budget and increase the share of “genuine” own resources that are linked to eu policy priorities, specifically the green transition and the digital transformation. overall, the changes on the revenue side of the eu budget after 2021 have been relatively limited, especially when compared to the strong increase of eu expenditure. the expected budget revenue from finance, accounting and business analysis 4 (1) 2022 41 the new financing instruments will be relatively low, thus they will not be sufficient to cover the repayment of the eu debt incurred in relation to the post-pandemic economic recovery of the member states. furthermore, the practical implantation of the new own resources may encounter difficulties in an increasingly complex international context. considering the repayment of the common debt of the eu and the growing number of common challenges, more reforms in the system of own resources are to be expected in the following years. references begg, iain. 2016. “the eu budget and uk contribution.” national institute economic review 236 (1): 39– 47. https://doi.org/https://doi.org/10.1177/002795011623600106. bellora, cecilia, and lionel fontagne. 2022. “eu in search of a wto-compatible carbon border adjustment mechanism.” 1/2022. cepii working papers. paris. http://www.cepii.fr/pdf_pub/wp/2022/wp2022-01.pdf. bisciari, p., p. butzen, w. gelade, w. melyn, and s. van parys. 2021. “the eu budget and the next generation recovery plan: a game changer?” brussels. https://www.nbb.be/doc/ts/publications/economicreview/2021/ecorevii2021_h2.pdf. bray, sean. 2022. “russia’s ukrainian war could impact eu carbon proposal too.” washington. https://taxfoundation.org/eu-carbon-border-adjustment-mechanism-cbam/. buti, m., and m. nava. 2003. “towards a european budgetary system.” https://cadmus.eui.eu/bitstream/handle/1814/1850/03_08.pdf?sequence=1&isallowed=y. council of the european union. 2022a. “council agrees on the carbon border adjustment mechanism (cbam).” 2022. https://www.consilium.europa.eu/en/press/pressreleases/2022/03/15/carbon-border-adjustment-mechanism-cbam-council-agrees-itsnegotiating-mandate/. ———. 2022b. “draft regulation of the european parliament and of the council establishing a carbon border adjustment mechanism.” brussels. https://data.consilium.europa.eu/doc/document/st7226-2022-init/en/pdf. deutsche bundesbank. 2020. “the eu budget and its financing: looking back and ahead.” monthly bulletin. https://www.bundesbank.de/resource/blob/831226/a569592c0a71b7c5c2494f6acace6a75/m l/2020-04-eu-haushalt-finanzierung-data.pdf. european commission. 2014. eu public finance. 5th ed. luxembourg: publications office. https://doi.org/https://data.europa.eu/doi/10.2761/17724. ———. 2017. “reflection paper on the future of eu finances.” https://op.europa.eu/en/publicationdetail/-/publication/5f9c0e27-6519-11e7-b2f2-01aa75ed71a1. ———. 2018. “a modern budget for a union that protects, empowers and defends. the multiannual financial framework for 2021-2027.” brussels. https://eurlex.europa.eu/resource.html?uri=cellar:c2bc7dbd-4fc3-11e8-be1d01aa75ed71a1.0023.02/doc_1&format=pdf. ———. 2021a. “eu budget policy brief: the evolving nature of the eu budget.” brussels. https://ec.europa.eu/info/sites/default/files/about_the_european_commission/eu_budget/kvau 21001enn_policy_brief_web.pdf. ———. 2021b. “proposal for a council decision amending decision (eu, euratom) 2020/2053 on the system of own resources of the european union.” brussels: european commission. https://ec.europa.eu/info/sites/default/files/about_the_european_commission/eu_budget/com_ 2021_570_1_en_act_part1_v8.pdf. ———. 2021c. “statement of estimates of the european commission preparation of the 2022 draft budget.” 2021. https://ec.europa.eu/info/sites/default/files/about_the_european_commission/eu_budget/db20 22_statement_of_estimates_web.pdf. ———. 2021d. “the next generation of eu own resources. factsheet.” luxembourg: publications office. https://ec.europa.eu/commission/presscorner/detail/en/fs_21_7047. ———. 2022a. “eu budget. how it works.” official web page of the european commission. 2022. https://ec.europa.eu/info/strategy/eu-budget/how-it-works/budgetlaw/legislation_en#decision-on-the-system-of-own-resources. ———. 2022b. “national contributions.” european commission web page. 2022. https://ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/2021-2027/revenue/ownresources/national-contributions_en. finance, accounting and business analysis 4 (1) 2022 42 european communities. 2000. “the community budget: the facts in figures.” http://aei.pitt.edu/42123/1/2000_budget.pdf. european parliament. 2019. “the history of the eu budget.” https://www.europarl.europa.eu/regdata/etudes/idan/2019/636475/ipol_ida(2019)63647 5_en.pdf. fuest, clemens, and jean pisani-ferry. 2020. “financing the european union: new context, new responses.” bruegel. https://euideas.eui.eu/wpcontent/uploads/sites/45/2020/09/fuestpisani_20200909.pdf. körner, kevin. 2020. “financing the eu’s recovery: increased budget ceiling and (new) eu revenues.” deutsche bank research. oecd. 2022. “international community strikes a ground-breaking tax deal for the digital age.” 2022. https://www.oecd.org/tax/beps/international-community-strikes-a-ground-breaking-tax-dealfor-the-digital-age.htm. official journal of the european union. 2012. “consolidated versions of the treaty on european union and the treaty on the functioning of the european union.” official journal of the european union. https://eur-lex.europa.eu/legal-content/en/txt/?uri=celex%3a12012e/txt. ———. 2020. “council decision (eu, euratom) 2020/2053 of 14 december 2020 on the system of own resources of the european union and repealing decision 2014/335/eu, euratom.” official journal of the european union. https://eur-lex.europa.eu/legalcontent/en/txt/?uri=celex%3a32020d2053. reininger, thomas. 2021. “the eu budgetary package 2021 to 2027 almost finalised: an assessment.” vienna. https://wiiw.ac.at/the-eu-budgetary-package-2021-to-2027-almost-finalised-anassessment-dlp-5627.pdf. 67 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg the effect of risk management reporting on financial efficiency maryam yousefinejad1, tahani ali hakami2, ahmed abdulkareem salloom al-bazi3, jaizah othman4, abdullah alhadadi5 1faculty of business, management and professional studeis, department of accounting and finance, management and science university, malaysia 2faculty of business administration, accounting department, jazan university, saudi arabia 3faculty of economics and management, universiti kebangsaan malaysia, malaysia 4faculty of business, management and professional studeis, department of accounting and finance, management and science university, malaysia 5faculty of business administration, accounting department, jazan university, saudi arabia info articles abstract keywords: financial efficiency, risk management reporting, risk management committee, liquidity risk, market risk, equity price risk. purpose: the main objective of this study is to investigate the relationship between risk management reporting and financial efficiency. design/methodology/approach: risk management reporting is measured by a score indicating whether companies report on risk management in their annual reports. efficiency is measured by the total asset turnover, which is the ratio of net revenue on total assets. this study applied a panel research design and data are collected from 138 companies listed on bursa malaysia in the product and service industries from 2018 to 2020. findings: the result of this study shows that there is a significant relationship between risk management reporting and efficiency in malaysia. the result of this study also shows between all available risk management reporting features in malaysian companies' annual reports cyber risk, equity risk, inventory risk, market risk, and regulatory risk, have significant relationships with financial efficiency. practical implications: the outcomes of this study may be useful for companies that have not prepared risk management reporting to understand the impact on their financial efficiency. the findings may also provide important suggestions for the boards of directors of these companies considering the preparation of such a report. originality/value: the study contributes to the scientific literature by conducting an extensive analysis on the results of risk management reporting from the perspective of financial efficiency. the significant relationship between risk management reporting and efficiency provides evidence that risk management is an important determinant of financial efficiency and, ultimately, of improving company’s performance. *address correspondence: e-mail: maryam_yousefi@msu.edu.my1 maryam_youssefinejad@yahoo.com1 finance, accounting and business analysis 4 (1) 2022 68 introduction at the outset of any business activity, there are a number of risks to which companies may be directly or indirectly exposed. these risks can impact a company's vision, mission, and opportunities. however, these risks can also be a company's greatest strength. companies can easily overcome the risks they face in the future or the risks they currently face. financial accounting can be influenced by risk management reporting. several authors have examined the link between financial accounting and risk management from different perspectives. however, to the best of knowledge, there are limited studies that have done on the relationship between risk management and efficiency. risk disclosure is important to improve the efficiency of the market because it helps investors estimate the size and timing of the company’s future cash flows, as well as their ability to extrapolate and predict stock returns, which affects the efficiency of investment decisions. thomas j. catalano (2021) found that risk management reporting may help companies to improve their financial flexibility, which reduces investors' need for additional information by lowering information asymmetry and agency costs, so that less cash and other funds are held for hedging purposes. risk management reporting also may help to improve risk management methods and the efficiency with which managers handle them, thereby increasing the likelihood that the company will achieve its investment objectives. despite the importance of risk disclosure as a means of increasing the transparency of information in financial reporting and enhancing confidence in the company's financial position, it does not receive enough attention because there is no accounting standard that regulates the various aspects of the company's risk disclosure and sets the minimum level of financial disclosure and non-financial threats. this may be reflected in the volatility and low level of risk disclosure in the financial reporting and affect the efficiency of the company's investment. the malaysian accounting standard board (masb) requires all companies listed on bursa malaysia to comply with accounting standards in disclosing their financial position and operations to help shareholders and investors evaluate their performance and make better decisions. in addition to these requirements, bursa malaysia lists some other specific disclosures that listed companies must include in their annual reports, such as a statement on the status of internal control, risk control and risk management. risk management is a proactive decision-making process aimed at mitigating and managing risks in the most effective and appropriate manner. however, most malaysian companies do not apply formal risk management to their annual reports. low level of transparency in disclosing information by the companies, high level of information asymmetry and agency problem are some of the reasons to the financial crises and companies’ low financial efficiency (nejad et al., 2020; yousefinejad et al., 2022). these problems have taken attention to the requirement of risk management disclosure, increase transparency of the company’s reporting, and reattracted the investors’ attention to investment. therefore, the main objective of this study is to determine the impact of risk management reporting by listed companies in the products and services industry in order to assess the impact on the financial efficiency, taking into account the different features of risk management reported by the companies. in this study, data was collected from 134 companies listed on bursa malaysia in the products and services sector. it was found that the importance given to the effective preparation of risk management reports is not taken too seriously as some of the listed companies have not submitted their risk management report since their inception. this happened because risk management reporting is not mandatory in malaysia. there are different types of indicators identified in this study such as liquidity risk, market risk, foreign exchange risk, and others. risk management played an important role in conducting this study. the results of this study can be helpful to encourage all the companies in malaysia to report their risk management to improve their efficiency to cover their obligation using their assets and help investors to make better decisions. it is crucial to complete the risk management reporting in an efficient way so that can quickly take remedial actions and find a workable solution. it can also help to face future risks and impacts with a prudent mindset and prior planning. therefore, this study attempts to find out whether risk management reporting affects efficiency. literature review the malaysian code on corporate governance stated a principle that the board of directors should maintain a sound system of internal control. the statement on risk management and internal control: guidelines for directors of listed issuers (dli) was introduced to reflect the changing regulatory environment and evolving approaches to corporate governance issues that have made disclosure an important regulatory tool (ahmad et al., 2015). the guidelines highlight the necessity for appropriate risk management, which is a crucial component of internal control. additionally, risk management reporting by boards of directors under internal control in a company, has become an essential part of corporate finance, accounting and business analysis 4 (1) 2022 69 governance disclosure requirements. the dli is proposed to guide companies’ board of directors in risk management disclosure under internal control in their annual reports. the dli has considered risk management reporting as one of the listing requirements. therefore, a public listed company is required to address issues related to internal controls and provide risk management reporting. with risk management reporting, the board of directors will be able to clarify the company’s level of risk tolerance and actively identify, evaluate, and screen important business risks to protect shareholders’ investments and the company’s assets or company’s efficiency. there are several previous studies that have looked at risk management reporting. however, in terms of the impact of risk management reporting and all its features on financial efficiency, previous studies are inconclusive and limited. pastor (2010) examined why risk management is necessary for the energy industry of 2598 companies from 1988 to 1994. the study observations consist of 1144 observations from french commercial banks, 387 italian, 524 spanish, and 543 german. the study found the most effective way to increase the effectiveness of risk management in the company is to develop it as a process within the company's support processes and to designate a process owner who is responsible for managing and promoting risk in the company and guiding business managers in this area. onaolapo a. r. (2012) examined the relationship between credit risk management efficiency and financial health in a sample of nigerian banks over a six-year period before and after the nigerian banking sector consolidation initiative. the data collection is secondary and covers a six-year period from 2003 to 2008. the study found the operational activities of a typical nigerian commercial bank are not sufficiently streamlined to maximize returns from lending, loans, and advances, which explains why the high incidence of non-performing loans and the rising cost of credit reduce the income from interest on loans. afriyie (2013) studied the impact of credit risk management on the profitability of rural and community banks in ghana's brong ahafo region by examining the financial statements of eleven rural banks from 2006 to 2010. the study found nonperforming loans reduce rural banks' profits, however, when nonperforming loans increase in proportion to profitability, it suggests that rural banks lack effective institutional measures to deal with credit risk management and that banks pass on the cost of loan defaults to other customers in the form of higher lending rates. the researchers found that all of the indicators are negatively related to bank financial performance and indicated rural banks do not have sound and effective credit risk management. ariffin & kassim, (2013) analyzed the relationship between liquidity risks and disclosure as and financial performance based on selected islamic banks in malaysia from 2006 to 2008. the study found positive effect of liquidity risk on financial performance in malaysian islamic banks. ismail et al., (2013) examined the effect of financial crises on risk management disclosure by all 17 islamic financial institutions in malaysia from 2006 to 2009, to check mandatory and voluntary items developed to measure the level of risk disclosure. analysis for a four-year period revealed that the risk disclosure has improved before and after the crisis indicating that islamic financial institutions have taken the necessary steps to improve their disclosure. shamsuddin (2018) examined the relationship between risk management disclosure and company characteristics in malaysian public listed companies. the study found the size of the company and leverage have significant relationships with risk management disclosure. ogboi & okaro (2013) and mwangi (2012) examined the impact of credit risk management and capital adequacy on the financial performance of banks in nigeria to obtain more empirical data on how credit risk management practices and capital requirements affect bank profitability in nigeria. the study used six banks with complete data for the period 2005-2009 while mwangi, (2012) looked at the data for a period of four years for 26 banks from 2008 to 2011. ogboi & okaro, (2013) demonstrated effective credit risk management and adequate capitalization have a favorable impact on banks' financial performance except for loans which had a negative impact on banks' profitability. however, mwangi, (2012) failed to demonstrate a clear relationship between credit risk management and financial performance. in addition, bayyoud & sayyad, (2015) extracted data from banks published financial statements for a period of 5 years from 2010 to 2014 and found credit risk has no effect on the profitability of palestinian commercial and investment banks. stanley isanzu (2017) examined the impact of credit risk on the financial performance of chinese banks using data collected from the country's five largest commercial banks over a seven-year period, from 2008 to 2014. the study found non-performing loans and capital adequacy as credit risk indicators have a significant impact on financial performance. based on annual reports for a 7-year period (2008-2015) provided by the albanian banking association, hallunovi & berdo (2018) determined whether credit risk management affects the profitability. the study found credit risk is still the biggest risk for commercial banks, so proper valuation and credit risk management are crucial. akhanolu et al. (2020) determined the primary influences on bank performance in nigeria, credit management and macroeconomic variables based on available statistics due to the extremely high level of bad debts in deposit-taking institutions that adversely affect performance. the sample of this study is from nigeria over a period of 11 years, from 2000 until 2010. five banks were selected for 11 years at a cross-sectional level. the authors found deposit finance, accounting and business analysis 4 (1) 2022 70 money banks with a higher proportion of adequate capital tend to lend more and absorb loan losses when they occur, resulting in better financial products for asset. dias et al. (2020) examined how an automotive manufacturer identifies and manages risk factors in its supply chain by conducting structured interviews. the analytical hierarchy process was applied to rank the risk factors, resulting in a risk matrix that can be used as a decisionmaking tool for the company under study. the focus was on companies in the automotive industry in japan during the period from january 2006 to december 2012. the authors found considering the attributes of a risk (frequency and severity), it is possible to establish a workflow in companies to analyze and measure risks. ahmed & huma (2021) examined the actual evidence of the effectiveness of lean and agile supply chain strategies on risk management in terms of creating a strong and resilient supply chain. data were collected from 140 supply chain professionals in the manufacturing industry to test the hypotheses using structural equation modelling. the authors found market orientation as an external force has a greater impact on agile strategy than lean strategy, but that quality management system as an internal force is strongly associated with the creation of lean supply chain strategies. in the study conducted by journal & ibrahim (2021), 84 egyptian companies on the egyptian stock exchange are examined to determine how risk disclosure affects investment efficiency. the authors found risk disclosure can improve investment efficiency mainly by reducing unproductive investment behavior. kuo et al., (2021) examined the relationship between risk management and corporate social responsibility (csr) and how this relationship is affected by managerial confidence and real activities earnings management. the findings show that companies with more effective risk management are more willing to engage in csr behaviors. the study also found when companies with more confident ceos who engage in real activities manipulation are higher, their csr inputs are larger. the study found that confident ceos with higher shareholdings have a stronger coherence to companies, and therefore, they are more likely to increase csr activities to enhance company’s reputation through risk management. nustini & mohd suffian (2021) examined the factors that influence the practice of corporate risk disclosure, profitability, leverage, auditor reputation, managerial ownership, and risk committee in the context of the pharmaceutical industry in indonesia and malaysia from the year 2015 to 2019. the study found insignificant results in profitability, leverage, and managerial ownership. noja et al., (2021) examined the role played by board characteristics in supporting risk management disclosure and shaping the financial performance of european companies in 2020 of 25 countries. the study risk management reporting improves profitability of companies. geresem & michael, (2021) examined credit risk management using data from several rural banks, suggesting that non-performing loans and capital adequacy as indicators of credit risk have a significant impact on financial performance. the authors also found except for liquidity risk for investment banks, which has been shown to have a significant relationship with financial performance, it was found that there are negligible correlations between capital risk, liquidity risk, and foreign exchange risk and financial performance. omesi & appah (2022) investigated the relationship between risk management and audit committees on audit pricing of listed consumer goods manufacturing companies in nigeria at year-end 2020. the results showed that risk management positively and significantly affect audit fees in nigeria. geresem & michael, (2021) applied agency theory to examine the relationship between capital structure, credit risk management and financial performance of microfinance institutions (mfis) in uganda. the researchers identified a sample size of 70 mfis from a population of 85 registered mfis in uganda. the authors found credit risk management contributes significantly to sound financial performance. salem oudat et al. (2021) examined the financial risks and financial performance of commercial and investment banks listed on the bahrain stock exchange from 2015 to 2019. the authors found there are insignificant relationships between capital risk, liquidity risk, and foreign exchange risk and financial performance, except for liquidity risk for investment banks, where a significant relationship was found with financial performance. sonny eli zaluchu, (2021) established a relationship between risk management and profitability of commercial banks in kenya and hosna et al, (2009) described the impact of credit risk management on profitability in four commercial banks in sweden for the period between 2014 and 2018. sonny eli zaluchu, (2021) stated financial institutions are determined by several factors, one of which is the ability of a financial institution to convert its deposit liabilities into revenue generating assets. while hosna et al, (2009) stated that the positive impact of credit risk management on profitability. as a conclusion of the literature review, previous studies show the effectiveness of risk management in the companies, the creation of a process within the company's support processes and the appointment of a process owner responsible for managing and facilitating risk in the companies, as well as supporting business managers in this area. however, as far as this study knows, there is no study in the literature that examined the effect of risk management reporting on financial efficiency. moreover, to the best of knowledge, there is no study in the literature that considers all available features of risk management reporting in malaysian companies' annual reports at the same time. finance, accounting and business analysis 4 (1) 2022 71 agency theory is probably the best theory to explain the agency costs that arise and the phenomenon of disclosure. according to agency theory, agency costs arise when one party (the company) has additional information compared to another party (the shareholders), so that the shareholders are in an unfavorable position in this situation (jensen & meckling, 1976). voluntary disclosure is one of the possible initiatives that the company should take to reduce agency costs (barako, hancock, & izan, 2006) because it has a signaling effect to the market (watson, shrives, & marston, 2002). in order to improve the information asymmetry, the board of directors can expand its functions and promote the disclosure of risk information. therefore, based on the above discussion and the assertion of agency theory, this study hypothesizes that there is a significant relationship between risk management reporting and financial efficiency. figure 1 shows the research framework of this study. as you can see, risk management reporting is the independent variable and efficiency is the dependent variable. figure 1: research framework methodology and data in order to obtain generalizable information on the impact of risk management reporting on efficiency, a quantitative study was conducted by this study. this study collects data from annual reports of companies in a specific industry, namely the products and services industry in malaysia for the period from 2018 to 2020. risk management in malaysia is fast becoming an important issue for all companies. it is a comprehensive strategy for managers to identify risks and choose appropriate solutions based on the company's risk appetite. this was the main purpose why malaysia was selected to conduct this study, and it aims to determine the extent of risk management implementation in malaysian companies in the products and services industry. apart from this, it is important to note that risk management reporting is not mandatory in malaysia, but most companies in the selected industries submit their risk management reports continuously every year. the reason why the product and service industry were chosen for this study is that they are exposed to risks of loss or a series of events that can lead to losses (karine tremblay 2012). although the losses may never occur, the company must plan for the risk that they will. risk management means addressing loss risks in a cost-effective way to protect the business from unexpected losses. managers of service companies can use this to discover and analyze loss risks, select, and implement treatment methods, and track the results of their efforts. in most countries, the services sector contributes significantly to gdp through the provision of jobs, inputs, and public services. trade in services has the potential to boost economic performance while providing a variety of conventional and new export opportunities. although the focus is on the services sector and many of the risk management concepts that apply to other industries are not considered. the reason why 2018, 2019 and 2020 were selected is that it is important to identify the risk conclusion in the last year of annual reporting. so, this is a period when the malaysian economy and political state experienced a decline due to some drastic reasons such as the covid 19 pandemic attack. these are the country, period and industry that were selected to conduct this research. the data collection was completed by analyzing the annual reports and collecting the risk management reports of all companies, a total of 138 companies indicating the sample size of the study, in the products and services industry of malaysia for the three years mentioned above. research design the research design of the study is panel data, which is a clear observation of the company in the product and service industry and the year that was 2018, 2019 and 2020. panel data consists of repeated observations over time on the same group of cross-sectional units. this research study was conducted using the quantitative method. quantitative methods emphasize objective measurement and the statistical, mathematical, or numerical analysis of data collected through surveys, questionnaires, and polls or through the manipulation of existing statistical data using computer techniques. quantitative research focuses on collecting numerical data and generalizing it about groups of people or explaining a particular phenomenon. risk management reporting & its features financial efficiency finance, accounting and business analysis 4 (1) 2022 72 data collection the sources for data collection were the website of bursa malaysia, companies listed in products and services as the main industry. this study obtained 414 companies-year observations. in the annual reports of the companies, this study recorded the risk management reporting, which was the independent variable for the three years 2018, 2019, and 2020, as well as the other data to complete the efficiency measurement. basically, the measurement of efficiency as the dependent variable of this study is measured by a formula that divides total revenue or sales of the company by total assets. in addition, this study captures the equity ratio, size, profitability, and return on equity of each company, which were defined as control variables of the study. in terms of the annual report, the variables mentioned above are considered as market capitalization, which can be defined as the value of a listed company calculated by multiplying the total number of shares by the current share price. in addition, the equity ratio is the ratio between a company's equity and total assets. also, profitability, which defines a company's ability to generate a return based on its resources, and return on equity (roe), a measure of financial performance calculated by return on assets multiplied by financial leverage multiplier. research models this study follows the following two research models. the difference between the two models is that the first model includes risk management reporting with all the available risk management reporting features in companies’ annual reports, while the second model only consists of all the features. 𝐸𝑓𝑓𝑖,𝑡 = 𝛽0 + 𝛽1𝑅𝑀𝑅𝑖,𝑡 + 𝛽2𝑅𝑀𝑖,𝑡 + 𝛽3𝐶𝐴𝑃𝑖,𝑡 + 𝛽4𝐶𝑂𝑀𝑖,𝑡 + 𝛽5𝐶𝑅𝐸𝑖,𝑡 + 𝛽6𝐶𝑌𝐵𝑖,𝑡 + 𝛽7𝐸𝑄𝑈𝑖,𝑡 + 𝛽8𝐹𝑂𝑅𝑖,𝑡 + 𝛽9𝐼𝑁𝑇𝑖,𝑡 + 𝛽10𝐼𝑁𝑉𝑖,𝑡 + 𝛽11𝑀𝐴𝑅𝑖,𝑡 + 𝛽12𝑅𝐸𝐺𝑖,𝑡 + 𝛽13𝑅𝐸𝑃𝑖,𝑡 + 𝛽14𝑆𝑇𝑅𝐴𝑖,𝑡 + 𝛽15𝑆𝑈𝑃𝑖,𝑡 + 𝛽16𝐸𝑃𝑆𝑖,𝑡 + 𝛽17𝐿𝐸𝑉𝑖,𝑡 + 𝛽18𝑆𝐼𝑍𝑖,𝑡 + 𝛽19𝑃𝑅𝑂𝑖,𝑡 + 𝛽20𝑅𝑂𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 m 1 𝐸𝑓𝑓𝑖,𝑡 = 𝛽0 + 𝛽1𝑅𝑀𝑖,𝑡 + 𝛽2𝐶𝐴𝑃𝑖,𝑡 + 𝛽3𝐶𝑂𝑀𝑖,𝑡 + 𝛽4𝐶𝑅𝐸𝑖,𝑡 + 𝛽5𝐶𝑌𝐵𝑖,𝑡 + 𝛽6𝐸𝑄𝑈𝑖,𝑡 + 𝛽7𝐹𝑂𝑅𝑖,𝑡 + 𝛽8𝐼𝑁𝑇𝑖,𝑡 + 𝛽9𝐼𝑁𝑉𝑖,𝑡 + 𝛽10𝑀𝐴𝑅𝑖,𝑡 + 𝛽11𝑅𝐸𝐺𝑖,𝑡 + 𝛽12𝑅𝐸𝑃𝑖,𝑡 + 𝛽13𝑆𝑇𝑅𝑖,𝑡 + 𝛽14𝑆𝑈𝑃𝑖,𝑡 + 𝛽15𝐸𝑃𝑆𝑖,𝑡 + 𝛽16𝐿𝐸𝑉𝑖,𝑡 + 𝛽17𝑆𝐼𝑍𝑖,𝑡 + 𝛽18𝑃𝑅𝑂𝑖,𝑡 + 𝛽19𝑅𝑂𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 m 2 variables’ measurements as mentioned before independent variable of this study is risk management reporting, and all the available features for risk management in annual reports of companies. dependent variable of this study is financial efficiency. this study also employs some control variables, earnings per share (eps), leverage, size, return on equity (roe) and profitability. table 1 illustrates the summary of the variables with their measurements and data collection sources. table 1: variables measurements and data collection sources variables measurements sources eff is financial efficiency measured by total asset turnover (revenue on total assets) annual reports, datastream rmr is risk management reporting measured by dummy variable (if the company provided risk management report 1 otherwise 0) annual reports rco is risk management committee measured by dummy variable (if the company have risk management committee 1 otherwise 0) annual reports cap is capital risk measured by dummy variable (if the company reported capital risk 1 otherwise 0), risk management feature annual reports com is compliance risk measured by dummy variable (if the company reported compliance risk 1 otherwise 0), risk management feature annual reports cre is credit risk measured by dummy variable (if the company reported credit risk 1 otherwise 0), risk management feature annual reports finance, accounting and business analysis 4 (1) 2022 73 cyb is cyber risk measured by dummy variable (if the company reported cyber risk 1 otherwise 0), risk management feature annual reports equ is equity risk measured by dummy variable (if the company reported equity risk 1 otherwise 0), risk management feature annual reports for is foreign currency risk measured by dummy variable (if the company reported foreign currency risk 1 otherwise 0), risk management feature annual reports int is interest rate risk measured by dummy variable (if the company reported interest rate risk 1 otherwise 0), risk management feature annual reports inv is inventory risk measured by dummy variable (if the company reported inventory risk 1 otherwise 0), risk management feature annual reports mar is market risk measured by dummy variable (if the company reported market risk 1 otherwise 0), risk management feature annual reports reg is regulatory risk measured by dummy variable (if the company reported regulatory risk 1 otherwise 0), risk management feature annual reports rep is reputational risk measured by dummy variable (if the company reported reputational risk 1 otherwise 0), risk management feature annual reports stra is strategic risk measured by dummy variable (if the company reported strategic risk 1 otherwise 0), risk management feature annual reports sup is supply change risk measured by dummy variable (if the company reported supply change risk 1 otherwise 0), risk management feature annual reports eps is basic earnings per share reported in comprehensive income statement below net income annual reports, datastream lev is leverage measured by equity ratio (total equity on total assets) annual reports, datastream siz is size measured by natural logarithm of total assets annual reports, datastream pro is profitability measured by net profit margin annual reports, datastream roe is return on equity ratio (return on assets multiplied by financial leverage multiplier) annual reports, datastream results and discussion descriptive statistic descriptive statistics provide a quantitative description of the data with the goal of summarizing the variables. table 2 provides descriptive statistics for all variables used in this study and presents the mean, median, maximum, and minimum values for all variables. the assumption behind the descriptive statistics is that the data are normally distributed, and a regression model based on those variables is valid. the total sample of the study consists of 414 company-year observations (138 companies listed in bursa malaysia and from 2018 until 2020). table 2 shows total number of observations after outlier treatment which is 399. correlation matrix multicollinearity is a statistical phenomenon in which two or more predictor variables are highly correlated in a multiple regression model. according to gujarati (2003), the presence of multicollinearity can affect the accuracy of multiple regression analysis by making estimates of regression coefficients unreliable. a correlation value of less than 0.8 indicates that there is no collinearity problem between finance, accounting and business analysis 4 (1) 2022 74 variables (gujarati 2003). table 3 shows the correlation matrix between variables in this study. from table 3, it can be concluded that there is multicollinearity problem between liquidity risk and interest rate risk and credit risk. at the same time, there is a multicollinearity problem between reputational risk and operational risk. therefore, in this study, these four variables are removed from the main analysis. finance, accounting and business analysis 4 (1) 2022 75 table 2: descriptive statistic eff rmr rco cap com cre cyb equ for int inv mar reg rep stra sup eps lev siz pro roe mean 0.71 0.89 0.37 0.00 0.01 0.82 0.01 0.03 0.51 0.74 0.03 0.36 0.01 0.07 0.10 0.00 0.07 0.81 5.12 -1.88 -0.76 med 0.64 1.00 0.00 0.00 0.00 1.00 0.00 0.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.57 5.06 1.58 1.96 max 2.41 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.69 8.87 7.87 53.99 55.86 min 0.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 4.00 -77.36 -78.43 obs 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 399 eff is financial efficiency measured by total asset turnover (revenue on total assets), rmr is risk management reporting measured by dummy variable (if the company provided risk management report 1 otherwise 0), rco is risk management committee measured by dummy variable (if the company have risk management committee 1 otherwise 0), cap is capital risk measured by dummy variable (if the company reported capital risk 1 otherwise 0), com is compliance risk measured by dummy variable (if the company reported compliance risk 1 otherwise 0), cre is credit risk measured by dummy variable (if the company reported credit risk 1 otherwise 0), cyb is cyber risk measured by dummy variable (if the company reported cyber risk 1 otherwise 0), equ is equity risk measured by dummy variable (if the company reported equity risk 1 otherwise 0), for is foreign currency risk measured by dummy variable (if the company reported foreign currency risk 1 otherwise 0), int is interest rate risk measured by dummy variable (if the company reported interest rate risk 1 otherwise 0), inv is inventory risk measured by dummy variable (if the company reported inventory risk 1 otherwise 0), mar is market risk measured by dummy variable (if the company reported market risk 1 otherwise 0), reg is regulatory risk measured by dummy variable (if the company reported regulatory risk 1 otherwise 0), rep is reputational risk measured by dummy variable (if the company reported reputational risk 1 otherwise 0), stra is strategic risk measured by dummy variable (if the company reported strategic risk 1 otherwise 0), sup is supply change risk measured by dummy variable (if the company reported supply change risk 1 otherwise 0), eps is basic earnings per share reported in comprehensive income statement below net income, lev is leverage measured by equity ratio (total equity on total assets), siz is size measured by natural logarithm of total assets, pro is profitability measured by net profit margin, roe is return on equity ratio (return on assets multiplied by financial leverage multiplier) table 3: correlation matrix between variables (multicollinearity) ef f cap co m cre d cyb equ for int inv liq mar ope reg rep rm stra sup eps lev pro rm t ro e siz e eff 1.00 finance, accounting and business analysis 4 (1) 2022 76 cap 0.00 1.00 com 0.02 0.00 1.00 cred 0.00 0.02 0.04 1.00 cyb 0.06 0.00 0.01 0.03 1.00 equ 0.00 0.01 0.02 0.08 0.01 1.00 for 0.10 0.05 0.03 0.47 0.07 0.17 1.00 int 0.02 0.03 0.01 0.80 0.12 0.10 0.52 1.00 inv 0.02 0.01 0.02 0.08 0.01 0.35 0.07 0.04 1.00 liq 0.00 0.03 0.03 0.92 0.05 0.09 0.48 0.84 0.06 1.00 mar 0.05 0.04 0.12 0.35 0.02 0.00 0.04 0.18 0.09 0.33 1.00 ope 0.04 0.01 0.33 0.13 0.13 0.04 0.22 0.11 0.04 0.09 0.09 1.00 reg 0.00 0.00 0.01 0.03 0.01 0.01 0.07 0.04 0.21 0.05 0.02 0.13 1.00 rep 0.03 0.01 0.09 0.13 0.12 0.14 0.22 0.12 0.05 0.09 0.16 0.82 0.02 1.00 rm 0.01 0.04 0.11 0.16 0.05 0.13 0.11 0.04 0.10 0.14 0.32 0.33 0.09 0.23 1.00 stra 0.03 0.02 0.07 0.16 0.02 0.06 0.00 0.18 0.06 0.15 0.23 0.63 0.02 0.62 0.43 1.00 sup 0.03 0.00 0.00 0.02 0.00 0.01 0.05 0.08 0.30 0.10 0.07 0.01 0.71 0.01 0.07 0.02 1.00 eps 0.05 0.02 0.01 0.00 0.02 0.02 0.06 0.06 0.05 0.01 0.07 0.00 0.03 0.01 0.04 0.01 0.02 1.00 lev 0.02 0.02 0.02 0.08 0.02 0.04 0.04 0.08 0.05 0.08 0.04 0.03 0.00 0.02 0.04 0.05 0.02 0.04 1.00 pro 0.16 0.00 0.01 0.07 0.01 0.01 0.00 0.07 0.02 0.07 0.05 0.06 0.00 0.05 0.00 0.09 0.00 0.11 0.40 1.0 0 rm r 0.06 0.02 0.03 0.66 0.02 0.06 0.30 0.52 0.06 0.60 0.20 0.09 0.02 0.09 0.08 0.11 0.02 0.01 0.12 0.0 5 1.00 finance, accounting and business analysis 4 (1) 2022 77 ro e 0.17 0.01 0.02 0.05 0.00 0.13 0.01 0.09 0.14 0.06 0.03 0.07 0.01 0.02 0.04 0.08 0.01 0.17 0.38 0.6 4 0.05 1.00 size 0.07 0.01 0.01 0.02 0.01 0.02 0.00 0.04 0.02 0.03 0.08 0.06 0.01 0.06 0.02 0.05 0.01 0.25 0.02 0.0 7 0.01 0.05 1.0 0 finance, accounting and business analysis 3 (1) 2021 78 regression analysis results this study applied panel least square (pls) to analyse the relationship between variables. in order to select the appropriate pls between pooled, fixed effect and random effect models, this study run the ‘redundant fixed effectliklihood ratio’ to compare between pooled and fixed effect models, and the ‘hausman’ test is carried out to compare between fixed and random effect models. according to the results of redundant and hausman tests, the fixed effect model was found to be more appropriate for two specified regression models. table 4 illustrate the results of redundant and hausman tests. table 4: comparison between pooled, fixed and random effect models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 35.256 -135.000 0.000*** cross-section chi-square 128.394 135.000 0.000*** correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 32.610 21.000 0.050** this study analyses the relationship between variables using fixed effect model and runs two regression models while considering white’s heteroscedasticity consistent standard error and covariance to solve the heteroscedasticity problem. table 5 shows the regression results of first model which indicates the relationship between risk management reporting and efficiency. table 5: the regression results of relationship between risk management reporting and efficiency variable coefficient std. error t-statistic prob. rmr 0.056 0.018 3.172 0.002*** rm -0.019 0.022 -0.848 0.397 cap 0.018 0.086 0.216 0.830 com 0.037 0.071 0.523 0.602 cyb 0.296 0.035 8.469 0.000*** equ -0.104 0.025 -4.135 0.000*** for 0.017 0.016 1.064 0.289 inv -0.082 0.038 -2.127 0.035** mar 0.024 0.005 4.706 0.000*** reg 0.237 0.052 4.594 0.000*** stra 0.070 0.046 1.542 0.124 sup -0.103 0.151 -0.684 0.495 eps 0.181 0.219 0.828 0.408 lev -0.054 0.012 -4.302 0.000*** siz -0.007 0.012 -0.587 0.558 pro 0.002 0.000 24.933 0.000*** roe -0.003 0.006 -0.604 0.546 adj r2 0.930 f-statistic 34.910*** durbin-watson 2.046 𝐸𝑓𝑓𝑖,𝑡 = 𝛽0 + 𝛽1𝑅𝑀𝑅𝑖,𝑡 + 𝛽2𝑅𝑀𝑖,𝑡 + 𝛽3𝐶𝐴𝑃𝑖,𝑡 + 𝛽4𝐶𝑂𝑀𝑖,𝑡 + 𝛽5𝐶𝑅𝐸𝑖,𝑡 + 𝛽6𝐶𝑌𝐵𝑖,𝑡 + 𝛽7𝐸𝑄𝑈𝑖,𝑡 + 𝛽8𝐹𝑂𝑅𝑖,𝑡 + 𝛽9𝐼𝑁𝑇𝑖,𝑡 + 𝛽10𝐼𝑁𝑉𝑖,𝑡 + 𝛽11𝑀𝐴𝑅𝑖,𝑡 + 𝛽12𝑅𝐸𝐺𝑖,𝑡 + 𝛽13𝑅𝐸𝑃𝑖,𝑡 + 𝛽14𝑆𝑇𝑅𝐴𝑖,𝑡 + 𝛽15𝑆𝑈𝑃𝑖,𝑡 + 𝛽16𝐸𝑃𝑆𝑖,𝑡 + 𝛽17𝐿𝐸𝑉𝑖,𝑡 + 𝛽18𝑆𝐼𝑍𝑖,𝑡 + 𝛽19𝑃𝑅𝑂𝑖,𝑡 + 𝛽20𝑅𝑂𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 * significance at the 0.10 level. ** significance at the 0.05 level. *** significance at the 0.01 level eff is financial efficiency measured by total asset turnover (revenue on total assets), rmr is risk management reporting measured by dummy variable (if the company provided risk management report 1 otherwise 0), rco is risk management committee measured by dummy variable (if the company have risk finance, accounting and business analysis 3 (1) 2021 79 based on the regression results of the relationship between risk management reporting and financial efficiency using the 1st regression model, the results provided in above table show there is a positive and significant relationship between risk management reporting and financial efficiency at the 1% level. also, the findings show significant relationship between cyber risk, equity risk and financial efficiency at 1% level. table 5 also shows, the relationship between inventory risk and efficiency is significant at the 5% level. market risk and regulatory risk show a similar result, both significantly are related to efficiency at the 1% level. in terms of control variables, there is no relationship between earnings per share and efficiency, while leverage has a negative and significant relationship with efficiency at the 1% level. there is also no relationship between size, and efficiency while profitability has a positive and significant relationship with efficiency at the 1% level. table 6 shows the regression results of the 2nd regression model indicating the relationship between all available risk management reporting features in companies reported annual reports and financial efficiency, excluding risk management reporting as a whole. management committee 1 otherwise 0), cap is capital risk measured by dummy variable (if the company reported capital risk 1 otherwise 0), com is compliance risk measured by dummy variable (if the company reported compliance risk 1 otherwise 0), cre is credit risk measured by dummy variable (if the company reported credit risk 1 otherwise 0), cyb is cyber risk measured by dummy variable (if the company reported cyber risk 1 otherwise 0), equ is equity risk measured by dummy variable (if the company reported equity risk 1 otherwise 0), for is foreign currency risk measured by dummy variable (if the company reported foreign currency risk 1 otherwise 0), int is interest rate risk measured by dummy variable (if the company reported interest rate risk 1 otherwise 0), inv is inventory risk measured by dummy variable (if the company reported inventory risk 1 otherwise 0), mar is market risk measured by dummy variable (if the company reported market risk 1 otherwise 0), reg is regulatory risk measured by dummy variable (if the company reported regulatory risk 1 otherwise 0), rep is reputational risk measured by dummy variable (if the company reported reputational risk 1 otherwise 0), stra is strategic risk measured by dummy variable (if the company reported strategic risk 1 otherwise 0), sup is supply change risk measured by dummy variable (if the company reported supply change risk 1 otherwise 0), eps is basic earnings per share reported in comprehensive income statement below net income, lev is leverage measured by equity ratio (total equity on total assets), siz is size measured by natural logarithm of total assets, pro is profitability measured by net profit margin, roe is return on equity ratio (return on assets multiplied by financial leverage multiplier). table 6: the regression results of relationship between risk management reporting features and efficiency variable coefficient std. error t-statistic prob. cap 0.029 0.084 0.339 0.735 com 0.021 0.075 0.277 0.782 cyb 0.254 0.036 6.969 0.000*** equ -0.093 0.026 -3.611 0.000*** for 0.008 0.016 0.524 0.601 inv -0.094 0.030 -3.146 0.002*** reg 0.190 0.052 3.689 0.000*** rm -0.011 0.026 -0.429 0.669 stra 0.053 0.049 1.076 0.283 sup -0.048 0.161 -0.301 0.764 mar 0.023 0.008 2.730 0.007*** eps 0.189 0.215 0.879 0.380 lev -0.049 0.011 -4.354 0.000*** siz -0.006 0.012 -0.506 0.614 pro 0.002 0.001 3.014 0.003*** roe -0.006 0.005 -1.029 0.304 finance, accounting and business analysis 3 (1) 2021 80 based on the regression results of above table, there is a significant relationship between cyber risk, equity risk and efficiency at 1% level. the relationship between inventory risk and efficiency is significant at the 1% level. market risk also has a positive and significant relationship with efficiency at the 1% level, same with regulatory risk that has a positive and significant relationship with efficiency at the 1% level. in terms of control variables, there is a no relationship between earnings per share and efficiency, while leverage has a negative and significant relationship with efficiency at the 1% level. there is also a positive and significant relationship between profitability and efficiency at the 1% level. adjusted r2 of both 1st and 2nd regression models are 93%, this means that 93% percent of the changes in financial efficiency can be explained by the applied explanatory variables. although this adjusted r2 value appears to be high, however, this result is consistent with findings of previous studies in this area. the durbin-watson is the number which indicates the autocorrelation of the residuals from a statistical regression analysis and values of less than 1 and greater than 3 pose a cause for concern. based on the results of tables 6 and 7, the problem of serial autocorrelation can be neglected in both regression models. conclusion this study concludes there is a meaningful relationship between risk management reporting, risk management reporting features, and financial efficiency in malaysia. there is a significant relationship between risk management reporting and financial efficiency at a 1% level. cyber risk and equity risk, also have significant relationship with financial efficiency. additionally, the relationship between inventory risk, market risk and regulatory risk and financial efficiency are significant. this study provides evidence on the results of risk management reporting from the perspective of financial efficiency. therefore, the outcomes of this study may be valuable for companies that have not prepared risk management reporting to realize its impact on their financial efficiency. the findings may also provide valuable suggestions for the boards of directors of these companies considering the preparation of such a report. the significant relationship between risk management reporting and financial efficiency provides evidence that risk management is an important determinant of financial efficiency and, ultimately, of improving company’s performance. as discussed before, this study aimed to find out the relationship between risk management reporting and financial efficiency. even though this study achieved its goal, it was conducted with a limited amount of information that only helped to find out the results. therefore, in the future, the study adj r2 0.930 f-statistic 35.103*** durbin-watson 2.546 𝐸𝑓𝑓𝑖,𝑡 = 𝛽0 + 𝛽1𝑅𝑀𝑖,𝑡 + 𝛽2𝐶𝐴𝑃𝑖,𝑡 + 𝛽3𝐶𝑂𝑀𝑖,𝑡 + 𝛽4𝐶𝑅𝐸𝑖,𝑡 + 𝛽5𝐶𝑌𝐵𝑖,𝑡 + 𝛽6𝐸𝑄𝑈𝑖,𝑡 + 𝛽7𝐹𝑂𝑅𝑖,𝑡 + 𝛽8𝐼𝑁𝑇𝑖,𝑡 + 𝛽9𝐼𝑁𝑉𝑖,𝑡 + 𝛽10𝑀𝐴𝑅𝑖,𝑡 + 𝛽11𝑅𝐸𝐺𝑖,𝑡 + 𝛽12𝑅𝐸𝑃𝑖,𝑡 + 𝛽13𝑆𝑇𝑅𝑖,𝑡 + 𝛽14𝑆𝑈𝑃𝑖,𝑡 + 𝛽15𝐸𝑃𝑆𝑖,𝑡 + 𝛽16𝐿𝐸𝑉𝑖,𝑡 + 𝛽17𝑆𝐼𝑍𝑖,𝑡 + 𝛽18𝑃𝑅𝑂𝑖,𝑡 + 𝛽19𝑅𝑂𝐸𝑖,𝑡 + 𝜀𝑖,𝑡 * significance at the 0.10 level. ** significance at the 0.05 level. *** significance at the 0.01 level eff is financial efficiency measured by total asset turnover (revenue on total assets), rco is risk management committee measured by dummy variable (if the company have risk management committee 1 otherwise 0), cap is capital risk measured by dummy variable (if the company reported capital risk 1 otherwise 0), com is compliance risk measured by dummy variable (if the company reported compliance risk 1 otherwise 0), cre is credit risk measured by dummy variable (if the company reported credit risk 1 otherwise 0), cyb is cyber risk measured by dummy variable (if the company reported cyber risk 1 otherwise 0), equ is equity risk measured by dummy variable (if the company reported equity risk 1 otherwise 0), for is foreign currency risk measured by dummy variable (if the company reported foreign currency risk 1 otherwise 0), int is interest rate risk measured by dummy variable (if the company reported interest rate risk 1 otherwise 0), inv is inventory risk measured by dummy variable (if the company reported inventory risk 1 otherwise 0), mar is market risk measured by dummy variable (if the company reported market risk 1 otherwise 0), reg is regulatory risk measured by dummy variable (if the company reported regulatory risk 1 otherwise 0), rep is reputational risk measured by dummy variable (if the company reported reputational risk 1 otherwise 0), stra is strategic risk measured by dummy variable (if the company reported strategic risk 1 otherwise 0), sup is supply change risk measured by dummy variable (if the company reported supply change risk 1 otherwise 0), eps is basic earnings per share reported in comprehensive income statement below net income, lev is leverage measured by equity ratio (total equity on total assets), siz is size measured by natural logarithm of total assets, pro is profitability measured by net profit margin, roe is return on equity ratio (return on assets multiplied by financial leverage multiplier). finance, accounting and business analysis 3 (1) 2021 81 could be conducted with a larger sample and with a different method of 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(2017), ‘the impact of credit risk on the financial performance of chinese banks’, journal of international business research and marketing, 2.3, 14–17 https://doi.org/10.18775/jibrm.1849-8558.2015.23.3002 yousefinejad, m., kassim, a. a., hakami, t. a., oth-, j., & manivannan, p. (2022). effect of financial performance on stock prices of manufacturing companies in malaysia ; moderating role of sustainability reporting. international business and accounting research journal, 6(1), 46–62. https://doi.org/10.3390/jrfm14020079 https://doi.org/10.6007/ijarbss/v11-i12/11899 https://doi.org/10.1080/0960310011006587 https://doi.org/10.17051/ilkonline.2021.05.42 https://search.ebscohost.com/login.aspx?direct=true&db=bth&an=133618103&site=eds-live https://doi.org/10.18775/jibrm.1849-8558.2015.23.3002 108 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg analysis of financial indicators compared with main characteristics of hospital based medical care in bulgaria velimira georgieva chupetlovska department of finance, university of national and world economy, sofia, bulgaria info articles abstract keywords: financial indicators, hospital based medical care, economic dependencies purpose: the purpose of the study is to analyze whether there is a relationship between fundamental financial indicators of hospital based medical care (hbmc) depending on ownership, location, and type. the indicators are as follows: total revenue, short-term assets and liabilities, working capital, equity capital, and its components. a relationship was found between the control of hospitals and shortterm liabilities, location, and income. moreover, dependence troughs individual financial indicators was also investigated. methodology: the study examines 15 research units of hospital based medical care. the sample contains hospitals1 with the highest revenues based on contracts with the national health insurance fund of 2021. each of the following districts: sofia, burgas, varna, plovdiv, and stara zagora is represented by three hbmc. specific analyses (variance, regression, and descriptive statistics) were conducted by verified statistical software – spss version 22. results: correlation between the hospital’s location and the income value was found. moreover, a statistically significant relationship between ownership and the amount of short-term assets was recognized. on the other hand, a strong correspondence between the size of the fixed capital and total revenue has been proven. a moderately strong, positive association determines the interaction between income and short-term liabilities. no significant results were found in the analysis of all other variables. conclusion: the results of the conducted study can be taken as bases for in-depth analyzes firstly in the field of financial stability, secondly on the importance of the distinguishing hospital’s characteristics. *address correspondence: e-mail: velimira.georgieva@unwe.bg 1 in the text, the words hospital and hospital based medical care (hbmc) are used synonymously. finance, accounting and business analysis 4 (2) 2022 109 introduction several studies are researching the main sources of revenue for hospital based medical care. all of them are consolidated that the national health insurance fund (nhif) has an important role in the organization of health services provided around the country. the ministry of health is another immutable factor that provides additional payments regarding more specific health goods and services, classified as emergency medical care and significant illnesses, vaccinations, etc. the municipal structures take care of their own hospitals and finance their activities according to the defined legal needs. in addition to these three sources, there are also payments from insurance companies, in connection with health insurance. studies and reports regarding the government of the health sector in the country reach the general conclusion that a large share of its financing is due to direct payments by patients (dimova et. al. 2019; ministry of finance 2005; ibrd 2015). this research examines the relationship between the incomes generated by hbmc from different sources, related to their allocation, ownership, and type. a correspondence between the created time lag of received revenues and coverage of expenses in the activity of private, government, and municipal health insurance companies is being researched. the different sources of income and the separate types of accrued liabilities, as well as the financial result as an indicator of the overall management of the hbmc, are been taken into consideration. relations between the listed indicators are more likely to be observed while analyzing their ownership. this fact is connected to the specific management in government, municipal and private hospitals. the results of the conducted study aims to reveal correspondence between the current financial government of bulgarian hospital based medical care and the management of the hospitals that provide it. moreover, through this research, a competitive analysis diverted by regions regarding that kind of services as total for the segment. the principles used in controlling and financing the hospitals are well researched in order to show effectiveness in management, as well as taking into consideration their ownership. literature review studies are proving a large number of hospitals per 100,000 population. it has been proven that in bulgaria their number is 50% more than the average for the eu-27 member states. according to some of the studies, the pointed fact can accrue as a problem that should be solved by the government leadership and as a result should stop the uncontrollable number increase of hospitals. another problem that the author examines is the valuation of the funds paid for the treatment performed (nikolova 2013). analyzes show that in 10 years, from 308 hospitals, they reached 348 (12.9% growth), while the number of private hospitals doubled from 47 to 111 (delcheva 1994). hospital care in bulgaria is provided by public and private medical institutions. the number of private hospitals is growing significantly, and in 2016 they were nearly 1/3 of the total number in bulgaria (dimova et. al. 2019). the correlation between the financing methods and the results of the hospitals were investigated. in the scientific work on the sources of financing (ivanova 2020), the conceptual features of healthcare financing in bulgaria are clarified. the implemented health reform and the problems arising from it are evaluated, and the need to apply a scientific approach to the management of the financial resource in health institutions if justified. as a result of the scientific research, the main trends and deviations in the financing of healthcare in bulgaria, a result of the applied financing model in bulgaria, have been identified. in similar developments, the contributions of the well-organized and financially stable healthcare sector are considered, with the view that the stable health profile of the citizens helps the development of the other sectors, through the workforce, and from there the economy as a whole (petrov 2015). the development is combined with the funding sources listed by the ministry of health, divided into public and private. budget financing, expressed through taxes, is one of the main public financing methods, followed by social and health insurance, which is the third pillar of healthcare financing. its idea is that the insured bears the incurred payments for health services, through the insurance contribution already paid into the system. another source is private health insurance, which on a voluntary basis collects funds from the insured and again covers the incurred health payments for health services received. the last group of private sources is the personal funds of citizens or the so-called private payments. a large share is formed by the costs of medicines (georgieva et. al 2016). the ratio of public-private expenses in bulgaria is extremely unfavorable, and in recent years the share of the latter has been between 41 and 48% (rohova 2016). the donation, which can be implemented in several different forms – corporate, institutional, and individual (ivanova 2018), is an additional considered source. most of the results involving the hospitals in the country reach similar conclusions regarding them and the general condition of the sector as a whole. one of the main problems of each individual department can be found in the big percentage of private payments. during the considered period of 2020, bulgarians are burdened with more than 40% of the total healthcare costs (gercheva 2020). an important aspect of this type of expenditure is that, in most cases, they are unregulated payments by households (ministry of finance, accounting and business analysis 4 (2) 2022 110 finance 2005). this leads to impoverishment of the population after they incur their health care costs (ibrd 2015). about 25% of households with the lowest incomes delay visiting a doctor for a health problem. the problems arising from the payment of health services by public funds and the transfer of the burden directly to households were examined (rohova 2016). according to a 2010 study, informal payments were made by 13% of patients in pre-hospital care and 1/3 of patients in hospitals (atanasova 2013). having easier access to the healthcare system is one of the main characteristics of hbmc and can be considered as much quicker way of getting help. it has been separately analyzed that 10% of hospital admissions could be avoided with better quality care "at the entrance" of the health system (gercheva 2020), referring to outpatient care. according to an analysis of the health system (dimova et. al. 2019), there is a lack of a clear regulatory framework for the formation of prices for health services. pricing is not based on actual costs, but rather on available resources in the nhif budget. the lack of policies and tools for the efficient allocation of public resources has a negative impact on the market behavior of healthcare providers. on the other hand, it is determined by the financing methods that stimulate the number of services and goods provided, i.e. the utilization of financial resources. the majority of published studies examine the health system as a whole, but not separately for each type of institution involved in the process of providing health services. the final results are analyzed, such as the number of private, municipal, and government hospital based medical care, but not their need and distribution by region in the country. separately, their type is also information that is taken for granted, and the need for and dependence on different types of hospitals is not explored. on a global scale, there are studies examining the ownership of hospitals as a factor in ensuring the health of the population (gabriel et. al. 2018). the main conclusion of the conducted study is that in the us, non-profit medical institutions are more likely to make efforts for the health of the population than public and private ones. there is a detailed analysis of the greek public hospitals that have followed earnings management techniques to influence reported earnings and which accrual accounts are appropriate to explain discretionary accruals. covering the period 2009–2019, the analysis reveals that greek public hospitals are trying to report small surpluses. accrual-based accounts and changes in their value between successive years provide evidence of relevance for earnings management (malkogianni 2022). according to a study in england, their is no quality differences between hospitals specializing in planned treatments and other hospitals, nor between for-profit and not-for-profit private hospitals. however, a distinction has been made in that private hospitals in the country accept for treatment milder cases, as well as patients in need of specialized health care. private hospitals treat patients with fewer comorbidities and past hospitalizations. controlling for observed patient characteristics and treatment type, private hospitals have fewer emergency readmissions (moscelli 2018). in norway, studies show similar results. the association between quality of care and hospital ownership is mixed since private nonprofit hospitals both offer shorter waiting times and shorter lengths of stay (bjorvatn 2018). the degree of indebtedness of medical institutions is of essential importance for the health services they provide. according to an analysis conducted to investigate whether financial leverage moderates the relationship between working capital and profitability for publicly listed european hospitals. the results reveal that increasing the length of the cash conversion cycle for hospitals with high financial leverage reduces profitability. on the contrary, increasing the length of the cash conversion cycle for those with low leverage increases profitability. the findings of this study suggest that leverage influences the relationship between the cash conversion cycle and profitability. the results were derived through regression analysis (dalci 2018). development of hypotheses and research methods based on the reviewed literature there is a lack of evidence regarding the problems that are been put in the next two hypotheses: hypothesis 1: the ownership, location, and specialization of the hospitals lead directly to their overall financial stability. the investigated financial indicators total revenue, revenue from nhif, revenue from private services, working capital, financial result, accumulated profit/loss, equity, and fixed capital are related to the three main characteristics. hypothesis 2: revenue can be taken as the main indicator of the volume of activity and its interactions with the rest of the investigated financial indicators. the direction of the relationship with the short-term liabilities is been looked into. this finance indicator shows the management of working capital and the invested fixed capital. the statistical analysis aims to detect a correlation between hbmc performing the same basic activity, but distinguished by different characteristics such as location, ownership, and type, according to law2. the 2 law on medical institutions, art. 9, paragraph 2 finance, accounting and business analysis 4 (2) 2022 111 described characteristics of the hospitals are prerequisites for the formation of relationships between the individual species, and a statistical approach will be used to check whether they are dependent and indicate an influence or insignificant. the data for the subsequent analysis were collected by the ministry of health (for government-owned hospital based medical care) and the commercial register at the registration agency (for municipal and private hospitals). the sample was made by collecting information from the national health insurance fund about the amounts paid to hbmc who performed hospital care services. based on the data for 2021 hospitals are ranked according to income from the nhif. through the published data from the last census by the national statistical institute (nsi) as of 2021, the 5 regional centers with the largest number of inhabitants were taken. this approach was chosen because these areas would have the most residents who would need hospital care and thus the values in the reports of the hbmc covering these locations would be the most significant. according to nsi data, these are the districts: sofia-city, burgas, plovdiv, varna, and stara zagora. based on the information published by the nsi and the nhif, the 3 hbmc with the most payments from the nhif for each of the 5 regions have been selected, given the importance of providing the health needs of the most populated regions with hospital medical care. the following elements were investigated taken into consideration their type (see table 1). table 1 number of monitored district 5 number of hospitals from each district 3 pieces number of total monitored hospital based medical care 1*2 15 pieces observation period 2019-2021 3 years total sample size 3*4 45 pieces qualitative variables 4 pieces quantitative variables (additional) 10 pieces the study aims to draw general conclusions about the type, ownership and the importance of the location of hospital based medical care in bulgaria. at the beginning of the analysis, descriptive statistics were used, through which a general view was shown based on the statistical sample. descriptive statistics aims to draw a generalized picture of the movement of the considered indicators and the possible dependencies between them. first, the distribution by ownership of the emitted units is examined (see table 2). table 2 code_sob frequency percent valid percent cumulative percent valid government _ property 6 40.0 40.0 40.0 municipal _ property 2 13.3 13.3 53.3 private property 7 46.7 46.7 100.0 total 15 100.0 100.0 from the descriptive part, it can be seen that the private hospitals included in the sample are a larger percentage than the government and municipal ones. by region, they are distributed equally in number, due to the methodology of sample selection. regarding the type of hospitals, according to the classification of the law on medical institutions, the distribution is as follows (see table 3). table 3: it can be seen that the multi-profile hospitals for active treatment mphat prevail, and there are two specialized hospitals for active treatment (sbal). the distribution according to the form of management (see тable 3) under which the hospitals operate shows the main form eood 6 units, followed by ood 4 units. government hospitals mostly operate under the legal form of a joint-stock company (ad or ead). private and municipal hbmc prefer ood and eood. finance, accounting and business analysis 4 (2) 2022 112 table 3 legal_form frequency percent valid percent cumulative percent valid ood 2 13 , 3 13 , 3 13 , 3 eood 6 40.0 40.0 53.3 ad 3 20.0 20.0 73.3 ead 4 26.7 26.7 100.0 total 15 100.0 100.0 in addition to the distribution of these 3 qualitative characteristics, it was checked how the main quantitative characteristics of the sample units were distributed. the first is the value of working capital: it is calculated according to the formula working capital = current liabilities – current assets (raikov 2013) the results show that 33.3% of the surveyed hbmc operate with negative working capital, of which slightly over 60% are public and the rest are private. this may speak of financing fixed assets with shortterm liabilities. when reviewing the revenues generated by the hospitals, they are grouped into four groups. the first represents the hbmc with annual revenues of less than bgn 50,000k, which have the largest share 57.8% of them, 42.3% are private, and 34.6% are government-owned, the remaining 23.1% are municipal. the distribution by regions shows that in sofia-city there are mainly hbmc with an income between 50,000k and 150,000k bgn. hospitals with more than 150,000k bgn total revenues are government and are in the regions of varna and plovdiv. according to their purpose, specialized hospitals are classified in the first group below bgn 50,000k annual turnovers. the second indicator examined is the national health insurance fund payments as part of the hospital's revenues. private hospitals have the highest percentage of hospitals receiving income from the nhif up to bgn 100,000k. government hospitals have an average percentage of up to this amount and represent with the most incomes from nhifover bgn 100,000k. the distribution by regions shows that sofia-city has mostly high revenue over bgn 50,000k, in burgas and stara zagora up to bgn 50,000k, varna has representatives in all groups up to bgn 150,000k, plovdiv hospitals receive most -often revenues from the cash register between 50,000k and 100,000k bgn per year. analogous to the revenues, given that the receipts from the nhif are a part of them, the specialized hospitals are ranked in the group up to bgn 50,000k. the health services provided, directly to patients, i.e. paid by households or from voluntary health insurance funds, mostly go to private hospitals and are distributed relatively evenly across regions. the highest percentage is observed in sofia-city. over 37% of hbmc with income between bgn 5,000k and 15,000k are located in this area. the indicators of financial result, accumulated loss/profit, equity, and fixed capital will be analyzed in parallel, due to their connection. mainly public hospitals realize a negative financial result a loss. with private ones, this is rather an exception. mainly, medical institutions report up to bgn 10,000k in profit, this is 71.1% of the surveyed hospitals (up to bgn 5,000 k 48.9%). they operate at a loss mostly in burgas and varna, and the most stable in their results are those in plovdiv. worst case scenario specialized medical institutions are ranked with a loss of around bgn 5,000k, on the other hand, the ones that have profit are around bgn 5,000k. private medical institutions most often operate a fixed capital of less than 100k bgn and own capital up to bgn 50,000k. even among them, there are those with negative own capital and they are a larger percentage than government medical institutions. also, over 70% of them have an accumulated loss of up to bgn 5,000k, and 11.1% even greater. public hospitals mainly operate with fixed capital of up to bgn 20,000k. at government hospitals, also observed representatives in the range from bgn 40,000 k to bgn 60,000k 27.78%. and are mainly in sofia-city and varna. negative equity with them is more of a rarity than a trend. regarding the financial result, however, 22% of government hospitals and 66% of municipal in the group of negative values (up to bgn 5,000 k). 72.2% of government-owned hbmc have a positive result of up to bgn 10,000k. however, the accumulated losses are significant 88.9% of the government hospitals have values up to bgn 150,000k. the municipal ones have mixed results, there are losses and profits of up to bgn 5,000k. the equity capital of the presented public hospitals is mainly within bgn 25,000k. the distribution by regions shows that the hbmc with the worst financial results are in varna and the best in sofia-city. in terms of accumulated losses and profits, however, sofia-city is one of the leading regions, together with stara zagora and burgas. for a more comprehensive view of the relationships between the quantitative and qualitative traits, an analysis of variance was performed. finance, accounting and business analysis 4 (2) 2022 113 3.1 analysis of variance the presence of a relationship between total income and ownership is investigated. the null hypothesis (h0) states that there is no relationship between total revenue and hospital ownership. the alternative hypothesis (h1) confirms the presence of dependence. as shown in the anova table the significance value is 0.066, while the risk of error  is 0.05 (table 4). therefore, the null hypothesis (h0) can be accepted. the conclusion of the results is as follows: there is no statistically significant relationship between the value of total revenues from hospital medical care and their ownership. table 4 anova total revenue ( binned ) sum of squares df mean square f sig . between groups 14,300 2 7,150 2,898 ,066 within groups 103,611 42 2,467 total 117,911 44 the income from the nhif is similarly not significantly related to the ownership of the hospitals. such a conclusion is logically laid out following the statement that the mentioned income is part of total revenue. after proving the missing connection regarding the ownership, it is examined how total income and the area in which the hospital is located are related. the null hypothesis (h0) rejects the existence of a relationship between total income and location. the alternative hypothesis (h1) confirms such a correlation between the two variables. the following results are obtained: table 5 anova total revenue sum of squares df mean square f sig . between groups 46501979046,110 4 11625494761.527 7,631 ,000 within groups 60940740234,727 40 1523518505,868 total 107442719280.837 44 table 6 descriptives total revenue n mean std . deviation std . error 95% confidence interval for mean minimum maximum lower bound upper bound burgas 9 35617.72 17591.696 5863.899 22095.54 49139.89 17870 75798 varna 9 70547.22 52963.979 17654.660 29835.50 111258.94 29987 160769 plovdiv 9 100680.06 63368,398 21122.799 51970.80 149389.33 32718 211392 sofia city 9 109158.67 20574.086 6858.029 93344.03 124973.31 75740 144525 stara zagora 9 31122.89 8005,926 2668,642 24968.99 37276.79 22915 48415 total 45 69425.31 49415.382 7366,410 54579.29 84271.34 17870 211392 from the anova table (table 5), a value of sig. is observed <0.05 ( the risk of error). this means that the null hypothesis (h0) is rejected and the alternative (h1) is accepted. there is a statistically significant relationship between the value of total revenues and the district in which the hbmc is located. values were checked for normality of distribution by the kolmogorov-smirnov test. as a result, the level of sig. <0.05, which means that income is not normally distributed. if this condition is not met, nonparametric kruskal-wallis analysis should be applied. it is clear from it that the alternative hypothesis should be accepted. namely that there is a statistically significant relationship between the area and the revenue of the hbmc. the proven connection between these two indicators is logical, since the distribution of residents, respectively those in need of hospital care, depends on the population of the district. from the descriptive table (table 6), through the value of the average values, it can be seen that sofia-city is in first place with finance, accounting and business analysis 4 (2) 2022 114 bgn 109,158k, followed by plovdiv with bgn 100,680k. stara zagora district is ranked last with bgn 31,122k. the values are arranged logically about the population data. the next two indicators tested for the presence of a relationship are short-term assets and hospital ownership. table 7 anova short-term liabilities sum of squares df mean square f sig . between groups 1186719904,343 2 593359952,172 3,260 ,048 within groups 7644710758,558 42 182016922,823 total 8831430662,902 44 table 8 descriptives short-term liabilities n mean std . deviation std . error 95% confidence interval for mean minimum maximum lower bound upper bound government property 18 21234.61 13562.944 3196,817 14489.92 27979.31 7065 51016 municipal property 6 4995.50 2587,701 1056,424 2279.87 7711.13 2210 8629 private property 21 17227.05 14973.345 3267,452 10411.26 24042.83 1660 52665 total 45 17199.20 14167.369 2111,947 12942.85 21455.55 1660 52665 anova table (table 7.1), shows a value of sig. < 0.05, from which the alternative hypothesis (h1) should be accepted , i.e. that there is a statistically significant relationship between short-term liabilities and the ownership of hospital based medical care. from the conducted one-sample test, it can be seen that a normal distribution is not present, therefore a non-parametric kruskal-wallis analysis was applied. it confirms the acceptance of the alternative hypothesis a statistically significant relationship exists between ownership and short-term liabilities of hospitals. from the descriptive characteristics (table 7.2) when applying the dispersion analysis, it can be seen that the government hospitals have the highest share, on average bgn 21,234.61k, followed by the private ones with bgn 17,199.20k. 3.2 regression analysis through regression analysis, two main variables have been analyzed whether the income affects the value of short-term liabilities and on the other hand whether the value of the invested fixed capital indicates a significant change in the generated income. researching the first two variables, the following hypotheses were defined: h0: there is no relationship between total revenues and short-term liabilities in hospital based medical care. h1: there is a relationship between total revenue and short-term liabilities. risk of error: = 0.05 the results indicate (tables 8.1 and 8.2) that there is a relationship between the two factors taking in mind that the value of sig. is less than the risk of error . the model explains only 34.3% of the relation between the two variables. the strength of the positive association expressed by the correlation coefficient r is moderately strong. constructed model can be presented as: y = 34 303.42 + 2.042 x (table 8.3) it can be concluded that: if total revenues change by 2.042, short-term liabilities will change by 1. table 9 model summary r r square adjusted r square std . error of the estimate ,585 ,343 ,327 40524,291 the independent variable is short-term liabilities. finance, accounting and business analysis 4 (2) 2022 115 table 10 anova sum of squares df mean square f sig . regression 36827339278,694 1 36827339278,694 22,425 ,000 residual 70615380002,143 43 1642218139,585 total 107442719280.837 44 the independent variable is short-term liabilities. coefficients unstandardized coefficients standardized coefficients t sig . b std . error beta short-term liabilities 2,042 ,431 ,585 4,736 ,000 ( constant ) 34303,422 9565.591 3,586 ,001 researching the second pair of variables – total revenues and fixed capital, the following hypotheses were defined: h0: there is no statistically significant relationship between total revenues and the value of the fixed capital of hospital based medical care. h1: there is a relationship between total revenue and fixed capital. risk of error: = 0.05 from the obtained results it is clear (tables 9 and 10) that there is a relationship between the two indicators, since sig. < . the coefficient of determination shows that 39.8% of the elements can be explained with this model. the strength of the positive association is strong 0.706 shown by the correlation coefficient. table 11. model summary r r square adjusted r square std . error of the estimate ,706 ,498 ,487 35399.140 . table 12. the independent variable is fixed capital anova sum of squares df mean square f sig . regression 53559458196.039 1 53559458196.039 42,742 ,000 residual 53883261084.798 43 1253099094.995 total 107442719280.837 44 table 13. the independent variable is fixed capital coefficients unstandardized coefficients standardized coefficients t sig . b std . error beta fixed capital 1,602 ,245 ,706 6,538 ,000 ( constant ) 45684.207 6405,763 7,132 ,000 from the performed regression analysis, it is clear that there is a relationship between the total revenues and the fixed capital used in hbmc. the proven hypothesis can serve as a basis for analyzing the financial indicators of the hospitals in question. almost 40% of the revenue increase is explained by the increase in fixed capital. constructed model can be presented as: y = 45684.2 + 1.602 x (table 9.3) it can be concluded that: when fixed capital changes by 1, total revenues increase by 1.602. the rest of the relationships between the investigated qualitative and quantitative indicators do not lead to significant conclusions and will not be described in detail. 4contributes and future studies the study contributes by giving a general idea of how the main financial indicators of hbmc interact one by another and on the other hand can be taken as bases for subsequent in-depth analyses. the main qualitative characteristics of the studied hospitals were examined ownership, location, type, and legal finance, accounting and business analysis 4 (2) 2022 116 form. preferred legal forms under which hbmc operate have been established, depending on their ownership. the information that is generated based on the legal form of the hospitals does not entail significant dependencies. the specialization of the hospitals mainly determines the size of the financial indicators. considering that in the sample the municipal hospitals are the only representatives of other than multi-specialty hospitals. that’s the reason why significant conclusions cannot be taken into consideration. concerning ownership, through the analyzes carried out, a conclusion can be made that there is no statistical correlation between a quality feature and the generated revenues of the hbmc, deduced through the applied dispersion analysis. through the presented descriptive analysis, it is shown that public healthcare hospitals (government and municipal) are characterized by worse financial indicators than private ones, or in other words, private healthcare hospitals are in a more stable financial condition. the regional centers that are the subject of development generate higher revenues, based on the larger number of the population in them. after the variables have been deduced, using dispersion analysis, the districts were arranged analogously to the published data from the nsi for the number of the population in 2021. the studied dependence property short-term liabilities was chosen due to the high percentage of hospitals with negative working capital. a statistically significant relationship was found between the two indicators – total revenue and short-term liabilities. moreover, after an analysis of the reviewed financial statements, it was concluded that due to the main source of income for public medical institutions the nhif (about 82% of the total income). the delay of cash flow appears as one of the main factors that lead to transferring of the payments to short-term liabilities. on the other hand, short-term trade payables have the largest share. as a summary, it can be concluded that hbmc uses direct payments for pay rows and tax obligations. while all other duties generate high values of short-term liabilities, due to delayed revenues from the main source nhif. another explanation for that reason can be the financing of fixed assets by hospitals at the expense of "cheap" trade credit from suppliers. through regression analysis, two variables were derived, namely, the increase in short-term liabilities by one unit was provoked by the increase in the hbmc's income by 2.042. this leads to the current financial management status of the hospitals. the increase of the performed activities and the generation of more income inevitably brings indebtedness, and low values of the working capital (while maintaining the studied trends). the second dependence draws the possibilities to generate certain incomes, given the invested fixed capital. it was concluded that the increase in capital by units will generate prerequisites for the increase in income by 1.602. in conclusion of all the investigated indicators and variables, although similar in their activities, hbmc has its peculiarities. to reach firm conclusions about financial management and opportunities for improvement, all of the hospitals should be examined. references bjorvatn a. 2018. private or public hospital ownership: does it really matter? social science & medicine. volume 196. pages 166-174. dalci i. ozyapici h. 2018.working capital management policy in health care: the effect of leverage. health policy. volume 122, issue 11. pages 1266-1272. delcheva e. 1994. health economics. university publishing house “economy”. dimova, antoniya & rohova, maria & koeva, stefka & atanasova, elka & koeva dimitrova, lyubomira & kostadinova, todorka & spranger, anne. 2019. health system analysis 2018. health systems in transition. gabriel, m.h., atkins, d., liu, x. and tregerman, r. 2018. examining the relationship between hospital ownership and population health efforts. journal of health organization and management. vol. 32 no. 8. pages 934-942. gercheva s. 2020. the controversial health care reform in bulgaria: financial sustainability of health insurance twenty years on. economics, education and the real economy: development and interactions in the digital age volume iv. pages 59-70. georgieva l. salchev p. dimitrova r. dimova a. avdeeva o. 2007. bulgaria health system review. health systems in transition. 9(1): 1–156 ivanova a. 2020. financing of the healthcare system in bulgaria state, trends, opportunities for optimization. an annual almanah ph.d. students research. volume xiii. ivanova a. 2019. sources and models of financing healthcare – specificity and effectiveness of health services an annual almanah ph.d. students research. volume xii. malkogianni, i. cohen s. 2022. earnings management in public hospitals: the case of greek state-owned hospitals. public money & management; oxford vol. 42, iss. 7. pages 491-500. ministry of finance. 2005. healthcare financing and management. theoretical basics, models, problems https://www.sciencedirect.com/journal/social-science-and-medicine https://www.emerald.com/insight/search?q=meghan%20hufstader%20gabriel https://www.emerald.com/insight/search?q=danielle%20atkins https://www.emerald.com/insight/search?q=xinliang%20liu https://www.emerald.com/insight/search?q=rebecca%20tregerman https://www.emerald.com/insight/publication/issn/1477-7266 finance, accounting and business analysis 4 (2) 2022 117 and trends. microeconomic analysis department. moscelli g. gravelle h. siciliani l. gutacker n. 2018. the effect of hospital ownership on quality of care: evidence from england. journal of economic behavior & organization. volume 153. pages 322-344. nikolova m. 2013. the issue of the number of hospitals and their capacity and effectiveness in bulgaria. business management. volume 3. pages 41-56. petrov m. 2015. the system of financing health care a brief analysis. scientific works of the university of ruse. volume 54 raikov e. 2013.working capital management. university of national and world economy, sofia. rohova m. 2016. private health expenditures and inequities in access to health services in bulgaria. varna medical forum volume 5 issue 2. pages 32-38 the international bank for reconstruction and development. 2015. final report on health care financing diagnostics and review of intended reforms. 28 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 social welfare: bulgaria (2007 – 2021) rumen brussarski department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 27 may 2023 revised 7 june 2023 accepted 12 june 2023 economic welfare has been one of the greatest challenges facing humanity since the expulsion of adam and eve from paradise. resources are limited, but people's desires for consumption are not. since 01.01.2007, bulgaria has been a member of the european union (eu) – a political and economic union of 27 countries with an area of 4 233 255 sq. km., a population of about 450 million people and over 15% of the world's gross domestic product. this article is devoted to economic growth, inequality in the distribution of income and the welfare of our society for the period 2007 – 2021. in the research process, we work with three main indicators – real gross domestic product per capita, gini coefficient and social welfare function of sen. for the purposes of the comparative analysis, we use four benchmarks – the eu 27, the neighboring countries, the countries of the visegrad group and the three largest economies in the eu. the study shows unsatisfactory rates of catch up economic development, a high degree of inequality in the distribution of income and the lowest level of social welfare within the eu for the entire period. keywords: economic growth, income inequality, social welfare jel: o40, d30, d60 * address correspondence: e-mail : rbrusarski@unwe.bg rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 29 introduction the welfare of modern society depends (mainly) on: • the amount of goods created over time – the size of the cake; and • the distribution of these goods among people – the distribution of pieces of the cake in society. in this article, we examine the dynamics of social welfare in bulgaria over a 15-year period (2007 – 2021), as follows: • economic growth; • income inequality; • social welfare function. for the purposes of the comparative analysis, we use four benchmarks: • eu 27 (from 2020); • neighboring countries (romania, greece, serbia, north macedonia and turkey); • the countries of the so-called visegrad group (poland, hungary, czechia and slovakia)1; • the three largest economies in the eu – germany, france and the united kingdom (until 2020). economic growth a key indicator of economic development in the modern world is the real gross domestic product per capita. figure 1 presents the dynamics of the real gross domestic product (gdp) per capita in the eu, bulgaria and the other twelve studied countries for the period 2007 – 2021 in purchasing power standards (pps)2. within the studied period, the real gdp per capita in bulgaria shows a steady growth with few exceptions (in 2009 and 2013 there was a slight decline, and in 2020 – stagnation). in 2007 (the first year of our eu membership), real gdp per capita in our country was 10 000 pps eu 27 (2020), and in 2021 – 18 600 pps eu 27 (2020). that's real growth of 86 %, or just over 4.5 %, on average per year. over the same period, real gdp per capita growth in the eu was 31.7 %, or about 2.0 %, on average per year (see figure 1). for the period 2007 – 2021, the changes in the real gdp per capita of our neighbors are as follows:  romania – 121.3 % growth (best result among the 13 countries included in the study);  greece – 10.4 % drop (the weakest result among the 13 countries included in the study);  serbia – 61.8 % growth;  north macedonia – 85.1 % growth;  turkey – 73.5 % growth. 1 established on 15 february 1991 at the meeting between president of the czech and slovak federative republic, václav havel, the president of the republic of poland, lech wałęsa, and the prime minister of the republic of hungary, józsef antall, in the hungarian town of visegrád. the group was created with the aim of moving away from communism and implementing the reforms required for full membership of the euro-atlantic institutions, such as nato and the eu. after the dissolution of czechoslovakia in 1993, the czech republic and slovakia became independent members of the alliance, incrementing the number of members from three to four. all four members of the visegrád group joined the european union on 1 may 2004 (https://en.wikipedia.org/wiki/visegr%c3%a1d_group) 2 the pps is an artificial currency unit used in the eu. theoretically, one pps can buy the same amount of goods and services in each country (i.e. “1 eu 27 euro”). by definition: vpps = vnc ppp (1) vpps is the value in ppss; vnc – the value in national currency; ppp – the purchasing power parity of the country (ppp is the respective exchange rate of pps, i.e. nc for one pps). https://en.wikipedia.org/wiki/visegr%c3%a1d_group rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 30 source: https://ec.europa.eu/eurostat figure 1. real gross domestic product per capita (pps eu 27, 2020) obviously, romania (with whom we have been competing for the last three decades) scores much better than bulgaria (the difference is more than 35 percentage points) – see figure 1!? within the research period, the real gdp growth per capita in the countries of the visegrad four is as follows:  poland – 88.0 %;  hungary – 60.9 %;  czechia – 43.5 %;  slovakia – 34.7 %. in this group (with a much higher starting level than bulgaria), only poland is ahead of our country in terms of real gdp per capita growth (see figure 1). finally, the three largest economies in the eu (with an even higher starting level than bulgaria) achieve the following growth in real gdp per capita:  germany – 34.0 %;  france – 25.7 %;  united kingdom – 17.4 %. in summary, for the period 2007 – 2021, the bulgarian economy is growing at a decent pace. however, in terms of real gdp per capita, bulgaria remains in last place in the eu (after 15 years of membership). after us (according to this indicator) are only two of the other twelve countries included in the study – serbia and north macedonia. the most appropriate benchmark for the purposes of the comparative analysis in this part of the article is the eu average real gdp per capita. figure 2 shows the dynamics of real gdp per capita for eu 27 (2020) = 100. in 2007, according to this indicator, bulgaria was literally at the bottom of the eu – 41 at eu 27 (2020) = 100. fifteen years later (unfortunately) it is at the bottom again – sad, but a fact! in 2021, the real gdp per capita in our country is 57 at eu 27 (2020) = 100. there is a growth of 16 points (in 15 years), i.e. about 1 point per year (see figure 2). at this rate (other things being equal) it will take us more than four decades (somewhere until the early 60s of the 21st century, possibly) to reach the eu average level of real gdp per capita!? this is (definitely) not a good prospect! 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 p p s e u 2 7 ( 2 0 2 0 ) year eu 27 (from 2020) bulgaria romania greece serbia north macedonia turkiye poland hungary czechia slovakia germany france united kingdom https://ec.europa.eu/eurostat rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 31 source: https://ec.europa.eu/eurostat figure 2. real gross domestic product per capita (eu 27, 2020 = 100) in romania, the catch up process is twice as fast. in 2007, the real gdp per capita in our northern neighbor was 44 at eu 27 (2020) = 100 (very close to ours), and in 2021 it is already as much as 30 points higher – 74 at eu 27 (2020) = 100. after 2009, greece (for obvious reasons) moved away from the eu average level of real gdp per capita – from 94 at eu 27 (2020) = 100 in 2007 to an unenviable 64 at eu 27 (2020) = 100 in 2021 (down 30 points). our western neighbors registered relatively modest results. for the entire period, the real gdp per capita in serbia increased by 8 points, and in north macedonia – by 12 points. turkey recorded a growth of 15 points (see figure 2). of the visegrad group, only poland has a higher catch up rate than ours – real gdp per capita at eu 27 (2020) = 100 increases by 23 points. of course, because of their higher starting positions, the four countries are currently (2021) much closer to the eu average level of real gdp per capita than bulgaria:  poland – 77 at eu 27 (2020) = 100;  hungary – 75 at eu 27 (2020) = 100;  czechia – 92 at eu 27 (2020) = 100;  slovakia – 69 at eu 27 (2020) = 100. traditionally, real gdp per capita in the three largest economies in the eu has been above the eu average. within the studied period, only germany recorded a weak growth of 2 points. france and united kingdom recorded a decline of 6 and 12 points respectively (see figure 2). in summary, given the low starting level of real gdp at eu 27 (2020) = 100 in our country, the catch up rates within the studied period (2007 – 2021) are unsatisfactory. in other words, the present is bad and the future is not very optimistic. income inequality the distribution of disposable income after social transfers in modern society depends on:  the market distribution of income3 and 3 the market distribution of income is a function of:  the distribution of ownership of the factors of production (human, physical and financial capital) among people; and  the market prices of factor services (wage, interest, rent and profit). 0 20 40 60 80 100 120 140 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 e u 2 7 ( 2 0 2 0 ) = 1 0 0 year eu 27 (from 2020) bulgaria romania greece serbia north macedonia turkiye poland hungary czechia slovakia germany france united kingdom https://ec.europa.eu/eurostat rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 32  the fiscal (including redistributive) policy of the state (taxes, social transfers, etc.). a traditional method for graphical representation of the distribution of income (or wealth) in society is the so-called lorenz curve, developed by max otto lorenz (1876 – 1959) in 1905 (lorenz 1905). the lorenz curve (the red line in figure 3) shows the cumulative share of the nation's total income (on the yaxis) that belongs to each cumulative share of the population (on the x-axis). the blue line in figure 3 (with a slope of 1) is called the diagonal of absolute equality (y = x), and the black right angle (bottom, right) – contour of absolute inequality (y = 0 % for all x < 100 %, and y = 100 % when x = 100 %). approaching the lorenz curve to the 45° diagonal of absolute equality indicates a decrease in inequality in the distribution of income in society, and moving the lorenz curve away from this diagonal – an increase in inequality. figure 3. lorenz curve the lorenz curve is the basis for the calculation of one of the most popular indices of inequality in the distribution of income – the so-called gini coefficient, proposed by the italian statistician, demographer and sociologist corrado gini (1884 – 1965) in 1912 (gini 1912; gini 1936). if we denote the area between the diagonal of absolute equality and the corresponding lorenz curve by a, and the area between the lorenz curve and the contour of absolute inequality by b (see figure 3), then the gini coefficient (g) has the following form: 𝐺 = 𝐴 𝐴 + 𝐵 (2) the gini coefficient changes from 0 to 1. an increase in the coefficient is an indicator of an increase in inequality in the distribution of income in society, conversely – a decrease in the coefficient indicates a decrease in inequality in the distribution of income in society. when the area of figure a is equal to zero, i.e. the lorentz curve coincides with the 45th diagonal of absolute equality, g = 0 (0 / (0 + b) = 0). accordingly, when the area of a covers the entire right triangle below the 45th diagonal of absolute equality (or the area of figure b is equal to 0), g = 1 (a / (a + 0) = 1). figure 4 presents the dynamics of the gini coefficient in the eu, bulgaria and the other twelve studied countries for the period 2007 – 2021. rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 33 source: https://ec.europa.eu/eurostat figure 4. gini coefficient (equivalised disposable income after social transfers*) note: * the equivalised disposable income is calculated in three steps:  all monetary incomes received from any source by each member of a household are added up; these include income from work, investment and social benefits, plus any other household income; taxes and social contributions that have been paid, are deducted from this sum;  in order to reflect differences in a household's size and composition, the total (net) household income is divided by the number of “equivalent adults”, using a standard (equivalence) scale: the modified oecd scale; this scale gives a weight to all members of the household (and then adds these up to arrive at the equivalised household size):  1.0 to the first adult;  0.5 to the second and each subsequent person aged 14 and over;  0.3 to each child aged under 14.  finally, the resulting figure is called the equivalised disposable income and is attributed equally to each member of the household. (https://ec.europa.eu/eurostat) during the first half of the period, the gini coefficient in bulgaria fluctuated around 35 percent (with the lowest value of 33.2 % in 2010 and the highest value – 35.9 % in 2008). after 2014, the gini coefficient in our country went up and reached a new (higher) orbit – the 40 percent (with the highest value of 40.8 % in 2019). in short, within the studied period, inequality in the distribution of income in bulgaria grew significantly (see figure 4)! the gini coefficient in the eu 27 (from 2020) is slightly above 30 % (fluctuations are within 1 percentage point for the entire period). thus, in the first half of the studied period, the gini coefficient in bulgaria is about 5 percentage points higher than in the eu 27 (from 2020), and in the second half this difference reaches 10 percentage points (10.6 percentage points in 2019). there is a significantly higher (and growing) degree of inequality in the distribution of income in our country compared to the eu 27 (from 2020) – see figure 4. income inequality in romania and greece (neighboring eu member states) is lower than in bulgaria (with few exceptions). in 2021, for example, the gini coefficient in romania is more than 5 percentage points lower than in bulgaria, and in greece – by more than 7 percentage points (see figure 4). 0 5 10 15 20 25 30 35 40 45 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (% ) year eu 27 (from 2020) bulgaria romania greece serbia north macedonia turkiye poland hungary czechia slovakia germany france united kingdom https://ec.europa.eu/eurostat https://ec.europa.eu/eurostat rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 34 in the middle of the research period, the gini coefficient in serbia4 is slightly higher than in bulgaria. after that, however, it starts to decrease (especially in the last 3-4 years) and the picture changes. in 2021 (for example) the gini coefficient in serbia is more than 6 percentage points lower than in bulgaria. after 2013, the inequality in the distribution of income in north macedonia is lower than in bulgaria (in 20205 the gini coefficient in north macedonia is nearly 9 percentage points lower than in our country) – see figure 4. within the studied period, the degree of inequality in the distribution of income in turkey is higher than in bulgaria – the gini coefficient there fluctuates from about 42 % to just over 44 %. obviously, the inequality in the distribution of income in all neighboring countries except turkey is lower than in bulgaria (with small exceptions over time)! during the whole period, the inequality in the distribution of income in the countries of the visegrad four (poland, hungary, czechia and slovakia) is much lower than in bulgaria (and lower than the average level for the eu) – see figure 4. in this group of countries, the gini coefficient is highest in poland, followed by hungary, czechia and slovakia (a kind of champion of equal distribution of income across the eu in the last few years). for 2020, the gini coefficient in slovakia is almost 20 percentage points lower than in bulgaria (see figure 4)! in the three most developed economies in the eu (germany, france and the united kingdom, until 2020) the gini coefficient fluctuates around the eu average level and (respectively) is lower than in bulgaria by between (about) 5 percentage points (in the first half of the studied period) and nearly 10 percentage points (in the second half of the period) – see figure 4. in summary, for the entire studied period, inequality in the distribution of income in bulgaria is higher than in the eu 27 (from 2020), the neighboring countries (without turkey), the countries of the visegrad four and the three largest economies in the eu. social welfare a basic tool for a complete and consistent ordering of the various combinations of individual welfare levels according to their attractiveness for society as a whole is the social welfare function. the isoelastic function of social welfare6 has the following form: 𝑊 = 1 1 − 𝑒 ∑(𝑈𝑖) 1−𝑒 𝑛 𝑖=1 (3) w is the social welfare; е – the parameter of inequity aversion (е ≥ 0)7; ui – the utility (welfare) of the ith member of society;8 n – the number of members of the society (n ≥ 2). with e = 0, there is no social inequity aversion. each marginal unit of individual utility has the same social value, regardless of the level of utility (welfare) of the individual. equation (3) is reduced to the unweighted (additive) utilitarian social welfare function. the idea is that society should strive to maximize the total happiness of the community.9 when e → ∞, social welfare is a function of the welfare of the poorest individual (or group of individuals) in society (the welfare of others has no social significance). equation (3) reduces to the rawlsian social welfare function. rawlsianism exalts in cult (equality in) the distribution of utility (welfare) between members of society.10 at e ∊ (0, ∞), the marginal increase in utility (welfare) of a low-utility individual has a greater social weight than the marginal increase in utility (welfare) of a high-utility individual. as e increases, the weight for equality (fairness) increases. this is the so-called standard welfare function. an example of a standard 4 before 2013, there was no data on the gini coefficient in serbia and north macedonia. 5 there is no data on the gini coefficient in north macedonia in 2021. 6 constant elasticity function. 7 when e = 1, equation (3) is undefined and is replaced by 𝑊 = ∑ 𝑙𝑜𝑔(𝑈𝑖) 𝑛 𝑖=1 . 8 individual utility (welfare) is a function of the individual's income and other variables. 9 the spiritual father of modern utilitarianism (philosophical school of the 19th century) is the english philosopher, jurist and reformer jeremy bentham (1748 – 1832). according to bentham, “the greatest happiness for the greatest number of people is the basis of morality and legislation.” 10 the idea is of the american moral and political philosopher john rawls (1921 – 2002). rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 35 function is the bernoulli-nash social welfare function11 (e → 1). if we assume that the social value of the additional lev income is some function of the individual's income, the utility (welfare) in equation (1) can be replaced by income and an appropriate weight to account for social inequality12 aversion. thus, equation (3) takes the following form: 𝑊 = ∑(ε𝑖 , 𝑌𝑖) 𝑛 𝑖=1 = 1 1 − ε ∑(𝑌𝑖) 1−ε 𝑛 𝑖=1 (4) w is the social welfare; ε – the parameter of inequality aversion; yi – the income of the ith member of society; n – the number of members of the society (n ≥ 2). for practical purposes, the so-called abbreviated social welfare function is particularly attractive (kondor 1975): 𝑊 = 𝑊(𝑌, 𝐼) (5) w is the social welfare; y – the income of the society; i – the inequality in the distribution of income among members of society. conceptually, the welfare of society as a whole is a function of total income (efficiency) and inequality in the distribution of income (equity).13 indian economist amartya sen, winner of the nobel prize in economics (1998), proposed the following abbreviated social welfare function (sen 1973): 𝑊𝑆 = �̅� ∗ (1 − 𝐺) (6) ws is the social welfare (0 ≤ ws ≤ �̅�); �̅� – the average income in society (gross domestic product per capita); g – the gini coefficient (0 ≤ g ≤ 1). �̅� in equation (6) is a measure of efficiency, and (1 – g) – an index of fairness (equality) in income distribution. equation (6) can be transformed as: 𝑊𝑆 = �̅� − �̅� ∗ 𝐺 (7) (�̅� * g) in equation (7) represents the cost of (the price of) inequality in the distribution of income in society. �̅� is calculated as: �̅� = 𝑌 𝑛 (8) �̅� is the average income in society (gross domestic product per capita); y – the income of the society; n – the number of members of the society (n ≥ 2). if every member of society receives �̅�, g = 0 and ws = �̅�. when one member of society receives all 11 daniel bernoulli (1700 – 1782) was a swiss mathematician and physicist who contributed to economic theory, and john nash (1928 – 2015) was an american mathematician, laureate of the nobel prize in economics (1994) and the abel prize for mathematics (2015). the plot of the famous american film “a beautiful mind” from 2001 (adaptation of the book of the same name by sylvia nazar, published in 1998) follows the biography of john nash. 12 in specialized literature, the term “inequity” refers to the fundamental and institutional unfairness, and the term “inequality” refers to the uneven distribution of income and wealth in society. 13 a two-criteria indicator of social welfare. rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 36 income (n * �̅�), and the income of others is zero, g = 1 and ws = 0 – see equation (6) and equation (7). so if g = 0.314 (for example), this means that 70 %15 of society's income (y = n * �̅�) with this degree of inequality is needed to achieve the same level of social welfare as with an equal distribution of income (g = 0): �̅� ∗ (1 − 0.3) = 0.7 ∗ �̅� ∗ (1 − 0) (9) at the beginning of the new century pundarik mukhopadhaya (2002) proposed the following generalized form of the sen’s swf: 𝑊𝑀 = �̅�𝛽 ∗ (1 − 𝐺) (10) wm is the social welfare; �̅� – the average income in society (gross domestic product per capita); β – the welfare-income elasticity (0 ≤ β ≤ 1); g – the gini coefficient (0 ≤ g ≤ 1). when β = 0 the swf is a function of inequality (g) only regardless of the level of efficiency of the society (rawls 1971). when β = 1 the swf will become the swf of sen (mukhopadhaya 2003). for the purposes of the following analysis, we use sen's classical welfare function. figure 5 presents sen's social welfare function in the eu, bulgaria and the remaining twelve studied countries for the period 2007 – 2021. source: author's own calculations. figure 5. social welfare function of sen within the studied period, the social welfare in bulgaria marked a steady growth with a single exception – 2013 compared to 2012. in other words, with each passing year, bulgarians live better and better! unfortunately, within the eu, bulgaria is the country with the lowest level of social welfare for the entire period (see figure 5). there are three main reasons for this:  low starting level of real gdp per capita (see figure 1);  unsatisfactory rates of catch up economic development (see figure 2); 14 30 %. 15 1 – 0.3 = 0.7 (70 %). 0 5 000 10 000 15 000 20 000 25 000 30 000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 year eu 27 (from 2020) bulgaria romania greece serbia north macedonia turkiye poland hungary czechia slovakia germany france united kingdom rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 37  high (and growing) inequality in income distribution (see figure 4). behind us (again) are only serbia and north macedonia (see figure 5). in 2007, bulgaria, romania and turkey have almost the same level of social welfare – see the corresponding swf values of sen. the following fourteen years, however, romania is experiencing high rates of economic growth and a reduction in inequality in the distribution of income. thus “at the end” (in 2021) the difference in social welfare between bulgaria and romania is quite serious (in favor of romania) – see figure 5. picture is the same in poland and czechia. at a higher starting level, these countries register high rates of catch up economic development combined with decreasing inequality in income distribution and achieve remarkable results. over the past five years, the level of social welfare in czechia has fluctuated around the eu average (see figure 5)! within the studied period, germany is a definite favorite. with impressive rates of economic growth and a gini coefficient around the eu average, it is clearly ahead of its direct competitors (france and the united kingdom) and demonstrates an enviable level of social welfare (much higher than the eu average) – see figure 5. finally, the descriptive statistics of the calculated social welfare are presented in table 1. table 1. descriptive statistics of the aggregated welfare using the swf of sen n min max mean* median** standard deviation*** eu 27 (from 2020) 15 16 725.4 22 647.6 19 087.1 18 380.6 1 827.03 bulgaria 15 6 470.0 11 215.8 8 372.5 8 139.6 1 253.94 romania 15 6 663.6 15 702.3 10 670.7 9 636.0 2 560.83 greece 15 12 088.8 15 917.4 13 534.4 13 053.6 1 169.66 serbia16 9 6 420.0 9 604.8 7 510.1 7 090.8 1 087.50 north macedonia17 8 5 796.0 8 246.7 7 085.2 7 136.4 784.95 turkiye 15 6 528.6 11 652.2 9 355.6 10 172.4 1 714.64 poland 15 9 017.4 18 300.0 12 998.0 12 386.8 2 680.61 hungary 15 11 234.4 17 593.2 13 764.2 13 137.6 1 835.81 czechia 15 15 462.9 22 334.4 18 262.3 17 451.7 2 446.05 slovakia18 14 12 608.5 17 085.6 15 206.3 15 341.4 1 383.16 germany 15 20 064.7 26 832.0 23 564.7 23 354.1 2 235.51 france 15 18 366.2 23 896.6 20 718.8 20 390.4 1 635.69 united kingdom19 12 17 846.4 21 147.0 19 685.7 19 772.3 1 097.61 source: author's own calculations. notes: * ∑ 𝑊𝑖 𝑁 𝑖=1 𝑁 n is the number of values of the swf of sen (2nd column in table 1); wi – the ith value of the swf of sen (see figure 5). ** 𝑊 [ 𝑁+1 2 ] if n is odd; 𝑊[ 𝑁 2 ]+𝑊[ 𝑁 2 +1] 2 if n is even. w is the ordered list of values of the swf of sen; n is the number of values of the swf of sen (2nd column in table 1). *** √ 1 𝑁 ∗ ∑ (𝑊𝑖 − �̅�)2𝑁 𝑖=1 n is the number of values of the swf of sen (2nd column in table 1); wi – the ith value of the swf of sen (see figure 5); �̅� – the mean of values of the swf of sen (5th column in table 1). conclusion 16 for the period 2013 – 2021. 17 for the period 2013 – 2020. 18 for the period 2007 – 2020. 19 for the period 2007 – 2018. rumen brussarski / finance, accounting and business analysis, volume 5, issue 1, 2023 38 in this article, we studied economic growth, inequality in income distribution and social welfare in bulgaria for the period 2007 – 2021. the main conclusions from the analysis can be summarized as follows:  the rates of catch up economic development of our country are unsatisfactory;  inequality in the distribution of income in bulgaria is high (and growing);  the level of social welfare in our country is growing, but it is (still) at the bottom of the eu 27. references eurostat. online: [https://ec.europa.eu/eurostat]. accessed: 12 may 2023. gini, c. 1936. on the measure of concentration with special reference to income and statistics, colorado college publication. general series no. 208, pp. 73–79. gini, c. 1912. variabilità e mutuabilità. contributo allo studio delle distribuzioni e delle relazioni statistiche, tipogr. di p. cuppini, bologna. kondor, y. 1975. value judgements implied by the use of various measures of income inequality. review of income and wealth, 21, pp. 309 – 321. lorenz, m. o. 1905. methods of measuring the concentration of wealth. publications of the american statistical association, 9(70), pp. 209 – 219. mukhopadhaya, p. 2002. efficiency criteria and the sen-type social welfare function. indian economic journal, 49(2). mukhopadhaya, p. 2003. the ordinal and cardinal judgment of social welfare change in singapore, 1982-99. the developing economies, 61(1). rawls, j. 1971. a theory of justice. harvard university press. sen, a. 1973. on economic inequality. oxford, clarendon press. visegrád group. online: [https://en.wikipedia.org/wiki/visegr%c3%a1d_group]. accessed: 18 may 2023. https://ec.europa.eu/eurostat https://en.wikipedia.org/wiki/visegr%c3%a1d_group 137 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg is there a trade-off between economic and environmental factors in traditional oil mine management? amin pujiati*, tri anggana putra, nadia damayanti department of economics development, faculty of economics, universitas negeri semarang, indonesia info articles abstract keywords: environment, economic, social, factor analysis, willingness to pay oil mining that is managed by the public can increase local income but on the other side inflict environmental damage. the aim of this research is to analyze the link between the environmental, economic, and social factors and to test whether there is a trade-off between economic and environment factor for traditional oil mining in wonocolo village, kedewan subdistrict, bojonegoro regency. the respondents are 84 traditional oil miners in wonocolo village. the method of collecting data is by using questionnaire. the analysis tool for analyzing the data is using factor analysis by principal component analysis method. the variables consist of income, education, age, distance from home to mine, and willingness to pay (wtp). the result shows that income and education are related positively to wtp which means the higher the income and education, the bigger the wtp. age and distance from the mine are related negatively to wtp which means the older and the farther the house from the mine, the smaller the wtp. the higher the income, the bigger the wtp shows that there is no trade-off between economic and environment factors for traditional oil mining. policy implications is that trade-off does not happen between economy and environment quality which means mining activity in wonocolo is still doable to increase gdrp without degrading the quality of environment. however, this activity needs evaluation especially on how rapidly crude oil reserves depleted and to prepare about green technology that can substitute non-renewable natural resources such as crude oil. *address correspondence: e-mail: amin.pujiati@mail.unnes.ac.id finance, accounting and business analysis 4 (2) 2022 138 introduction natural resources are one of the development of capitals. indonesia is known for its abundance of natural resources. one of natural resources that has its own fair share in development of national and regional economic is mineral resources (widayat, 2017). crude oil is one of the most valuable mineral resources that contribute for economic to improve human welfare (handayani et al., 2022; kozminski & baek, 2017; lin & raza, 2020; pujiati et al., 2019, 2022). management and utilization of the crude oil resource for national and regional development must obliged to the principle of sustainable development as to prevent environmental issue in the future (pujiati et al., 2020, 2017; wann-ming, 2019). the coordinated development of the environment quality and the socio-economy has always been a concern of the global community (broman & robèrt, 2017; oktavilia et al., 2019; peng et al., 2019; pujiati et al., 2022; sundram et al., 2021; j. wang et al., 2018). exploiting this development opportunity though poses several trade-offs, although bringing significant economic benefit, it also plays great impact on adverse environmental impacts (damania et al., 2018; godby et al., 2018). according to marsiglio and privileggi (2021) their study showed that independently of the relative weight of economic and environmental goals, capital will initially overshoot its long run level in order to the decrease over time while pollution will monotonically increase during the transition towards the long run equilibrium. there is a sort of trade-off between environment and production, providing insights that, policies directed toward protecting the environment may harm economic activities wesseh and lin (2022) meaning also that if policies directed toward growing the economy may harm the environment quality. herziger et al. (2020) higher income individuals could practice sustainable consumption without depleting discretionary spending resources. the kind of natural resources that cannot be regenerated such as crude oil, if the management and the utilization does not base itself on the principle, it will cause great scarcity. according to central statistical agency (2021), the amount of crude oil production, condensat, and natural gas in indonesia has been depleted since 2017 to 2021. crude oil and condensat reserve in 2017 were 292 million barrel and it has declined to the position of 240 million billion barrel in 2021. the decrease in oil production in indonesia is 21,6% or approximately 52 million barrels since 2017 and natural gas production in 2017 was 2.781 mmscf (million standard cubic feet) and it has declined to the position of 2.433 mmscf in 2021, the decrease in natural gas is 14% or approximately 347 mmscf. the declining trend required wiser management so that the next generation can relish crude oil as natural resources. indonesia’s crude oil reserves spread through many blocks, one of the biggest oil reserve blocks is blok cepu. with its own potential up to 729 million barrel, blok cepu is the biggest after blok rokan. regions that are part of the blok cepu will potentially increase regional revenues. blok cepu is in 3 districts, namely blora, bojonegoro and tuban regencies. the existence of petroleum resources has contributed greatly to the grdp revenue for the mining and quarrying sector. table 1. grdp distribution based on current prices by business field in the mining and quarrying sector in 2017-2021 (%) regency 2017 2018 2019 2020 2021 blora 24,52 26,67 25,01 18,89 24,31 bojonegoro 47,41 49,61 49,36 43,42 50,14 tuban 9,10 9,30 8,90 8,94 9,15 source: (badan pusat statistik, 2022a, 2022b, 2022c) the era of regional autonomy provides broad opportunities for regions to increase revenue through the management of natural resources owned by each region (pujiati et al., 2018, 2020). among the blok cepu, the distribution of gross regional domestic product (grdp) based on business field on current prices, bojonegoro regency mining and quarrying sector has the highest percentage of total grdp of each district. bojonegoro regency has traditional oil mining in wonocolo village, kedewan sub-district, the relics of the netherlands amounted to 494 oil wells with average production of 500 bopd (barrels oil per day). management of oil mining still uses simple tools. the absence of a good treatment system has caused heavy metal pollution in soil, water and, air pollution (de brito et al., 2019; meng et al., 2020; mondal et al., 2019). this is caused by oil spills and residual waste from the processing of oil which is discharged into nature without going through processing that has occurred for years. whereas spills and oil waste that pollute the ground can reach the location of ground water or other water sources so that it will endanger areas that still rely on ground water as the main source of clean water and drinking water (de brito et al., 2019). another problem is that there are still illegal drilling (illegal mining) and illegal oil refining activities. even though economically mining produces high gross regional domestic product (grdp), the exploitation of natural resources that do not heed the ability and carrying capacity of the environment will cause a decline in environmental quality (canare & francisco, 2019; kurniawan & finance, accounting and business analysis 4 (2) 2022 139 managi, 2018) development comes with an impact that is undeniable to environment but on the other hands it raises the grdp. with the negative impact or damage caused to the surrounding environment it must be compensated by economic size so that the environment can be managed again if the oil mining activities are no longer in operation. this raises the principle that the polluter must pay for pollution arising from its production activities and become a consideration in calculating the cost of accommodation for external or environmental costs (saidi et al., 2018). the principle of pollutants must pay for the pollution that results will make individuals or groups consider the cost or value they are willing to pay, as a form of responsibility in maintaining and restoring post-mining environmental conditions. the value of willingness to pay as compensation for environmental improvement depends on several factors of income, education, age, distance from home to mine. income and willingness to pay have a positive relationship (cahyati et al., 2019). someone who has greater income will be able to meet their daily needs so that person is willing to set aside his income to participate in efforts to improve environmental quality. this is because there is a tendency for people who are able to meet their needs to pay more attention to their health and comfort. the higher one's education, the higher the awareness to protect the environment so that the opportunity for willingness to pay for wtp is greater (ito & zhang, 2020; mutaqin & usami, 2019; vo et al., 2021). according muazzinah and aidar (2017), age variable does not have any significant effect on the value of wtp. the distance between the house and the location of natural resources being managed has negative relationship, the farther the distance traveled the more costs incurred so that the willingness to pay wtp is getting smaller (prasmatiwi et al., 2011). natural resources are development of capitals that can generate income. the high contribution of natural resource management in terms of income must be balanced with the high environment that is maintained. there has been many research conducted on willingness to pay but there has not one that has been done about wtp in regards to natural resource management especially on traditional oil mining. the urgency of this study is trying to prevent the environmental degradation in other places that still manage to have traditional oil mining so that won’t be any trade-off between grdp and environment. the purpose of this study was to test whether the trade-off between economy and environment happen. this research is expected to contribute academically and practically by proving whether there is a trade-off between economic and environmental factors in traditional oil mine management. literature review relationship between income to environment keynes's theory of consumption explains that the factor affecting consumption is income. according to (ikhsan & syahrival, 2014) if one does a labor therefore, one will receive a remuneration in the form of money as income. income and consumption have a positive correlation, the higher the income, the higher the ability to consume (saptutyningtyas, 2007). a person consumes not only to meet the needs of private goods, but also public goods, namely environment goods. according to (sayyidah, 2013; ladyance & yuliana, 2014) there is a positive and significant relationship between income and people's willingness to pay related to environmental improvement. this means that if the income owned by the community is greater, then their willingness to pay tends to be greater. there is a tendency that the greater the income, a person will pay more attention to their health and comfort, including the environment. other research linking wealth with wtp is from shao et al (2018) found that rich people have stronger wtp regarding environmental protection. however, by increasing people's income, the marginal wtp for environmental protection will decrease and there will be a reversal of the top income level, so that wtp is not always accompanied by an increase in income and the middle class has the strongest wtp for environmental protection. wang et al (2020) also found that the behavior of hoarding food is driven by several motivations and subjective perceptions of risk, stating that women with higher education and a high-income consumer category tend to hoard food on a large scale, but the wtp for hoarding food immediately is influenced by income. liu et al (2019) found that young people with high levels of education and high income tend to have a higher wtp for self-driving vehicle technology. vo et al (2021) found differences in wtp based on gender, area of residence, monthly income, and risk of covid-19. relationship between education to environment human resource is one of the capitals for development. the increasing number of populations will become the capital of development if it is balanced with the quality of human resources improvement. increased quantity must be balanced with quality. improvement and development of human resources can be achieved through education, both formal and non-formal. the higher the education, the higher the awareness of the importance of protecting the environment. a person's awareness in maintaining environmental conditions which is getting higher has a positive correlation with the level of education. finance, accounting and business analysis 4 (2) 2022 140 the high level of education causes the opportunity for the willingness to pay to improve environmental quality will be even greater (nwofoke, onyenekwe, & agbo, 2017). this is supported by research conducted by peng et al (2019), the higher a person's education level, the higher his willingness to pay new technology such as self-driving vehicles. research (yuen & chu, 2008) states that education is the factor that has the highest influence on wtp to clean the air. liu et al (2019) found that young people with high levels of education and high income tend to have a higher wtp for self-driving vehicle technology. ntanos et al (2018) found that using the binary logit model, wtp is positively related to education, energy subsidies, and assistance from the state regarding renewable resources. sanchez et al (2022) found that by using the random parameter latent class (rplc) many homeowners with low education tend to be insensitive to information about fire risk compared to homeowners with higher education. relationship between age and environment in making decision, a person is influenced by the level of maturity. age is a way to measure maturity. there is a positive link between age and mindset in making decisions for the benefit of both personal and other people or society. awareness of protecting the environment is a shared responsibility and is needed by people who have a mature mindset. with the older a person's age, it is considered that they will have a more mature mindset in making decisions and the level of awareness in protecting the environment will be better that their tendency of willing to pay for environmental improvements is getting bigger (nwofoke, onyenekwe, & agbo, 2017; amanda, 2009). according to peng et al (2019) age is one of the factors affecting wtp on new technology. liu et al (2019) found that young people with high levels of education and high income tend to have a higher wtp for self-driving vehicle technology. chua et al (2022) found that age and distance to health facilities were the main predictors of wtp using telemedicine. relationship between distance from home to mine and environment willingness to pay for environmental improvement is influenced by distance, namely the travel time from the house to the destination. the farther the distance must be traveled, the greater the cost and time to spend. so, the assumption is that the farther a person has to travel, the smaller his willingness to pay will be, due to the large consumption or costs that must be incurred. then the research of nwofoke, onyenekwe, & agbo (2017) shows a negative relationship between distance and someone's willingness to pay. where the farther the farmer's house is from the rice mill, the lower the chance of his willingness to pay due to the reduced air pollution they consume. wana dan sori (2022) used the logit model found that wtp for obtaining improved water availability is influenced by household income, family size, education level, and distance from water sources. method the research is conducted in wonocolo village, kedewan district, bojonegoro regency. this type of quantitative research, primary data source with a questionnaire method. respondents in the study are 84 traditional oil miners. the research variable used is environment which can be assesed through willingness to pay (wtp) as the dependent variables. the independent variables are income, education, age, and distance from home to mine. according to muazinnah and aidar (2017) and lazaridou (2019), willingness to pay is willingness of individuals to pay for an environmental condition resulting from the use of resources in order to improve environmental quality. the value of willingness to pay (wtp) for environmental improvement is used to measure the value of willingness to pay someone for environmental damage caused by mining in rupiah units. the calculation of wtp uses the contingent valuation method (cvm) that has been done by li and kallas (2021). the following stages: creating a hypothetic market by explaining to the community the solutions to overcome post-mining soil contamination in the form of a bioremediation program, auction value or payment offer (wtp) for the bioremediation program, calculating average wtp value, and aggregating the wtp value. wtp someone for environmental damage caused by mining in rupiah units. income is measured by total income per month from working as a traditional oil miner in rupiah. education is measured by the number of years of formal education that has been taken in years. the age is measured by the age of the miners in years. the distance from the house is measured from the house to the traditional oil mine location in kilometres. the analytical tool used to analyze the link between the environmental, economic, and social factors and to test whether there is a trade-off between economic and environment factor for traditional oil mining uses factor analysis with the principal component analysis method. a factor analysis is applied to systemically integrate the variables. factor analysis is a technique of dimension reduction and data simplification (hao et al., 2019; shrestha, 2021). factor analysis is used to extract two factors and could explain 57,66% of the common variance of food group variables, while five components were extracted, finance, accounting and business analysis 4 (2) 2022 141 explaining 26.25% of the total variance of food group variables (santos et al., 2019). according to noora (2021) factor analysis can be combined with principal component analysis (pca) and can be used to examin whether the statements represent identifiable factors related to touris satisfaction. pca can signify to the statistical process used to underline variation for which principal data components are calculated and bring out strong patterns in the dataset. the analysis stage begins with testing the feasibility of a factor analysis tool with a collinearity test between variables using the kaiser-meyer-olkin (kmo) barlett's test of sphericity, measure of sampling adequacy (msa), extraction, and rotation. results analysis of the amount of wtp with the cvm method cvm (contingent valuation method) approach is used in calculating the value of willingness to pay for environmental damage caused by traditional oil mining in wonocolo village. the stages and results are as follows: first, create a hypothetical market by providing an explanation and knowledge of the impact of environmental damage arising from traditional oil mining activities, especially when mining activities are no longer exist or after mining. the solution offered is to reduce environmental damage on soil pollution with a bioremediation program. second, obtain wtp auction value with the bidding game technique, namely by repeatedly asking respondents questions until they get a certain amount of payment value. the auction value or payment offer (wtp) for the bioremediation program is idr 2,000, idr 3,000, idr 5,000, idr 10,000, and idr 15,000 per month. third, calculate the average value of wtp and aggregate the value of wtp. there were 40 respondents (48%) who are willing to pay wtp and 44 people (52%) are unwilling to pay. respondents who are not willing to pay wtp have reasons: there is no mutual agreement between the community and the manager about large irregular income and basic household needs and environmental damage that have occurred over a long period of time. the average wtp that respondents are willing to pay is rp. 3,369 per month (table 2). table 2 shows the description of the variables noted with wtp for willingness to pay, inc for income, edu for education, age for age, and dist for distance. respondent's income has the highest range among other variables, which means that there is a high gap in terms of respondent's income. the average age of the respondents is 37 years, which means that they are classified as young and productive. average education is 9 years or junior high school completion and includes low education. the average income of the miners is rp. 2,700,000 / month, the distance from the house to the oil mining site is an average of 5 km. the average wtp who is willing to be paid is rp. 3,369 per month or rp. 3,370 if rounded off. table 2. descriptive statistics n minimum maximum mean wtp 84 .00 15.00 3.3690 inc 84 8.00 80.00 27.1310 edu 84 4.00 12.00 8.9286 age 84 22.00 75.00 37.4643 dist 84 1.00 10.00 4.5679 valid n (listwise) 84 source. processed primary data several steps were taken to see the accuracy of the analysis tools. factor analysis requires that the data matrix must have sufficient correlation, so a correlation test is carried out using the kmo measure, barlett's test of sphericity, and the measure of sampling adequacy (msa). in table 3, the kmo value is 0.547. factor analysis can be continued if the kmo value is> 0.5. barlett's test of sphericity value is significant at 0.00. based on these two criteria, the factor analysis can be continued. table 3. kmo and bartlett's test kaiser-meyer-olkin measure of sampling adequacy. .547 bartlett's test of sphericity approx. chi-square 37.177 df 6 sig. .000 the next step for factor analysis is to look at the msa of each variable. in the msa calculation in table 4, it shows that all variables used, namely income, age, education, and distance have an msa of 0.50 which means that all variables meet the requirements of the factor analysis test. msa for age is 0.527, finance, accounting and business analysis 4 (2) 2022 142 education is 0.531, income is 0.640 and distance is 0.646. factor analysis basically classifies the variables into factors. the next step is to perform extraction and rotation. table 4. anti-image matrices zscore (age) zscore (edu) zscore (inc) zscore (dist) anti-image correlation zscore (age) .527a .527 -.018 .032 zscore (edu) .527 .531a -.232 .125 zscore (inc) -.018 -.232 .640a .099 zscore (dist) .032 .125 .099 .646a note. a. measures of sampling adequacy (msa) the next stage in factor analysis is extraction. extraction in factor analysis aims to classify the variables into factors and how many factors are formed that can explain the overall variation in the model formed. table 5 shows that of the four variables, two factors are formed (eigenvalues> 1 become one factor). factor 1 can explain 43.04% of the variation, factor 2 can explain 25.02%. both factors overall can explain 68.07%. table 5. total variance explained component initial eigenvalues extraction sums of squared loadings total % of variance cumulative % total % of variance cumulative % total 1 1.722 43.044 43.0 44 1.722 43.044 43.044 1.558 2 1.001 25.021 68.065 1.001 25.021 68.065 1.165 3 .843 21.064 89.129 4 .435 10.871 100.000 note. extraction method: principal component analysis. source. processed primary data table 6 shows the rotation results of the variables which are grouped into two factors with a loading factor > 0.5. the two factors, factor 1, age and education, respectively, the loading factor is 0.880 and 0.837, factor 2 is income and the distance are the loading factor of 0.605 and 0.858, respectively. factor 1 can be given a new variable name social and factor 2 can be given a new variable name economy. table 6. rotated component matrixa component 1 2 zscore (inc) .281 .605 zscore (edu) .837 .246 zscore (age) -.880 .022 zscore (dist) .063 -.858 note. extraction method: principal component analysis. rotation method: varimax with kaiser normalization.a a. rotation converged in 3 iterations. the results of the rotation in table 6 show that the age variable as one of the social variables shows that the loading factor value is 0.880 which is negative, meaning that if the age of a person increases, the wtp value that is willing to be paid to improve environmental quality will decrease due to unable to savour the benefit of their sacrifice for the better-off of environment in long term. these results indicate that the miners in wonocolo village with an increasingly old age, their level of concern and awareness in protecting the environment are getting lower. the results of this study do not support amanda (2009) which explains that there is a positive influence between age and willingness to pay wtp. the difference between this research and amanda’s is that amanda’s research is about the willingness to pay on tourist attractions where visitors pay and can enjoy sacrifices for environmental improvement. for traditional oil mines, the sacrifices made by traditional miners by paying wtp in the long term they don't enjoy so that the older they get the more they don't want to pay. based on the data description, the number of respondents who are willing to pay wtp is 40 people (48%). the age of respondents who are willing to pay wtp is at most 30-40 years old as much as 37.5%, aged <30 years as much as 25%. this means that the young people are willing to pay the remaining 62.5% of the old age group. the older, the concern for the environment is measured by the willingness to share finance, accounting and business analysis 4 (2) 2022 143 the less the wtp. the reason people who are old age do not want to pay wtp because the environmental damage that is happening now is that it has been hereditary, so they feel it is not their responsibility to pay for environmental damage. this study supports bowen's theory regarding the definition of public goods, including the environment. public goods are goods where exceptions cannot be determined, if public goods are available then no one can be exempted from the benefits of these goods. the environment includes public goods that have non-exclusive and non-rivalry characteristics. nonexclusive (not special) means that a person cannot be excluded from the benefit of consuming public goods whether the person pays or not. nonrivalry means that if there is additional consumption there is no additional cost for consuming the goods. the results of the research show the importance of socialization, environmental awareness campaigns in every joint activity so that the goals of sustainable development are achieved. the results of development are not only for the present generation but for future generations. the loading factor value of the education variable is 0.837 and has a positive sign, so that it can be interpreted that if the higher the education a person has taken, the greater the value of wtp that is willing to be paid will increase. education is one of the social variables that affects the willingness to pay and has a different relationship with the age variable. results these results support research gravitiani et al. (2017), muazzinah and aidar (2017), and nwofoke et al. (2017) the higher the level of education a person has, the higher the wtp value they are willing to pay will be greater. this happens because the level of knowledge and understanding of people who have higher education will be considered better than those whose education is still below it. as mentioned on another studies from ahmed et al. (2015) and jianjun (2015) that level education plays a huge role on the willingness to pay for environment quality. the income variable has a loading factor value of 0.605 and has a positive sign. this can mean that if the level of income a person has is getting bigger, the wtp value paid will be even more. this result is supported by research from tuaputy et al. (2014) regarding the externalities of gold mining community in buru regency, maluku, explains that if the miners' income is higher, the wtp value for environmental improvement will be higher. this result is interesting because the greater the income, the greater the wtp value, which means that the environment is getting better. income is one of the factors of economic variables. evidence from developing countries indicates that water pollution yields no measurable benefits without collaboration among local governments and strong implementation and enforcement. therefore, government has to trade off economic growth with environmental governance, which presents the possible dilemma of economic recession without environmental improvement (j. li et al., 2020). yet, despite widespread consensus that economic and environmental policy preferences are substitutes, empirical efforts to evaluate this economy-environment trade-off remain uneven (mildenberger & leiserowitz, 2017). also, the fact that this study shows that the higher the income, it also increases the willingness to pay for the environment around it. these results prove that there is no trade-off between economic and environmental variables. the mining community proves that the greater the income they get, the greater the willingness to pay for environmental damage because mining processing is still traditional. the house distance variable is the result of the loading factor value of 0.858 and has a negative sign and it can be interpreted that if the distance from the house to one's work location is further away, the greater the value of the wtp that is willing to be paid will be smaller. commuting and wages can be attributed to the sorting of workers into certain firms at various distance (dauth & haller, 2020). the location of the mine that is outside the residential area causes costs and time to be sacrificed to reach the mining location, this results in a negative relationship to the value of the wtp because the farther the miner's house is from the mining location, the greater the cost and the greater the value. less is willing to pay for environmental improvement. these results support prasmatiwi et al. (2011). the economic distance between the house and the mining location is calculated as a cost. the farther the distance, the greater the costs incurred. if the costs incurred are greater, the willingness to pay for environmental damage will be smaller. this is different from the income variable which is an economic variable which has a positive relationship with the willingness to pay for environmental damage. conclusion people's willingness to pay for environmental damage or wtp is related to factors of age, education, income, and the distance from the house to the mining site. social factors consisting of age and education variables have different relationships. age is negatively related to willingness to pay wtp, the older the willingness to pay wtp is smaller. while education is positively related, the higher the education the greater the willingness to pay wtp. economic factors, which consist of income and the distance between the house and the mining site, also have a different relationship. income has a positive relationship, the higher the income the greater the willingness to pay wtp so that the environment is getting better. this proves that there is no trade-off between the economy as measured by income and the environment in the finance, accounting and business analysis 4 (2) 2022 144 case of traditional oil mining. the distance between the house and the willingness to pay wtp has a negative relationship. the farther the distance, the smaller the willingness to pay the wtp so that the environment is also getting worse. the absence of a trade-off between economic and environmental variables is only proven for the income variable, for the variable distance between the house and the mining location, there is still a trade-off between economic and environmental variables. practical implications according to this research, trade-off does not happen between economy and environment quality which means mining activity in wonocolo is still doable to increase gdrp without degrading the quality of environment. however, this activity needs evaluation especially on how rapidly crude oil reserves depleted and to prepare about green technology that can substitute non-renewable natural resources such as crude oil (azadi et al., 2020; chen et al., 2022; huang et al., 2020; jinzhong et al., 2020; y. wang & yu, 2021). limitations and future research agenda limitations of the study, the cvm method in calculating wtp requires sufficient time, cost and understanding of the community about the environment to obtain preferences that can show how much the community cares for the environment. with such limitation, the future research agenda is to use more efficient and effective method such as benefit transfer method. this method can be used by using the results of studies/research in other places that have the same/almost the same characteristics and typology (hanley & czajkowski, 2019; lawton et al., 2021; rauner et al., 2020). references ahmed, a., masud, m. m., al-amin, a. q., yahaya, s. r., rahman, m., & akhtar, r. 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(2017). analisis dampak keberadaan pertambangan emas liar masyarakat terhadap lingkungan (studi kasus di desa lunyuk rea kecamatan lunyuk kabupaten sumbawa). gane swara, 11(2), 80–84. 118 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg design of corporate project performance and labor productivity at pt vitra graha interia moh.mukhsin1, syarifaturrodiyah2 faculty of economics and business, sultan ageng tirtayasa university, indonesia info articles abstract keywords: labor productivity; education; remuneration; design; project performance to achieve good project performance, the company must meet three indicators: the project must be completed on time and on budget, at a cost that does not exceed the budget, and with quality that meets specifications or agreements. labor productivity factors, according to some studies, can have an impact on project performance. this study will thus investigate the impact of labor productivity factors such as education, experience, remuneration, materials, and design on project performance. with an r2 value of 0.215, productivity has a significant positive effect on project performance, implying that variables in this study contribute 21.5% to project performance, while the remaining 78.5% is influenced by other factors. all pt vitra graha interia employees who are directly involved in bank btpn's sharia projects from september 2019 to january 2020 are included in this study. the sample was drawn from the entire population (saturated sample). eighty of the 270 distributed questionnaires were returned in full and could be analyzed. ibm spss 25 applications will then be used to process the data. testing revealed that educational, remuneration, and design factors are among the labor productivity factors that influence project performance. meanwhile, at pt vitra graha interia, experience and material factors have no effect on project performance. meanwhile, with an r2 value of 0.215, labor productivity has a significant positive effect on project performance at pt vitra graha interia. *address correspondence: e-mail: moh.mukhsin@untirta.ac.id1, syarifaturrodhiyah04@gmail.com2 mailto:moh.mukhsin@untirta.ac.id mailto:syarifaturrodhiyah04@gmail.com finance, accounting and business analysis 4 (2) 2022 127 introduction a project can be said to be successful if the entire scope of work can meet the expected quality, according to the realization with the schedule, with the minimum cost and can be completed on time that has been agreed upon. therefore, identify time, cost and quality as the three most important indicators to measure project performance (meng 2012). however, due to the size and complexity of this industry, construction project implementation often has poor performance and is a concern among practitioners and academics (thomas and sudhakumar 2015). in its implementation projects often run inefficiently such as delays or delays in time, cost overruns, low productivity, poor quality and inadequate customer satisfaction (eriksson and westerberg 2011). labor productivity is an important part of various construction plans related to project schedules, quality, and costs (pawiro, tjakra, and arsjad 2015). productivity is a term in production activities as a comparison between output and input, the higher the productivity, the higher the level of project accuracy and the lower the wastage of costs that will occur. productivity can also be interpreted as the level of efficiency in producing a good or service (hernandi and tamtana 2020). efforts to produce better performance and increase productivity require an understanding of various productivity factors as a way to understand project performance (soekiman et al. 2011). factors that affect labor productivity need to be reviewed in various forms because in each project the factors that affect labor productivity are different, so in planning the workforce should be equipped with productivity analysis and indications of influencing variables. thus the workforce can carry out their activities as expected (pawiro, tjakra, and arsjad 2015). poor project performance such as delays is caused by a lack of skills and expertise of the workforce where this workforce has low productivity so it takes a long time to complete a job on a project (messah, widodo, and adoe 2013). lack of workforce experience can cause a project to be judged to be running slowly (i. p. and rini and tenriajeng 2014). poor performance is also found in companies where the determination of the number of wages and the time of receiving wages cannot meet workforce satisfaction, so it is following . maslow's theory of needs where if remuneration cannot meet the physiological needs of workers, they tend to have low productivity (hatmoko 2014). then another labor productivity factor that is seen to affect project performance is material. material factors are the most influential factors on project performance, delays in materials will cause unavailability of materials needed by workers, so workers are forced to stop/postpone work where this will interfere with labor productivity and affect the overall schedule (margareth and simanjuntak 2010). and the design factor has a fairly high influence value, especially in large-scale companies (soekiman et al. 2011). pt vitra graha interia is a company engaged in furniture and interior design. as a contractor, pt vitra graha intera is the party responsible for the procurement of furniture for construction projects. the implementation of company projects is often delayed. where project delays experienced by this company resulted in project cost overruns. one of them is a project owned by the bank btpn sharia project period from september 2019 to january 2020. the delay in project completion at pt vitra graha interia was caused by several obstacles including material procurement problems, obstacles in the design process, workers who were unable to complete the project on time, then the quality of the project results are not following the agreed specifications so there must be rework. so based on these problems, this study aims to analyze labor productivity factors, especially the factors indicated to contribute to project performance problems at pt vitra graha interia including education factors, experience factors, remuneration factors, material factors and design factors. literature review labor productivity productivity is a measure that states how to manage and utilize resources to achieve optimal results. productivity can be used as a measure of the success of an industry in producing goods or services. so the higher the ratio, the higher the product produced (harris, alam, and wibowo 2017). there are two measurements of productivity, the first measurement is the measurement of productivity in a wider angle called multifactor productivity or total factor productivity (tfp) where the product/service (output) is compared to many or all of the resources (input) (haizer, render, and munson 2017). multifactor productivity/total factor productivity (tfp) can be expressed in the following equation: tfp = total output σ(labors +material+equipment+energy+capital) (1) data for calculating multifactor productivity/total factor productivity is relatively difficult to obtain, but in the process of measuring productivity, it can be done more easily and under control by using singlefinance, accounting and business analysis 4 (2) 2022 128 factor productivity/partial factor productivity (pfp), namely the comparison of products/services (output) compared to specifics. one resource (input). one of the most commonly used pfp measures is labor productivity, which is defined as the ratio of output to labor input; the output is the quantity of products/services produced by the workforce, and the input is the labor time (thomas and sudhakumar 2015). labor productivity is expressed in the following equation: labor productivity = output quantity working hours (2) productivity is a term in production activities as a comparison between output and input, the higher the productivity, the higher the level of project accuracy and the lower the waste of costs that will occur. productivity can also be interpreted as the level of efficiency in producing a good or service (hernandi and tamtana 2020). factors of labor productivity labor productivity factors are all factors that affect productivity which is seen as a subsystem to show where the productivity potential and reserves are stored (hendra, 2013). in another study, labor productivity factors were identified as key factors usually used by stakeholders in each to formulate strategies to improve their industry performance (soekiman et al. 2011). the factors of labor productivity are based on several studies, namely research from (i. p. rini 2017), (i. p. and rini and tenriajeng 2014), (hatmoko 2014), and (berk 2016) and indicators of influence on project performance are as follows: 1. educational factor education is an activity to improve the ability of the workforce by increasing knowledge and understanding of general knowledge and economic knowledge in general, including increasing mastery of decision-making theory in dealing with organizational problems. while training is an activity to improve the ability of employees by increasing knowledge and operational skills in carrying out a job (masram and mu’ah 2015). based on several studies, the indicators in this factor are the educational background / final level of the workforce, the knowledge, and ability of the workforce in each type of work, and training that is carried out periodically by the company to improve the ability of the workforce. 2. experience factor experience is a measure of the length of time or period of work that the workforce has taken in understanding the tasks of a job and has carried it out well. the wider a person's work experience, the more skilled a person is in acting to achieve the goals set (rizkie, ani, and hartanto 2019). based on several studies, the indicators in this factor are the length of the workforce working in the same field, the skills of the workforce, and the experience of the project manager 3. remuneration factor a remuneration is a form of imbalance received by the workforce for their distribution to the organization (jawad and iqbal 2018). the focus of financial remuneration indicators on this factor is the number of wages received by workers who have met the needs of the workforce, the number of wages received by workers according to or commensurate with their work, and the timeliness of payment of labor wages. 4. material factor material is the main component of the construction. material is an item (goods) that is processed to make another item (labombang and qamaria 2012). the indicators for this factor are the availability of material that is maintained, the quality of the material is the best material quality, the scheduling/duration of time in material procurement so that the supply system is maintained and the material supplier is the chosen partner or supplier trusted by the company. 5. design factor one of the important documents in project activities is the design document. a design document is a communication tool between the planning consultant and the contractor related to the design to be built. design documents are generally submitted in the form of construction drawings and specifications (rks) (mahirudin 2010). indicators of these factors are a complete design, clearly legible design drawings, no errors in the design, no changes to the design, duration of time for revision and distribution of design money, duration of time for approval of changes to the scope of work, rework resulting from design changes or production errors. , and impractical designs. project performance project performance is a measure of how well a project is carried out in terms of objectives, time and budget constraints, and organizational policies and procedures (institute 2017). each project, as a distinct set of activities, has a specific goal to achieve. limits have been established in the process of achieving these objectives, namely the amount of cost (budget) allocated, time/schedule, and quality limits that must be met. the triple constraint refers to these three constraints. these three constraints are critical parameters finance, accounting and business analysis 4 (2) 2022 129 for project implementation and are frequently linked to project goals. because the three limits are mutually exclusive, it is generally followed if you want to improve the performance of the product that has been agreed upon in the contract. project performance is a measure of how well a project is carried out in terms of objectives, time and budget constraints, and organizational policies and procedures (institute 2017). each project, as a distinct set of activities, has a specific goal to achieve. limits reached in the process of achieving these objectives are typically followed by an increase in quality, which in turn increases costs that exceed the budget. on the other hand, if you want to cut costs, you usually have to sacrifice quality or timeliness. from a technical standpoint, the extent to which these three objectives can be met is the measure of project success (dharmayanti, adnyana, and nugraha 2020). project performance indicator the level of success in carrying out tasks and the ability to achieve the goals that have been set is referred to as performance. if the desired goals are met correctly, performance is deemed good and successful. many performance indicators related to various dimensions can be used to measure and evaluate project performance. such as time, cost, quality, customer satisfaction, client change, business performance, health, and safety. time, cost, and quality are the dominant dimensions of performance evaluation, which can be defined as follows: 1. time performance time performance is one element of a project's performance indicator is construction time. time performance is the comparison between the agreed time between the owner and the contractor with the actual time of project completion. in this case, to achieve good project performance, the company must be able to carry out and complete the project on time according to the agreed schedule. 2. cost performance cost performance is an important criterion in project success. cost performance is the most important indicator of project success that is used by many parties. this performance not only presents the profitability of the company but ut also the productivity of the organization at any time during the project process. poor project cost performance is a major concern of customers. based on the consequences above, the company must be able to ensure that the costs incurred for project work are the most optimal costs, do not experience swelling, and exceed the agreed budget. 3. quality performance a quality performance is considered as a function of the procedures applied during the construction process. quality is an important element for sustainable customer satisfaction. in the project, the contractor's quality performance is considered important for customer satisfaction. the company must be able to ensure that it can complete the project with results by the specifications agreed upon by the customer (agsarini and wiguna 2015). method pt vitra graha interia, jalan manis raya no. 13, manis industrial area, tangerang regency, banten, conducted this study. and the project under consideration is the bank btpn sharia project, which will run from september 2019 to january 2020. this study's population is the workforce at pt vitra graha interia, which is directly involved in the bank btpn sharia project from september 2019 to january 2020, totaling 270 workers from various positions ranging from top management to workers from all divisions. the sample in this study is drawn from a saturated sampling technique, or it is drawn from the entire existing population. sugyono (2013) the independent variable (x) and the dependent variable (y) were the variables in this study (y). the independent variables are labor productivity factors based on the results of the literature study and adjusted to the research problem in this article, while the dependent variable is project performance. the variables used in this study are presented in the following figure : finance, accounting and business analysis 4 (2) 2022 130 figure 1. variable the types of data needed in this research are secondary data and primary data. secondary data is obtained from literature studies, both previous research through journals or books, and project time schedule reports from companies. primary data were obtained through interviews and distributing questionnaires directly to respondents. the scale used in the questionnaire is the likert scale. where the likert scale is used to measure attitudes, opinions, and perceptions of a person or group of people about social phenomena. using a likert scale, each respondent's answer is scored as follows: table 1. likert scale qualification answer score strongly disagree 1 disagree 2 neutral 3 agree 4 strongly agree 5 a validity test is used to measure the validity or validity of a questionnaire. a valid instrument or questionnaire has a high level of validity. the instrument can be said to be valid if it can measure what is desired, able to reveal data from the variables studied appropriately. using the spss 25 ordinal data application, the test is carried out by analyzing the correlation coefficient with the decision criteria if r > 3% with a significant level of 5% (sugiyono 2013). reliability is a tool to measure the questionnaire which is an indicator of a variable. a questionnaire compiled can be said to be reliable or reliable if a person's answers to questions can be stable from time to time (ghozali 2013). calculation of reliability using the spss 25 application by looking at the reliability coefficients on alpha, the interpretation can be said to be reliable if the cronbach alpha value > 0.6 (sugiyono 2013). this study uses data with an ordinal scale, so it is necessary to transform the data into data with an interval scale using the successive interval method.the successive method is used to change the data that was originally in the form of ordinal data into interval data. several studies stated that the likert scale is included in the ordinal scale (suliyanto 2011). an ordinal data must be converted into an interval first as a condition to be able to perform mathematical procedures such as regression (wahyuni 2021). data analysis carried out in this research is a multiple linear regression analysis. multiple regression analysis to determine the effect of each variable x (labor productivity factors) on variable y (project performance) at pt vitra graha interia. data analysis was carried out with the help of the spss 25 application. results and discussions of the 270 questionnaires that have been distributed, as many as 85 questionnaires were returned, 80 questionnaires were answered completely and could be analyzed, as many as 5 questionnaires were not finance, accounting and business analysis 4 (2) 2022 131 answered properly, and as many as 185 questionnaires were not returned. with the number of questionnaires returned complete and can be analyzed, namely 80 questionnaires, the number of samples in this study has met the requirements of the right sample size. based on roscoe's opinion in (sugiyono 2013), namely the number of samples in research with multivariate analysis (correlation or multiple regression), the minimum number of sample members is 10 times the number of variables studied. where in this study there are 6 variables used (5 independent variables and 1 dependent variable), then the number of sample members is at least 10 x 6 = 60. validity analysis. the instrument used in this study was declared feasible, as evidenced by the results of the following reliability and multicollinearity tests. the results of the validity test on all variables are as follows: table 2. validity test results variable indikator correlation coefficient (r statistic) education (x1) x1-1 0.698 x1-2 0.786 x1-3 0.804 experience (x2) x2-1 0.851 x2-2 0.827 x2-3 0.719 remuneration (x3) x3-1 0.813 x3-2 0.835 x3-3 0.466 x3-4 0.620 material (x4) x4-1 0.800 x4-2 0.853 x4-3 0.847 x4-4 0.741 design (x5) x5-1 0.766 x5-2 0.641 x5-3 0.808 x5-4 0.855 x5-5 0.850 x5-6 0.793 x5-7 0.852 x5-8 0.771 project performance (y) y1-1 0.900 y1-2 0.874 y1-3 0.695 source : primer 2021 based on table 2 above, it can be seen that all items or indicators of the variables studied, both the independent and dependent variables have a correlation coefficient value > 0.3. so it can be concluded that all of the instrument items are declared valid. finance, accounting and business analysis 4 (2) 2022 132 reliability analysis. the results of the reliability test on all variables are as follows: table 3 reliability test results variable alpha cronbach result education (x1) 0.611 reliable experience (x2) 0.698 reliable remuneration (x3) 0.643 reliable material (x4) 0.822 reliable design (x5) 0.913 reliable project performance (y) 0.770 reliable source : primer 2021 based on table 3 above, it can be seen that all items or indicators of the variables studied, both the independent and dependent variables have cronbach's alpha values > 0.6. it is concluded that all variables are declared reliable. demographic characteristics of respondents. based on data processing, several profiles of respondents were obtained which were presented with several groupings of respondents' characteristics, namely based on position/work section, length of work, and last education which can be seen in the following table: table 4. respondents work section work section frequency percentage top management 16 20.0% staff 3 3.8% div. production 38 47.5% div. glass 1 1.3% div. metal 4 5.0% div. finishing 7 8.8% div. sofa 9 11.3% div. fiber and marble 1 1.3% div. packing 1 1.3% div. set up 0 0% div. shipment 0 0% total 80 100% source : primer 2021 based on the table above, it can be seen that most of the respondents were from the production division, namely 38 people or 47.5% of the total respondents. then in the second place the most respondents were from the top management as many as 16 people or 20% of the total respondents. furthermore, in the third place, namely from the sofa division, as many as 9 people or 11.3% of the total respondents. in fourth place, namely the finishing division, there were 7 people or 8.8% of the total respondents. then in fifth place are respondents from the metal division 4 people or 5% of the total respondents. then the staff ranks sixth, namely 3 respondents or 3.8% of the total respondents. then the seventh place is the glass division, fiber & marble division, and the packing division with 1 respondent or 1.3% of the total respondents. finally, the part where there are no respondents is from the setup division and the shipping division. table 5. respondents length of work length of work frequency percentage 1-9 years 34 42.5% 10-19 years 27 33.8% 20-29 years 15 18.8% ≥ 30 years 4 5.0% total 80 100% source : primer 2021 finance, accounting and business analysis 4 (2) 2022 133 based on the following table, the number of respondents with the most length of work is in the range of 1-9 years having worked, namely 34 people or 42.5% of the total respondents. then in second place the most are respondents with 10-19 years of work experience with a total of 27 people or 33.8% of the total respondents. then in the range of 20-29 years of work there are 15 people or 18.8% of the total respondents and the group with the least number of respondents is in the range of 30 years with a total of 4 people or 5% of the total respondents. table 6 respondents education education frequency percentage bachelor degree 8 10% senior high school 64 80% junior high school 8 10% total 80 100% source : primer 2021 based on the table, it is known that most respondents have the latest senior high school education with a total of 64 people or 80% of the total respondents. then the respondents whose last education was bachelor degree and junior high school had 8 people or 10% of the total respondents. multiple linear regression analysis. the results of the analysis of this study through the multiple linear regression method obtained several results. first, the direction of the influence of productivity factors (x) on project performance (y) both positively and negatively through unstandardized coefficients (b) analysis which forms the regression model equation. second, testing the effect of variable x on variable y partially through t-test with criteria tvalue > t table, sig < 0.05 and simultaneously through f test with criteria fvalue > f table, sig < 0.05. then the third, the large percentage of the contribution of the influence of productivity factors on project performance through the value of the coefficient of determination. all outputs can be seen in the following table: table 7 multiple linear regression results variable unstandardized coefficients (b) t statistic sig constant 2.709 4.060 0.000 education (x1) 0.222 2.508 0.014 experience (x2) -0.087 -0.012 0.991 remuneration (x3) 0.291 3.036 0.003 material (x4) -0.239 -0.813 0.418 design (x5) 0.117 2.257 0.027 fstatistic = 5.329 sig = 0.000 r2 = 0.215 source : primer 2021 based on table 7, it is found that the multiple regression model equation is y = 2.709 + 0.222x1 – 0.087x2+ 0.291x3 – 0.239x4 + 0.117x5. the value of unstandardized coefficients (b) / regression coefficient shows that from the 5 variables studied 3 variables have a positive effect, namely education, remuneration, design; and 2 other variables have a negative effect, namely experience and material. variable the positive value of the regression coefficient means that changes in the x variable will have a unidirectional effect on the y variable. in this case study the increase in project performance by education is 22.2%, remuneration is 29.1%, and design 11.7%. while the variable with a negative value of the regression coefficient can be interpreted that changes in the x variable will have the opposite effect on the y variable. in this case study, the decline in project performance by experience is 8.7% and material is 23.9%. testing the influence of labor productivity factors on project performance simultaneously through the f test found that labor productivity has a significant positive effect on project performance, this can be seen through the test results, namely the calculated f value > f table (5.329> 0.226) and the significance value < 0.05 (0.000< 0.05), it can be concluded that all variables (education (x1), experience (x2), remuneration (x3), material (x4), and design (x5)) have a significant positive effect. simultaneously on project performance. then based on the t test, the labor productivity factor that proved to have a significant effect on project performance was education with a t statistic value > t table (2.508 > 1.993) and a significance finance, accounting and business analysis 4 (2) 2022 134 value of < 0.05 (0.014 < 0.05). remuneration with statistical t value > t table (3,036> 1,993 ) and its significance value < 0.05 (0.003 < 0.05). and a design with a static t value > t table (2.257 > 1.993 ) and a significance value of < 0.05 (0.027 < 0.05).then the result of the coefficient of determination (r2) is 0.189 or 18.9%, it can be concluded that the value of the dependent variable, namely project performance can be explained by the regression equation of 21.5% while the remaining 78.5% is explained by other variables outside the model. regression equation in this study. through this research it was found that labor productivity factors can affect performance, in this case study these factors are education, remuneration, and design. the results of this study are in line with research from permono (2015) that the formal education of the workforce is an important indicator in the placement of workers on a project. in addition, formal education also influences the achievement of project quality. the level of knowledge and skills of the workforce is also important for project performance, while in the study of noumeiry and aqli mursadin (2017) where the resource factor indicators of the quality and skills of the workforce have a high influence on project performance. then, at pt vitra graha interia project work is a job that is done manually and relies on the ability of each workforce. workers are required to have high skills in carrying out their work, so every ability must continue to be honed to increase knowledge which will increase effectiveness and efficiency in work, in line with research from djukardi and semiawan (2018) where periodic training has a significant impact on overall project performance. the results of a person's work based on his ability can be seen directly in the quality of project results. then through this study, it can be, from the number of wages received and the time of receiving the wages can have an impact on the workforce, in line with research hatmoko (2014) where workers who are not satisfied with the wages given compared to the workload tend to reduce their productivity which will interfere with project work. as a contractor, pt vitra graha interia must always ensure that every product is following what the project owner wants, then the limited work time puts pressure on the workforce plus wages that are considered not following the workload and payment of wages that are often not following the workload. the schedule is one of the causes of the low motivation of the workforce working this is in line with research from rini and tenriajeng (2014 ) where the lack of motivation in the workforce can have an impact on the productivity of the workforce so that it will cause delays in project completion design factors can affect project performance in this case study, it can be seen in how the company conducts business. as a company that produces goods with a custom system that requires a high level of art, design drawings of course become important items for the running of the project. at pt vitra graha interia, the project will start running if the design drawings have been approved by all parties, the changes, approval of the design drawings will affect the project implementation time. then, incomplete images, unclear images even design errors and others of course will affect the results of the product considering that the product made will be adjusted to what the customer wants through the design drawing. this is in line with the results of research from ferdian et al. (2018) the design factor shows a very high relationship and becomes the dominant factor that affects project quality performance. then it is also supported by research from kartika, robial, and agung (2020) that changes in design will affect project performance and based on research soekiman et al. (2011) where based on the value of the relative importance index (rii) the design has a high influence on project performance. conclusion at pt vitra graha interia, labor productivity has a significant positive impact on project performance. the labor productivity factors tested in this study, namely education, remuneration, and design factors, had a significant positive effect on project performance, whereas experience and material factors had no significant positive effect. labor productivity factors, as independent variables, can explain 21.5% of project performance as the dependent variable, with the remainder explained by variables outside of this study. the identification of labor productivity factors can be used by the company as a strategy to improve project performance. companies can effectively create change by paying more attention to labor productivity factors that are considered capable of influencing or in this discussion improving project performance. based on the results of this study, companies need to pay attention to the education factor of the workforce, ensuring that the workforce has sufficient education and skills that are continuously honed. to achieve the desired project performance, the company must also ensure the satisfaction of the workforce with the remuneration they receive and at the same time pay attention to the design factors in each project activity that has been running well. projects are unique activities and different circumstances in each company can be influenced by different productivity factors, so further research is expected to add to the variables tested. then it can also add data and test on other types of respondents and a wider scope of research. finance, accounting and business analysis 4 (2) 2022 135 acknowledgment the author appreciates the head of hrd and operations manager and the entire workforce of pt vitra graha interia who have supported and provided a lot of help and information for this research. 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of this study is to find out if there is a relationship between retirement perception and saving among early adult workers in palembang. this study is a research with a quantitative approach. design/methodology/approach: the research design used is correlational quantitative research. questionnaires were distributed through a google form completed by 170 workers aged 20-40 years old in palembang. the data collection method uses a retirement perception scale and a savings behavior scale analyzed using product-moment correlation. spss software was used for data analysis. findings: the results show that there is a relationship with a significant positive correlation between retirement perception and saving behavior among early adult workers in palembang. the limitation of this study is in determining the age of the subjects, who are early adult workers (20-40 years old), who the research shows tend to have a positive perception of retirement because they are still far from thinking about retirement, so the anxiety they feel is still low, which affects the results of this study. practical implications: the implication is that workers should enrich the information about all matters related to retirement so that they are able to better understand all the changes that will occur and prepare everything to realize retirement as expected. also, they should improve their saving behavior from now on to be financially secure in retirement and not have any problems related to financial changes later on. originality/value: this study contributes to the existing literature on the relationship between retirement and savings behaviour. in addition, this is the first time a study of this type has been conducted in palembang. the researchers are interested in learning more about people's attitudes toward retirement and their saving behaviour, as workers in early adulthood tend to focus more on having fun than saving for the future. *address correspondence: e-mail: hristina_jaizaho@yahoo.com finance, accounting and business analysis 4 (1) 2022 53 introduction according to santrock (2012), peak physical performance occurs between the ages of 19 and 26. from their mid-twenties into late early adulthood, people also often seek stability for their early career in a particular field. they may work hard to improve their career and improve their financial situation. it is appropriate for early adulthood to be a productive age for a worker in the life of their career. when a worker reaches retirement age, retirement is a normal part of their life. the term "retirement" refers to the act of finally ending one's career or employment (mansor et al., 2015). when faced with the financial uncertainty of retirement, one option is to start saving now. individuals can prepare for any differences between their current income and future needs by setting money aside (the life-cycle motives). people's perceptions of what life will be like after retirement are shaped by a variety of factors, including changes in late adulthood and the onset of retirement. a variety of factors many people, therefore, believe that retirement is a signal that a person is no longer needed because of their lower productivity. due to their lack of preparation for retirement, many people have developed a sense of pessimism because they believe that their physical condition is deteriorating, they are suffering from a variety of illnesses, and their appearance has deteriorated (paidi, 2013). however, there are a few people who are positive about retirement. many of them believe that retirement allows them to spend more time with their family members who were previously consumed by their work schedules. of these two perceptions about retirement, this negative perception will cause anxiety for workers who are looking forward to retirement. one of the negative perceptions that often arise upon retirement is that financial resources will diminish, leaving them unable to meet all of the needs of family life. the purpose of this study is to find out if there is a relationship between retirement perceptions and savings behaviour of early adulthood workers in palembang. the research conducted in this study aims to answer the following research questions: rq1 : is there a relationship between the perception of retirement (physical condition) and savings behaviour of early adult workers in palembang? rq2 : is there any relationship between retirement perception (financial condition) and saving behaviour of early adult workers in palembang? rq3 : is there a relationship between retirement perceptions (social condition) and savings behaviour of early adult workers in palembang? literature review an employee retires when he or she reaches the retirement age set by the agency or company where he or she works. perceptions of retirement vary; there are workers who perceive it. there are positives and negatives about retirement. this difference in perception is due to this. there are many factors that affect a person's perception. it is important to develop a positive attitude so that retirement is no longer seen as a threat in life, but as a great opportunity to be optimised so that individuals can better perceive and embrace retirement. research by santrock (2012) found that peak physical performance is reached between the ages of 19 and 26. people in their late twenties and early thirties are also likely to seek stability in their early careers in certain occupations. they may work very hard to be successful professionally and financially. in addition, a person's cognitive creativity peaks in maturity around age forty and declines rapidly thereafter. young adults are expected to take on new roles in their lives, as important life changes occur during this developmental stage. consequently, young adulthood is a fertile period in a worker's professional life. according to the malaysian study by ibrahim et al. (2012), malaysian workers still do not know that they need to save for retirement. their lack of knowledge about the importance of saving for retirement is alarming. if they have enough money to pay for their future expenses, they know the importance of saving for retirement. as a result, many retirees are forced to return to work to cover their basic living expenses once they are no longer working. while it is true that it is easier to talk about saving for retirement than actually putting in the time and effort, it is possible with everyone's support and consistent attempts to change this. there needs to be some understanding of the need to save for one's future. saving is a decision-making process and saving is a routine activity to achieve a goal (retirement funds, buying something, giving gifts) (lewis, webley & furnham 1995; warneryd, 1999). perceived future financial needs, saving decisions, and saving activities all play a role in saving behaviour. people, on the other hand, tend to view saving as an investment, depositing money into a bank account, speculating, or gambling with mortgages. in other words, saving is trying to save money that is not used for consumption for a specific purpose and time frame. in a study by adami et al. (2018), socioeconomic factors were found to play an important role in determining retirement savings behavior among ethnic minorities. the study concluded that high poverty finance, accounting and business analysis 4 (1) 2022 54 rates are more likely due to educational attainment, part-time work, and long-term unemployment. during the same period, a study by dolls et al. (2018) found an increase in tax-deductible private savings and earned income due to the efforts of the german pension administration, which sends out annual letters with detailed information about the pension system and expected pension payments. a recent study by alkhawaja and albaity (2020) examined the effects of future perspective (ftp), financial risk tolerance (frt), and knowledge of financial planning for retirement (kfpr) on retirement savings behavior (rsb). the study found that ftp and kfpr had a significant positive effect, while frt had an insignificant negative effect on rsb, and these results are consistent with previous studies. koh et al. (2021) examined the relationship between trust in people and participation in retirement planning. the study found that trust in private and public financial agents was positively associated with saving for retirement and that financial education also played an important and consistent role in retirement decision making. perception of retirement the perception of retirement is shaped by both internal and external influences, such as one's thinking ability and psychological state, which can lead to positive and negative perceptions of retirement. aspects of perception of retirement the process of perception takes place in the cognitive area of the individual. the objects that are perceived in relation to retirement are the physical, financial, and social conditions. retirement is a time full of changes and the most fundamental is the change of these three things, so it has an impact on the individual's perception of retirement. a. physical condition retirement, entering the phase of development into late adulthood, brings individual physical changes. declining physical abilities affect individual activities related to physical activity. b. financial situation the financial situation of individuals who work and retire has changed significantly. while working, individuals receive regular income in the form of wages for their work, but when the individual retires, the regular financial income changes. c. social conditions the change from the role of a worker to that of a retiree has implications for the social life of the individual. the life of a worker who has a variety of work routines and meets different colleagues every day will change with retirement. support from loved ones and family is necessary to ease the adjustment process. forms of perception there are two forms of perception, namely: a. positive perception individual evaluation of an object or information with a positive view or as expected from the perceived object or existing rules. a positive perception of retirement is an individual's evaluation of retirement and all the changes that accompany it with a positive outlook. according to rini (2001), forms of positive perceptions of retirement include: 1. improving health by reducing the amount of stress one faces; 2. after retirement, there is more time and opportunities for togetherness with families and partners; 3. retirement does not cause people to age quickly and get sick easily because it has the potential to improve health by allowing them to spend more time exercising; and 4. they can spend more time on social life in the community. b. negative perception individual perception of certain objects or information with a negative view that is contrary to what is expected from the perceived object or from the existing rules. negative perception of retirement is the evaluation of retirement and all the changes that accompany it by an individual with a negative view. according to rini (2001), forms of negative perceptions of retirement include: 1. loss of status and respect; 2. lack of financial resources; 3. loss of various facilities and amenities; 4. exclusion from old associations and the feeling of growing old; and finance, accounting and business analysis 4 (1) 2022 55 5. feeling of being useless and no longer needed due to age and declining productivity. methodology and data the population in this study were workers who have the characteristics of early adulthood (20-40 years) in palembang. since the number of the population with the criteria for early adulthood workers (2040 years) in palembang is not known with certainty, the researchers used non-probability sampling, i.e., they determined the characteristics that represent the identified population. the type of non-probability sampling used is quota sampling. this is a technique for determining a sample from a population that has certain characteristics until the desired number (quota) is reached (sugiyono, 2014). the research design used in this study is a correlational research design. in this study, the questionnaires were distributed online. respondents are asked 34 questions to be completed with alternative answers that were provided. the quantitative analysis in this study starts with data collection and specifying the variables that describe the perception of retirement of workers in categories that in the end represent the total score of the respondent's completion of the questionnaire. to support this research, the researcher uses primary data sources, that is, data obtained from the results of the distribution of questionnaires to early adult workers aged 20 to 40 years in palembang. a likert scale was used in the data collection for the two variables. the likert scale is the rating value of each response added to get a total score. in this scale, there are 2 types of questions: positive and negative. the positive scale is used to measure the positive scale and the unfavorable scale is used to measure the negative scale. the data analysis technique used in this study is the product-moment correlation technique using spss software. the purpose of this technique is to find out the relationship between the independent variable and the dependent variable. theoretical framework and hypothesis development theoretical framework figure 1. framework hypothesis development hypothesis 1: physical condition hypothesis 1 of this study states that the perception of retirement (physical condition) has a negative relationship with saving behavior among early adult workers in palembang. this means that the more positive the perception of retirement (physical condition), the lower the saving behavior. on the other hand, the more negative the perception of retirement (physical condition), the higher the savings behavior. hypothesis 2: financial condition hypothesis 2 of this study states that the perception of retirement (financial condition) has a negative relationship with the saving behavior of early adult workers in palembang. that is, the more positive the h2 h3 h1 perception of retirement physical condition financial condition social condition saving behaviour finance, accounting and business analysis 4 (1) 2022 56 perception of retirement (financial condition), the lower the savings behavior. on the other hand, the more negative the perception of retirement (financial situation), the more savings behavior increases. hypothesis 3: social condition hypothesis 3 of this study states that the perception of retirement (social situation) is negatively related to the saving behavior of early adult workers in palembang. this means that the more positive the perception of retirement (social condition), the lower the saving behavior. on the other hand, the more negative the perception of retirement (social condition), the higher the saving behavior. data analysis and results demographic analysis a demographic of the research respondents can be presented which is intended to describe the profile or identity of respondents according to gender, respondent's age, status and level of education which can be described as follows: table 1 demographic information category frequency percentage (%) gender male 98 57.6 female 72 42.4 age 20 – 25 61 35.9 26 – 30 47 27.6 31 – 35 35 20.6 36 – 40 22 12.9 41 – 50 5 2.9 status married 110 64.7 single 60 35.3 level of education high school 27 15.9 diploma 48 28.2 degree / magister 95 55.9 descriptive statistics table 2 descriptive statistics n minimum maximum mean std. deviation physical condition 170 24,00 40,00 33,7412 3,55898 financial condition 170 21,00 40,00 32,4118 4,13327 social condition 170 32,00 55,00 45,3176 5,59313 saving behaviour 170 21,00 40,00 32,1824 4,22681 valid n (listwise) 170 normality table 3 normality test : one-sample kolmogorov-smirnov test unstandardized residual n 170 normal parametersa,b mean .0000000 std. deviation 3.20099863 most extreme differences absolute .056 positive .036 negative -.056 kolmogorov-smirnov z .731 asymp. sig. (2-tailed) .659 from the normality test using the kolmogov-smirnov approach in table 3 above, it can be seen that the data are normally distributed. this is evident from the asymptotic significance (2-tailed) of 0.659 finance, accounting and business analysis 4 (1) 2022 57 >0.05. this means that the standardized residual is declared to be normally distributed. reliability analysis table 4 reliability test variable cronbach’s alpha total item description physical condition 0.720 8 reliable financial condition 0.732 8 reliable social condition 0.783 11 reliable saving behaviour 0.791 7 reliable the results of the reliability test in the table 4 show that the cronbach alpha value of physical condition (x1), financial condition (x2), social condition(x3) and saving behaviour (y) have been tested has a value above 0.70. cronbach alpha values ranged from 0.720 0.791. thus, all the variables in this study were declared reliable hypothesis testing (correlation and regression) in seeking empirical evidence on the factors determining business performance, the theoretical model of the study led to the development of eight hypotheses. table 5 product moment correlation & coefficient determination independent variable r r2 sig description category physical condition 0.421 0.177 0.000 sig < 0.05 significant financial condition 0.873 0.763 0.000 sig < 0.05 significant social condition 0.503 0.253 0.000 sig < 0.05 significant overall, physical condition, financial condition, and social condition are positively related to saving behaviour. the details of the analysis for each hypothesis are provided below. physical condition the correlation coefficient or r-number of the physical condition is 0.421 greater than r-table (0.421 > 0.1971) with a value of p = 0.000, indicating that there is a relationship with a significant positive correlation direction because the significant value is 0.000 < 0.05. therefore, it can be concluded that there is a positive relationship between the perception of retirement (physical condition) and saving behaviour, which means that the researcher's hypothesis is rejected. the correlation contribution of the two variables is 17.7%. this explains that the more positive the perception of retirement (physical condition), the higher the saving behaviour of workers. the more negative the perception of retirement (physical condition), the lower the saving behaviour. this study rejects hypothesis 1, which states that the relationship between perceptions of retirement (physical condition) and saving behaviour is negative, but the results show the opposite direction of correlation. the majority of them currently perceive retirement as it is fun because with retirement they can take a break from work and pursue hobbies to fill their free time financial condition the correlation coefficient of financial condition is 0.873 greater than the r-table (0.873 > 0.1971) with a value of p = 0.000, indicating that there is a relationship with a significant positive correlation direction, since the significant value is 0.000 < 0.05. therefore, it can be concluded that there is a positive correlation between the perception of retirement (financial situation) and saving behaviour, which means that the researcher's hypothesis is rejected. the correlation contribution of the two variables is 76.3%. this explains that the more positive the perception of retirement (financial condition), the higher the saving behaviour of employees. on the other hand, the more negative the perception of retirement (financial condition), the lower the saving behaviour. this study rejects hypothesis 2, which states that the correlation between perception of retirement (financial condition) and saving behaviour is negative, but the results show the opposite direction of correlation. the majority of respondents currently perceive retirement as fun, in part because retirement allows them to be entrepreneurial to meet their financial needs. social condition the correlation coefficient or r-count of the social condition is 0.503 greater than r-table (0.503 > 0.1971) with a value of p = 0.000, indicating that there is a relationship with a significant positive correlation direction, because the significant value is 0.000 < 0.05. therefore, it can be concluded that finance, accounting and business analysis 4 (1) 2022 58 there is a positive relationship between the perception of retirement (social conditions) and saving behaviour, which means that the researcher's hypothesis is rejected. the correlation contribution of the two variables is 25.3%. this explains that the more positive the perception of retirement (social conditions), the higher the saving behaviour of workers. on the other hand, the more negative the perception of retirement (social conditions), the lower the saving behaviour. so, this study rejects hypothesis 3, which states that the correlation between the perception of retirement (social condition) and saving behaviour is negative, but the results show the opposite direction of correlation. the majority of respondents currently perceive retirement as fun, in part because they can spend more time with their families during retirement. conclusion in conclusion, based on the results of this study, the research hypotheses were rejected. it is believed that retirement perception is negatively correlated with saving behavior, but the results of the study show the opposite direction. the research results show that the more positive workers' perception of their retirement period, the higher their saving behavior. on the other hand, if their perception of retirement is negative, their saving behavior will also be lower. the results of this study are not consistent with the basic assumption of the researcher, which is that a negative perception of retirement causes anxiety, especially in relation to the finances of workers, so they try to reduce anxiety by trying to take preventive measures, that is, save more before retirement, so that when you retire you will not have financial problems. the conclusion from this research is that the company should continue its efforts to prepare for workers who will retire by providing training for entrepreneurs so that workers have the necessary knowledge to become entrepreneurs after retirement. and for the workers for more enriching information about all matters related to retirement, so it is expected that they will be able to better understand all the changes that will occur and prepare everything to realize retirement as expected. also, from now on, they should improve their saving behavior in order to be financially secure in retirement and not have problems related to financial changes later on. for other researchers who will conduct research on the same topic, it is recommended to use different research methods to enrich the studies on saving behavior. also, other factors/independent variables that could influence saving behavior should be added. references adami, r., carosi, a., & sharma, a. (2018). retirement saving in the uk: a life-cycle analysis. studies in economics and finance, 35(1), 109–136. https://doi.org/10.1108/sef-01-2017-0018 alkhawaja, s. o., & albaity, m. (2020). retirement saving behaviour: evidence from uae. journal of islamic marketing. https://doi.org/10.1108/jima-03-2020-0072 dolls, m., doerrenberg, p., peichl, a., & stichnoth, h. (2018). do retirement savings increase in response to information about retirement and expected pensions? journal of public economics, 158, 168–179. https://doi.org/10.1016/j.jpubeco.2017.12.014 ibrahim, d., isa z, m., & ali, n. (2012). malaysian savings behavior towards retirement planning. research journal. singapore: iacsit press. accessed on december 28, 2015 www.ipedr.com/vol28/20icemm2012-t10003.pdf koh, b. s. k., mitchell, o. s., & fong, j. h. (2021). trust and retirement preparedness: evidence from singapore. journal of the economics of ageing, 18. https://doi.org/10.1016/j.jeoa.2020.100283 lewis, a., webley, p., & furnham, a. (1995). the new economic mind. pearson. lim, s. m., tenk, t., teoh, m., & lee, t. h. (2021). workers’ retirement saving behaviour during the covid-19 pandemic in malaysia. international journal of academic research in business and social sciences, 11(3). https://doi.org/10.6007/ijarbss/v11-i3/8855 mansor, m. f., chor, c. h., abu, n. h., & shaari, m. s. (2015). demographic factors associated with retirement planning: a study of employees in malaysian health sectors. asian social science, 11(13), 108-116. paidi, p. (2013). strategi persiapan masa pensiun bagi para karyawan. e-journal widya ekonomika, 12. diakses pada tanggal 15 september, 2015 dari http://download.portalgaruda.org/article.php?article=250180&val=6685&title=stra tegi%20persiapan%20masa%20pensiun%20bagi%20para%20karya wan. rini, j.f. 2001. pensiun dan pengaruhnya. www.e-psikologi.com\pensiun.htm. santrock, j.w. (2012). lifespan development, edisi ke tiga belas. jakarta: erlangga. sugiyono. (2014). metode penelitian pendidikan pendekatan kuantitatif, kualitatif, dan r&d. bandung: https://doi.org/10.1108/sef-01-2017-0018 https://doi.org/10.1016/j.jpubeco.2017.12.014 https://doi.org/10.1016/j.jeoa.2020.100283 finance, accounting and business analysis 4 (1) 2022 59 alfabeta. warneryd, k. e. (1999). the psychology of saving: a study of economic psychology. 1 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 company valuation: the most widely used valuation methods in bulgaria dimiter nenkov department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 5 may 2023 revised 1 june 2023 accepted 5 june 2023 the main objective of this research paper is to discuss the approaches, methods and models used for the valuation of companies. the valuation of companies is a serious challenge for financial analysts and appraisers all over the world, due to the fact that value is invisible and difficult to find. this is one of the reasons for the high number of methods and models developed for this purpose, as well as the many different classifications for them. one of the challenges is the selection of the appropriate combination of methods. this research starts with an overview of other studies about the most preferred valuation methods by certified financial analysts in europe and the world as a whole. the studies indicate that only few methods and models are intensively used by analysts. the most preferred and widely used methods by them are the relative methods, followed by the dcf enterprise model. a survey was conducted by the author among actively operating certified appraisers in bulgaria. the survey shows that, in general, bulgarian appraisers prefer and use mostly the same methods that are used by financial analysts in europe and other international markets. still, there are some curious differences – the dcf enterprise model is again very intensively used, but the confidence in the relative valuation methods, according to respondents, is very low in bulgaria. at the same time, the other widely applied method by appraisers in bulgaria is the net asset value (nav) method, contrary to the fact that they do not particularly trust it. keywords: stock markets, investing, speculating, pe ratios, fundamentals, stock market bubble jel: g30, g32 * address correspondence: e-mail : dnenkov@unwe.eu mailto:dnenkov@unwe.eu dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 2 introduction determining the actual value of companies is a real challenge and an exercise of increased difficulty. the reason is very simple – the value of an enterprise is kind of hidden and invisible. a clear distinction must be made between the acquisition price of an asset and its actual value. according to benjamin graham and warren buffett, "price is what you pay, value is what you get." (graham 2006; morris 2009). the fact that determining value is a difficult task, is evident in the very definitions of value used by appraisers and stock analysts, as well as in valuation standards (graham 2006; international valuation standards committee 2001; hitchner 2017, international appraisal standards board 2020). it is not by chance that these definitions refer us mainly to the market, which is considered to be the only one capable of determining this actual value (zukin 1990; hitchner 2017). the problem, however, is that the stock market itself very often fails in this function, and the price it determines often deviates from the actual value of the respective stocks and companies (nenkov 2021). appraisers are often not fully aware of what exactly they are looking for in the specific appraisal task the actual value, or rather the price that would satisfy the wishes of the appraisers and the contracting counterparties. in this regard, prof. damodaran asks the question: "what are we looking for in the evaluation the price or the value?" (are we pricing or valuing?)" (damodaran 2017). moreover, in reality it turns out that a company can have different values at the same moment, which can be illustrated by the “hexagon” figure of copeland, murrin and koller (copeland et. all. 2000). the prominent difficulties associated with determining the value of common stock lead to the fact that none of the established valuation methods and models are sufficiently reliable and definitive in determining the value. this has led to the development of many different methods and models that exist and are used in practice. thus, one of the challenges for analysts and valuers is the selection of the appropriate valuation methods. according to prof. damodaran, the problem in valuation is not the lack of valuation methods, the problem is that they are too many (damodaran 2012). the classifications of approaches, methods and models for evaluating enterprises are also very different and numerous (zukin 1990; damodaran 2012; copeland and antikarov 2008; kassarova 2008). regardless of this diversity, however, they all have some recurring, common characteristics that outline the three main approaches for extracting enterprise value. these are (international appraisal standards board 2020; hitchner 2017):  asset-based approach;  income-based approach;  market approach. the international valuation standards refer to the same three main approaches in the valuation activity, although with some slight differences in their names (international appraisal standards board 2020; international valuation standards council 2011). each one of the approaches has its advantages and disadvantages, each one is accompanied by certain limitations and difficulties, which ultimately call into question the reliability of the final result of the valuation the calculated value. each of the approaches is implemented through a set of specific valuation methods and models. the main methods of the asset-based approach, are net asset value (nav) and liquidation value. from the income-based approach, the best-known modern models include: (reilly and brown 2003) discounted dividend model (ddm), dcf equity valuation model, dcf enterprise valuation model, economic value added model (also known as excess return model or residual income model) (cs first boston 1996; pinto et al. 2019), adjusted present value (apv) model (damodaran 2002), models based on the valuation of real options (copeland et al. 2000). the market valuation approach involves various specific methods. depending on where the market multipliers (ratios), needed for the evaluation, are taken from, two methods are distinguished: capital market method and transactions method. depending on the market ratio used, the methods include:  price to earnings (pe) method;  price to book value (p/bv) method;  price to sales (p/s) method;  price to cash flow (p/cf) method;  price to free cash flow (p/fcf) method;  price to dividend method (p/div);  enterprise value / ebit method ( ev /ebit);  enterprise value / ebitda method (ev/ebitda);  enterprise value / sales method (ev/sales);  enterprise value / assets method (ev/assets);  other. dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 3 studies about the valuation methods used by financial analysts an interesting and very useful survey regarding the methods used to evaluate companies was conducted by frank bancel and usha mittoo among 356 european experts in company valuation (including portfolio managers, investment bankers, financial analysts, etc.) with cfa certificate or its professional equivalent. the survey was conducted in 2012 and published in 2014, and gives a fairly good insight into the most commonly used methods for valuing companies in europe. the research itself is significantly more ambitious than establishing preferred methods and models for valuation. the authors of the study focused on the following four main questions (bancel and mittoo 2014):  which valuation models are most popular among experts?  how do practitioners determine the input variables needed for these models?  which input variables are easier to determine and which are more difficult?  which input differences are more critical and which are less critical to the valuation? according to the authors of the study, one of the reasons for emphasizing the above questions is that the theory provides little guidance on determining the input parameters for the evaluation. this forces practitioners to make their own assumptions, which lead to large variations in valuation. therefore, the questions are not limited to which models are used, but also how they define each component in the model. in this regard, they attempt to encourage discussion among scholars and practitioners on how to reduce these gaps between valuation theory and practice. the total number of questions in the survey is 50 (bancel, mittoo, 2014). the questionnaire includes a total of five important topics (bancel and mittoo 2014): 1/ valuation models; 2/ cost of capital; 3/ dcf approach (method); 4/ the relative valuation approach and 5/ advantages and disadvantages of valuation methods. the share of those who answered the questions is about 5 %. the analysis is limited to the 356 respondents who answered most of the survey questions, and to 8 countries with at least 10 respondents. the largest share of respondents came from france – 36 %, followed by the united kingdom – 16 %, spain – 13 % and switzerland – 12 %. a total of 13 % of responses were received from the other countries poland, belgium, germany and portugal. the respondents are all experts with serious experience in the analysis and valuation of stocks and companies. the largest group is that of portfolio managers (23 %), followed by financial analysts (22 %), investment bankers (19 %), valuation experts (16 %). about 80 % of respondents have more than 5 years of experience in the financial industry, about 50 % have at least 10 years of similar experience (bancel and mittoo 2014). source: bancel, f., and u. mittoo. 2014. the gap between the theory and practice of corporate valuation: survey of european experts. journal of applied corporate finance, columbia business school, 26(4), pp. 106117 figure 1. which methods are most used by experts 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% other the net worth approach the dividend growth model free cash flow to equity (fcfe) dcf (free cash flow to the firm) relative valuation the popularity of different valuation methods dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 4 figure 1 shows the preferences of the surveyed experts for the different valuation methods and models. the most popular are the relative valuation methods about 80 % use them, as well as the dcf enterprise valuation model about 79 % use it. the dcf equity valuation model is used by less than 40 % of the experts. net asset value (net worth) approach and dividend model are used by less than 22 % of respondents, while option models or eva models are very rarely used. in 2019, pinto, robinson, and stowe conducted a survey of stock valuation practices by professional financial analysts who are members of the cfa institute. the research confirms the great importance given to relative valuation methods and discounted cash flow models. according to this research, when valuing individual stocks, 92.8 % of analysts use market multiples and 78.8 % use discounted cash flow (dcf) models. when using dcf models, 20.5 % of analysts use a residual income model, 35.1 % use a discounted dividend model (ddm), and 86.9 % use a free cash flow model. in terms of free cash flow models, the model based on fcff (free cash flows to the firm), i.e. the dcf enterprise model, is used about twice as often as the fcfe (free cash flow to equity) model, i.e. the dcf equity model (pinto et al. 2019). according to pinto et al. (2019), analysts like to use free cash flow (fcff or fcfe) when the following circumstances exist: the company does not pay dividends. the company pays dividends, but they are very different from the company's capacity to pay dividends. free cash flows are consistent with profitability, within a reasonable forecast period that the analyst feels confident about. the analyst takes a controlling interest perspective, with which comes discretion regarding the use of free cash flow. another study by pablo fernández from 2017 on the valuation methods used, also indicates that dcf models and relative valuation methods are the most used (fernandez, 2017). the results of these other studies are fully consistent with the results on this point of the bancel and mittoo study. source: bancel, f. and u. mittoo. 2014. the gap between the theory and practice of corporate valuation: survey of european experts. journal of applied corporate finance, columbia business school, 26(4), pp. 106117 figure 2. how many methods are used in a valuation figure 2 shows the preferred number of methods that the experts surveyed by bancel and mittoo (2014) use in one company valuation. the largest part is of the experts who use two methods when valuing about 32 %. about 29 % use three methods, i.e. about 60 % of all respondents rely on usually two or three valuation methods. only 21 % work with only one single method. about 12 % use four methods, 5 % use five, and only 1 % use six or more (bancel and mittoo 2014). 0% 5% 10% 15% 20% 25% 30% 35% two valuation methods three valuation methods one valuation method four valuation methods five valuation methods at least six valuation methods the number of valuation methods used by experts dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 5 as it became clear above, relative valuation methods are the most preferred. according to where the peer (analogue) companies are located, they are divided into two main types: 1/ capital market method, in which the analogues are public companies whose shares are regularly traded on the stock exchange, and 2/ transaction method, in which the analogues are companies (usually non-public) that have recently been the subject of a merger or acquisition, i.e. a transaction involving a significant block of shares of the relevant company, and the price of the transaction has been publicly announced (kassarova 2008). source: bancel, f. and u. mittoo. 2014. the gap between the theory and practice of corporate valuation: survey of european experts. journal of applied corporate finance, columbia business school, 26(4), pp. 106117 figure 3. most commonly used market multiples in relative valuation methods according to bancel and mittoo's survey, 86 % of respondents use market multiples (ratios) derived through the transaction method, and 73 % derive market multiples based on regularly traded stocks. about 50 % use both methods. figure 3 illustrates which market multiples are the most widely used by experts in the relative approach and which are the least used. it can be seen that the ratio firm value / ebitda is used with the greatest confidence. it is relied on by 83 % of appraisers who use several ratios (multipliers) and by 70 % of appraisers who use only one ratio (multiplier). second most trusted is the price-earnings (p/e) multiple, used by 68 % of respondents. the price to book value (p/bv), enterprise value / ebit and enterprise value / sales ratios are used by about 45 % of experts each. a survey on the company valuation methods used in bulgaria purpose and setting of the present survey the main goal of the survey is to establish the combinations of approaches, methods and models for the valuation of enterprises, preferred by professional analysts and appraisers in bulgaria. one of the tasks is to compare them with the preferences and practices of cfa analysts in europe and in the world, discussed in the previous section. the survey is aimed primarily at certified independent appraisers of enterprises and certified independent appraisers of financial assets and financial institutions (fafi) in bulgaria. many of them work as financial analysts and/or consultants in the financial and real sector. the survey questions were emailed to approximately 150 certified independent appraisers of enterprises and of financial assets and financial institutions (fafi). the total number of respondents to the survey is 50, which is about 33 % of potential respondents addressed. the survey is completely anonymous, but it is known that among the respondents are most of the specialists appraisers and analysts actively dealing with these issues at the current stage, from the companies that are members of the chamber of professional appraisers in bulgaria. the survey is a relatively short one and includes only 7 questions, each of which has ready-made possible answers. the questions are as follows: question 1: in what capacity are you most often required to value enterprises and their shares? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% firm value / ebitda pe ratio firm value / ebit price-book ratio firm value / sales other survey evidence: which multiples are most popular? dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 6 question 2: do you hold a certificate/s of qualification in the field of enterprise and common stock valuation? question 3: indicate which of the following methods you prefer as the most reliable in principle (the more popular methods and estimation models are listed). question 4: how many methods (models) do you usually use for one valuation? question 5: indicate the methods and models that are most often included in the combination of methods and models you use in a valuation? question 6: assuming that there are three main approaches to deriving enterprise value 1/ assetbased approach, 2/ income-based (discounted cash flow) approach and 3/ relative valuation approach, which of the three, according to you, is the most reliable in general? question 7: in your opinion, how much should be the discount rate used in the dcf enterprise model (i.e. wacc), when valuing an average enterprise in bulgaria in 2022? survey results the first two questions in the survey are expected to give some insight into the professional qualifications and experience of the surveyed experts. the first question, along with the preset possible answers, looks like this: in what role are you most often required to value entire businesses and their common stock or units? (you may indicate more than one possible answer): a. as a certified appraiser of enterprises b. as a certified appraiser of financial assets and financial institutions c. as a financial analyst in an investment brokerage firm or another company d. as an expert in a consulting company e. other the distribution of responses to the first question by the 50 respondents is shown in figure 4. usually 82 % of the respondents have to value companies and shares as certified independent appraisers of enterprises, and 10 % as certified independent appraisers of fafi. also, 20 % are experts in consulting companies. financial analysts in investment brokerage firms are 12 %. the answer "other" was indicated by 16 % of the respondents. the sum of these percentages is 140 % because more than one possible answer was given. this amount of 140 % means that a large proportion of respondents value companies simultaneously in two or more capacities. source: survey and calculations by the author figure 4. answers to question 1 82% 10% 12% 20% 16% question 1: in what capacity do you most often have to value companies and their shares? as a certified independent appraiser of enterprises as a certified independent appraiser of financial assets and financial institutions as a financial analyst in an investment brokerage firm or another company as an expert in a consulting company other dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 7 question 2 is as follows: do you hold a certificate/s of qualification in the field of enterprise and common stock valuation? (you may indicate more than one possible answer): a. certificate of independent appraiser of enterprises b. certificate of independent appraiser of financial assets and financial institutions c. certified financial analyst (cfa) certificate d. other certificate or document in this field e. i have no special certification in this field figure 5 illustrates the distribution of responses to the second question. it is evident from them that 90 % of the respondents have a certificate for an independent appraiser of enterprises, and 12 % for an independent appraiser of fafi. certified financial analysts (cfa) are 14 %. other certifications are held by 12 % of respondents, including some other international certifications such as rics (royal institute of chartered valuers), or recognized european valuer (rev), etc. only 4 % of respondents do not have a certificate in this field. all this testifies about a serious level of qualification of the experts who answered the following questions regarding the valuation methods used. source: survey and calculations by the author figure 5. answers to question 2 question 3 of the survey, along with the possible answers, is as follows: indicate which of the following methods you prefer as the most reliable in principle (indicate only one method/model): a. net asset value (nav) method b. dcf enterprise valuation model c. dcf equity valuation model d. dividend discount model (ddm) e. relative valuation method (peer companies valuation) f. extra return model (economic profit model) g. adjusted present value model h. models based on the valuation of real options i. other 90% 12% 14% 12% 4% question 2: do you hold a business and common stock valuation certificate? certificate of independent appraiser of enterprises certificate of independent appraiser of financial assets and financial institutions certified financial analyst (cfa) certificate other certificate and document in this field i have no special certification in this field dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 8 source: survey and calculations by the author figure 6. answers to question 3 this third question aims to find out which methods are most trusted by valuers. the responses are shown in figure 6. the dcf enterprise model stands out as the most reliable for the surveyed experts, with 46 % support. in the second place is the net asset value method, preferred by 24 % of respondents. the dcf equity valuation model is third, with 14 % support. this means that a total of 60 % of experts rely on discounted cash flow models. the relative valuation method (approach) is preferred by only 10 % of respondents. the discounted dividend model, the adjusted present value model, the models based on the valuation of real options are preferred by only 2 % of respondents, and the economic profit (excess return) model, as well as other potential models, by 0 % of respondents. the very modest percentage of confidence in the relative valuation method(s) is striking only 10 %, which for european experts is the most preferred (with around 80 % support), according to the study by bancel and mittoo, presented in the previous section (bancel and mittoo 2014). this is one of the big differences with europe that the present survey finds. the reasons can mainly be sought in the not well developed and very small stock market in bulgaria. this, on the one hand, reduces the significance and representativeness of the derived market ratios (multiples), and on the other hand, severely limits the number of potential peer (analogue) companies. in many cases, it is necessary to look for the appropriate peer companies in the international stock markets, which leads to other problems, such as reducing the degree of comparability with the valuated enterprise, etc. this local feature deserves further in-depth study. another thing that makes a special impression is that the dividend model is practically not used in bulgaria (only by 2 % of respondents). it is not particularly popular in europe either, according to bancel and mittoo, but is still used there by nearly 22 % of experts there (bancel and mittoo 2014). the reason should be found in the limitations that are characteristic of this model, which make it very difficult to implement in the conditions of bulgaria. first of all, the percentage of public joint-stock companies in bulgaria that pay regular and stable dividends is extremely low. the vast majority of public companies do not even pay any dividends. on the other hand, the huge mass of enterprises in bulgaria are non-public, for which the dividend payment policy remains part of their internal information. the fourth question in the survey is as follows: how many methods (models) do you usually use for one valuation? a. one b. two c. three d. four e. five f. more than five 0% 10% 20% 30% 40% 50% method net asset value (nav) dcf enterprise valuation model (fcfi) dcf equity valuation model (fcfe) discounted dividend model (ddm) relative valuation method (peer companies method) extra return model (economic profit model) adjusted present value model (apv) models based on the valuation of real options other question 3: which of the following methods do you prefer as the most reliable in principle? dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 9 source: survey and calculations by the author figure 7. answers to question 4 it is clear from figure 7 that 72 % of the respondents use two methods (models) most often to carry out one valuation. another 20 % usually use three methods. this means that a total of 92 % of the surveyed experts use two or three methods. one model is used by 4 %, four models are used by another 4 %. none of the respondents use 5 or more models to make a single valuation. two of the more significant differences with the european experts in bancel and mittoo's survey are that with them the share of those who use only one method is much more significant 21%, as well as those who use four methods 12 % (bancel and mittoo 2014). question five of the survey is about preferred combinations of methods: indicate the methods and models that are most often included in the combination of methods and models you use in a single valuation (you may indicate more than one possible answer): a. net asset value (nav) method b. dcf enterprise valuation model c. dcf equity valuation model d. dividend discount model (ddm) e. relative valuation (peer companies) method f. excess income model (economic profit model) g. adjusted present value model h. models based on the valuation of real options i. other figure 8 illustrates very interesting results. surprisingly, the net asset value (nav) method ranks first in the combinations of valuation methods used by 80 % of the respondents. it is followed by the dcf enterprise model with 74 %. the relative valuation method falls into the used combinations of methods in 48 % of the cases, the dcf equity model in 42 % of the cases, and the dividend model in only 14 % of the cases. the rest of the methods and models very rarely fall into the used combinations: the adjusted present value model is 8 %, models with valuation of real options – 6 %, model of economic profit – 2 % and other methods – 2 %. 0% 10% 20% 30% 40% 50% 60% 70% 80% one two three four five more than five question 4: how many methods (models) do you usually use for one valuation? dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 10 source: survey and calculations by the author figure 8. answers to question 5 one of the main reasons why the first place of nav is taken as a surprise is that it was preferred as the most reliable in principle (question 3) by only 24 % of the respondents in this survey (see fig. 6). in europe, too, only 22 % of experts rely on nav. apparently, the explanation for the extremely strong presence of net asset value in the combinations of methods used in bulgaria should be sought in another direction. apparently, the analysts and appraisers of enterprises in the country have to include this method in their valuations for one reason or another:  in certain cases, they may be required to do so.  in other cases, the contracting authorities require to a significant extent that the value be derived precisely on the basis of the company's assets.  this method has traditionally been applied very intensively in the conditions of bulgaria during the last three decades.  there are also many cases when the financial indicators of the enterprises are such that they do not allow them to be valued using the discounted cash flow models.  not infrequently, the valued enterprises are before or after the cessation of activity, which does not allow the application of the alternative methods of valuation, and anyway one must rely on the nav or the liquidation value method. on this issue, an additional deeper study is required. there is also some discrepancy regarding the relative valuation method. it is indicated as reliable by only 10 % of the respondents (fig. 6), but it is included in the combinations of valuation methods and models by 48 % of the respondents. the sixth question in the survey is about which of the three possible valuation approaches are trusted by analysts and appraisers in bulgaria: assuming that there are three main approaches to deriving enterprise value 1/ asset-based approach, 2/ income-based (discounted cash flow) approach and 3/ relative valuation approach, which of the three do you think is most reliable in principle? a. asset-based approach b. income-based (discounted cash flow) approach c. relative valuation approach d. it depends on the specific case 80% 74% 42% 14% 48% 2% 8% 6% 2% 0% 20% 40% 60% 80% 100% method net asset value (nav) dcf enterprise valuation model dcf equity valuation model discounted dividend model (ddm) relative valuation method (peer companies method) extra return model (economic profit model) adjusted present value model (apv) models based on the valuation of real options other question 5: indicate the methods and models that are most often included in the combination of methods and models you use in a single valuation dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 11 the question is formulated in this way with this caveat at the beginning, because not all analysts and valuers accept the classification of approaches and methods to which the authors of the present study adhere. the distribution of responses is illustrated in figure 9. in the first place is the answer "it depends on the specific case", given by 48 % of the respondents. this shows that, according to the experts, there is no approach that seems reliable in all cases. this is a very relevant position, given that the reliability of an approach or its methods depends primarily on the availability and nature of the information needed for the valuation, as well as on the specific characteristics of the valued enterprise. this makes one approach more reliable in some cases and another approach more reliable in other cases. source: survey and calculations by the author figure 9. answers to question 6 however, of the three valuation approaches, the income-based (discounted cash flow) approach stands out and emerges as the most reliable in principle in comparative order (against the other two), with 38 %. the asset-based approach is considered the most reliable by only 8 % of respondents, and the relative valuation approach by 6 %. against the background of the answers to the previous questions, the extremely low confidence in the relative valuation approach among appraisers in bulgaria is no longer a big surprise. but with regard to the asset-based approach, questions still arise its reliability is determined to be very low (with only 8 %), but its net asset value (nav) method ranks first in the combinations of methods and models used (80 %) (fig. 7). the last question in the survey, question 7, is a bit off its main thrust. but it is always important and relevant for any survey in the field of application of methods and models for the valuation of going concern enterprises. the question normally attracts increased interest among the experts surveyed. this question was part of a 2017 survey in a previous study made by the author. the question is as follows: in your opinion, what should be the discount rate for the dcf enterprise valuation model (i.e. wacc) when valuing an average enterprise in bulgaria in 2022? a. between 2.00% and 4.00% b. between 4.00% and 6.00% c. between 6.00% and 8.00% d. between 8.00 % and 10.00 % e. between 10.00 % and 12.00 % f. between 12.00 % and 14.00 % g. between 14.00 % and 16.00 % h. between 16.00 % and 18.00 % i. between 18.00 % and 20.00 % j. between 20.00 % and 22.00 % k. between 22.00 % and 24.00 % l. other: ………………………………………………. 8% 38% 6% 48% 0% 10% 20% 30% 40% 50% 60% asset based approach income based (dcf) approach relative valuation approach it depends on the specific case question 6: which of the three approaches do you think is the most reliable in principle? dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 12 as can be seen, the range of possible ready-made answers is quite wide, and it is also left open with answer l "other". the distribution of responses is shown in figure 10. source: survey and calculations by the author figure 10. answers to question 7 figure 10 shows that the largest percentage of respondents 28%, believe that the correct cost of capital (wacc) and discount rate for the dcf enterprise model is between 10.00 % and 12.00 %. this is followed by the discount rate between 8.00 % and 10.00 % indicated by 26 % of respondents, and the discount rate between 12.00 % and 14.00 % indicated by 16 % of respondents. thus, a total of 54 % of the respondents see the appropriate discount rate in the range of 8.00 % to 12.00 %. a total of 70 % of respondents see it in the range of 8.00 % to 14.00 %. outside of them there are some 12 % who see the correct rate at a level between 16.00 % and 18.00 %. only 8 % believe the discount rate should be 8.00 % or below, and another 8% of respondents believe it should be 18.00 % or above. the results show that regarding the discount rate, the divergence of views is large. there is no single range with more than 28 % support. at first glance, there is a clustering of a large percentage of respondents a total of 70 %, for the interval from 8.00 % to 14.00 %. but this is a very wide range, with a large scatter in the possible discount rate, leading to extremely large differences in valuations when using the dcf enterprise model. conclusion the survey among certified independent appraisers in bulgaria shows that the valuation methods and models more widely used are about the same as in europe and the world. for example, the dcf models, mainly the dcf enterprise model, are the most preferred. however, there are some serious differences. one of them is the vely low confidence in the relative valuation method/approach. another difference is the extremely high presence of the net asset value method (80 % of respondents) in the combinations of valuation methods applied. this is very surprising, because the indicated confidence in this method is very low, as well as it is for the asset-based approach as a whole. references bancel, f., and u. mittoo. 2014. the gap between the theory and practice of corporate valuation: survey of european experts. journal of applied corporate finance, columbia business school, 26(4), pp. 106117. copeland, t., and v. antikarov. 2008. real options – a practitioner's guide. texere, new york. 2% 2% 4% 26% 28% 16% 2% 12% 4% 0% 0% 4% 0% 5% 10% 15% 20% 25% 30% between 2.00% and 4.00% between 4.00% and 6.00% between 6.00% and 8.00% between 8.00% and 10.00% between 10.00% and 12.00% between 12.00% and 14.00% between 14.00% and 16.00% between 16.00% and 18.00% between 18.00% and 20.00% between 20.00% and 22.00% between 22.00% and 24.00% other question 7: in your opinion, what wacc should be used when valuing an average enterprise in bulgaria in 2022? dimiter nenkov / finance, accounting and business analysis, volume 5, issue 1, 2023 13 copeland, t., t. koller, and j. murrin. 2000. valuation – measuring and managing the value of companies. john wiley & sons, new york. cs first boston. 1996. eva primer. february 20, 1996. damodaran, a., damodaran on valuation, https://pages.stern.nyu.edu/~adamodar/new_home_page/dam2ed.htm damodaran, a. 2002. investment valuation tools and techniques for determining the value of any asset, john wiley & sons, new york. damodaran, a. 2012. investment valuation – tools and techniques for determining the value of any asset, john wiley & sons, new york. fernandez, p. 2017. company valuation methods graham, b. 2006. the intelligent investor – revised edition, first collins business essentials edition (harpercollins publishers), (preface to the fourth edition by warren e. buffett, updated with new commentary by jason zweig) hitchner, j. 2017. financial valuation – applications and models. john wiley & sons, inc., 4th ed. international appraisal standards board, "international appraisal standards", effective january 31, 2020 (translation by the chamber of professional appraisers (apap), in agreement with the smso) international valuation standards committee international valuation standards 2001, london 2001, (standard 1) international valuation standards council. 2011. international valuation standards. london kassarova, v. 2008. biznes ocenyavane (manuscript deposited in tsntb no. 168 / 2008) morris, c. 2009. the sages – warren buffett, george soros and paul volcker. ciela, 2009 nenkov, d. 2021. us stock market at the background of the covid-19 pandemic: implication for valuation, finance, accounting, and business analysis, 3(1), pp. 22-32 pinto, j., t. robinson, and j. stowe. 2019. equity valuation: a survey of professional practice, review of financial economics, 37(2), pp. 219-233 (first published 19 oct, 2018), https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/freecash-flow-valuation reilly, f. k., and k. c. brown. 2003. investment analysis – portfolio management. thomson learning, usa, 2003 zukin, j. h. 1990. financial valuation: businesses and business interests. warren gorham lamont https://pages.stern.nyu.edu/~adamodar/new_home_page/dam2ed.htm https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/free-cash-flow-valuation https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/free-cash-flow-valuation 41 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg the image of the european economy at the time of the pandemic crisis grażyna musiał university of economics in katowice, poland info articles abstract history article: submitted 22 january 2021 revised 13 march 2021 accepted 5 april 2021 aim: the aim of the paper is to create a coherent image of contemporary capitalism as influenced by the changes evoked by the pandemic crisis. the reality, or the circumstances that need to be taken into consideration, do not constitute a logical whole where its constitutive parts would complement one another, but rather seem to contradict one another, or to belong to different theoretical orders. methodological approach: the paper presents theoretical basis of the economic and social system which was formulated by the thinkers of the european enlightenment. some general conclusions resulting from the empirical analysis of economy in the era of pandemic crisis are presented. results: the author finds dynamism be a feature of capitalism at every stage of its development. that feature refers to the turn of the 20th and 21st c. when the economy on several occasions encountered the barrier of effective demand. practical significance: the latest stage of globalisation and the role of transnationality is analysed. the rupture of the relationship networks between dependent companies and central corporations during the 2020 pandemic negatively affects the functioning of the national economies in europe. the author scrutinises those examples of economy sectors which have been negatively influenced by the pandemic. originality: the economics literature undertakes the critique – from the liberal theories’ standpoint – of the well-established idea of social market economy in the ordo version. change (destruction) of economic structures requires a new discussion on their theoretical basis. keywords: political economy, general methodology, global demand, pandemic crisis, ordo – liberalism, adam smith, immanuel kant, leon walras *address correspondence: e-mail : grazyna.musial@interia.pl 42 introduction human actions and thoughts copied as social practices are the carries of social structures. the prevailing forms of activities of the participants of public life and their results become structuralised environment for subsequent activities which may either retain or change the existing situation. if it is so, then a question about the meaning of social structures for the reproduction and social change is at the same time a question about the meaning of social activities and popularised thinking practices for the system globalisation of the second decade of the 21st c. the subject of the paper are certain symptoms of changes in europe and the world because of the pandemic crisis. the theories of changes emerging in science and those created by social sciences adopt a theory that chaos contains a potential which creates a favourable environment for creating orderly systems (prigogine, stengers, 1990, hayek, 1993). transformations of chaotic states may head in various directions. the choice of the direction of changes is not determined, because even in case of asymmetry many changes depend on the efficiency of those who use the system rules (akerlof, spence, stiglitz, nobel prize in economics 2001). some people may waste their advantage, some other may make the best use of the enfeebled alternative potential. in circumstances of rapid social, economic and political changes caused by the pandemic crisis people try to settle the relationship with the world around. they are ready to accept such forms of social life which are not fully satisfactory (social isolation, home office) and which only remotely execute the planned projects (democratic participation in company management, sense of democracy and feeling that sense). they are ready to accept something which in the times past was odd, as a new standard. they are surprised by the fact that the novelty now designates the trends of the new world order (sztompka, 1998). according to the present standards until the mid-18th c. the world was extremely poor. the changes were brought by the beginning of the industrial revolution. it was possible due to the co-existence of new technologies in industry, energy acquired from coal and from the market powers. in his innovative work of 1776 adam smith wrote about the advantageous natural circumstance of great britain: “england, on account of the natural fertility of the soil, of the great extent of the sea-coast in proportion to that of the whole country, and of the many navigable rivers (...) is perhaps as well fitted by nature as any large country in europe to be the seat of foreign commerce, of manufactures for distant sale, and of all the improvements which these can occasion.” (smith, 2007, volume 1, p. 1533-534). adam smith advocated that the division of labour and specialisation accompany each other and cause economic growth. he realised that the division of labour depended on the size of the market. the extensiveness of market determines the level of specialization, and thus the labour efficiency. the economic potential results from economic growth, yet the very concepts of economic and social progress are the creations of philosophy. it was the enlightenment, the philosophical trend in europe lasting throughout the 18th c., that introduced the idea do social progress. the enlightenment thinkers were the first to notice the possibility of conscious social activities aiming at the improvement of the existence of people all over the world. what are the ideals of the enlightenment based on? adam smith believed that the economic system may be shaped in such as way as to satisfy the needs of people. that was a progressive project. in book v of his work entitled an inquiry into the nature and causes of the wealth of nations smith devoted a large part to a detailed explanation why the state had major duties in such spheres as education, infrastructures, justice and defence system. those are the fields which require a collective action which would complement the market power rather than substitute it. book v deals with the income of a monarch or a state where chapter i refers to the expenses of a monarch or a state, in particular the expenses related to country’s defence, justice, public devices and institutions and the upkeep of the majesty of authority. while analysing smith’s work from today’s perspective, too often it is because of his in-depth analysis of the manner in which the market powers may support the selforganising division of labour (“invisible hand”). in 1776, that same year that smith’s book was published, thomas jefferson and the founding fathers of the american republic, disciples of john locke and david hume, advocated that political institutions were the creations of man, and that they should be shaped consciously and should satisfy society needs. in 1776 thomas jefferson published his political project – the declaration of independence (jefferson 1776). immanuel kant, an outstanding german philosopher of the enlightenment promoted the ideas of creating a world management system. in 1795 he advocated that permanent peace between nations might be achieved if self-governing republics connected by international trade would be established. kant emphasized the sense of commerce and the power of money as the factors forcing states to promote peace. he found it necessary to create the federation of free states. such liaison would be determined by the necessity to keep and protect freedom of a given country – for itself and for other allied countries. kant’s idea of creating republics worldwide thus granting peace, was elaborated on in the report prepared by working group appointed by the central intelligence agency of the usa. grażyna musiał / finance, accounting and business analysis 3 (1) 2021 43 the main assumptions of the enlightenment: adam smith’s project of organising economic life and immanuel kant’s idea of peace in perpetual social progress constitute the inspiration in the 21st c. and are vital in europe and worldwide. one needs to note the efforts of leon walras related to the nobel peace prize in 1905. walras claimed that his academic output in which the idea of peace as a prerequisite for economic development of states – presented by walras in his economic theory works – predestined him for winning the nobel prize. he tried for two subsequent years, yet in vain 1. in view of the pandemic situation in europe and worldwide in 2020 it seems that the ideals of the enlightenment acquired significance. adam smith does not appear to be an advocate of liberal ideals as he is – in a simplified way – presented. the most natural and fundamental element of each science are the ideals presented therein. the ideals regulate and bind facts and are the basis of reasoning in science – claimed william whewell in his philosophy, in the part entitled: review of opinions on the nature of knowledge and the methods of seeing (zamecki 2012, p. 640). global economy and pandemic crisis one gets to know the nature of the contemporary european economy via analysing it in motion and progress. structural conditions of the nature of economy are overlapped by the necessity to get to know the economic processes in their dynamics. conducting the analysis in a pure form, i.e., separately from long-term regularities of progress would impoverish the possibilities of interpreting the undergoing changes. it is caused firstly by formal difficulty in separating phenomena in their dynamics (due to economic situation) and structure; and secondly by the mutual permeation of those types of processes. the undergoing globalisation evokes numerous negative phenomena, increased instability of growth and poor inclination to invest, structural lack of financial balance, unfavourable psychological and sociological changes. the global character of increasing number of phenomena hinders compensating use of international relations channels for solving problems of individual national economies. never in the history has the world relied so much on multilateral agreements and international organisations. although the main institutions proved to be lasting and flexible the time has weakened the resilience of some of them. entering the globalisation era, the world economy opens the period of interrelations accompanied by the lack of institutional adaptation to new conditions. the outlined nature of contemporary economy is complemented by its pessimistic image caused by the pandemic crisis. therefore, one cannot fail to observe that the full costs of crisis will not be swiftly known. enormous, yet still unknown, costs of the current pandemic crisis will encumber both the present as well as the future generation. a real sphere and the sphere of regulations in modern theory of economics the range, scope and costs of the pandemic crisis which commenced at the beginning of 2020 in china and in a short period of time reached other countries worldwide clearly show that its scope is incomparable with any other crisis after wwii. one could relate it to the 1929–1933 crisis which hit the world economy. the current pandemic crisis causes measurable and unmeasurable costs. measurable costs, which 1 footnote in april 1905, leon walras decided to apply for the nobel peace prize, awarded in this category by the nobel committee from 1901. he sent his candidacy in the form of "notification" to norway. he was joined by the written support of his three friends at the university of lausanne: ernest roguin, maurice milliud, alexander mauer. walras wrote a short text on the occasion, entitled "peace through social justice and free trade." in it, he justified that he deserved the award because in his scientific achievements he emphasized the importance of social justice, land purchases and free trade for the cause of world peace. he spoke about the pacifist movements that france should initiate and strive to join, in support of this initiative, by small states such as switzerland. it was a few years before the first world war. the decision to receive the nobel peace prize was not made. walras had a good social sense of the social conditions necessary to develop economic activity in europe and the world [see léon walras: letter of july 20, 1905. (w) william jaffé (ed.): corespondence of léon walras and related papers. vol. iii (1898 – 1909). amsterdam 1965, north – holland. see also: agnar sandmo: retrospectives. léon walras and the nobel pease prize. “journal of economics perspectives”, vol. 21, no. 4, fall 2007, s. 217-228. grażyna musiał / finance, accounting and business analysis 3 (1) 2021 44 will only be known after some time, include the following types: (table 1 and 2, appendix 1) 2); decrease of gdp and foreign exchange, increase of unemployment rate, public finances debt, collapse of small and medium sized companies and mergers and acquisitions. in view of the division of economic system into a real sphere and the sphere of regulations, the increase of the international capital movement characteristic of the turn of the 20th and 21st c. reflects the increase of the significance of the regulation sphere in the description of world economy. material and physical processes such as production, consumption and exchange undergo in the real sphere. in the sphere of regulation there is coordination of real processes consisting in noticing, processing and transmitting information and knowledge and on preparing and making decisions. there is a close correlation between the two spheres – production and exchange are impossible without transmitting information, making decisions and coordinating individual plans. on the other hand, economic regulation only makes sense when we know the context in which the real production and exchange processes take place. the mental division of real and regulatory processes is the expression of the choice of methodological option. the presented methodological approach was created and promoted in literature by janos kornai with a strong emphasis on regulatory processes. kornai practised the science of economics via the prism of regulatory processes. he applied the method of coordinating economic decision with the help of two-level planning models. he achieved it together with a hungarian mathematician tomas liptak in 1965. kornai-liptak two-level model is an alternative to the dantzigwolfe decomposition from 1960. the latter model made it possible to perform multi-scale linear programs (dantzig, wolfe 1960). the presented analysis seems to be up-to-date since the interest in the concepts of janos and kornai in the world literature is still great (magnin, nenovsky 2020). the contemporary international finance is an academic discipline scrutinising economic processes undergoing in that sphere of economy. it will allow us to know the intensity, directions and character of financial transfers. it is said that the economy is dominated by financial problems. that process is intensified by the system of motiving managers from financial institutions (musiał 2020). that systems induces the managers to make risky decisions to maximize the profits in a short period of time. it also often strengthens secondary turnover on financial markets which frequently harms the real sphere of economy. the services on the financial market were to facilitate financing of the real sphere of economy, optimise the means’ allocation processes to minimise the risk of the economic entities. meanwhile, such services do not manage risk, but rather create it 2. with reference to that, stiglitz formulated the opinion of the too far-fetched progressing autonomy of financial markets, improper functioning of rating agencies which include in their opinions too few macroeconomic factors which might influence the risk of investing. stiglitz emphasised the loosening of the criteria of proper and correct functioning of such institutions as banks, in particular central banks (stiglitz 2004). the pandemic crisis and the european economy: banking sector the turn of the 20th and 21st c. is characterised by two processes being present in the european economy: european integration and globalisation. those two processes are parallel. in the contemporary economy one can distinguish the goods-and-services market and the financial market. the pandemic crisis spans the whole world. only a big world crisis would give basis for a new monetary system. the world heads towards global authority (global government) and the means to archive 2 footnote it is worth paying attention to the trust that the idea of ordoliberalism enjoyed among economists in germany for a long time. this situation is starting to change. paul krugman, nobel laureate in economics, in 2008, pointed out that the mainstream german economy is satisfied with its situation and lives in its own intellectual universe. at a conference organized by the joint american and german academic centers, the problem was raised: “ordoliberalism what for? regulatory policy and the social market economy put to the test, 19 september 2018. it found that german economics had split off from the western mainstream. this state of the economy was considered an aberration, arguing that it grew out of an intellectual tradition called ordoliberalism. according to brigitte young, ordoliberalism is an irritating german idea. harold james, recognized as an expert in german economics at princeton university, or mario draghi, the italian president of the european central bank, together they make the economy in germany similar to the branch of moral philosophy (draghi) and would like to call it so [ordoliberaliism: a german addity? edited by thorstein beck and hans – helmut kotz, 2017, w tym: brigitte young: ordoliberalism as an “irritating german idea”, s. 31-40. a vox ue.org e book]. grażyna musiał / finance, accounting and business analysis 3 (1) 2021 45 that are the financial instruments. big corporations, which achieved their positions in the global system, such as amazon, blackrock, altria and others, are interested in getting to know the economic situation in national economies which function on the basis of debt. investigating the reasons and finding the effects might be known after a longer period of time. the changes caused by pandemic situation are presented below on the basis of information obtained from the bank for international settlement with the seat in basel, switzerland. that bank has been chosen, because of the special role it has in europe and the world. sixty-three central banks and monetary authorities are members of the bank for international settlement. global economy meeting (gem) coordinates works of committees, namely: committee on the global financial system, committee on payments and market infrastructure, markets committee. advisory economic committee of the bank for international settlement – which is the central bank – is composed of eighteen members, namely: president of the federal reserve system of the usa, central european bank, bank of china, the presidents of central banks of germany, france, italy, sweden, canada, india, brazil, spain, and previously also of england. the members meet every second month, on sunday evenings at 7 p.m. in the conference room “e” located in the round building at 2 centralbahnplatz in basel, switzerland. the meeting lasts about 60 to 90 minutes. after that, the members go to the dining room on the 18th floor. they dine until 11p.m. or even midnight. the group is composed almost exclusively of males. the advisory economic committee is supposed to prepare projects for global economy market and supervise establishing the agenda. the session starts on monday morning and lasts for about 3 hours. adam lebor describes the meeting in the following way: “apart from the people who participated in the dinner on sunday night, the monday session is attended by the representatives of i.a. indonesia, poland, republic of south africa, spain or turkey. the presidents of fifteen smaller counties, such as hungary, israel or new zealand may attend the meeting as observers only and usually do not speak. the presidents of the member banks of the third category – coming from macedonia or slovakia – are not allowed to enter the session room and may only hunt for pieces of information during coffee and meals breaks. the presidents of all sixty bank-shareholders of the bank for international settlement then go for lunch (in the form of an open buffet). the dining room designed by herzog & de meuron (a swedish company which also built the olympic stadium in beijing known as “the bird’s nest”) has white walls and black ceiling and provides a spectacular view of three countries: switzerland, france and germany. at 2 p.m. the bankers and their assistants come back to room “b” where the issues interesting for the presidents are being discussed” (lebor, 2016, p. 5). such two-day meetings have been carried on for over eighty years. the bank was established in 1930. the meetings of presidents are confidential. the seat of the bank for international settlement is beyond the jurisdiction of swiss authorities. it enjoys protection like that granted to the united nations organisation or diplomatic posts. to enter the premises of the bank the swiss authorities need to obtain the permit issued by the bank’s management. the bank sends and receives post which is protected in the same way as diplomatic correspondence. the bank is exempt from swiss taxes. its employees do not have to pay income tax on their high remunerations. in 2011 the salary of the general director amounted to 763 930 swiss francs. the sum is increased by numerous bonuses. by virtue of the swiss law, all representatives of banks are granted immunity for life covering all activities conducted by them during their duties. by virtue of the swiss law the property of the bank is not subject to civil law claims and may not subject to seizure. the bank is a very liked employer. six hundred of its employees come from over fifty countries. the bank for international settlement has two local offices – one in hong kong (since 1998) and the other one in mexico (since 2002). without going into details, one may observe a high centralisation level of authorities and institutions in the sphere of banking. for example, under the auspices of snb – frb – bif (snb – swiss national bank, frb – the federal reserve board, bif – bank of international settlements) for the second time the following conference was held: high – level conference on global risk, uncertainty, and volatility. zurich (rüschlikon), 12 – 13 november 2019. that conference, as it is called – of a higher level – was organised since the world faced deep uncertainty in the field of economy, finance and politics. the uncertainty and its implication for market assets and financial stability were among the key issues discussed during the conference sessions. the aim was to develop theoretical and empirical basis of operation of global markets, including the transmission of insecurity to the real economy, and financial stability. the character of economic processes in the era of pandemics in polish economy grażyna musiał / finance, accounting and business analysis 3 (1) 2021 46 a few examples illustrating the pandemic crisis in poland are discussed below. capital group of powszechny zakład ubezpieczeń społecznych s.a. informs of a significant deterioration of business conditions for the banking sector which was caused inter alia by the fall of interest rates, increased credit risk and additional deductions in lieu of the expected credit instalments. moreover, the banks realised in their results the reserves related to covid-19 which reduced the results of the capital group of pzu s.a. by pln 220 million. the company announced some time ago that they wished to keep the costs under strict control. they managed to do so despite the pressure on the increase of remuneration and despite additional costs related to covid-9 pandemic. the return on capital in q3 of 2020 was achieved at the level of 20.4% which places pzu s.a. capital group among the insurers with the highest return on capital in europe (gieroba, 2020, p. 84-85). let us discuss the situation in more detail. it is a good example which reflects the nature of the undergoing globalisation process. it is a capitalist globalisation with two tendencies: one related to salaries, and the other to profitability. as far as salaries are concerned the tendency is to level them down, and as far as return rate and profitability go the tendency is to increase them up to the worldwide standard norms. that erasure of high remunerations and not so profitable capitals – that double levelling movement – is made at the stage of circulating capital. capital itself goes in such spheres where high profitability is obtained and leaves the places where labour costs are high. capitalist globalization includes a mechanism which constantly selects industries and sectors worth functioning on a world market. that mechanism is explained by the law of political economy: the law of uneven development of capital. it has never been so much visible as nowadays. it results from the subordination to the profitability criterion which is binding on the world market. the results of operation of pzu s.a., the structure of capital group of the conglomerate nature, might be understood as far as its essence is concerned, if one considers the market context in which the group operates. the structure is typical for oligopoly. the president discusses the employees’ pay in the context of pressure on the increase of salaries, and he informs of the return on capital when he mentions the fact that pzu is among the insurance companies with the highest return on capital in europe. one needs to observe that the development of capital is not of a linear character. the contradictions of capital economy are evident on the world scale. it is inadequate to call the process of economic development as sustainable. in fact, it is the opposite, one should rather talk about new inequalities in world economy and rethink the definition. 4.1. mergers and acquisitions on the polish market the report published by navigator capital group fordata shows that there were 52 mergers and acquisitions on the polish market in q2 2020, which was 3 cases fewer than in q1 2020 and as many as 11 cases fewer than in q2 2019. the biggest transaction between march 2020 and june 2020 was the acquisition of energa group by pkn orlen for pln 2.8 milliard (home@market 2020, no. 11, p. 32). 4.2. prolonging the government support for big companies called “financial shield” means the willingness of the state to co-participate in the fight against the consequences of pandemic. the program consists of the following points: subsidising fixed costs of small and medium-sized companies, remitting subvention from the financial shield coming from polski fundusz rozwoju (polish development fund), long-term loans (for 6 years) for sectors affected by restrictions, subsidising employment, exemption from zus (social insurance company) premiums, mayors of towns lower the rents for restaurateurs (e.g., the mayor of gdańsk lowered the rent to pln 1 (bobroszek 2020 p. 101). the report by cezary szczepański entitled jak odetkać kurek z pieniędzmi shows that in 2019 as many as 90% of polish entrepreneurs did not receive payment in the required time. companies directly affected by pandemic restrictions and their contractors are in a particularly difficult situation. they do not pay and they do not receive due payments. (szczepański 2020, p. 102). 4.3. polish brewing market on the verge of collapse due to pandemic poland in the second (right behind germany) biggest producer of beer in the european union with the production on the level of 40 million hectolitres of beer annually. according to the deloitte analysis the whole beer production and sale chain in poland is of the total added value of pln 19.4 milliard annually, which provides in total almost 158 thousand workplaces. in view of the binding act on education in sobriety and counteracting alcoholism it is impossible to sell beer online, i.e. with delivery. you can only sell beer in retail shops which obtained the licence. at present, poland is the only european union country in which selling beer via the internet is prohibited. (szczepański 2020, p. 32). grażyna musiał / finance, accounting and business analysis 3 (1) 2021 47 4.4. miscellanea: in business the digit of the month is 5.6 million dollars. that is how much was earned by albert bourla, the president of pfizer for selling 62% of his company’s shares. he sold them on the day it was announced that his company had invented an effective coronavirus vaccine (my company. polska, 2020 no. 12 (63) december 2020, p. 8). in politics – well said. “as it was the case with the spanish flu, we now also have to expect that the second wave of covid-19 will be more severe for economy than the first one. it seems that it will keep the economists busy for the whole winter – said angela merkel, the german chancellor. (my company. polska, 2020 no. 12 (63) december 2020, p. 8) 5. independence of the central bank in the 20th c. the independence of the central bank became an international norm. at the end of the 20th c. there were around 200 central banks all over the world, almost one per one country. the percentage of banks, which have operational independence while establishing the policy is about 80-90 percent which is illustrated by figure no. 1. figure 1. number of central banks source: banking directory the status of independence of central bank is constituted by quasi-constitutional, institutional, personal, financial and economic independence. swedish bank sveriges rilkbank was founded in 1668. it is the bank that has been granting prizes in the field of economy since 1969. models of independence of central banks are created – there is a whole spectrum of such models and in every case the independence of a central bank is only partial. the legal index of independence constructed for some countries by oecd is presented in table no. 3. table 3. de jure measures of central bank independence country cbi measure country cbi measure australia 0.25 japan 0.44 austria 0.86 the netherlandes 0.86 belgium 0.86 new zealand 0.35 canada 0.47 norway 0.45 denmark 0.50 spain 0.86 finland 0.86 sweden 0.30 france 0.86 switzerland 0.77 germany 0.86 uk 0.70 italy 0.86 us 0.48 source: bank of england speech what has central bank independence ever done for us? speech given by andy haldane chief economist and member of the monetary policy committee ucl economists’ society economics conference 28 november 2020 grażyna musiał / finance, accounting and business analysis 3 (1) 2021 48 table 3 presents the results of long–term research. ana carolina garriga conducted research in 182 countries in the period from 1970 to 2012. she presented the results in academic forums e.g. monetary policy and central banking: historical analysis and contemporary approaches, princeton university, 6– 7 february 2015. 5.1. bank for international settlement and its current information and its character bank for international settlement in basel, switzerland publishes a weekly magazine “bis bulletin.” the authors of the articles are the employees of the bank, and sometimes other economists. the articles cover the topics which enjoy the greatest interest and are of a technical nature. the opinions expressed in articles are the opinions of the authors, and not necessarily of the bank. in issue 19 of 22nd may 2020 there is an article by three authors: frederic beissay, daniel bees and phurichai rungcharoenkitkul entitled: dealing with covid–19: understanding the policy choices. the article presents gdp situation in january and april 2020. the year 2020 is compared to the same period in 2019. the data refers to the world, aes and emes. the text is about the charges related to saving life in the era of increased social distancing. the problem is presented in figure 2. figure 2. passenger transport has yet to reach pre–virus levels. sources: chinese ministry of transport wind. i quote for: frederic beissay, daniel bees and phurichai rungcharoenkitkul entitled: dealing with covid–19: understanding the policy choices. “bis bulletin no. 19, 22 may 2020, p. 3 figure no. 2 – the right side shows the number of visits in shops and recreational centres in 2020 in february and april in uk and in new york before introducing economy shut–down (17th february 2020, 2nd march 2020) and after shutting down economy (16th march 2020, 30th march 2020 and 13th april 2020). the authors base the article on two economists from the university of chicago, namely: michael greenston and wisham nigram, both employed by the university, in becker friedman institute for economics. their study is entitled does social distance matter. “working paper” 2020, chicago university press, chicago (20 pages). 6. the needs in the time of pandemics: covid–19 needs economy which is epidemic-oriented. covid–19 pandemic is a global catastrophe of the humanist system in the world scale that has not been experienced since the spanish flu of 1918. epidemiology as the science has begun to develop in the 19th c. yet we know the examples of statistical analysis of public health before that period, suffice it to mention the works of john graunt of 1662 (graunt 1662). the first epidemiology society was founded in london – london epidemiological society – in 1850, and the first epidemiology study entitled on the mode of communication of cholera was published by john snow 1849 (first edition, and 1855 second edition). john snow as epidemiologist and anaesthesiologist. he was called the victorian cartographer. london suffered from cholera epidemic three times during his life (he died at the age of 45): in 1832, 1848/1849 and 1853/1854. at present, the epidemiologist asks for expert opinions. they are important in view of the needs grażyna musiał / finance, accounting and business analysis 3 (1) 2021 49 related to foreseeing and counteracting future pandemic. one needs to understand the impact of the pandemic on people, material goods and economic activities of people all around the world. identification of costs which are particularly important from the economic point of view will be helpful in analysing covid–19, because so far epidemiologists act based on their intuition. the fact that the virus is infectious in now a new problem. in view of the catastrophe caused by covid–19 one cannot allow for isolated works – epidemiologists separately and economists separately. there is a growing need to join the efforts and use the know–how to analyse the present situation. epidemiology is a sister discipline of economy as both sciences require the application of observation and experiments; moreover, economy and epidemiology both use isolation (separation) and develop their own respective language. one should not choose between the public health and healthy economy. one has to take the matter in one’s own hands. that is the message of eleanor j. murray, a professor of medicine and an epidemiologist, formulated in the article: epidemiology's time of need: covid–19 calls for epidemic–related economics [murray 2020]. there were 750 000 thousand cases of coronavirus worldwide from december 2019 to 30th march 2020. the research conducted in centre for disease control and prevention "aerosol and surface distribution of severe acute respiratory syndrome coronavirus 2 in hospital wards" (guo, wang, zhang et al., 2020). the research was conducted at huoshenshan hospital in wuhan, china, in a general medical and intensive care unit. there were 9 patients with severe disease in intensive care units, and 24 patients with less severe disease in the general unit. the research was carried out by a team led by scientists from the military academy of medical sciences in cooperation with the academy of military sciences in beijing, china. figure 3. spatial distribution of coronavirus 2 aerosols for severe acute respiratory syndrome in isolated intensive care units (icu) and general wards (gm) of huoshenshan hospital in wuhan, china. picture below illustrates the research conducted at huoshenshan hospital in wuhan. sources: guo zhen-dong, zhong yi-wang, shou-feng zhang, xiao li, lin li, chao li, yan cui, rui-bin fu, yun-zhu dong, xiang-yang chi, meng-yao zhang, kun liu, cheng cao, bin liu, ke zhang, yu-wei gao, bing lu and wei chen: aerosol and surface distribution of severe acute respiratory syndrome coronavirus 2 in hospital wards, wuhan, china, 2020, p. 1590 grażyna musiał / finance, accounting and business analysis 3 (1) 2021 50 figure 3 illustrates the spatial distribution of coronavirus 2 aerosols. the figure consists of four parts and a, b, c, d. coronavirus 2 on the surface and in the air in departments was investigated. the indicators resulting from air tests differed depending on the place of sampling for testing. in intensive care units, there were 12 air vents and 16 air vents per hour. there were 8 air vents and 12 air vents per hour in general departments. virus-laden aerosols were placed near the air outlets in patient rooms and doctor's offices. in parts a and c, the places referred to in the figure are marked with colored circles (orange). based on the research, it was found that virus contamination was greater in the air and on the surface of facilities in intensive care units than in general units. by march 30, 2020, none of the hospital staff had been infected with sars2-cov-2, indicating that appropriate precautions were effective in preventing infection in the hospital where the research was conducted. family members are usually not professionally trained, which easily leads to familial contamination. the construction of mobile cabin hospitals has been found to be an effective means of preventing infection transmission. a limitation to the conclusions made is that the test results do not indicate the amount of viable virus. in other words: for a measured minimal infective dose, the aerosol transmission distance cannot be accurately determined. the research brought us to the following conclusion: in order to determine the distribution of coronavirus with the acute respiratory distress in the hospital wards in wuhan, china, samples of air and surface were tested. pollution was bigger at the intensive care wards than in general care wards. the virus was widely spread on floors, computer mouse devices, litter bins and handrails and was present in the air ca. 4 meters away from patients. the transmission distance sars–cov–2 might amount to 4 meters. in the initial period of the pandemic crisis, the medical journal "the lancet" published an article entitled: phisical distancing, face masks and eye protection to prevent person-to-person transmission of sars-cov-2 and covid-19: a systematic review and metaanalysing (chu, akl, duda, solo, yaacoub, schünemann et al., 2020) the studies concerned patients aged 30 to 60 years who had symptoms of sars (severe acute respiratory syndrome) and mers (middle east respiratory syndrome). 172 case studies were carried out in 12 countries, on 6 continents, 44 relevant comparative studies were performed. it is reported that between march and 28 march 2020, there were 5.85 million human infections worldwide, 359,000 people died. the studies were performed using the cochrane method (quantitative econometric studies) and the grade approach (qualitative gradual studies) was used. it concerns the criterion of the intensity of the features: high, moderate, low, very low. 87 english-language literature items were used. the research was funded by the world health organization. two health care workers from poland, from krakow, participated in the study. the conclusions resulting from the conducted research included recommendations about keeping social distance and the need to wear face masks. you should also protect your eyes. the robert koch institute in berlin informed about new variants of the sars-cov-2 virus in great britain and south africa. the results of epidemiological studies are not yet available. the attached figure illustrates the situation that it is extremely important to strictly follow known rules in order to collectively prevent the transmission of sars-cov-2. grażyna musiał / finance, accounting and business analysis 3 (1) 2021 51 figure 4. abwägung der dauer von quarantäne und isolierung bei covid–19 sources: abwägung der dauer von quarantäne und isolierung bei covid–19. “epidemiologisches bulletin”. berlin: robert koch institut, no. 39, 24 september 2020, p. 7. conclusion the societies of european and other countries entered the second decade of the 21st century with quite an unusual baggage. the first is the pandemic crisis. the second is the economic crisis. the main thesis of the analysis results from the observation confirming the observation about the growing gap between the real economy and the regulatory sphere. we are dealing with a sequence of processes of a systematic increase in social inequalities, the concentration of income and wealth within corporations that are, for example in poland, branches of transnational corporations. a decrease in the gdp growth rate, an increase in unemployment, mergers and collapses of small and medium-sized enterprises in poland are a sign that the economy with a lower level of development fulfills the role of a dependent economy in relation to the economic / political centers of europe and the world. the study shows that the banking system plays a special role in the regulatory sphere. it would be premature at the present stage of presenting the state of the european economy during a pandemic and the role of banks' actions towards economic entities, to track and evaluate the effectiveness of the preventive role of this system against the pandemic threat in poland, europe and the world. nevertheless, it can be said that the complexity of the profit maximization mechanism in transnational corporations such as blackrock is increasing. this company has its share in banking assets, for example in poland in alior bank. modifications to modern capitalism introduce measures to protect and strengthen capitalism, for example in the banking system by bank of international settelments, based in basel, switzerland, but at the same time exacerbate its deep contradictions. large transnational corporations are interested in stimulating demand for their products and services, and large transnational capital groups see their interest in the continuous increase in turnover on financial markets. a review of specialist medical literature, including "the lancet", indicated that knowledge was accumulated about the symptoms and effects of the spread of pathology. further work is needed on the causes of the epidemic crisis. references grażyna musiał / finance, accounting and business analysis 3 (1) 2021 52 dantzig george b., philipwolfe: decomposition principle for linear programs. “operations research”, 1960, vol. 8, issue 1, s. 101-111 akerlof gregore a. 2001: behavioral macroeconomics and macroeconomic behavior. nobel lecture boissay frederic, daniel rees and pchurichai rungcharoenkitkul: dealing with covid-19: understanding the policy choices, “bis bulletin” no 19. 22 may 2020 chu, derek a., elie a. akl, stephanie duda, karla solo, sally yaacoub , holger j schünemann: physical distancing, face masks, and eye protection to prevent person-to-person transmission of sars-cov-2 and covid-19: a systematic review and meta-analysis. “the lancet”, vol 395, issue 10242, pages 1973 – 1987, june 27, 2020. dobroszek kuba: co zawiera nowa tarcza? „my company. polska” nr. 12 (63) grudzień 2020, s. 101 fuzje i przejęcia na polskim rynku. “home&market”, nr 11, listopad 2020, s. 32. garriga ana carolina: central bank independence in the world: a new dataset. “international interzetions” 42 (5): 849-858 gieroba kamil: grupa pzu odporna na wirusa. “sieci” 2020, no 49 (418), s. 84-85. grenston michael i wisham nigram: does social distance matter? working paper 2020, 6 chicago university, becker friedman institute grount john: natural and political observations made upon the bills of mortality. 1662 guo zhen-dong, zhong yi-wang, shou-feng zhang, xiao li, lin li, chao li, yan cui, rui-bin fu, yun-zhu dong, xiang-yang chi, meng-yao zhang, kun liu, cheng cao, bin liu, ke zhang, yu-wei gao, bing lu and wei chen: aerosol and surface distribution of severe acute respiratory syndrome coronavirus 2 in hospital wards, wuhan, china, 2020 "emerging infections diseases", vol. 26, no. 7, july 2020, s. 1586-1591. hayek fridrich august von: law, legislation and liberty. vol 1-3 1979. routledge, jaffé william (ed.): corespondence of léon walras and related papers. vol. iii (1898 – 1909). amsterdam 1965, north – holland. jefferson thomas: deklaracja reprezentantów stanówzjednoczonych ameryki zgromadzonych na kongresie generalnym. 4 lipca 1776 kant imanuel: zum ewigen 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[in:] a. farazmand (ed), global encyclopedia of public administration, public policy, and governance. springer nature switzerland ag, 2020, page 1 – 9 murray eleanor j.: epidemiology's time of need: covid-19 calls for epidemic-related economics. „journal of economics perspectives” vol. 34, no. 4, fall 2020 musiał grażyna: modern world and economic interactions in the light of the science of economics as well as finances and accounting. “finance, accounting and business analysis” 2020, volume 2, issue 1, p. 17-24. doi: https://doi.org/10.16408/faba.v2i1 phillips peter: giants. the global power elite. wydawnictwo: seven stories press. new york, ny: 2018 prigogine ilya, isabelle stengers 1990: porządek z chaosu: nowy dialog człowieka z naturą. 1984. sandmo agnar: retrospectives. léon walras and the nobel pease prize. “journal of economics perspectives”, vol. 21, no. 4, fall 2007, s. 217-228 smith adam: badania nad naturą i przyczynami bogactwa narodu. tom 1. wydawnictwo naukowe pwn warszawa 2007. spence andrew michael 2001: signaling in retrospect and informational structure of markets. nobel lecture stiglitz joseph eugene 2004: globalizacja. przeład: hanna simbierowicz. wydawnictwo naukowe pwn, warszawa 2004. szczepański cezary: jak odetkać kurek z pieniędzmi, „my company. polska” nr. 12 (63) grudzień 2020, s. 102 sztompka piotr (ed.): building open society and perspectives of sociology in east-central europe. montreal, university of quebec press, 1998. w biznesie to liczba miesiąca: 5,6 miliona dolarów. „my company. polska”, nr. 12 (63) grudzień 2020, s. 8 w polityce: dobrze powiedziane. „my company. polska” s. 8 young brigitte: ordoliberalism as an “irritating german idea”. [w:] ordoliberalism: german oddity? edited by thorsten beck and hans-helmut kotz. 2017. a vox a vox ue.org e – book, p. 31-40 https://econpapers.repec.org/article/inmoropre/ https://pubmed.ncbi.nlm.nih.gov/?term=yaacoub+s&cauthor_id=32497510 https://pubmed.ncbi.nlm.nih.gov/?term=sch%c3%bcnemann+hj&cauthor_id=32497510 grażyna musiał / finance, accounting and business analysis 3 (1) 2021 53 zamecki stefan: komentarze do naukoznawczych poglądów williama whevella (1794 – 1866). studium historyczno – metodologiczne. pan warszawa 2012 grażyna musiał / finance, accounting and business analysis 3 (1) 2021 54 appendix 1 source: https://gailwritinglife.files.wordpress.com/2014/07/declaration.jpg, [30.11.2020] appendix 2 table 1. registered unemployment rate in poland in 2015-2020 in percent january february march april may june july august september october november december 2020 5,5 5,5 5,4 5,8 6,0 6,1 6,1 6,1 6,1 6,1 6,1 2019 6,1 6,1 5,9 5,6 5,4 5,3 5,2 5,2 5,1 5,0 5,1 5,2 2018 6,8 6,8 6,6 6,3 6,1 5,8 5,8 5,8 5,7 5,7 5,7 5,7 2017 8,5 8,4 8,0 7,6 7,3 7,0 7,0 7,0 6,8 6,6 6,5 6,6 2016 10,2 10,2 9,9 9,4 9,1 8,7 8,5 8,4 8,3 8,2 8,2 8,2 grażyna musiał / finance, accounting and business analysis 3 (1) 2021 55 2015 11,9 11,9 11,5 11,1 10,7 10,2 10,0 9,9 9,7 9,6 9,6 9,7 source: https://stat.gov.pl/obszary-tematyczne/rynek-pracy/bezrobocie-rejestrowane/stopa bezrobocia-rejestrowanego-w-latach-1990-2020, 4,1.html, [01.12.2020] table 2. gross domestic product in poland in 2015-2020 in billions of zlotys i-iii quarter iv-vi quarter vii-ix quarter x-xii quarter 2020 552227,9 524864,8 2019 521714,5 548099,4 565833,4 637908,7 2018 486735,2 506843,8 525998,8 597794,6 2017 458470,4 478896,0 491407,2 560577,7 2016 430175,3 450125,2 454818,7 526029,3 2015 415705,2 434231,1 439971,7 510334,9 source: https://stat.gov.pl/obszary-tematyczne/inne-opracowania/informacje-o-sytuacjispolecznogospodarczej/biuletyn-statystyczny-nr-92020,4,104.html, (01.12.20) 70 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 defined contribution pension schemes in central and eastern european (cee) countries – current issues and future perspectives jeko milev department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 16 may 2023 revised 11 june 2023 accepted 12 june 2023 defined contribution pension schemes have become quite popular throughout europe in the last 20 years. many countries implemented reforms trying to address the growing concerns about the pension systems organized mostly as pay-as-you-go structures in the last century. adding fully funded components into the pension insurance, governments were trying to mitigate the problems arising from the ongoing process of population aging and the resulting unfavorable demographic trends in most of the countries in europe. these reforms were widespread in central and eastern europe in the late 1990’s and early 2000’s after the influential report1 published by the world bank in 1994 whose recommendations became cornerstones of the changes introduced into the pension systems in the region. the objective of the current paper is to give some insight into the current place of the defined contribution pension schemes in the pension systems in different countries in europe and their significance in the next decades. the issue is substantial, especially in the light of the continuous inflation and rising pressure on public finances. long term sustainability of both pension systems and public finances requires reforms that further support accumulation of resources in the long term. the first part of the paper describes the current condition of defined contribution pension schemes in 9 cee countries, the second part is dedicated to some common problems of the schemes. the paper concludes with some recommendations for future reforms. the methodology used in the paper includes descriptive and comparative analysis, deductive and inductive approach. the basic findings of the research show that defined contribution pension schemes in cee countries are exposed to significant political risk but they must be further supported and reformed in the continuous process of building sustainable and adequate pension systems in the region. keywords: pension funds, pension reforms, risks, cee countries jel: g11, g12, g22, g23 * address correspondence: e-mail : j.milev@unwe.bg 1 world bank. 1994. averting the old age crisis: policies to protect the old and promote growth. new york, n.y.: oxford university press jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 71 introduction defined contribution pension schemes are a specific way of organizing fully funded pension insurance. they have been growing in popularity in the last 20 years for many reasons, but two of them are standing out: the reforms made in central and eastern european countries that supplemented the pay-asyou-go pillars with fully funded ones and the obvious trend of transferring the investment risk towards the insured individuals observed in pension insurance in the west part of the continent. the tendency is easily seen even in those countries with serious tradition in pension insurance, based on capital accumulation (the uk and the netherlands). defined contribution pension schemes have several specific features: first, insured individuals and their employers pay contributions into individual accounts; second, the paid contributions are invested into specific types of financial assets; third, pension benefit is determined on the basis of the accumulated amount into one’s personal account at the date of retirement. unlike the defined benefit pension schemes, in which pension amount is estimated usually as a percentage of the final salary, the defined contribution pension schemes do not give insight into the future benefit. the pension strongly depends on the sum accumulated towards the end of one’s professional career. the paid contributions, the realized yield and the fees charged by the managing company are the factors that affect most pension amount. the insured individuals bear significant risks both in the accumulation and in the distribution phase (blake 2006). at the same time the so-called vested benefits2 (rights) are determined much more easily than the corresponding amounts in a defined benefit scheme. defined contribution pension schemes became popular in central and eastern european countries in the late 1990’s and early 2000’s. they were seen as supplementary elements of the pay-as-you-go pillars whose financial health was expected to deteriorate in the next decades. the governments were trying to respond to the negative trend of population aging caused by high emigration rates, decreasing fertility rates and increasing average life expectancy. the expected rise in dependency ratios3 meant that pay-as-you-go pension pillars could exert significant pressure on public finances in the mid and in the long term. the fully funded pillars of the pension systems were seen as beneficial for the pension system itself but also for the whole financial system. there is evidence of incentivizing the trade on the domestic capital markets after introduction of some capital components into the pension system4. davis (1993) also points out that pension funds, under certain assumptions, can contribute effectively to the development of the local stock exchanges. that was an additional argument for the introduction of a fully funded element in the pension systems of countries whose financial markets needed a booster to start channeling more efficiently the individual savings towards business. two decades after their introduction, pension funds in central and eastern europe have different destinies in different countries. some of the governments made “reversal” reforms5 (hungary and poland), others continued to support the funded component and even adopted detailed regulation concerning the pay-out phase (bulgaria). the current research is trying to shed some light on the development of the mandatory fully funded pillars into the pension systems in central and eastern european countries and to give insight into some future changes needed to strengthen them. the basic thesis is that fully funded pillars need further support and reforms in order to become those elements that can raise sustainability and adequacy of the pension systems in the region. the studies in this field accomplished in the last years have some controversial results. there is no common conclusion on the problems that need to be sorted out in order to ensure the success of the capital pension schemes. bielawska (2013) points out the fiscal issues arising after the implementation of the pension reforms in hungary and poland. the transitional costs from purely payg pension system to mixed one (pay-as-yougo and fully funded) are seen as one of the basic reasons for implementing reversal reforms in both countries. sebo and virdzek (2013) put special accent to the political risk as a crucial factor for the investment performance of the defined contribution pension schemes in slovakia. the return realized by the pension funds operating such schemes is an important element for ensuring public support for future reforms. szczepanski and brzeczek (2013) in addition to the investment performance show that specific risk may arise from typical principal-agent problem in pension insurance which means that pension fund managers can act not in the best interest of the members of the scheme. right regulation is seen as crucial for decreasing this type of risk especially when pension scheme is compulsory. at the same time different research paper of the european commission (2010; 2012; 2018; 2021a) show a persistent trend of 2 vested benefit is the amount the insured could transfer into another pension fund before reaching retirement age. 3 dependency ratio measures the ratio between those individuals aged over 65 and those in working age. 4 there is such evidence for the chilean stock market, where the trade volume increased several times just in a few years after the big pension reform in 1980’s 5 reversal reform is a change in the pension system that destroys the mandatory fully funded component into the pension system. such reforms were made in hungary (2011) and in poland (2014) jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 72 increasing asset value and number of insured individuals in the fully funded pillars of the pension systems throughout european union (eu). some of the reasons behind the observed trend are related to the expected rising pressure on public finances due to the aging of the population and the deteriorating demographic structures in almost all of the countries in eu. the first part of the research is dedicated to the actual structure of the pension systems in all those countries that made reforms following the model of the world bank. the second part is trying to classify some common trends and to outline some of the risks related to them. in conclusion recommendations are made for some future reforms. the mandatory defined contribution pension schemes in central and eastern europe in the mid 1990’s the world bank published a report that strongly recommends structural reforms of the pension systems around the world. at the center of the reforms was put the multi pillar approach that combines the pay-as-you-go principle with the fully funded one. the obvious trend of increasing life expectancy and decreasing fertility rates was expected to cause gradual aging of the population and increasing strain on the pension systems based primarily on pay-as-you-go principle. the parametric reforms (increasing pension age, limiting early retirement options, etc.) applied to the state pension schemes were considered as insufficient for promoting long term sustainability and adequacy of pension incomes. the introduction of fully funded elements into the pension systems was seen as a possibility to strengthen the financial condition of pension insurance by relaxing part of the burden that falls on the payas-you-go structures, but not only. fully funded components were supposed to incentivize individuals to pay contributions on real incomes thus constraining “grey economy” which was a serious issue for many of the developing countries (kirov 2010). at the same time capital pension schemes under certain assumptions can raise savings in the economy and support stock market trade thus promoting economic growth in the long term (davis 1993). and finally, fully funded pension systems could have a better return to the insured individuals than pay-as-you-go pillars. according to aaron (1966), the return to pay-as-yougo depends on two basic factors – growth rate of average earnings (they determine the amount of contributions paid into the social security system) and old age dependency ratio (pensioners towards working individuals). on the other hand, the return to a fully funded pension system depends also on two factors: the return of financial assets and the passivity ratio (working age towards years in retirement). davis (1993) shows that in case of equality between dependency ratio and passivity ratio, the return solely depends on the growth rate of average wage and the return of financial assets. for many countries the latter exceeds the former, thus giving precedence to the fully funded pension schemes. in addition, the already formed trend of population aging means that the dependency ratio is expected to further deteriorate in the next decades giving another advantage to fully funded structures. all these arguments made possible the fundamental pension reforms implemented in many countries in central and eastern europe. hungary (1998), poland (1999), latvia (2001), bulgaria (2002), estonia (2002), croatia (2002), lithuania (2004), slovakia (2005), romania (2008) made pension reforms following the model proposed by the world bank. the pension systems in these countries have similar features but also common problems. at the start of the reform the governments had to address and solve important issues concerning the exact design, structure and financing of the second pillar pension funds. all of the countries adopted defined contribution pension schemes with personal accounts, managed by pension insurance companies, structured as separate legal entities. in the very beginning, it was crucial for the policymakers to convince insured individuals that pension funds are financial institutions, designed to support the pension systems and to increase probability of receiving benefits adequate to preretirement income. the idea of having an individual account for accumulation of assets for future retirement appeared to be quite innovative for countries where pension insurance had been organized on semashko6 model for decades (gochev and manov 2003). social security systems in all countries from the former soviet bloc were financed solely by the state budget and people commonly believed that pension insurance cannot be financed on other grounds than on funds provided by the government. the financial “pyramids” that existed in some of the countries in the years after the collapse of the communist regimes were another scar that had to be healed. convincing people that pension funds were not institutions that manage some other “ponzi scheme” was important for the success of the reform. another issue that had to be sorted out was related to the amount of the contributions destined to the pension funds. the approach adopted by all countries, but estonia, was to reduce the contribution due to the first pillar and to redirect that amount into the second pillar. the government in estonia reduced the 6 nikolay semashko is a russian academic and politician whose ideas about social security were widely accepted in soviet union and countries from the former soviet block jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 73 payment due to the first pillar but also introduced additional contribution to finance the private pension funds in the country. the reduction of the contribution rate for the first pillar raised the question of how to compensate the expected lower revenues into the state pension system. table 1. contribution rates for the first and for the second pillar at the start of the reform n: country first pillar contribution rate second pillar contribution rate 1 hungary 18.5 % 8 % 2 poland 12.22 % 7.3 % 3 latvia 18 % 2 % 4 bulgaria 27 % 2 % 5 estonia 16 % 6 % 6 croatia 15 % 5 % 7 lithuania 23.4 % 2.5 % 8 slovakia 9 % 9 % 9 romania 29 % 2 % source: oecd (2004, 2008); bejakovic (2019) the adopted approach of financing the transition period was different for the various countries. three basic models were applied: revenues from general taxation, own resources, additional public debt (bielawska 2013). the combination of the three variants was also an option. the last basic issue that had to be addressed was related to the individuals allowed to join the new pension funds. the very nature of the fully funded pension systems implies that insured individuals need a comparatively long period in order to accumulate enough resources into their accounts. those of them who were close to their retirement were excluded from the possibility of saving or they were given the option to choose whether to join the scheme. the different countries adopted different approaches to this issue, but the common feature was that not all individuals were allowed to join the new pillar of the pension system. table 2. criteria for compulsory joining the second pillar pension funds in cee countries n: country individuals mandatory insured into the new pension funds 1 hungary all persons under the age of 35 2 poland all persons born after 31.12.1968 3 bulgaria all persons born after 31.12.1959 4 estonia all persons born after 31.12.1982 5 croatia all persons below 40 years 6 latvia all persons below 30 years on 1st of july 2001 7 lithuania all persons below 40 years 8 slovakia all persons that start work after 01.01.2005 9 romania all persons below 35 years source: oecd (2004, 2008); bejakovic (2019) the start of the reform was promising, and many individuals were convinced that pension systems needed the adopted change. despite the initial enthusiasm, the new pension funds had to respond to many challenges in the following years. one of the first appeared on the surface just a few years after the beginning. the government in hungary was not satisfied with the position of the european commission that funds accumulated into the second pillar cannot be deducted from the official public debt. the growing liabilities of the government appeared to be a threatening circumstance for the pension funds. the policymakers in the country made a “reversal” reform and seized the funds accumulated for a period of 13 years. so, in 2011 the hungarian compulsory second pillar pension funds stopped to exist. the reversal was made by introducing strong incentives7 for all individuals to transfer “voluntarily” their accumulated resources into the first pillar of the system. similar transformation was made in poland a few years later. due to the wish of the government to keep the ratio public debt/gdp on acceptable level, the ruling class forced second pillar pension funds to transfer their polish government bonds into the state social security system. then, the state officials promised to take responsibility of paying an additional part of the pension benefits proportionate to the share of government securities transferred to the budget. polish pension funds were restricted to invest primarily into corporate instruments, and at the same time they started to gradually transfer the savings of those individuals who have 10 years to retirement into the state payg 7 the adopted new regulation required those who choose to stay within the second pillar to give up their pension benefit due by the state. jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 74 pillar. no other cee government took actions like these, but some milder measures aimed at constraining the activity of pension funds were assumed by each of the researched countries. the following table summarizes some of them. table 3. regulative changes made in the cee countries aimed at constraining the activity of second pillar pension funds n: country measure taken by the policymakers 1 hungary full “reversal” reform (seizure of pension assets) 2 poland contribution rate reduced to 2.92 %. assets in government bonds transferred to the state social security system and redeemed. assets from pension funds transferred gradually to payg pillar 10 years prior to retirement. 3 bulgaria part of the assets of occupational pension funds were seized. insured individuals were allowed to transfer their resources from the second into the first pillar of the system. contribution rate remains at 5 %. 4 estonia 6 % contribution rate cut to 0 % between june 2009 and january 2011 and shifted to payg. then gradual increase from 2011. 5 croatia option to exit the scheme 6 latvia 8 % contribution rate reduced to 2 % in may 2009. then increased to 4 % from 2013 7 lithuania 5.5 % contribution rate reduced to 2 % in 2009. introduced voluntary participation 8 slovakia 9 % contribution rate reduced to 4 % in 2013. option to enter and to exit the scheme 9 romania reduction in planned growth path of contribution rate from 2 % to 6 %. rate froze at 2 %, started to increase from 2011 at annual rate of 0.5 p.p. source: bielawska (2015), [based on price and rudolph (2013) and schwarz (2011)] and author’s update the adopted changes undoubtfully show that second pillar pension funds in the cee region are exposed to significant political risk. though managed by private institutions, these types of pension schemes are financed by compulsory contributions and that makes them quite vulnerable to political decisions. the governments in all countries were inclined to consider the second pillar as part of the public pension systems and the past experience proves that they can easily change the rules in a way that puts the funds under significant risk. the basic reason for the accomplished reverse reforms was related to the need for additional resources that could temporarily relax part of the burden on public finances, but two other factors must be mentioned as well. first, comparatively low amounts accumulated into the funds. at least three reasons could explain the unfavorable situation: low contribution rates, short period of accumulation and comparatively low yield. pension funds are widely blamed for the realized yield for the time of their existence, but in an environment of very strict regulation rules and extremely low interest rates for more than a decade, the achieved low return is not a surprise. however, the pension funds, in those countries with established multi-fund systems, were able to realize significantly higher returns in the aggressive portfolios than in the conservative and balanced ones. the countries which did not introduce portfolios with different risk profiles were not able to take advantage of the prolonged upward trend in the stock markets for the last decade. daneva (2018) and pandurska (2020) show the positive features of multi-fund system and its importance for the insured individuals in defined contribution schemes. the second basic reason for the implemented reverse reforms stems from the first one. when accrual of resources into individual accounts is not considered as significant, public opinion is not so noisy in opposing the changes that would destroy individual savings. the reversals in both hungary and poland showed that general public is not decisive in protecting its own rights and resources in the second pillar pension funds. the governments were able to implement legislative changes without meeting any significant resistance. to a certain extent this is also due to the lack of understanding of what exactly is lost and what function pension funds fulfill. all measures taken in the last decade show declining and volatile support by the policymakers in cee region for the second pillar, despite the initial enthusiasm among governments that initiated the reforms. the fundamental question is whether pension funds should continue to be considered as important elements in raising sustainability and adequacy of the pension systems in cee countries. defined contribution pension schemes as a factor for future sustainability and adequacy of pension systems in europe in a number of research papers (european commission 2010; 2012; 2015; 2018; 2021b) published in the last decade, european commission continuously underline the problems stemming from the aging of the jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 75 population and the deteriorating demographic structures for the future sustainability of the pension systems around europe. these unfavorable trends are expected to be managed by pension reforms which are seen mostly in the following directions: raising employment rates among elderly, increasing pension age, and enhancing the opportunities to build up safe complementary retirement savings. the reforms that member states are expected to implement concern both the pay-as-you-go pillar and the fully funded one since the observed trend of population aging is supposed to affect adversely all of the pension columns. prolonged saving and gradual buildup of pool of assets is seen as irrevocable trend that can effectively support elderly in receiving adequate pension benefits but also governments in securing sustainability in public finances. the 2022 global pension index, published by mercer and cfa institute (2022)8 confirmed once again that those countries which were able to build robust funded component into their pension systems take top ten of the places in the “quality of pension systems” ranking: table 4. 2022 mercer and cfa global pension index about quality of pension systems n: system overall grade overall score adequacy sustainability integrity 1 iceland a 84.7 85.8 83.8 84.4 2 netherlands a 84.6 84.9 81.9 87.8 3 denmark a 82.0 81.4 82.5 82.1 4 israel b+ 79.8 75.7 81.9 83.2 5 finland b+ 77.2 77.5 65.3 93.3 6 australia b+ 76.8 70.2 77.2 86.8 7 norway b+ 75.3 79.0 60.4 90.3 8 sweden b 74.6 70.6 75.7 79.5 9 singapore b 74.1 77.3 65.4 81.0 10 uk b 73.7 76.5 63.9 83.0 source: mercer cfa institute global pension index 2022 highlights key challenges of defined contribution plans for retirees. online: [https://www.cfainstitute.org/en/about/press-releases/2022/mercer-cfainstitute-global-pension-index-2022] the above table shows that 7 of the first 10 most robust pension systems are in europe with no country from cee region. the report outlines an important trend in the last years – the gradual turning of defined-benefit pension plans into defined contribution pension schemes. this is a sustainable trend and expectations are that more and more people will depend on this type of pension schemes in the next decades. defined contribution pensions are expected to play a crucial role in mitigating the adverse effects on the pay-as-you-go systems caused by the negative demographic processes. their future development is considered as a priority in many of the oecd countries. together with the gradual increase of pension age, the strengthening of the fully funded components in the pension systems is the most obvious trend in the last decade. incentivizing additional saving, governments are trying to raise both sustainability and adequacy of the pension systems in the long term. the main question is not whether defined contribution pension schemes should exist but how to be developed further so that to respond to the future challenges brought by the aging of the population. it’s worth noting once again that within defined contribution pension schemes investment risk is transferred towards the insured individual. the amount accumulated at the date of retirement is crucial in determining the future pension amount. from this point of view, three elements are of utmost importance in securing long term stability of the scheme: regular payment of contributions, yield realized by the pension companies and management fees. the experience of the cee countries in the last two decades in managing pension schemes based on a fully funded principle shows that proper regulation is important for each of the three components. the regular payment of contributions is maybe the only element that doesn’t depend so strongly on the efforts of the regulator since the practice shows that there are variety of reasons for not paying contributions for a certain period. individuals with irregular payments are expected to rely primarily on the pay-as-you-go system as fully funded pension funds are not supposed to transfer resources among individual accounts. nonetheless, the efforts to limit the extent of this group should be continuous, including variety of incentives so that to constrain at least the number of those who voluntarily are trying to escape the payments into the pension fund. the investment rules are the second factor of great significance for improving the accumulation of resources into individuals’ account. the risks to which individuals are exposed at different stages of their lives are different (milev 2014). those who have just entered into the labor market and whose investment horizon is expected to be over 30 years need to worry most about the inflation risk. the risk of declining purchasing power of money is very serious for all types of fully funded pension schemes. if pension funds’ 8 mercer and cfa institute publish on a regular basis global pension index (mcgpi) by studying the pension systems of 44 countries accounting for 65 % of world’s population. jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 76 rate of return continuously lags behind the inflation rate, the probability of accumulating enough resources to finance pension benefit adequate to the preretirement income decreases significantly. assuming some risk in terms of higher volatility of asset prices in the short term in exchange for a raised probability of realizing yield that exceeds inflation in the mid and in the long term looks like a good deal for those individuals. on the other hand, people whose retirement is close and respectively the investment horizon is short need mostly stability of their investment. any significant drop in the value of their portfolio of assets just prior to the date of retirement can seriously hurt their financial position and the possibility of financing adequate benefit. flexibility of investment rules is quite important especially when insured individuals are the ones that bear the investment risk. some of the cee countries were able to introduce the multi-fund system thus enabling pension companies to structure portfolios with different risk profiles for the different groups of insured. the investment results of the funds with different risk level undoubtfully show that aggressive portfolios’ rate of return is higher than the one of the conservative funds for the last 10 years. the unprecedented last decade of zero and negative interest rates was quite appropriate for investing in variable income instruments and the funds in countries where investment regulations were not so restrictive took significant advantage relative to others. insured individuals in estonia, latvia, lithuania and slovakia were able to select aggressive strategy for their pension savings and the assumed risk was compensated with significantly higher return9. it is an interesting fact that the funds whose rate of return is the highest one are those with adopted passive investment strategy following some market index10. the funds in countries where regulatory restrictions didn’t allow the construction of different portfolios of assets adjusted for the risk profile of the insured individuals were not so successful in their investment performance in the last decade. investment managers in those countries were trying to follow a balanced strategy but investing traditionally in fixed income instruments in an environment of extremely low interest rates proved to be an unsuccessful approach for the past years. the exact results of the different types of funds and the comparison with the inflation rate will be analyzed in another research. management fees are the third component that seriously affects the amount accumulated into one’s individual account. the costs incurred by the insured individuals directly reduce the realized yield and could significantly influence the performance of the fund. the fees charged by the compulsory pension funds in cee countries are strictly regulated. according to davis (1993) “costs are higher for small funds than large, and for defined benefit relative to defined contribution”. this observation is partly confirmed by the development of the bulgarian pension insurance companies whose fees charged on the managed funds’ assets were higher at the beginning of their operation and gradually declined. the investment fee charged on the value of the managed assets used to be maximum 1% annually for the period between 2002 and 2015 and then it was lowered to maximum 0.75 % in 2019. the management fee charged on each paid contribution was maximum 5 % between 2002 and 2015 and has been gradually reduced to 3.75 % since 2019. the observation “the smaller the fund, the higher the fees” is quite valid for the development of the universal pension funds in bulgaria. however, the regulator, in this case, plays a major role since the general practice was pension companies to charge the maximum allowed amount. the fact that fees are gradually decreasing is a positive one and could further boost the performance of the funds in the next years. similar trend is observed for the fees charged by the pension companies in other cee countries as well. the three analyzed components (paid contributions, realized yield, charged fees) are undoubtfully important for establishing defined contribution pension schemes as an important factor for the future adequacy and sustainability of the pension systems in cee countries. however, there is one crucial element that if not put under control, could devastate the fully funded pillars in all of the countries in europe – inflation. the last decade of unprecedented low interest rates and very loose monetary policy implemented by the main central banks (mostly fed and ecb) provoked high inflation rate in 2022 which reverse the trend in interest rate level and for a period of 12 months both fed and ecb raised the main reference rates significantly11. the inflation rate and the resulting volatility of interest rate levels have disastrous effects for the pension funds both in the short and in the long term. the sharp rise of interest rates resulted in a drastic drop of the market values of all fixed income securities in the portfolios of pension funds. the widely adopted mark to market approach in evaluation of these securities lead to announcing huge losses in 2022. that could significantly undermine the trust of the general public towards 9 the aggressive portfolios in slovakia realized 2 to 3 times higher return than the conservative ones for the period between 2013-2022. 10 in slovakia pension funds are obliged to offer portfolio of assets that replicates a market index. the investment performance of these portfolios significantly exceeds the yield realized by aggressive portfolios which have been managed actively for the period 2013-2022 11 ecb raised the reference rate from 0 % to 3.75 % and fed raised the rate from 0 % to 5.25 % for the period between 01.01.2022 and 10.05.2023. jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 77 pension funds although the duration of their liabilities allows the losses currently to be considered as “accounting ones”. in the long term, however, inflation could be even more erroneous. rates of inflation like the ones in 2022 could devastate the defined contribution pension schemes. it is almost impossible to realize rate of return that exceeds such rates12 of inflation. unfortunately, the huge public debts and pension liabilities in the first pillar of the pension systems in almost all countries in europe make inflation quite probable in the next decades. from one side, it will allow financing of the pay-as-you-go systems easier but on the other it will ruin the sustainability of the fully funded pillars of the pension systems around europe. defined contribution pension schemes cannot sustain such a trend and their existence may be called into great question. conclusion pension systems around europe are facing big challenges in the next decades. traditionally established on a pay-as-you-go principle, they must be rebuilt thus responding to the negative trends of the aging of the population and the deteriorating demographic structures. pension systems in cee region are affected even more by the unfavorable demographic trends suffering additionally from net emigration and loss of people in working age. the structural reforms made in the early 2000’s introduced fully funded defined contribution pension schemes which were considered as important elements that could support the pay-as-you-go systems in the long run. the reports published by the world bank and the european commission in the next years were continuing to foster additional saving as a necessary tool for preventing poverty in old age. however, due to a variety of reasons many of the cee countries started to delay some additional changes in their second pillars and even to reverse already accomplished reforms. the support for the fully funded schemes should be a prolonged effort. the most sustainable and adequate pension systems around the world continue to be the ones with robust funded component. so, the pension insurance built on a capital principle must not be left behind but additionally strengthened with important reforms that could mitigate some of the risks that appeared in the last years. first, pension funds must be allowed to structure portfolios with different risk profile thus addressing both the inflation risk which is the most important risk for those individuals with long investment horizon and asset price risk for those individuals who are close to the date of their retirement. second, regulators need to keep different types of fees charged by the managing companies as low as possible, because they can significantly affect the amount accumulated in the individuals’ accounts towards the date of retirement. third, those individuals who were not able to accumulate enough resources to fund their retirement must not serve as an argument to implement some type of “reversal” reform. governments should have continuous policy to reduce the scale of this group by incentivizing individuals to save additionally for their retirement. this is the only sustainable approach to address the negative demographic trends and to mitigate the expected hit over the pay-as-you-go pension systems in the next decades caused by the aging of the population. references aaron, h. 1966. the social insurance paradox. the canadian journal of economics and political science, (32), p. 371-374. bejakovic, p. 2019. ‘the croatian pension system and challenges of pension policy’. in petak, z., kotarski, k. (ed.) policy-making at the european periphery. the case of croatia. pallgrave macmillan, p. 229-245. bielawska, k. 2013. the impact of the fiscal situation on retreat from the mandatory pension funds in the countries of central and eastern europe: the case study of hungary and poland: publishing house of put. bielawska, k. 2015. pension reforms and long-term sustainability of public finances of the central and eastern european countries: publishing house of put. blake, d. 2006. pension finance. uk: john willey & sons ltd. daneva, i. 2018. osiguriavane i osiguritelen pazar [insurance and insurance market]: publishing house of nbu, sofia. davis, e. p. 1995. pension funds retirement income security and capital markets. an international perspective. uk: oxford university press. european central bank. online: [www.ecb.europa.eu]. european commission. 2010. towards adequate, sustainable and safe european pension systems (green paper). 12 2022 inflation rate in bulgaria is 13% http://www.ecb.europa.eu/ jeko milev / finance, accounting and business analysis, volume 5, issue 1, 2023 78 european commission. 2012. an agenda for adequate, safe and sustainable pensions (white paper). european commission. 2018. pension adequacy report: current and future income adequacy in old age in the eu. european commission. 2021a. pension adequacy report: current and future income adequacy in old age in the eu. european commission. 2021b. the 2021 aging report. economic and budgetary projections for the eu member states (2019 – 2070). eurostat. online: [https://ec.europa.eu/eurostat]. federal reserve board. online: [www.federalreserve.gov]. gochev g., and b. manov. 2003. socialno osiguriavane – teoria i praktika [social security – theory and practice]: publishing house of trakia m, bulgaria. kirov, st. 2010. chastnite pensionni shemi [private pension schemes]: publishing house: faber. mercer & cfa institute. 2022. global pension index. milev, j. 2014. riskovete pred osigurenite lica v universalni pensionni fondove – predizvikatelstva i reshenia [the risks for the insured persons in universal pension funds – challenges and solutions], publishing house: unwe. oecd. 2004. pension reforms in the baltic countries. oecd. 2008. private pensions outlook. pandurska, r. 202. kliuchovi aspekti i predizvikatelstva pred razvitieto na pensionnata sistema v bulgaria [key aspects and challenges in front of the pension system in bulgaria: publishing house: unwe, sofia. price, w., and r. rudolph. 2013. reversal and reduction, resolution and reform. lessons from the financial crisis in europe and central asia to improve outcomes from mandatory private pensions, world bank. schwarz, a. 2011. new realities in pension policy in central europe, world bank. sebo j., and t. virdzek. 2013. dismantling the myths about the pension funds performance from the saver’s perspective: publishing house of put. szczepanski m, and t. brzeczek. 2013. risk reform in poland and the efficiency of occupational pension schemes, poland: publishing house of put. world bank. 1994. averting the old age crisis: policies to protect the old and promote growth. new york, n.y.: oxford university press. https://ec.europa.eu/eurostat http://www.federalreserve.gov/ 14 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 tax knowledge, tax complexity and tax compliance in south africa baneng naape department of economics, university of the witwatersrand, johannesburg, south africa info articles abstract history article: submitted 15 may 2023 revised 30 may 2023 accepted 1 june 2023 purpose: the key objective of this study is to investigate the influence of tax knowledge and tax complexity on tax compliance in south africa. design: the data collection process involved self-structured questionnaires targeted at south african personal income taxpayers. the data was analyzed by means of descriptive analysis, inferential statistics and binary logistic regression. findings: the findings from the pearson correlation test revealed that knowledge on tax types, tax payment methods and tax penalties is positively associated with tax compliance and this association was found to be statistically significant. in addition, the results from the binary logistic regression revealed that knowledge on tax penalties is positively associated with higher probabilities of tax compliance and this association was likewise found to be statistically significant. this, to some extent, implies that tax penalties are well enforced by the government to induce tax compliant behaviour. meanwhile, demographic factors such as the level of educational attainment as well as perceptions on the state of democracy were found to play a significant role in inducing tax compliance. practical implications: the study recommends the expansion of educational programmes that inform taxpayers about the different tax types they are liable for, the procedure for calculating and filing tax returns as well as the financial and legal consequences of exhibiting a tax non-compliant behaviour. originality: the research topic is relevant for the management of tax systems especially during times wherein policymakers are in search of approaches to collect additional budget revenues. the study also presents a historical overview of problems that are observed in the income tax system of the republic of south africa, and this analysis is linked to the problems of tax compliance. keywords: tax knowledge, tax complexity, tax compliance, south africa jel: h24, h26, c51, i21 * address correspondence: e-mail : banengnaape@gmail.com https://orcid.org/0000-0001-8000-8341 baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 15 introduction the nexus between tax knowledge, tax complexity and tax compliance has been extensively studied by different researchers such as saad et al. (2004), palil (2005) and pau et al. (2007). this is because, tax knowledge and tax complexity are critical components of voluntary tax compliance. without proper knowledge and understanding of the different tax types and laws and administrative procedures, taxpayers becomes reluctant to file their tax returns and settle their tax liabilities. the year 2000 marked the introduction of the efiling system by the south african revenue services (sars) while the year 2011 saw a shift in the power to assess. in terms of the income tax act, no. 58 of 1962, the power to assess was vested in the commissioner. the tax administration bill however, which was passed before the south african parliament, introduced the concept of “self-assessment” (hofmeyr 2011). self-assessment in this regard, implies that “the taxpayer will have to report the basis of assessment, submit a calculation of the tax due and, usually, make payment of the outstanding tax. the onus will be on the taxpayer to calculate the correct amount of tax payable” (sars 2011). although the efiling system has gained popularity in recent times and accelerated the payment of taxes, the system remains challenged by a number of issues including the lack of tax knowledge and technological literacy. self-assessment also, implies a shift in responsibility from tax authorities to the individual taxpayer. saad (2014) notes that in order for taxpayers to execute these responsibilities, they are expected to be well-informed about the exiting tax provisions and laws. thus, one possible way for creating a tax compliant environment is to improve the availability of tax information to the public. similarly, a less sophisticated tax system can go a long way in stimulating a tax compliant environment. although sars has various tax awareness programmes, several studies (e.g., evans and joseph 2015; bornman and ramutumbu 2019) have empirically indicated that tax knowledge remains a hindrant to tax compliance in south africa and the rest of the world. the majority of south african citizens fail to comprehend different tax laws and provisions set by the government and as a result, have to employ the services of tax consultants at additional costs. also, the self-assessment system requires some knowledge on and access to technological devices. this is problematic for a country such as south africa which has failed to harness the digital evolution. access to technological devices and stable internet connection remains limited more especially in the rural areas. while acknowledging that the topic on the influence of tax knowledge on tax compliance has been studied before, earlier studies were not able to distinguish the different aspects of tax knowledge, a gap which this study aims to fill. the study will play a significant role in closing the gap on the relationship between tax knowledge and tax compliance in south africa since few empirical studies have attempted to establish this relationship. also, compared to previous studies, this study does not use the broad definition of tax knowledge to estimate its influence on tax compliance but rather breaks tax knowledge into three parts: tax calculation knowledge, knowledge on tax reporting and knowledge on tax payments. this is done to understand the overall influence of tax knowledge on tax compliance from different angles. as mentioned earlier, theory suggests that when citizens are well informed about tax laws and provisions, they are most likely to be tax compliant. thus, this study plays a crucial role by empirically analysing this relationship in the context of south africa. the study will be organised as follows: section 1 will provide an introduction to the study and outline the objectives and significance of the study. section 2 will provide an overview of literature on the relationship between tax knowledge and tax compliance, both from a theoretical and empirical perspective. section 3 will unpack the empirical strategy to be executed by the study to estimate the influence of tax knowledge on tax compliance in south africa. section 4 will detail the findings of the study in line with existing studies. section 5 will provide a brief conclusion of the study as well as implications for policymaking. literature review this section briefly discusses the literature on the influence of tax knowledge on tax compliance. the section is twofold: the first part of the section unpacks theories relating to tax knowledge, tax complexity and tax compliance while the second part summaries findings from earlier studies on the relationship between tax knowledge and tax compliance. theoretical literature a well-designed tax system is crucial to every nation as it has the potential to enhance tax compliance by allowing taxpayers to settle their tax liabilities with ease, thereby reducing administrative costs and raising tax yields. smith (1776) defines a well-designed tax system as one that is founded on numerous tax principles including equity, efficiency, certainty and convenience. of interest, however, are baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 16 the canons of efficiency and convenience. a tax system is regarded efficient when the cost of collecting and settling tax liabilities is minimal as high tax administration costs would reduce the net tax yield and to some extent, discourage taxpayers from being tax compliant (naape and mahonye 2021). pigou (1954) notes that, because individual taxpayers and businesses plan ahead, tax liabilities due ought to be predictable and communicated in time. in addition, the sum, time and manner of payment of taxes should be convenient to the contributor. the theoretical literature begins by providing a background on the south african income tax system. this is followed by a discussion on tax knowledge and complexity as well as the nexus between tax knowledge, tax complexity and tax compliance. south african income tax system the south african income tax legislation was first enacted in 1962 through the income tax act no.58 of 1962. the legislation was executed to provide guidance on the exercise of powers and performance of duties by tax authorities as well as the manner in which tax officials may raise and collect taxes from income and donations. during this time, the responsibility to calculate and file tax returns was vested in tax authorities. thus, taxpayers were not required to be fully abreast of the different tax laws and procedures followed in the calculation and filing of tax returns as compared to today. also, several tax reforms have since been implemented in the form of tax cuts and hikes as well as changes in tax brackets and exemptions. through these reforms, the government aimed to improve administrative efficiency and tax revenue collections (schoeman and jordaan 2015). the maximum income tax rate in south africa stood at 50 % in 1980 before a reduction to 45 % in 1987 and a further reduction to 43 % in 1991. during the period under study (2008-2021), the maximum income tax rate remained fixed at 40 % between 2008 and 2015 before an increase to 41 % in 2016 and 45 % in 2017 (naape and mahonye 2021). in terms of tax revenue collected, taxes collected from income and donations account for a larger share of the total tax revenue in south africa. for example, personal income taxes made up 31 % of the total tax revenue collected by the government during the 2008/09 financial year followed by corporate income taxes at 30 % of total tax revenue (statistics south africa 2019). a decade later, personal income taxes make up 38 % of total tax revenue collected by the government followed by value added taxes at 24 % of total tax revenue. tax knowledge saad (2014) notes that basic understanding of the tax payment system is a crucial factor in a voluntary tax compliance system, more especially in determining and calculating an accurate tax liability. this includes basic understanding of the tax compliance status, filling dates, compliance laws, procedures and consequences as well as the manner in which tax liability is calculated and settled. knowledge of the different regulations governing taxes and applicable tax reforms is also crucial to avoid both intended and unintended miscalculations. tax complexity tax complexity arises when taxpayers find it difficult to comprehend the different tax laws and reforms governing tax administration and compliance (richardson and sawyer 2001). cox and eger (2006) state that tax complexity can take different forms including compliance complexity, computational complexity, procedural complexity, rule complexity and forms complexity. the six potential causes of tax complexity were first identified by long and swingen (1987). this includes record keeping, frequent changes to tax laws, calculations, details, ambiguity and forms. empirical literature saad (2014) analysed taxpayers views on their level of tax knowledge and whether the income tax system in new zealand is perceived to be complex or not. the data was collected by means of telephonic interviews and analysed through thematic analysis. the findings revealed that the participants have a lack of technical knowledge on tax and perceived the income tax system to be complex. a study by bornman and ramutumbu (2019) assessed the tax compliance risk profile of small business owners in the soweto township. the data was collected by means of semi-structured questionnaires and analysed through statistical inference and thematic analysis. the findings revealed that a lack of knowledge on tax laws and provisions as well as observations on fairness and opportunity for non-compliance, were major contributing factors to tax non-compliance in the soweto township. damajanti and karim (2017) analysed the effects of tax knowledge on tax compliance by officials in the tax office of the java region. the authors made use of questionnaires as a data collection technique. compared to earlier studies, their study was unique in that they analysed tax knowledge from three aspects, namely: tax calculation knowledge, knowledge of tax reporting and knowledge of tax payments. based on findings, the three instruments of tax knowledge were found to have a statistically significant influence on the level of tax compliance in the java region. gambo et al. (2014) attempted to establish the baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 17 relationship between tax complexity and tax compliance in selected african countries. the study made use of the pearson correlation test and ordinary least squares econometric technique to analyse the sourced data. based on findings, tax complexity has a significant negative impact on tax compliance in the selected african countries. in addition, the study found that as a result of the complex tax system, taxpayers spend roughly 19 hours more in self-assessment than the regional self-assessment average. matibe et al. (2015) investigated the extent to which tax knowledge and awareness influence decisions about tax compliance by firms in export processing zones in kenya. the authors made use of structured questionnaires to gather primary data and analysed the primary data through descriptive and inferential statistics. the study revealed that employees who received adequate training on tax knowledge and awareness were more tax compliant than those with little or no training on tax knowledge and awareness. thus, it can be inferred that there is a close relationship between tax knowledge and awareness and compliance among firms in export processing zones in kenya. palil (2010) explored the relationship between tax knowledge and tax compliance in malaysia. the data collection process involved large scale postal surveys collected at national level. the individual characteristics of the taxpayer’s knowledge were analysed by means of anova and t-test while the relationship between tax knowledge and tax compliance was established by means of multiple regression. the study found a significant relationship between tax knowledge and tax compliance in malaysia although the level of tax knowledge differs greatly among respondents. oladipupo and obazee (2016) estimated the effects of tax knowledge and tax penalties on tax compliance across selected small and medium enterprises (smes) in nigeria. the data was collected by means of structured questionnaires and analysed through econometric techniques such as ordinary least squares. the results revealed that tax knowledge exhibits a positive and statistically significant effect on tax compliance while tax penalties exhibit a positive yet statistically insignificant effect on tax compliance in nigeria. the findings suggest that tax knowledge is more effective in inducing a tax compliant behaviour among smes in nigeria than tax penalties. cechovsky (2018) established the relationship between tax knowledge and tax compliant attitude in australia. the study employed a mixed methods approach incorporating interviews and self-structured questionnaires. the respondents comprised of a group of 700 vocational business students. the study revealed that tax knowledge encourages a tax compliant attitude and discourages a tax evasion attitude in australia. hantono (2021) investigated the influence of selected tax variables including tax awareness, tax knowledge and tax morale on tax compliance. the study made use of self-structured questionnaires to gather data. this comprised of a pool of 100 qualifying respondents and the incidental sampling technique was used to sample the data. by means of the multiple linear regression technique, the study found that tax awareness, tax morale and tax knowledge have a significant positive impact on tax compliance in indonesia. wadesango and mwandambira (2018) examined the effect of tax knowledge on tax compliance among small medium enterprises (smes) in zimbabwe using a pool of 35 smes and 40 tax officials. the findings were that tax knowledge influences a tax compliant behaviour among smes and tax officials although issues of high tax rates and perceptions on corruption weigh on the willingness of taxpayers to settle their tax liabilities. meanwhile, a similar study by twum et al. (2020) analysed the influence of tax knowledge on tax compliance in panel of 130 managers of smes. the data was collected by means of surveys and analysed through structural equation modelling. the findings revealed that knowledge of employment income, awareness of sanctions and knowledge of tax rights and responsibilities have a positive and statistically significant influence on tax compliance in ghana. musimenta (2020) analysed the effect of tax knowledge, tax complexity and compliance costs on tax compliance in uganda while incorporating the influence of indirect costs of tax compliance. the results indicated that tax knowledge is not correlated with compliance costs and that tax knowledge is better suited at explaining variations in internal costs than external costs of compliance. in addition, the results indicated that tax knowledge has a positive significant influence on tax compliance. manual and xin (2016) explored the role of selected tax variables including tax knowledge, tax compliance costs and tax deterrent measures on tax compliance in west malaysia. a group of 150 self-employed taxpayers was randomly selected. the data collection method included online questionnaire surveys and simple random sampling technique and was analysed through the help of the pearson correlation technique and multiple regression. the findings revealed that tax deterrence measures are significantly correlated with tax compliance whereas, on the contrary, tax knowledge and tax compliance costs are not significantly correlated with tax compliant behaviour among self-employed taxpayers in west malaysia. mukhtar et al. (2015) investigated the effect of selected tax compliance factors on government revenue mobilisation in somaliland. the selected tax compliance variables include tax knowledge, digitalisation of the tax collection system and tax audit. the target population was business owners in the gobonimo market, and the population was selected using the stratified random sampling technique. in addition, the study employed both primary and secondary data for which primary data was collected by baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 18 means of structured questionnaires while secondary data was collected from reliable secondary data sources. the study found that business owners in the gobonimo market lack the necessary knowledge to settle their tax liabilities which limits the government’s ability to mobilise tax revenue. the underlying factors included the inability of taxpayers to use the online tax filling system as well as limited information on the benefits of paying taxes. research methodology research approach a research approach provides a detailed overview of the steps and procedures the researcher plans to execute in the collection and analysis of data as well as interpretation of research outputs. in most cases, the research approach incorporates three components namely, philosophical world view, research methods and research design (grover 2015). haradhan (2017) notes that decisions on the research approach are usually based on the objective of the study, the researcher’s personal experience and audience of the study. this study employed a quantitative research approach. this includes collecting primary data through selfstructured questionnaires and analysing the data by means of inferential statistics. sampling strategy identifying and selecting the right sampling technique is crucial in survey research as this ultimately predicts the generalizability of the findings obtained in the study. although several sampling techniques exist, ranging from probability sampling to non-probability sampling, the most suitable sampling technique for our analysis is the simple probability sampling technique. under the simple probability sampling technique, participants in the population group are sampled by a random process, usually by a random number table or random number generator (taherdoost 2016). the target population consisted of south african permanent residents above the age of 18 years and who are registered for income tax with sars. data collection data collection refers to the steps undertaken by the researcher to collect and measure information about the variable(s) of interest (young 2016). this process enables the researcher to answer specified research questions, engage in hypothesis testing and analyse research outcomes. for the purposes of this study, the researchers made use of primary data collected by means of electronic surveys in the form of self-structured questionnaires. data analysis data analysis can be described as the process of systematically visualising information collected through quantitative or qualitative research instruments either to identify the characteristics of the variables in question, to explore the relationship between two or more variables or to measure the impact of one variable on the other (patel 2009). the data collected in this study was assessed statistically by means of descriptive analysis and inferential statistics. descriptive analysis descriptive analysis forms the basis of econometric modelling as it provides a summary of the type of data the researcher is dealing with. in general terms, descriptive statistics is the process of describing the main characteristics of a dataset which can either be a representation of either the sample of the study or population at large (sharma 2019). there are several factors which distinguish descriptive statistics from inferential statistics. for example, descriptive statistics, unlike inferential statistics, aim to summarize information about variables while inferential statistics on the other hand, aim to explain the association between two or more variables. in addition, while inferential statistics are based on probability theory, descriptive statistics are not. in other words, research findings cannot be inferred on the basis of descriptive statistics whereas, on the contrary, conclusions can be obtained from inferential statistics. pearson correlation test the pearson correlation test attempts to estimate the presence and strength of a linear relationship between two variables (mukaka 2012). the presence of a linear association between two variables is given by the probability value, usually at the 1 %, 5 % or 10 % interval levels. the strength of the linear relationship between two variables is given by the coefficient value. cohen (1988) notes that a coefficient value below 10% indicates that there is weak linear association between two concerned variables, while a coefficient value between 10 % and 30 % indicates that there is a moderate linear association between two concerned variables. any coefficient value above 50 % is indicative of a strong linear association between two concerned variables. the formula for calculating the correlation coefficient for any two continuous baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 19 variables is given by: 𝑟 = ∑ (𝑥𝑖 − 𝑥)(𝑦𝑖 − 𝑦)𝑛 𝑖=1 √[∑ (𝑥𝑖 − �̅�)2𝑛 𝑖=1 ][∑ (𝑦𝑖 − �̅�)2𝑛 𝑖=1 ] (1) where 𝑥𝑖 and 𝑦𝑖 are values of x and y for the 𝑖𝑡ℎ individual. mukaka (2012) states that one of the conditions of using the pearson correlation test is that the variables should be normally distributed. binary logistic regression the logistic regression model has been widely used by researchers (e.g., peng et al. 2002; mertler and vannatta 2005) to obtain odds ratio in the face of categorical variables. the technique aims to model the chance of an outcome based on individual characteristics (peng et al. 2002). for example, the technique can be used to estimate whether males succeed in college, whether female adults are most likely to get pregnant or whether male teenagers are most likely to engage in illegal activities or not. the technique works in a similar fashion as the linear multiple regression technique except that the outcome variable is binary (sperandei 2013). one advantage of using the logistic regression model over other econometric techniques is that it allows the researcher to use continuous independent variables with ease and it can handle more than two independent variables simultaneously. a simple logistic regression model can be expressed mathematically as follows: 𝑙𝑜𝑔 ( 𝜇 1 − 𝜇 ) = 𝛼1𝑋1 + 𝛼2𝑋2+. . . 𝛼𝑛𝑋𝑛 (2) where 𝜇 indicates the possibility of consequences for each event, 𝛼𝑖 represents the slope coefficients associated with the reference group and the 𝑋𝑖 independent variables. unlike discriminant analysis, the logistic regression model does not assume that the explanatory variables are normally distributed. this technique is best situated for our analysis given that the response variable is binary. model specification our estimation model will be guided by earlier studies with a few modifications to put it in line with the objectives of the study. the following model will be estimated: 𝑡𝑐 = 𝛽0 + 𝛽𝑖𝛿𝑡 + 𝛼𝑖𝜗𝑡 + 휀𝑡 (3) where 𝑡𝑐 is a binary tax compliance variable taking a value of 1 for compliance and 0 for noncompliance, 𝛽0 is the constant term, 𝛿𝑡 is a vector for individual level characteristics of the respondent: age, sex, education, employment status, wealth and ethnicity. 𝜗𝑡 is a vector for variables that captures different aspects of tax knowledge including tax calculation knowledge, knowledge on tax reporting, knowledge on methods of payment and knowledge on tax penalties. 휀𝑡 is the idiosyncratic error term. table 1. description of variables gender categorised as male and female age ranging between 18 – 65 years education no education, matric, undergraduate, postgraduate employment sector private sector, public sector, informal sector employment status employed, unemployed, self-employed reason for evasion unfair tax system, taxes are too high, government steals money, i know i won’t get caught difficulty of evasion very easy, easy, neither easy nor difficult, difficult, very difficult benefit taxpayer’s benefit from public services tax morale if the quality of public services inspires the taxpayer trade off the trade-off between higher tax rates and quality public services or lower tax rates and poor quality of services social influence if the perceived compliance of others influences the taxpayer corruption perception on the level of corruption trust in government perception on the trust in government state of democracy perception on the state of democracy tax liable for this entails knowledge on which type of the taxes the taxpayer is liable for tax return calculation this entails knowledge on how to calculate tax returns payment methods this entails knowledge on different payment methods that can be used to settle tax liabilities tax penalty this entails knowledge on the different tax penalties applicable to the taxpayers source: author baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 20 ethical considerations fleming and zegwaard (2018) note that when dealing with fundamental ethical research that involves human participation, it is important to consider the ethical dilemmas that might play out. the study and data collection instruments were designed in such a way that they take into consideration the possibility of harm to participants. in addition, the study did not pose any psychological or physical harm to participants. further to this, the study carried no potential for legal or social harm since no information about a participant’s behaviour to illegal activities or substance abuse was collected. the study made use of anonymous self-structured questionnaires and surveys wherein participants were not required to give out any information pertaining their identify such as their full names, identity numbers, contact numbers, email or physical addresses. findings and discussions this section presents findings from the econometric tests performed including descriptive analysis, correlation analysis and binary logit regression. the results are likewise discussed in line with the objectives and hypothesis of the study. descriptive analysis the descriptive analysis was performed to examine the individual characteristics of the variables including the average, standard deviation, range and skewness. the findings are provided in table 2 below. table 2. descriptive statistics n minimum maximum mean std. deviation skewness statistic statistic statistic statistic statistic statistic std. error tax compliance 150 0 1 0.33 0.471 0.747 0.198 gender 150 1 3 1.65 0.493 -0.449 0.198 education 150 1 4 2.66 0.566 -1.222 0.198 age 150 2 7 2.87 0.771 1.824 0.198 employ status 150 1 3 2.15 0.488 0.360 0.198 employ sector 150 2 4 2.67 0.807 0.664 0.198 tax liable for 150 1 2 1.81 0.391 -1.625 0.198 tax return calculation 150 1 2 1.58 0.495 -0.327 0.198 payment method 150 1 2 1.59 0.494 -0.356 0.198 tax penalties 150 1 2 1.63 0.485 -0.529 0.198 source: author’s computations the findings in table 2 reveal that the variables have a mean value ranging between 0 and 3. also, the findings indicate that the standard deviation across all variables is below unity. the combination of lower mean values and standard deviation implies that the data points are closer to the mean. nonetheless, the skewness of the data is more diversified. several variables such as gender, education, tax return calculation, tax penalties and knowledge on payment methods were found to be skewed to the left while other including tax compliance, age, employment status and sector were found to be skewed to the right. the total number of observations was 150 across all variables. correlation analysis the next step involved examining the association between the dependent variable and explanatory variables by means of the pearson correlation test. the statistical significance of the association was also examined. the results are provided in table 3 below. baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 21 table 3. pearson correlation variables tax compliance gender educated age employ status employ sector tax liable tax return payment method tax penalty tax compliance corr 1 -0.020 0.193** -0.052 -0.044 -0.124 0.334** 0.074 0.152* 0.214** sig. 0.405 0.009 0.265 0.295 0.066 0.000 0.183 0.032 0.004 gender corr -0.020 1 -0.049 0.005 0.143* 0.062 0.004 -0.117 -0.163* -0.078 sig. 0.405 0.277 0.476 0.041 0.225 0.482 0.077 0.023 0.171 education corr 0.193** -0.049 1 0.131 -0.175* -0.157* -0.016 0.014 0.094 0.023 sig. 0.009 0.277 0.054 0.016 0.028 0.424 0.433 0.126 0.388 age corr -0.052 0.005 0.131 1 -0.162* -0.056 -0.146* 0.036 0.161* 0.124 sig. 0.265 0.476 0.054 0.024 0.247 0.038 0.333 0.024 0.065 employ status corr -0.044 0.143* -0.175* -0.162* 1 0.742** 0.046 -0.093 -0.236** -0.012 sig. 0.295 0.041 0.016 0.024 0.000 0.290 0.129 0.002 0.443 employ sector corr -0.124 0.062 -0.157* -0.056 0.742** 1 0.103 -0.043 -0.105 -0.005 sig. 0.066 0.225 0.028 0.247 0.000 0.104 0.299 0.100 0.476 tax liable for corr 0.334** 0.004 -0.016 -0.146* 0.046 0.103 1 0.355** 0.223** 0.232** sig. 0.000 0.482 0.424 0.038 0.290 0.104 0.000 0.003 0.002 tax return calculation corr 0.074 -0.117 0.014 0.036 -0.093 -0.043 0.355** 1 0.465** 0.321** sig. 0.183 0.077 0.433 0.333 0.129 0.299 0.000 0.000 0.000 payment method corr 0.152* -0.163* 0.094 0.161* -0.236** -0.105 0.223** 0.465** 1 0.472** sig. 0.032 0.023 0.126 0.024 0.002 0.100 0.003 0.000 0.000 tax penalties corr 0.214** -0.078 0.023 0.124 -0.012 -0.005 0.232** 0.321** 0.472** 1 sig. 0.004 0.171 0.388 0.065 0.443 0.476 0.002 0.000 0.000 source: author’s computations note: ** correlation is significant at the 0.01 level (1-tailed), * correlation is significant at the 0.05 level (1tailed). the findings from the pearson correlation test revealed a positive association between the level of educational attainment and tax compliance in south africa. this implies that educated citizens are most likely to be tax compliant given that they are well informed about the different regulations and institutions governing taxes. furthermore, a positive association was revealed between tax compliance and knowledge about tax types. individuals who have knowledge about the different tax types and the taxes they are liable for are most likely to be tax compliant, holding other factors constant. also, the tax payment method and tax penalties were found to be positively correlated with tax compliance and the association was found to be statistically significant. the next subsection provides findings form the binary logistic regression model. binary logistic regression the binary logistic regression model was estimated to analyse the impact of tax knowledge on tax compliance in south africa. the findings are provided in table 4 below. the variable that captures knowledge on tax types was dropped given that it was perfectly correlated with the dependent variable. table 4. model 1 b s.e. wald df sig. exp(b) tax return calculation -0.092 0.417 0.048 1 0.826 0.913 tax payment method 0.337 0.449 0.564 1 0.453 1.401 tax penalties 0.894 0.444 4.059 1 0.044** 2.444 constant -2.616 0.843 9.632 1 0.002* 0.073 omnibus tests of model coefficients (0.051) hosmer and lemeshow test sig (0.972) source: author’s computations, note: *, ** denote significance at the 1% and 5% level, respectively baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 22 the findings revealed that knowledge on calculation of tax return is negatively associated with higher probabilities of tax compliance. this implies that the inability of taxpayers to calculate and file tax returns on their own induces a non-compliant behaviour. the finding however was found to be statistically insignificant. on the contrary, knowledge on tax payment methods was found to be associated with higher probabilities of tax compliance albeit the association was likewise found to be statistically insignificant in explaining variations in taxpayers attitudes. similarly, knowledge on tax penalties was found to be associated with higher probabilities of tax compliance and the association was found to be statistically significant. this implies that, to some extent, tax penalties in south africa have been enforced effectively and are thus sufficient to induce taxpayers attitudes. table 5. model 2 b s.e. wald df sig. exp(b) tax return calculation -0.117 0.429 0.075 1 0.785 0.889 tax payment method 0.371 0.486 0.582 1 0.445 1.449 tax penalties 1.000 0.474 4.455 1 0.035** 2.718 gender -0.012 0.386 0.001 1 0.975 0.988 education 0.975 0.422 5.330 1 0.021** 2.650 age -0.388 0.308 1.579 1 0.209 0.679 employment status 0.689 0.673 1.046 1 0.306 1.991 employment sector -0.565 0.367 2.369 1 0.124 0.568 constant -4.318 2.046 4.454 1 0.035** 0.013 omnibus tests of model coefficients (0.017) hosmer and lemeshow test sig (0.953) source: author’s computations note: ** denotes significance at the 5% level table 5 presents findings from model 2 which incorporates demographic factors. the findings revealed that selected demographic factors including gender, age and employment sector are negatively associated with higher probabilities of tax compliance although the association was found to be statistically insignificant. in contrast, the level of educational attainment was found to be positively associated with higher probabilities of tax compliance. this implies that educated citizens are most likely to behave in a tax compliant manner given the amount of knowledge they have on tax policies and regulation. table 6. model 3 b s.e. wald df sig. exp(b) tax return calculation -0.057 0.466 0.015 1 0.902 0.944 payment method 0.748 0.502 2.220 1 0.136 2.113 tax penalties 0.825 0.493 2.807 1 0.094*** 2.282 social influence -0.673 0.445 2.284 1 0.131 0.510 benefit 0.209 0.455 0.211 1 0.646 1.233 tax morale 0.574 0.567 1.024 1 0.312 1.775 trade off -0.200 0.402 0.248 1 0.619 0.819 constant -2.996 1.500 3.990 1 0.046 0.050 omnibus tests of model coefficients (0.063) hosmer and lemeshow test sig (0.353) source: author’s computations note: *** denotes significance at the 10% level perceptions on government including public services that taxpayers benefit from as well as perceptions on the quality of public services, were incorporated into the initial tax compliance model. the findings indicated that all the variables that capture perceptions on government are statistically insignificant in explaining variations in taxpayers attitudes. the last point of analysis involved the incorporation of political legitimacy into the initial tax compliance model. the findings are provided in baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 23 table 7 below. table 7. model 4 b s.e. wald df sig. exp(b) tax return calculation -0.376 0.467 0.646 1 0.421 0.687 tax payment knowledge 0.409 0.488 0.704 1 0.402 1.505 tax penalty knowledge 0.978 0.479 4.167 1 0.041** 2.660 percept on corruption 0.695 1.040 0.446 1 0.504 2.004 trust in government -0.361 1.178 0.094 1 0.760 0.697 state of democracy 0.799 0.452 3.135 1 0.077*** 2.224 constant -3.734 1.472 6.436 1 0.011* 0.024 omnibus tests of model coefficients (.102) hosmer and lemeshow test sig (.695) source: author’s computations, note: *,**,*** denote significance at the 1%, 5% and 10% level the political legitimacy model revealed that the state of democracy is positively associated with higher probabilities of tax compliance in south africa. this is because, in a democratic state such as south africa, taxpayers believe that they have the authority to deliberate and decide legislation as well as to choose governing officials or parties. as such, they are more likely to be tax compliant given that they have vested their trust in the ruling party. the state of corruption was found to be positively associated with higher probabilities of tax compliance while on the contrary, the state of trust in government was found to be negatively associated with higher probabilities of tax compliance. this indicates that citizens are dissatisfied with the government’s conduct and are thus less willing to settle their tax liabilities. conclusion and recommendations this study was aimed at estimating the influence of tax knowledge and tax complexity on tax compliance in south africa. the data collection process involved self-structured questionnaires. the data was analysed by means of descriptive analysis and inferential statistics. the study made use of simple probability sampling to obtain the sample population and size. the target population consisted of 300 south african taxpayers although only 151 participants completed the survey. the findings from the pearson correlation test indicated that knowledge on tax types, payment method and tax penalties is positively correlated with tax compliance in south africa. furthermore, results from the binary logistic model revealed that knowledge on tax penalties is positively associated with higher probabilities of tax compliance and this associated was found to be statistically significant. this implies that tax penalties are well in force and effectively communicated to taxpayers to induce a tax compliant behaviour. in contrast, knowledge on tax calculation was found to be negatively associated with probabilities of higher tax compliance although the association was found to be statistically insignificant. demographic factors such as the level of educational attainment as well as the state of democracy, were found to play a significant role in inducing tax compliance. given these findings, the study recommends the expansion of programmes that educate taxpayers about the different tax types they are liable for, the importance of filling tax returns on time as well as payment facilities available to avoid penalties. various methods of communication can be utilised, including through educational television programmes and local radio stations, billboards, and telephonic communication. more attention can be channelled towards specific career groups such as artists and professional athletes, who in most instances, lack the knowledge on tax types they are liable for. references bornman, m. and p. ramutumbu. 2019. a tax compliance risk profile of guesthouse owners in soweto, south africa. southern african journal of entrepreneurship and small business management, 11(1), pp.a181. https://doi.org/10.4102/sajesbm.v11i1.181. cechovsky, n. 2018. ‘the importance of tax knowledge for tax compliance: a study on the tax literacy of vocational business students’. in c. nägele and b. e. 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i. t. ondabu. 2015. relationship between tax compliance barriers and government’s revenue generation at gobonimo market in somaliland. international journal of business management and economic research, 6(6), pp.380-399 musimenta, d. 2020. knowledge requirements, tax complexity, compliance costs and tax compliance in uganda. cogent business & management, 7(1), pp. 1-19, doi: 10.1080/23311975.2020.1812220. naape, b., and n. mahonye. 2021. does south africa’s tax effort fall short of its tax capacity? development southern africa, 38(5), pp. 750-768, doi: 10.1080/0376835x.2021.1883418. oladipupo, a. o. and u. obazee. 2016 tax knowledge, penalties and tax compliance in small and medium scale enterprises in nigeria. ibusiness, 8(1), pp. 1-9. http://dx.doi.org/10.4236/ib.2016.81001. palil, m. r. 2005. does tax knowledge matter in self-assessment system? evidence from the malaysian tax administration. journal of american academy of business, 6(2), pp.80 – 85. palil, m. r. (2010). tax knowledge and tax compliance determinants in self-assessment system in malaysia. phd thesis, the university of birmingham. pau, c., а. sawyer, and a. maples. 2007. complexity of new zealand’s tax laws: an empirical study. australian tax forum, 22(1), pp.59–92. peng, c. y. j., k. l. lee, and g. m. ingersoll. 2002. an introduction to logistic regression analysis and reporting. the journal of educational research, 96(1), pp. 3-14. pigou, a. c. 1954. some aspects of the welfare state. diogenes, 7(6) richardson, m., and a. sawyer. 2001. a taxonomy of the tax compliance literature: further findings, problems and prospects. australian tax forum, vol. 16, no. 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(2016). ‘questionnaires and surveys’. in zhu hua, ed. research methods in intercultural communication: a practical guide. oxford: wiley, pp. 165-180. appendix 36% 63% 1% male female prefer not to say gender 4% 26% 69% 1% education 28% 60% 9% 0% 1% 1% 18 24 25 34 35 44 45 54 55 64 65 or older age 5% 74% 21% self employed employed unemployed employment status baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 26 10% 49% 1% 40% unfair tax system taxes are too high i know i won't get caught the government steals tax money reasons for evasion 3% 7% 46% 28% 15% very easy easy neither easy nor difficult difficult very difficult ease of evasion 19% 81% no yes knowledge on tax types 42% 58% no yes tax calculation knowledge 41% 59% no yes tax payment knowledge 37% 63% no yes knowledge on tax penalties baneng naape / finance, accounting and business analysis, volume 5, issue 1, 2023 27 level of corruption trust in government state of democracy yes 5% 4% 27% no 95% 96% 73% 95% 96% 73% do the following encourage you to be tax compliant 63% 37% no yes social influence 42 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 the phenomenon of government audit delay in indonesia stela petrisia1*, evada dewata2, yevi dwitayanti3, hadi jauhari4 department of accounting, sriwijaya state polytechnic, indonesia1 department of accounting, sriwijaya state polytechnic, indonesia2 department of accounting, sriwijaya state polytechnic, indonesia3 department of business administration, sriwijaya state polytechnic, indonesia4 *corresponding author info articles abstract history article: submitted 9 november 2023 revised 1 april 2024 accepted 30 april 2024 purpose: to find out whether government size, audit findings, and the number of accounting entities have an effect on audit delay in the context of regional financial reporting. design/methodology/approach: this type of quantitative research uses multiple regression analysis techniques with the help of the e-views version 12 application with sample observations of 102 provincial governments in indonesia in the period 2019-2021. findings: the results of the study reveal that government size has a negative influence on audit delay. different things happen to audit findings and the number of accounting entities which have a positive effect on audit delay. government size, audit findings, and the number of accounting entities jointly influence the audit delay of provincial governments in indonesia. practical implications: this research can provide implications that provincial governments in indonesia can be more timely in preparing financial reports so that audit delays can be minimized. the average audit delay phenomenon that occurs in provincial governments in indonesia exceeds the applicable statutory limits, with the most occurring in 2019, namely 163 days. originality/value: this research examines factors within the scope of the government sector that influence the phenomenon of audit delay in financial reports. paper type: research paper keywords: audit delay, government size, audit findings, the number of accounting entities jel: h11 address correspondence: email: stela16petrisia@gmail.com1 evada78@polsri.ac.id2 yevi_dwitayanti@polsri.ac.id3 ha.di@polsri.ac.id4 mailto:%20stela16petrisia@gmail.com1 mailto:evada78@polsri.ac.id2 petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 43 introduction creating financial statements for local governments is carried out in order to obtain information that contributes to information users to assess accountability and make decisions. government regulation no. 71 of 2010, government financial statements must meet the qualitative characteristics of information ranging from information relevance, reliable, comparable, and understandable. the relevance of financial information is that it can determine user decisions in order to evaluate financial events, predict, and confirm or correct evaluation results. the significance of relevance can state that all government financial information must be statements in a timely manner. timeliness is required in terms of presenting quality government financial statements information. based on recognized provisions, the relevance of financial statements for local governments published in a timely manner can be predicted from the time required by the government in preparing until the submission of the financial statements for local governments to the financial audit agency (bpk) and the duration of the bpk's examination (wicaksono and sutaryo 2017). the publication of the audit statements requires time to examine the local government financial statements. this examination process then stretches the duration from the end date of the fiscal year to the issuance of the audit statements (lhp) which is called audit delay. the delay in submitting unaudited financial statements to financial audit agency (bpk) exceeds the predetermined duration, which is three months after the end of the fiscal year. this left two months for the statements to be audited by the financial audit agency (bpk). in the end, the maximum time is five months or about 150 days to produce audited financial statements after the end of the fiscal year. the occurrence of audit delay that exceeds the threshold provisions will result in financial statements that experience delays in publication. delayed publication indicates that there is an error in the statements, so that the completion of the audit takes a lot of time. even though various regulations have been established regarding the timing of financial statements, in reality there are still several local governments that exceed the threshold of the time provisions submission of financial statements. the following can be seen in figure 1 the average level audit delay per year as follows: source: audit statements (lhp) figure 1. average level of audit delay in indonesia audit delay in 2019 has the highest average value of around 163 days. in 2019 the maluku provincial government achieved the goal of an audit delay exceeding the threshold by 209 days. in the meantime, the west kalimantan provincial government encountered the quickest audit delay, lasting 66 days.based on the 2019 audit statements, there were 25 provincial governments that experienced an increase in audit delay. the occurrence of the audit delay phenomenon results in delays in local government financial statements which can indicate problems with the financial statements. delays in finance statements of the local government statements can result in loss of capacity in decision making (sutaryo and lase 2015). audit delay can be influenced by many factors. much has been found before about the effect of audit delay in the private sector, while in the government sector it is still relatively small. the variables that have implications for audit delay in the public sector include government size. rather than having a small total amount of assets, a government with a large asset size also has a large number of transactions. this causes financial management to be more complicated, thus spending a lot of time in preparing and examining government finances. audit findings are problems identified by the auditor during the examination that are contained in the audit statements. auditor checks are carried out by identifying the necessary corrective actions against 142 142 163 135 134 0 20 40 60 80 100 120 140 160 180 2017 2018 2019 2020 2021 petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 44 deviations from recognized standards and regulations (karlina et al. 2018). the results of the examination of audit findings require time for longer discussions before the results are presented in the audit statements, including discussions within the audit team as well as the findings of the inspection team and related governments. government accounting standard (sap) no. 71 of 2010 states that the accounting entity is a government unit, either a budget user or goods that are obliged in terms of preparing financial statements that will eventually be consolidated. the more the number of accounting entities in local governments, the easier it will be to prepare lkpd. the local government combines the financial statements of several the number of accounting entities it owns without having to record transactions one by one that occur in the use of the budget in its local government. in the end, it can be seen how many the number of accounting entities, namely opd in each local government, will make it easier to prepare financial statements. based on previous research, inconsistencies in research results are still obtained, such as (wafa and nugraeni 2018) stating that government size affects audit delay positively, because governments with large total assets have more transactions, causing the length of financial statements. in line with (erniza et al. 2015) the size of the government composition will further prolong the examination and the possibility of audit delay is greater. in contrast to vertiarani and halim (2019) the size of the government negatively affects audit delay, because a large government can be consistent in timeliness rather than the small total assets owned by the government. (wibowo and purwaningsih 2019) states that there is a negative influence between government size and audit delay, because a large government is supported by good management and will reduce the duration of financial statements. other research by vanesha and syofyan (2020), marni et al. (2019), bakar and arza (2019), and karlina et al. (2018), their research shows that government size cannot affect audit delay, because a large government does not mean that it can be used as an excuse for delays in submitting financial statements. gemilang and pramita (2021) state that government size cannot affect audit delay. the number of transactions will not necessarily affect the examination and the size of the total assets of the local government has the same pressure in the context of timely financial statements, so it cannot be used as a reference for how long the audit delay is. research by gemilang and pramita (2021), wulandari (2021), (wafa and nugraeni (2018) and karlina et al. (2018) mention that audit findings can affect audit delay. there is a confirmation process in advance regarding the audit findings that are communicated to the auditee to obtain a response to these findings. in the end, it takes longer in the examination which results in longer audit delay. in contrast to rahmawati and verawaty (2021) which resulted in a negative effect, because the increasing number of audit findings encourages the government to follow up on audit findings so that the number of findings in the future period can be minimized and strive for well-prepared financial statements. (ramadhani et al. 2022) audit findings that could not affect audit delay, because the large number of audit findings in local governments does not necessarily increase the length of audit time. research (hardini and sukirman 2016) concluded that the number of accounting entities have a negative effect on audit delay, because the number of accounting entities indicates a higher quality management system to facilitate the preparation of financial statements. research by tullah et al. (2019) the number of accounting entities cannot affect audit delay. the small number of accounting entities creates a large workload which results in a lack of effectiveness in preparing financial statements. meanwhile, the size of an entity will require a larger audit scope as well, resulting in a longer audit process. the difference in research from the previous one is in observations consisting of 34 provincial governments in indonesia for the 2019-2021 fiscal year and using e-views 12. in addition, the use of research theory, where vanesha and syofyan (2020) and marni et al. (2019) used the value of information theory and research by frasti et al. (2017) which used the upper echelons theory. meanwhile, the use of grand theory in this study is agency theory and compliance theory. this study also does not discuss audit delay in corporate financial statements, but in the public or government sector. the timeliness of financial statements must be considered because it affects the quality of lkpd. in agencies, audited lkpds provide information to the public and other parties on how important it is to provide financial statements in a timely manner (asni et al. 2017). several other considerations for conducting research related to audit delay are the phenomenon of audit delay in the supreme audit agency (bpk) of the provincial government in indonesia which still experiences untimeliness in issuing lhp on lkpd. this research is expected so that the provincial government in indonesia can be more relevant and ensure timeliness in presenting financial statements, where in the end the inspection process can be accelerated and will not cause delays in the publication of local government financial statements. literature review and hypothesis development agency theory the theory that describes the relationship that exists between principals (shareholders) and agents petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 45 (management) is defined as agency theory, jensen and meckling (1976). the governance relationship in this theory is experienced between the public (principal) and the government (agent). information asymmetry is an agency problem that is often encountered. the public depends on the information provided by government, and the government is aware of the circumstances that it faces. in the public sector concept, the government, which acts as an agent, obtains a mandate for governance from the public which is useful in achieving public welfare and submitting local government financial statements. therefore, the timeliness of financial statements is carried out as a criterion of the government's responsibility as an agent to the public as a principal. this is done so that government financial information will be useful and right on target. compliance theory local government engagement complies with applicable laws and regulations. compliance theory in the number of accounting entities takes responsibility for financial statements as an absolute matter on disclosing information based on laws and regulations and government accounting standards. audit delay will be faster if the accounting entity is compliant in submitting financial statements. this theory moves to be more compliant with applicable regulations, in line with the government's obligation to statements its finances in a timely manner. in the context of the theory of local government compliance in complying with the provisions of laws and regulations so that the audit process can minimize the number of audit findings on financial statements and can indicate good financial management. audit delay the length of time required in completing the lkpd audit is more appropriately called audit delay, which is calculated from the number of days during the issuance of the audit statements on the lkpd starting from the closing date of the fiscal year, namely december until the auditor's statements is stated. the management of the entity as the object of examination is responsible according to bpk regulation number 1 of 2017, which is to prepare and submit in a timely manner its financial statements. starting three months after the end of the fiscal year must submit financial statements in accordance with the provisions to bpk which will then go through the inspection process. at the end of the examination process, it is an obligation for bpk to provide lhp on lkpd to be submitted to dprd with a deadline of two months after receipt of lkpd. audit delay is measured based on the number of days starting from the submission of the lkpd until the availability of the lhp by the bpk to the dpr, which shows that the audit delay deadline does not exceed may 31 (karlina et al. 2018). the process of examining financial statements takes time so that it can result in audit delay. audit delay results in low quality financial information which can indicate the level of inconsistency of decisions based on published information. audit delay that exceeds the statutory deadline will have an impact on the delay in the publication of local government financial statements, this signaling an error in the financial statements for local governments, so that the time span required for examination will be longer. size of government the size of the government is said to resemble a picture where the government is classified in to the category of a large government or a small government based on the amount of government assets as a measurement scale used. the total assets of each government are shown in the financial statements for local governments on the balance sheet for the fiscal year in question. small government, a large government's capacity is determined by its assets. the large size of local tends to be encouraged by good management, so the audit delay will be smaller (wibowo and purwaningsih 2019). local governments with a large number of assets will relatively help government operations because large-scale local governments are required to disclose their financial statements in a timely manner. carried out due to the substantial obligation that comes with managing the government's vast asset base, which includes financial statements. several studies have been conducted, especially in the government sector, not only the number of assets used as a measurement of the size of a government. the size of the government can be determined by the amount of regional income, area, population density, apbd value, number of employees, and productivity levels. natural logarithm of the total assets (ln total assets), which is the result of converting the owned assets into an amount, is used to determine the size of the government. assets owned by the government are as a support in providing optimal services for the community. audit findings the data collected, processed and tested in the context of conducting audits are provided analytically based on elements of recognition of usefulness for interested parties. audit findings contain problems encountered while on-site by the auditor, by identifying deviations that require acceptable corrective action (karlina et al. 2018).the inspection findings imply the existence of conformity or nonpetrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 46 conformity of the implementation process. the discrepancy is in the form of problems with the objective evidence of the audit provisions in investigating the accuracy of the discovery of violated audit criteria and determining recommendations for corrective action. the audit findings contained in the audit statements on the financial statements for local governments consist of findings on weaknesses in the internal control system and findings on non-compliance with statutory provisions. competence is better able to increase effectiveness and reduce misstatements in financial statements. this encourages more reliance on the resilience of the government's internal control system and reduces substantive testing time at the end of the period thereby accelerating the issuance of audit statements (nouraldeen 2020). the number of accounting entities pp no. 71 of 2010 concerning sap states that the number of accounting entities consists of government units that use regional/state budgets and goods that have the obligation to carry out accounting and preparation activities. financial statements, which will later be consolidated to the statements entity. the local government is used as one of the statements entity parties with the regional apparatus organization (opd) acting as the accounting entity. the number of accounting entities, the more complexity between the number of accounting entities in carrying out the cooperation process and the difficulty in controlling financial statements by each agency. quality resources accompanied by adequate facilities can improve the management system, so that the lkpd preparation process will be better and can reduce the audit delay that occurs (afriani and satyawan 2023). this research used the number of accounting entities contained in the audit report on the lkpd in each local government. the effect of government size on audit delay the size of the government can be described in asset ownership, the high total assets, the size of the government can also be assumed. according to jensen and meckling (1976), agency theory has a basic principle in the partnership between principal and agent as a "nexus of contract". the amount of assets owned by the government leads to timely statements. governments with large total assets can be consistent in timeliness rather than small total assets owned by the government (vertiarani and halim 2019). the size of a large local government is driven by good management, so the audit delay will be smaller (wibowo and purwaningsih 2019). so it can be concluded that the size of the local government will minimize audit delay. from this description, the first hypothesis proposal is: h1: government size has a negative effect on audit delay the effect of audit findings on audit delay audit findings can be contained in the lhp of each local government. the number of audit findings is related to compliance theory. local governments are required to comply with laws and regulations. the compliance theory of local governments in complying with the provisions of laws and regulations so that the audit process can minimize the number of audit findings on financial statements and can indicate good financial management. low audit findings can reduce the time for rebuttal or response to the findings that occur, thus the audit process takes place faster and the audit delay will be low. efforts made by local governments in order to serve the community well, including by minimizing the occurrence of misstatements in the preparation of financial statements that are not reasonable as well as possible (aprila et al. 2019). compliance theory encourages the government to strive to publish financial statements in a timely manner. clarification, responses, and answers to audit findings are obtained after communicating them to the auditee. therefore, the large number of audit findings causes the length of the examination and audit delay to be more (gemilang and pramita 2021). the large number of audit findings requires additional time in order to discuss the findings both within the bpk and with the local authorities before being determined in the audit statements. the relatively larger number of audit findings can cause time to respond to these findings, so that the audit delay will also increase (wulandari 2021). so it can be said that the magnitude of audit findings can also increase audit delay. based on this description, the second hypothesis proposal reads: h2: audit findings have a positive effect on audit delay the effect of the number of accounting entities on audit delay compliance theory in the number of accounting entities is absolute in accounting for financial statements as financial statements compliance in accordance with laws and regulations and government accounting standards. audit delay will be faster if the accounting entity is compliant in submitting financial statements. the number of accounting entities can make it difficult for the government to control the process of cooperation and coordination of financial statements of accounting entities. many accounting entities can increase the merging process and statements duration, so that it will increase audit delay (itsniawan and suranta 2015). so the conclusion that can be drawn is that the more petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 47 accounting entities, the more audit delay. from this explanation, the third hypothesis proposal reads: h3: the number of accounting entities has a positive effect on audit delay the effect of government size, audit findings, and the number of accounting entities on audit delay large government size is encouraged by good management, so audit delay will be smaller (wibowo and purwaningsih 2019). many audit findings require a relatively long duration in the examination, in the end the audit delay becomes more. the number of accounting entities can increase the merging process and statements duration, resulting in more audit delay. the conclusion that can be drawn is that government size, audit findings and the number of accounting entities can simultaneously affect audit delay. from this description, the fourth hypothesis proposal reads: h4: government size, audit findings and the number of accounting entities have an effect on audit delay methods the type of quantitative data used is panel data. the data comes from the audit statements on the annual financial of provincial local governments in indonesia in the 2019-2021 fiscal year. the population used in the study consisted of provinces in indonesia for the 2019-2021 fiscal year. the purposive sampling technique is used as a sample technique on certain conditions. the provisions referred to in the sampling is the audit statements (lhp) which is available at the bpk for the 20192021 period. the following are the details of the sample selection in table 1 as follows: table 1. sample selection details election requirements total provincial government in indonesia 38 government that has not yet provided lhp on lkpd in 2019-2021 (4) number of samples 34 number of years of research 3 number of observation units 102 source: data processed (2023) operational definition of variables audit delay is an independent variable in this study. generally speaking, the benchmark for determining the length of time needed to complete the annual audit statements is to count the days from the end of the fiscal year to the bpk's release of the audit statements. therefore, audit delay is measured based on the number of days after the december 31 book closing date. if the number of days of audit delay is high, it indicates a delay in financial statements. in contrast, audit delay with a low number of days means the timeliness of financial statements. the formula for calculating audit delay is as follows: ad = date of issuance of the lhp − date of end of fiscal year (1) government size is an assessment of its size or size based on various measurement scales, such as total assets, regional income, population, area, and the value of a government's apbd. in this study, the size of the government is based on the measurement can be seen as follows: upd = ln(total assets) (2) the amount of audit findings, weaknesses in the internal control system as well as non-compliance with legal requirements that are included in the audit statements is used to evaluate the audit findings. bpk auditors statements audit findings that have a direct and material effect on weaknesses or noncompliance with the presentation of financial statements. the number of accounting entities must prepare financial statements as budget and goods users which are ultimately combined in the statements entity. the number of accounting entities can be seen from the lhp on lkpd which contains the number of accounting entities examined. data analysis technique the use of data analysis techniques in this study raised multiple regression analysis models with the petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 48 formula: ad = α + β1up + β2ta + β3ea + ε (3) where: ad audit delay α constant up size of government ta audit findings ea the number of accounting entities β1, β2, β3 coefficient ε error term descriptive statistical analysis table 2. descriptive statistical testing results y_ad x1_up x2_ta x3_ea mean 144.0098 30.26765 16.65686 43.17647 median 143.0000 30.10500 16.00000 41.00000 maximum 209.0000 33.93000 43.00000 96.00000 minimum 66.00000 28.48000 5.000000 27.00000 std. dev. 22.39718 0.963192 7.641076 12.36845 observations 102 102 102 102 source: data processed (2023) the average audit delay (ad) deviation is 22.39718 from the mean value of 144.0098. the lowest audit delay value is 66 and the highest is 209. the government size variable (up) has an average deviation of 0.963192 from 30.26765. the lowest value of government size is 28.48 and the highest value is 33.93. in contrast to the average deviation of audit findings data (ta) of 7.641076 from the average value of 16.65686. the average deviation of accounting entity (ea) data is 12.36845 from the average value of 43.17647 with the lowest value of accounting entity of 27 and the highest value of 96. panel data regression model selection results chow test determine which model is better between the common effect model (cem) and the fixed effect model (fem) by conducting a chow test. table 3. chow test results effects test statistic d.f. prob. cross-section f 1.763392 (33,65) 0.0258 cross-section chi-square 65.214342 33 0.0007 source: data processed (2023) the results of model selection with the chow test display a cross-section chi-square probability value of 0.0007<0.05, so that in the chow test the best model use is the fixed effect model. hausman test the hausman test was conducted to determine the best model between the random effect model (rem) with fixed effect model (fem). table 4. hausman test results test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 9.755455 3 0.0208 source: data processed (2023) the results of the hausman test model selection display a probability value of 0.0208<0.05, petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 49 so that the suitable model is the fixed effect model. the use of fixed has been selected twice, namely in the chow test and hausman test. while common and random were not selected at all. it can be concluded from the three models (cem, fem, and rem), the best use of the model is the fixed effect model (fem) in interpreting panel data regression in this study. panel data regression analysis based on the fixed effect model, the results of multiple linear regression with this model can be displayed as follows table 5. multiple linear regression results variable coefficient std. error t-statistic prob. c 1936.092 809.008 2.393 0.019 x1_up -61.522 26.553 -2.317 0.024 x2_ta 1.597 0.423 3.779 0.003 x3_ea 1.006 0.390 2.578 0.012 adjusted r-squared 0.379 = 37.9% f-statistic 2.711 prob (f-statistic) 0.000 source: data processed, 2023 based on table 5, the coefficient value of variable x1 is -61.522, the coefficient value of variable x2 i s 1.597, the coefficient value of variable x3 i s 1.006 and the constant value is 1936.092. then the results of the equation are obtained as follows: y = 1936.092 − 61.522 x1 + 1.597 x2 + 1.006 x3 (4) the beta coefficient for government size (x1) is -61.522. this means that a 1% increase in x1 will result in a corresponding decrease in audit delay (y). the ratio of audit findings (x2) to audit delay (y) is 1.59. if x2 increases by 1%, audit delay (y) will also increase. the accounting entity variable (x3) has a value of 1.006. a 1% increase in x3 is accompanied by a 100.6% increase in audit delay (y). hypothesis testing test t (partial) government size (x1) with a t count of -2.317 with significance 0.024<0.05. so that it states that government size (x1) has a negative and significant effect on audit delay, so hypothesis 1 is accepted. partial test results show that audit findings (x2) are 3.779 and a significance value of 0.003<0.05, this audit findings have a positive and significant effect on audit delay so that hypothesis 2 is accepted. the t value of the accounting entity variable (x3) is 2.578 and the significance value is 0.012<0.05. this states that the number of accounting entities partially affect audit delay and hypothesis 3 is accepted. f test (simultaneous) based on the f value of 2.711, the f count > f table is 2.711>2.697 and a significance of 0.0002<0.05. so that the size of the government, audit findings and the number of accounting entities simultaneously have an influence on audit delay. in this study hypothesis 4 is accepted. test coefficient of determination (adjusted r-square) the results in the equation obtained adjusted r-squared of 0.379, meaning that 37.9% of the factors of examination detention can be explained by the independent variables conforming of government size, audit findings and the number of accounting entities. the rest is explained by other variables, videlicet 62.1% which are not included in this disquisition model. result and discussion effect of government size on audit delay petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 50 partially, variables can affect audit delay with the results of t count by -2.317 with a significance of 0.024<0.05, then h1 is accepted. it was found that there is an unidirectional relationship between government size and audit delay, where the small size of the government causes the audit delay to be greater. large governments can be consistent in timeliness than small governments (azaharia and sulardi 2021). good control helps large governments minimize errors in the financial statement presentation. furthermore, there is a lot of pressure on the government's financial performance, therefore management is trying to publish financial statements more quickly, which will shorten the audit's delay. research by vertiarani and halim (2019), wibowo and purwaningsih (2019) and siregar (2015) which states that government size has a negative effect on audit delay is in line with the results of this study. however, the results of this study contradict research conducted by wafa and nugraeni (2018) where government size has a positive effect on audit delay. in contrast, gemilang and pramita (2021) and fuad and wiradinata (2020) concluded that government size has no effect on audit delay, because it is not a benchmark for how long the audit delay is and will not affect the examination of financial statements. the effect of audit findings on audit delay partial results show that audit findings are 3.779>1.984 with a significance of 0.003<0.05, thus audit findings have a positive and significant effect on audit delay so that h2 is accepted. there is a positive or unidirectional relationship between audit findings and audit delay, where the greater the audit findings, the greater the audit delay. usually audit findings contain problems encountered during the examination. the number of audit findings requires a longer duration before it is determined, either within the audit team or with the local authority in responding to the findings. so that it takes longer in the examination and can cause the longer the audit delay. the non-compliance of public sector entities (auditees) in responding to the auditor's questions, providing the required paperwork, answering audit findings promptly, or replying to audit engagement letters causes the length of audit delay (cohen and leventis 2013; fully and david 2020). this is in line with the research of gemilang and pramita (2021), wulandari (2021), wafa and nugraeni (2018) and karlina et al. (2018) that audit findings have an effect on audit delay. this study does not support ramadhani et al. (2022) and frasti et al. (2017) that audit findings are not significant to audit delay, most likely due to measurements based on the number of cases in audit findings only. the effect of accounting entity on audit delay the accounting entity has a positive effect on audit delay, by showing a significance of 0.0122<0.05, and t count > t-table, namely 2.578480>1.984467, so h3 is accepted. the link to a large accounting entity will prolong the audit delay. audit delay is faster if the accounting entity is compliant in submitting financial statements. if there are many accounting entities, it can make it difficult for local governments to control the financial statements of each accounting entity with the statements coordination process. the number of accounting entities can increase the merger process, so that it will increase the audit delay. this study does not support research conducted previously by (tullah et al. 2019) saying audit delay has no effect on the number of accounting entities. the effect of government size, audit findings, and the number of accounting entities on audit delay based on the test results by conducting the f-test, the probability amount (fstatistic) is 0.0002<0.05, and f count is 2.711>2.697 so it can be concluded that the variables of government size, audit findings and the number of accounting entities simultaneously have an influence on the audit delay of the provincial government in indonesia. this supports the theory described by vertiarani and halim (2019). governments that are capacitated with large total assets will be more consistent in their statements timeliness, in contrast to governments with smaller asset scales that inform finance. the substantial total assets show this effect, which reduces the audit delay. the findings of wibowo and purwaningsih's (2019) study are further supported by the results of a parallel test for variables relating to local government size that also influence audit delay. the present study is consistent with the research conducted by wafa and nugraeni (2018), which determined that the combination of the local government's size, audit findings, and audit opinion significantly influences the duration of the audit. conclusion large government size has good management that can shorten the number of days that government financial statements audits take to complete. the quantity of audit findings is acquired by a longer discussion time to give responses and the examination process. local governments with a large number of the number of accounting entities need to carry out a process of cooperation and coordination between the number of accounting entities, resulting in a longer statements time. petrisia, dewata, dwitayanti, jauhari / finance, accounting and business analysis, volume 6, issue 1, 2024 51 this study has limitations, namely that researchers do not use all levels of local government in indonesia, such as provinces, districts and cities in order to have more representative research results. in addition, there is a coefficient of determination of only 37.9% between government size, audit findings, and the number of accounting entities on audit delay. this suggests adding other variables in suppressing audit delay, analogous as adjudicator quality which allows for farther effective results as a factor that is also told by audit delay. reference afriani, b. r., and m. d. satyawan. 2023. analisis faktor-faktor yang mempengaruhi audit delay pada laporan keuangan pemerintah daerah 2016-2018 analysis of factors affecting audit delay in local government financial statement in indonesia. jurnal akuntansi akunesa, 11(2): 195-204. aprila, n., fachruzzaman, f., and d. pratiwi. 2019. pengaruh opini audit dan kualitas auditor terhadap audit delay pada pemerintah kabupaten/kota di indonesia. jurnal akuntansi, 7(3): 75–86. https://doi.org/10.33369/j.akuntansi.7.3.75-86. asni, n., mas’ud, a., dharmawaty, t., and i. irawati. 2017. the influence of educational background, auditor tenure, and auditor professional proficiency to audit delay. international journal of management and applied science (ijmas), 3: 124-128. http://iraj.in. azaharia, a. y. p., and sulardi. 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issue 2, 2022 http://faba.bg a women empowerment model in improving food security of agribusiness communities lili marliyah*, eko heri widiastuti, agus sutriyanto, marhaeni dwi satyarini, dwi asih k handayani universitas ivet, indonesia info articles abstract keywords: empowerment, social capital, agribusiness the purpose of this study was to describe women's accessibility in agribusiness in increasing food security and the effect of social capital conditions. the novelty in this research was the existence of a social capital-based women's empowerment model in the agribusiness community. the research method used was qualitative and the sampling technique used was purposive sampling. structured interviews, observations, and documentation were used in data collection. internal and eternal validity of the data was carried out with triangulation techniques. the results showed that the women's empowerment model was still partial, not yet integrated or developed in social institutions. the level of accessibility of women in the agribusiness sector stands out in several activities, specifically plant care, harvesting, post-harvest activities to marketing activities. women's accessibility to resources and income were relatively balanced. women were more dominant in the management of the use of production costs and the necessities of life. women's access to using leisure time was relatively low, due to the dominance of domestic activities. the social capital structure of the agribusiness community in the bandungan area was classified as outward-looking, judging from the elements of trust, norms, and networks between individuals. the size of the social capital or the social capital of the community in the bandungan area was relatively large. the recommended model for empowering women in the agribusiness field was the emphasis on strengthening and revitalizing institutions or social capital that grew and developed in economic, social, cultural, religious, and political fields that created a conducive, participatory, and market institutional coordination system. friendly competitions and the ideal conditions that were formed were expected to increase the accessibility of women in the agribusiness community, in terms of activities, resources, income, leadership, and leisure time. *address correspondence: e-mail: lilimarliyah@rocketmail.com finance, accounting and business analysis 4 (2) 2022 149 introduction the topography of the bandungnan area is in the form of lowlands to mountains, with varying altitudes, namely 547 m–1,190 m above sea level, with incepticol soil type which means the soil is fertile and has the potential for agricultural development, in fact almost 60% of the land is designated for agricultural business. in addition, the availability of labor is quite high, because the productive age population reaches 55.56%, and almost 60% of the population is farmers (undip, 2003). therefore this research is important to do to improve the agribusiness system which is not yet highly competitive, reduce institutional distortions, improve the bargaining position of farmers, reduce redundancy in agricultural trading systems and improve the low level of farmer share (lili marliyah, 1999). especially at the present time, the government of central java alone imported 60,000 tons of rice from vietnam (suara merdeka, 16 march 2007). this shows that the community's food security is still relatively unstable. policies for the development of agricultural systems that are in accordance with the socio-economic anatomy of the formed community, support the creation of resilient agricultural development to achieve food security. according to arifin (2004), efforts to strengthen the basis of agriculture and other natural resources are aimed at achieving food security and food sovereignty. demands for efficiency and the development of agribusiness with high added value will color future agricultural development (arifin, 2004). rosdiana (2015) said that it is very possible to empower and improve the quality of human resources, especially village women, through various activities to empower them economically, socially and psychologically. empowering farming communities in the bandungan area, which is a center for horticultural production (vegetables, fruit and flowers) as true entrepreneurship, is an undeniable necessity in supporting community food security. the empowerment of farming communities through various agribusiness system development programs based on historical studies is mostly carried out sectorally with a group approach, so far it has not yielded the expected results. efforts to develop agribusiness systems, such as the production center area development program, market infrastructure development program (sta-jetis) and cold storage development program, farmer group strengthening development program, are still experiencing many obstacles. in the development of a horticultural agribusiness system, it is hoped that the simultaneous approach will increase the food security of the community. empowerment is also an effort to develop community satisfaction to be able to participate actively in the development process (khairunnisa, 2017). empowerment is an important strategy in increasing the role and opportunities of women in their lives. this is in accordance with the dual role of women which is divided into two, namely the domestic role, which is in charge of managing the household and the role of the public who work outside the home to work to meet the needs of family life (burger & moore, 1996). in agricultural development, empowering women farmers is a transformation process that is more applicable to be able to capture various changes in the allocation of economic resources, the distribution of benefits and accumulation in an effort to increase production, family income and the adoption and spread of technology (roosganda elizabeth, 2007). in line with zaharani (2016) and irawan (2015) who said one effort is needed in empowering women, namely through the creative economy in dealing with competitive rivalry level. empowerment can be interpreted as a process towards being empowered or a process to gain power/strength/ability and/ or the process of giving power or strength/ability from those who have power to those who are less or not yet empowered. process activities refer to a series of actions or steps that are carried out systematically chronologically reflecting the phasing of efforts to transform people who are less or less empowered towards empowerment. (ambar teguh s, 2004). in the concept of community empowerment, winami (1998) suggests that the essence of empowerment includes three things, namely: enabling, strengthening potential or power, and creating self-sufficiency both individually and in community groups. indicators of successful implementation of the empowerment program include: (1) reducing the number of poor people; (2) the development of efforts to increase income by the poor by utilizing available resources; (3) increased public awareness of efforts to improve the welfare of poor families in their environment; (4) increased independence of the group which is marked by the growing productive business of members and groups; (5) community capacity building and income distribution. (sumodiningrat, 1999). methods in accordance with the problems and overall objectives of the research stages as many as 2 stages (2 years), namely using a case study design, especially descriptive case studies, the approach used is a qualitative approach with the gender frame work analysis (gfa) model. the purpose of this approach finance, accounting and business analysis 4 (2) 2022 150 is to combine methods qualitative approach developed towards gender analysis to obtain comprehensive, systematic and in-depth information from the cases studied. the use of a qualitative approach is considered appropriate to be able to reveal the role of women in various fields of development, in this case the field of agricultural/agribusiness development and social capital structure in the bandungan area. on in this early stage of research activity (2nd year), the research approach used is a qualitative approach, while the type of research is an intensive survey. the research location is set at six villages that are included in the bandungan area, namely bandungan village, jetis village, candi village, kenteng village and duren village and banyukuning village. according to the regional regulation of semarang regency number 3 of 2002, this area is designated as an integrated economic development area (kapet). these development efforts really need accurate data on community potential, especially data on women's accessibility and data on social capital potential owned by the bandungan area community. in this research activity, members of the population were all farmers living in the bandungan area, consisting of 5 villages, totaling 34,053 people. from the number of research populations that have been determined above, a number of key informants/key informants were determined as many as 54 people who were determined by the sampling technique, namely purposive sampling, namely the sample with the aim. in qualitative research, the researcher is the research instrument. the data triangulation step can be carried out by checking the degree of trust in the research results with several data collection techniques. in addition to checking the degree of trust with several data sources using the same method. data analysis using structural analysis method. besides being able to reveal meanings or symbols in society, this analysis can also reveal the logic behind these meanings (burhan bungin, 2006). results and discussion social capital of the agribusiness community in the bandungan region the parameters for measuring capital include three parameters for measuring social capital, namely: 1) trust, namely the hope that grows in a society in the form of honest, regular behavior and cooperation based on shared norms. communities that have good social capital are characterized by the existence of strong social institutions , so that capital will create a harmonious social life; 2) the norms include understandings, values, hopes and goals shared by a group of people. sources of norms come from religion, moral guidelines and secular standards, for example a professional code of ethics that was born and developed based on past processes to support a climate of cooperation; 3) networks of cooperation between humans are a form of dynamic infrastructure of social capital, which facilitates communication and interaction so that trust grows and strengthens cooperation. the network is used to build strong relationships both formal and informal. strengthening the feeling of cooperation and the benefits of participation of its members is built through close social networks. the results of the study in measuring the variable social capital of the bandungan area community using the parameters or indicators above, seen from the parameter of belief that the structure of social capital is quite good, considering that existing social institutions or institutions are supported by social norms that apply in society both social institutions engaged in the economic, social and religious fields. judging from the sector, the majority of social institutions whose number and frequency of activities are often carried out are institutions in the religious field, then the economic sector, social institutions engaged in the field of arts and culture and the last group is social institutions engaged in politics. this is in line with nadhir (2021) stating that there are several activities in empowerment such as mentoring (becoming a mediator, especially accompanying members from those who don't know to know and from those who can't to can) and social welfare efforts (activities that are sustainable and independently serve the community). . if from the element of social capital, namely the element of norms, the more implementable structure is the number of social institutions engaged in the economic sector, then the religious and socio-cultural fields, then the political or government sector. the structure of social capital is seen from the networks of cooperation between people, so the structure of social capital can be stratified according to fields, namely: the first rank is the socio-cultural field, the economic field, the religious field and the last is the political field. agribusiness community women's empowerment model in the bandungan area based on social capital. from the results of collecting and processing research data from various data sources, it shows that efforts to empower women in research locations have not been able to improve food security, but can be carried out synergistically between relevant institutions authorized to carry out empowerment efforts. in this case efforts to empower women must touch various aspects and not only be incidental in nature finance, accounting and business analysis 4 (2) 2022 151 through social activities that are commonly carried out by women only, for example pkk groups and arisan, but empower and improve all activities, especially those that can increase social capital indicators. owned by the community. this is because women are village assets to play a role in increasing general welfare, as well as the international development paradigm which demands the involvement of women in development (muhammad, 2022). as bagus (2022) says that women's empowerment activities involve a process of increasing and development power/ ability both knowledge, skill to power which can influence his life better and independent. in this case the empowerment effort utilizes the potential of social capital owned by the community in the bandungan area. the condition of the social capital of the community has quite a huge potential if it is utilized optimally in the effort to empower women which includes social institutions in various fields, namely the fields of religion, economics, social culture and politics. conclusion the change in the agricultural system from traditional to agaribusiness has resulted in a commercialization process in the bandungan area. changes in land structure caused by the influx of investors, workers and tourists have caused changes in the socio-economic life of the community. there is harmony between the agribusiness structure and the socio-economic structure of the community. judging from the dimensions of the agribusiness structure, it describes an agribusiness structure that is small holder (small farmer) and seen from the socio-economic dimension it is relatively homogeneous, and there is no striking social layering/stratification. the social capital structure of the agribusiness community in the bandungan area tends to be included in the outward looking type, or briddging social capital, that is, social capital is usually modern in nature from a grouping, association group or community, but the positive impact of the existing type of social capital has not worked out as idealized. judging from the elements of trust, norms and networks between individuals, the size of social capital or social capital of the people in the bandungan area has relatively large or strong potential. the results of the study show that the influence of social capital on the accessibility of women who has been running is still relatively small, integrated in every existing and developing activity in social institutions or institutions in the bandungan community. of the four areas of social capital that were validated for improvement in research activities, it turned out that only two (2) areas could be successfully developed in an effort to empower women, namely the economic field and the socio-cultural field. a model of women's empowerment in agribusiness with emphasis on strengthening and revitalizing institutions or social capital that grows and develops in the economic and socio-cultural fields can be recommended so as to create a conducive institutional coordination system that has the opportunity to increase women's accessibility. the ideal conditions that are formed are expected to increase the accessibility of women in the field of agribusiness both in terms of activities or activities, resources, income, leadership and free time, so that women's empowerment and food security can be increased strengthening/revitalization between institutions or social institutions needs to be improved especially in providing opportunities for women to increase their accessibility in various fields of life, so that the positive impact of social capital is achieved. the need to increase women's empowerment in the agribusiness society in the bandungan area, especially in the fields of religion and politics. references nice, n. (2022). women empowerment victims of domestic violence (kdrt) by the office of women's empowerment, child protection and family planning (dp3ap2kb) batu city. reforms , 12 (1), 145151. burger, jco, & moore, ha (1996). sociology of women . jakarta: rineka. bustanul arifin. 2004. economic analysis indonesian agriculture, kompas, jakarta. collado, gerronimo, m. 1978 . an agribusiness erawork for developing agricultural economics. eko heri widiastuti. 2003 . ecological changes as a result of changes in the agricultural system in the bandungan area 1900 1980, report on the education of the semarang veterans teachers' training college. geertz, clifford. 1983 . agricultural involution, process of change and political fighting, bhatara, jakarta. irawan, a. 2015. creative economy as a solution for the welfare of society in increasing the level of the economy. in the national seminar on economics and business (sneb) (pp. 1-5). kano, hiroyoshi . 1990 . performance of anatomy of socio-economic layering of farming communities finance, accounting and business analysis 4 (2) 2022 152 in an east jawea ndesa, ugm press, yogyakarta. kano, hiroyoshi. 1996 . under the smoke of a sugar factory, village communities on the coast of java throughout the 20th century, ugm press, yogyakarta. khairuunnisa, i. 2017. women's economic empowerment in the regions. scientific journal of economics (journal of accounting, tax and management) , 6 (11), 81-91. lili marliyah. 1999 . factors influencing farmers' decisions in choosing commercial cut flower trading institutions for non-orchid commercial cut flower production centers in bandung regency, master's thesis, padjadjaran university, bandung. muhammad, fm 2022. empowering women in life skill development by utilizing local potential in semuli raya village, abung district, north lampung regency (doctoral dissertation, raden intan state islamic university lampung). nadhir, m. (2021). empower people poor through self-help groups public. in angewandte chemie international edition, 6(11). rosdiana, w. 2015. analysis of village women's empowerment (study in bulutengger village, sekaran district, lamongan regency). jkmp (journal of public policy and management) , 3 (2), 117-132. saptana, et al. 2004 . institutional integration of the kass forum and agropolitan programs in the context of developing sumatran vegetable agribusiness, center for agricultural socio-economic research and development, bogor sudaryanto, t and prayogo . 1993 . conception and scope of agribusiness, seminar materials, center for research and development of agricultural socio-economics, bogor sudaryanto, t and effendi p. 1993 . agribusiness in perspective: conception, scope of analysis and summary of discussion results in the discussion of proceedings. zaharaini, z. 2016. empowering women through the creative economy. visionary & strategic journal , 5 (1). 127 finance, accounting and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 implementation of the money follow program concept in performancebased budgeting in indonesia siti karlina1* , ira novianty2 government management accounting, politeknik negeri bandung, bandung, indonesia1 government management accounting, politeknik negeri bandung, bandung, indonesia2 * corresponding author info articles abstract history article: submitted 5 july 2023 revised 4 december 2023 accepted 9 december 2023 purpose: the purpose of this study is to discuss how the implementation of the money follow program concept in performance-based budgeting in local governments in indonesia. design/methodology/approach: this study uses descriptive research by using questionnaires in data collection. the questionnaires were distributed to regional work units as an element of implementing local government policies in indonesia. findings: the results showed that the implementation of the money follow program concept in the implementation of performance-based budgeting in local governments in indonesia has been well implemented. however, there are still obstacles, such as coordination between regional apparatus work units that is still difficult, the system used in planning and budgeting that is not yet adequate, and the limited budget owned by local governments to finance priority programs and activities. practical implication: the implication of this research for local governments in indonesia is to provide input to evaluate the system used in planning and budgeting and improve coordination between regional apparatuses so that the implementation of the money follow program concept can run smoothly. originality/value: this research examines the implementation of the money follow program concept, which is a new concept in performancebased planning and budgeting in local governments in indonesia. paper type: research paper. keywords: money follow program, performance-based budgeting. jel: h60, h61, h70. * address correspondence: e-mail : siti.karlina.amp19@polban.ac.id1 ira.novianty@polban.ac.id 2 mailto:siti.karlina.amp19@polban.ac.id mailto:ira.novianty@polban.ac.id https://orcid.org/0009-0001-2403-2600 https://orcid.org/0000-0001-7913-6071 siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 128 introduction regional autonomy is the right and authority of regions to manage their government affairs in the community's interests (christia and ispriyarso 2019; sufianto 2020). since regional autonomy, local governments have been given the authority to regulate and manage their government affairs, including regional financial management. the existence of budgeting reforms marked by the issuance of a package of laws in state finance, namely law number no. 17 of 2003 about on state finance, law number no. 1 of 2004 on state treasury, and law number no. 15 of 2004 on examination of state financial management and responsibility has consequences for the application of performance-based budgeting in regional financial management (wardani and silvia 2021). performance-based budgeting is an approach to budgeting that focuses on the relationship between inputs, outputs, and outcomes as well as the effectiveness and efficiency of each program and activity implementation (halim and iqbal 2019; borce and nikolov 2015). the purpose of implementing performance-based budgeting is to create effectiveness and efficiency in government spending (borce and nikolov 2015). since its inception, the concept used in performance-based budgeting is the money-follow function, which focuses on budget allocation based on the functions of each unit in government agencies (ningsih, wirahadi, and fontanella 2018). however, over time, the facts on the ground show that there are still weaknesses in the concept, including stalled projects at the central level and the local government level due to a mismatch between planning and budgeting as well as spending that exceeds the set budget and political influence on budgeting (mauro, cinquini, and pianezzi 2019). therefore, since 2014 the central government has made a policy to change the concept of performance-based budgeting from money follow function to money follow the program (ningsih, wirahadi, and fontanella 2018). the money follow program concept is a planning and budgeting concept that focuses on budget allocations based on the weight of programs/activities following the objectives set by the government and has a direct impact on society (ningsih, wirahadi, and fontanella 2018; suwanda et al. 2021). this concept only began to be applied at the ministry/agency/local government level starting in 2016. it was further stipulated in government regulation no. 17 of 2017 on synchronize the national development planning and budgeting process. of the 38 provinces in indonesia, the west java provincial government is one of the local governments implementing the money follow program concept in its planning and budgeting since 2018. based on data from the budget realization report of provincial governments throughout indonesia in 2022, the west java provincial government ranks first in the realization of the highest local government budget expenditure, which is 88.00 %, and the fifth highest local government budget revenue realization, which is 63.40 %. therefore, based on the phenomena described above, the purpose of this study is to discuss how the implementation of the money follow program concept in performance-based budgeting in local governments in indonesia. methods the type of research used in this research is descriptive research. the location of this research is the west java provincial government. the population in this study was 36 local government work unit of west java province. the sampling technique used is saturated sampling or census because all the population is used as a sample, so the total sample in this study is 36 local government work unit of west java province. the type of data used in this study is subject data (self-report data) in the form of opinions from respondents in each local government work unit of west java province. the data source used in this study is primary data from distributing questionnaires given to 36 local government work unit of west java province. respondents in this study were local government work unit heads, planning/budgeting sections, and finance/accounting sections of each local government work unit in west java province. the data analysis used in this research is descriptive. descriptive analysis in this study explains the choice of respondents' answers from a scale of 1 to 5, which reflects the level of answers from very bad to very good. descriptive calculations are carried out by looking at the mode and calculating the average answer from local government work unit employees of west java province. the following is the formula used to calculate the average. average = ∑ 𝑥 𝑛 (1) where: x : total observed value n : number of observations after calculating the average results of respondents' answers, the scale range is calculated to see the siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 129 tendency of respondents' answers to each statement which can be calculated using the following formula. scale range = (highest score − lowest score) many classes = (5 − 1) 5 = 0,8 (2) based on the scale range, an interpretation is made based on the predetermined scale. table 1 is a scale interpretation based on the scale range according to sugiyono (2021). table 1. scale range range interpretation 1.00 – 1.79 strongly disagree / very unfavorable 1.80 – 2.59 disagree / not good 2.60 – 3.39 less agree / less good 3.40 – 4.19 agree / good 4.20 – 5.00 strongly agree / very good source: sugiyono (2021). results and discussions assessment of the money follow program concept the money follow program variable has three dimensions: thematic-holistic, integrative, and spatial (christy, walewangko, and wauran 2019). these three dimensions are divided into eight indicators. the following summarises respondents' answers to the indicators in each dimension of the money-follow program variable. thematic-holistic based on annex i presidential regulation no. 79 of 2017 on the 2018 government work plan, the thematic-holistic dimension relates to priority themes in preparing the government work plan for the central and local governments. the thematic-holistic dimension has four indicators which can be seen in table 2 thematic-holistic dimension questionnaire results are below. table 2. thematic-holistic dimension questionnaire results indicator 1 2 3 4 5 average interpretation mfp1 detailed planning of priority programs and activities each year. 0% 1.3% 11.7% 42.9% 44.2% 4.299 strongly agree mfp2 changes in programs and activities every year. 2.6% 9.1% 19.5% 27.3% 41.6% 3.961 agree mfp3 always follow the changes in the local government budget. 0% 1.3% 6.5% 14.3% 77.9% 4.688 agree mfp4 integration between local government work units in planning priority programs and activities. 0% 1.3% 15.6% 15.6% 67.5% 4.494 strongly agree thematic-holistic dimension assessment 4.361 very good source: primary data processed (2023). based on the results of the distribution of questionnaires which can be seen in table 2 above, 44.2 % of respondents strongly agreed that there are already details related to priority programs and activities that will be implemented next year. this is because the programs and activities to be implemented are already siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 130 contained in the long term development plan and regional medium term development plan documents of west java province. however, in planning and budgeting there are still obstacles, namely the limited budget for programs and activities, so each local government work unit must find other alternatives so that these limitations do not reduce the quality of the implementation of each program and activity. in addition, the budget proposed by each local government work unit sometimes differs significantly from the amount approved by the west java provincial government. a total of 41.6 % of respondents, with an average of 3.961 agreed that the programs and activities planned by each local government work unit in west java province had changed every year. these changes are conditional, for example due to the covid-19 pandemic, adjusting activities and schedules for implementing activities, shifting, refocusing, and adding to the budget. a total of 77.9% of respondents with an average of 4.688 agreed that they followed the changes in the local government budget according to instructions from the west java provincial government. for example, in 2022, there were changes in the local government budget, namely for regional revenue from rp31.54 trillions to rp32.10 trillions (an increase of 1.78%); regional expenditure from rp31.5 trillions to rp33.98 trillions (an increase of 7.79%); financing receipts from rp742.37 billions to rp2.66 trillions (an increase of rp1.92 trillions); and financing expenditure from rp757.54 billions to rp782.84 billions (an increase of rp25.3 billions). the change in the financing revenue budget is due to the remaining over calculation of the previous year's budget based on the audit results from audit board of the republic of indonesia. meanwhile, the changes in financing expenditures are allocated to meet the needs of the west java governor election reserve fund in 2023 and the additional allocation of working capital to provincial enterprises. however, there are still obstacles in the system used in the local government budget changes, namely local government information system. when changes are made, sometimes local government information system errors are due to the large number of accesses each local government work unit makes. in addition, the components listed in local government information system are incomplete, especially those in capital expenditure. when there is a previous rotation, each local government work unit must update the accounts in local government information system again by coordinating with local government finance and asset office. a total of 66.2 % of respondents with an average of 4.473 strongly agreed that they coordinate with other local government work units in planning programs and activities that will be implemented over the next year. the coordination was carried out at the west java province local government work unit forum. the purpose of the local government work unit forum is to align the programs and activities of each local government work unit with the proposed programs and activities from the musrenbang governementwide work plans in west java province. the existence of coordination between local government work units in planning and budgeting can encourage the creation of a collaboration between local government work units in the success of the juara program through the team of teams. integrative based on annex i presidential regulation no. 79 of 2017 on the 2018 government work plan, the integrative dimension relates to the resources used to implement priority programs and activities. the integrative dimension has two indicators that can be seen in table 3 below. table 3. integrative dimension questionnaire results indicator 1 2 3 4 5 average interpretation mfp5 integration between local government work units in the implementation of priority programs and activities. 0% 0% 14.3% 29.9% 55.8% 4.416 agree mfp6 integration of funding sources for the implementation of priority programs and activities. 0% 0% 2.6% 24.7% 72.7% 4.701 strongly agree integrative dimension assessment 4.559 strongly agree source: primary data processed (2023). based on table 3 above, 55.8 % of respondents with an average of 4.416 agreed that they coordinated with other local government work units in implementing priority programs and activities. coordination here is specifically carried out between the west java provincial local government work unit and the west java provincial bappeda as the regional apparatus tasked with carrying out government affairs in the planning, siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 131 controlling, and evaluating regional development in west java province. however, there are still obstacles in this coordination related to the time and busyness of each local government work unit with their internal affairs. each program and activity carried out by the local government work unit of west java province has minimum standards of service as a guideline for determining the type of essential services and quality of services in providing services to the community. based on the west java provincial regional government implementation report, there are still problems in the implementation of these minimum service standards, namely not optimal community access to education because there are still sub-districts that do not have public schools, there are still districts/cities that have not reported in the event of a disaster or outbreak, the budget for disasters and outbreaks has not been allocated equally to all districts/cities, the available infrastructure, especially in the field of public works, is not all supportive, the budget refocusing in 2021 has caused the service budget for communities affected by the enforcement of local regulations and head local government regulation in west java province to be unavailable, and the covid-19 pandemic has caused restrictions on activities between regions, causing several programs and activities to be hampered. a total of 72.7% of respondents with an average of 4.701 also agreed that there is integration of funding sources in implementing priority programs and activities of west java province. the primary source of funding for implementing these programs and activities is the west java provincial local government budget. still, there is also funding from revenue sharing fund, general allocation fund, special allocation fund, and grants. in 2023, the west java provincial government received transfer funds from the central government in the form of revenue sharing fund amounting to rp2,198,044,917,000 originating from taxes and natural resources; general allocation fund of rp3,298,968,208,000; special allocation fund of rp5,033,727,259,000; and grants of rp7,752,000. the general allocation funds obtained were allocated to finance the payroll of government employees with employment agreement formations, village funding, education, health, and public works. the special allocation funds obtained by the west java provincial government are divided into physical special allocation fund and non-physical special allocation fund. physical special allocation funds are allocated to finance education, health, irrigation, agriculture, marine and fisheries, and small and medium industries. meanwhile, non-physical special allocation funds are allocated to finance operational assistance for education units, regional civil servant teacher allowances, operational assistance for organizing museums and cultural parks, health operational assistance, capacity building funds for cooperatives and micro and small businesses, funds for women and child protection services, and investment facility funds. grants obtained by the west java provincial government came from foreign loans that were granted amounting to rp7,752,000. the funds were used to finance the ipdmip (integrated participatory development and management of irrigation project) program. the ipdmip program is a west java provincial government program that aims to create a sustainable irrigation system. spatial based on annex i presidential regulation no. 79 of 2017 on the 2018 government work plan, the spatial dimension relates to the clarity of function and integration of the location of the implementation of priority programs and activities. the spatial dimension has two indicators that can be seen in table 4 below. table 4. spatial dimension questionnaire results indicator 1 2 3 4 5 average interpretation mfp7 there is a precise location of each program and activity planned by each local government work unit. 1.3% 0% 14.3% 40.3% 44.2% 4.260 strongly agree mfp8 there is a connection between the infrastructure needed in each program and activity. 0% 0% 16.9% 49.4% 33.8% 4.169 agree spatial dimension assessment 4.215 very good source: primary data processed (2023) the spatial dimension is one of the approaches used in preparing the 2018 governement-wide work plans (government work plan). the spatial dimension relates to the function of locations integrated with implementing priority programs and activities. based on table 4 above, 44.2% of respondents with an siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 132 average of 4.260, strongly agree that each program and activity planned by them is evident where the program and activity will be implemented. this is because all complicated matters relating to the programs and activities to be implemented, one of which is the location, must be included in the planning documents and adjusted to the locus of the activities to be implemented. for example, one of the activities in the west java provincial government program in the health sector is integrated health center and champion. during the planning of the 2023 program and activities, the west java provincial government has determined that the locus of the integrated health center and champion activities in 2023 is in eight districts/cities in west java, including cirebon city, pangandaran regency, cirebon regency, kuningan regency, banjar city, cianjur regency, sukabumi regency, and tasikmalaya city. a total of 49.4 % of respondents, with an average of 4.169, also agreed that the available infrastructure had supported implementing programs and activities to be carried out by the west java provincial local government work unit. this is related to the regional development priorities of west java province in 2023, one of which is the development of regional connectivity infrastructure and environmental management, as well as the development of tourism destinations and infrastructure. however, based on bps data in the west java in figures 2023 report, of the total length of west java roads, namely 28,030.12 km, there is 2,015.96 km of roads in a state of disrepair and 2,408.82 km of roads in a state of heavy damage. in addition, based on the west java province local government implementation report, land facilities that support the implementation of public works affairs are not all owned by the government, so it requires a sufficient budget and a long negotiation to free the land. based on the explanation above, the assessment of each local government work unit on the application of the money follow program concept in planning and budgeting can be seen in table 5 below. table 5. money follow program variable assessment no dimensions average interpretation 1 thematic-holistic 4.361 very good 2 integrative 4.559 very good 3 spatial 4.215 very good money follow program variable assessment 4.378 very good source: primary data processed (2023). table 5 above shows that the average assessment of the application of the money follow program concept is 4.378 or classified as very good criteria because the implementation of the money follow program concept has precise planning and coordination between local government work units in planning, budgeting, and implementing government priority programs/activities, and a precise location of each planned program/activity. however, the assessment results show a value that is not optimal at 5.00 because in the implementation of the money follow program concept, there are still obstacles, including the system used to compile/revise the local government budget; sometimes errors during working hours, there are still problems in implementing minimum standards of service, and not all infrastructure that supports the implementation of priority programs and activities is adequate. performance based budgeting performance-based budget variables have five indicators: budget planning, budget implementation, budget transparency and accountability, budget efficiency and effectiveness, and performance evaluation (anggraeni and saleh 2020; ginanjar et al. 2019). these five dimensions are divided into ten indicators. the following is a summary of respondents' answers to indicators in each dimension of the performancebased budget variable. budget planning budget planning is a stage to determine steps and strategies for achieving predetermined goals (triyono, kalangi, and alexander 2019). budget planning made by local governments needs to be adjusted to the strategic plan that has been determined because the strategic plan is the main guideline for achieving the objectives of local government organizations (adhi, hakim, and makmur 2019). respondents were asked to assess the budget planning carried out by their respective local government work units. the following is table 6 of the budget planning dimension questionnaire results. siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 133 table 6. budget planning dimension questionnaire results indicator 1 2 3 4 5 average interpretation pbb1 there is a link between budget planning and the west java province local government work unit strategic plan. 0% 0% 7.8% 57.1% 35.1% 4.273 strongly agree budget planning dimension assessment 4.273 very good source: primary data processed (2023) based on table 6 above, 57.1 % with an average of 4.273, strongly agreed that the budget plans made by each local government work unit were by the west java province local government work unit strategic plan document. this means that the budget planning made by each local government work unit has referred to the performance indicators set in the strategic plan of each local government work unit in west java province. the basis for making the local government work unit strategic plan is the west java provincial government's local government medium term. a clear example that there is a link between the budget planning carried out by each local government work unit and the west java province local government work unit strategic plan, namely, the initial draft of the west java province local government work unit strategic plan is an input in the formulation of the draft local government medium term which will later be discussed in the local government medium term musrenbang. later, after the local government medium term is stipulated by regional regulation, it will become the basis for the preparation of annual regional planning and budgeting carried out by each local government work unit in the local government. budget implementation budget implementation is the stage of implementing the budget by the predetermined budget planning (ginanjar et al. 2019). budget implementation carried out by local government work unit in local governments requires monitoring from local government work unit leaders so that budget implementation is by predetermined plans (ginanjar et al. 2019). the budget implementation dimension has two indicators which can be seen in table 7 below. table 7. budget implementation dimension questionnaire results indicator 1 2 3 4 5 average interpretation pbb2 direct supervision of budget execution. 0% 1.3% 6.5% 32.5% 59.7% 4.506 strongly agree pbb3 recording by the accounting department. 0% 0% 0% 16.9% 83.1% 4.831 strongly agree budget implementation dimension assessment 4.669 very good source: primary data processed (2023) based on table 7 above, 59.7 % of respondents, with an average of 4.506, strongly agreed that local government work unit leaders supervise budget implementation in each local government work unit. this can be proven by the evaluation carried out by local government work unit leaders on budget implementation by providing feedback in assessing whether the budget implementation has gone well. in addition, there are monev (monitoring and evaluation) activities and the application of public information disclosure to public bodies in west java province. this activity is a form of supervision and evaluation carried out by the governor of west java province as the regional head to all regional apparatus and provincial enterprises in west java province. starting in 2022, the monev activity will be carried out through e-monev (electronic monitoring and evaluation). e-monev aims to improve the services of the regional apparatus and regional budget office of west java province and the public information openness index ranking of west java province. however, the e-monev system also turns out to still have weaknesses, namely, the e-monev system experiencing errors during working hours which causes sub-sub activities that do not appear in the system. so, this impacts the monev report of an agency in that quarter that cannot reach the predetermined target. in addition to e-monev constraints, there are other obstacles faced by the majority of local government work units related to this monev activity, namely program and activity data in each section in local siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 134 government work unit or each technical implementing service unit (of the government) in local government work unit submitted late to the planning section. so that when an evaluation is to be carried out, the planning section has not yet obtained the data, which results in the evaluation activity being postponed. a total of 83.1 % of respondents, with an average of 4.831, strongly agreed that the accounting section in each local government work unit continuously records all transactions made into the local government information system. the recording is done after the local government work unit has finished carrying out the activity. the activity of inputting transactions into local government information system has been ordered by the ministry of home affairs of the republic of indonesia since 2019. still, it was only implemented within the west java provincial government in 2021. one of the achievements achieved by west java province in the implementation of local government information system is that west java province is used as a pilot model for implementing local government information system for other local governments in indonesia. in the implementation of local government information system, of course, there are still weaknesses, namely the local government information system website sometimes experiences errors during working hours, which can hamper the data input process for making local government work unit financial reports. budget transparency and accountability budget transparency and accountability are principles in performance-based budgeting (hermanto 2020). respondents were asked to assess budget transparency and accountability in each local government work unit in implementing performance-based budgeting. table 8 summarizes the respondents' answers to budget transparency and accountability dimensions. table 8. results of the budget transparency and accountability dimension questionnaire indicator 1 2 3 4 5 average interpretation pbb4 information disclosure to those who need it. 0% 2.6% 23.4% 41.6% 32.5% 4.039 agree pbb5 publication of local government work unit financial reports at least once every six months on the website of each local government work unit of west java province. 19.5% 6.5% 23.4% 26% 24.7% 3.229 disagree pbb6 financial report information is updated on the west java province local government work unit website at least once a year. 11.7% 5.2% 11.7% 31.2% 40.3% 3.831 agree pbb7 preparation of local government work unit financial reports every year. 0% 0% 1.3% 2.6% 96.1% 4.948 strongly agree assessment of budget transparency and accountability dimensions 4.012 good source: primary data processed (2023) based on table 8 above, 32.5 % of respondents, with an average of 4.039 agreed that the information provided by each local government work unit is easily accessible to those who need information. all information or data the public can know is available on one website developed by the west java provincial government, namely on the opendata.jabarprov.go.id page. however, sometimes the update of data or information on the website is late due to delays in submitting data or information from the relevant local government work unit to west java department of communication and information. a total of 24.7 % of respondents, with an average of 3.229 disagreed that each local government work unit publishes financial reports every six months on the local government work unit website or the west java provincial siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 135 government website. this is because the publication of financial reports is carried out once a year after an audit by indonesian audit board. the only published financial statements are the consolidated financial statements of the west java provincial government. the publication is on the west java portal website, https://jabarprov.go.id/, which the west java department of communication and information manages. a total of 40.3 % of respondents, with an average of 3.831 agreed that each local government work unit updated their financial report information. however, the update of financial report information carried out by each local government work unit is not directly through the website but by providing financial reports per month, quarterly, semesterly, and annually to local government finance and asset office west java province. this is because updating financial report data on the portal website is the task of west java department of communication and information after the annual financial statements of each local government work unit are combined into the consolidated financial statements of the west java provincial government and audited by audit board of the republic of indonesia. a total of 96.1 % of respondents, with an average of 4.948, strongly agreed that each local government work unit prepares financial reports every year. the result is regulated in government regulation no. 12 of 2019 article 10 on regional financial management which states that the head of local government work unit as a budget user, is responsible for preparing and submitting the financial reports that each local government work unit must prepare to include a budget realization report, balance sheet, operational report, statement of changes in equity, and notes to financial statements. these financial reports must be submitted to the governor of west java through head of local goverment financial management office no later than two months after the end of the fiscal year. budget efficiency and effectiveness budget efficiency and effectiveness emphasize that the budget available to local governments must be appropriately utilized to improve public welfare (halim 2007). respondents in each local government work unit of west java province were asked to assess budget efficiency and effectiveness. the following is presented in table 9, a summary of respondents' answers to budget efficiency and effectiveness in implementing performance-based budgeting in west java province. table 9. budget efficiency and effectiveness dimension questionnaire results indicator 1 2 3 4 5 average interpretation pbb8 there is a small budget allocation for each program and activity implementation. 0% 0% 9.1% 24.7% 66.2% 4.571 strongly agree pbb9 there are no programs and activities that are not implemented. 0% 1.3% 7.8% 53.2% 37.7% 4.273 strongly agree assessment of budget efficiency and effectiveness dimensions 4.422 very good source: primary data processed (2023) based on table 9 above, 66.2 % of respondents, with an average of 4.571, strongly agreed that each local government work unit utilizes the budget by the predetermined budget ceiling. all of the budgets are allocated to the implementation of programs and activities that each local government work unit has planned. however, based on the west java provincial local government implementation report, there are still budgets that have not all been absorbed, including rp12,944,356,990 for the development of the social welfare sector carried out by social department in west java rp1,986,867,069 for programs supporting regional government affairs and rp711,451,062 for programs to improve public peace and order carried out by civil service police unit in west java and rp286,192,564,329 for programs and activities at education department in west java. a total of 53.2 % of respondents with an average of 4.273 strongly agreed that the programs and activities planned annually by each local government work unit could be implemented. however, there are still obstacles in the implementation of these programs and activities, including the covid-19 pandemic, which has caused activity restrictions on the implementation of programs and activities and budget refocusing, which has caused budget allocations that were initially for the implementation of programs and activities to be focused first on buying vaccines, medicines, personal protective equipment for health workers, and other matters in the health sector related to handling the covid-19 pandemic. https://jabarprov.go.id/ siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 136 performance evaluation performance evaluation is one of the stages in performance-based budgeting. performance evaluation is carried out to determine strategies or efforts to achieve predetermined goals (ginanjar et al. 2019). the following table 10 is a summary of respondents' responses to the performance evaluation dimension. table 10. performance evaluation dimension questionnaire results indicator 1 2 3 4 5 average interpretation pbb10 periodic evaluation of the implementation of each program and activity. 0% 0% 7.8% 28.6% 63.6% 4.558 strongly agree performance evaluation dimension assessment 4.558 strongly agree source: primary data processed (2023) based on table 10 above, 63.6 % of respondents, with an average of 4.558, strongly agreed that the leaders of each local government work unit regularly evaluate the implementation of programs and activities carried out by each local government work unit. in general, the evaluation carried out by the local government work unit leader is carried out every month. the result is done to determine whether or not the strategies used in implementing these programs and activities are good. so that later, each local government work unit head can make policies if there are deviations in implementing these programs and activities. currently, evaluation activities in implementing programs and activities of each local government work unit have been carried out digitally through the e-monev (electronic monitoring and evaluation) website on the https://e-monevkijabar.com/ page. so that evaluation activities will be more accessible and more systematic because all conventional reports will be replaced and integrated with one reporting system, namely emonev. however, most local government work units complained that sometimes the e-monev application experienced errors during working hours, such as the non-appearance of several sub-activities, which could hinder the process of making monitoring and evaluation reports for each local government work unit. based on the explanation above, the assessment of the implementation of performance-based budgeting can be seen in table 11 below. table 11. performance-based budgeting variable assessment no dimensions average interpretation 1 budget planning 4.273 very good 2 budget implementation 4.669 very good 3 budget transparency and accountability 4.012 good 4 budget efficiency and effectiveness 4.422 very good 5 performance evaluation 4.558 very good performance-based budgeting variable assessment 4.387 very good source: primary data processed (2023) based on table 11 above, it can be seen that the average assessment of the application of performancebased budgeting is 4.387 or classified as very good because the budget plan made by each local government work unit follows the west java province local government work unit strategic plan document; the existence of monitoring and evaluation activities through the e-monev system; the recording of financial transactions in local government information system, updating data and information; the preparation of financial reports every month, quarter, semester, and year; and budget utilization following the predetermined budget ceiling. however, this assessment has not yet obtained an optimal score of 5.00 because there are still obstacles, such as the covid-19 pandemic, which causes restrictions on the implementation of programs and activities, budget refocusing, delays in submitting data or information from local government work unit to west java department of communication and information which causes delays in the process of updating data or information on the opendata.jabarprov.go.id website, there is still a budget that has not been absorbed, and the system used to conduct monitoring and evaluation sometimes errors during working hours. conclusion based on the research results on the implementation of the concept of money follow program in the implementation of performance-based budgeting in indonesia, the concept of money follow program in performance-based budgeting has been implemented well. however, there are still obstacles faced, including https://e-monevkijabar.com/ siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 137 budget constraints; coordination between local government work units in implementing priority programs and activities; infrastructure supporting the implementation of programs and activities is not adequate; the system used to compile/revise the local government budget and monitoring and evaluation sometimes errors during working hours; and the covid-19 pandemic which caused limited implementation of programs/activities and budget refocusing which caused budget allocations that were initially for the implementation of programs and activities to be focused first on buying vaccines, medicines, personal protective equipment for health workers, and other matters in the health sector related to handling the covid-19 pandemic. references adhi, k., a. hakim, and m. makmur. 2019. proses perencanaan anggaran berbasis kinerja pada 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otonomi daerah di indonesia [the rise and fall of regional autonomy in indonesia], academia praja: jurnal ilmu politik, pemerintahan, dan administrasi publik (academia praja: journal of political science, government and public administration), 3(2): 271–88. sugiyono. 2021. metode penelitian kuantitatif kualitatif dan r&d [quantitative qualitative and r&d research methods]. edited by sutopo. kedua. bandung: cv alfabeta. suwanda, d., r. moenek, s. lukman, and m. syaifullah. 2021. the implementation of performance-based budgeting through a money follow program in impressing budget corruption. jurnal ilmiah universitas batanghari jambi (scientific journal of batanghari university jambi), 21(2): 871–78. triyono, n., l. kalangi, and s. alexander. 2019. evaluasi konsistensi perencanaan dan penganggaran di pemerintah provinsi sulawesi utara [evaluation of planning and budgeting consistency in north sulawesi provincial government]. emba journal: economics, management, business and accounting, 7 siti karlina and ira novianty / finance, accounting and business analysis, volume 5, issue 2, 2023 138 (3): 4017–25. wardani, n. d., and d. silvia. 2021. pengaruh anggaran berbasis kinerja dan kejelasan sasaran anggaran terhadap akuntabilitas kinerja instansi pemerintah pada lembaga penjaminan mutu pendidikan (lpmp) provinsi lampung [the effect of performance-based budgeting and clarity of budget objectives on government agency performance accountability at the education quality assurance agency lampung province)]. bisnis dan akuntansi unsurya (business and accounting unsurya), 6(1): 47– 56. 83 finance, accounting and business analysis volume 2 issue 2, 2020 http://faba.bg analysis of stock split volatility in stock price on indonesia sharia stock index femei purnamasari, miftahul jannah, m. ridhanoyudistira universitas islam negeri raden intan lampung, indonesia info articles abstract history article: submitted 23 january 2020 revised 4 march 2020 accepted 17 may 2020 stock split is a stock price, tock liquidity is influenced by high low stock prices, then the stock split is the right action to maintain stock liquidity so that the price becomes small and fluitive(kurniawati, 2013). stock price splitting is an event rarely performed by issuers.currently, issuers carrying out stock split activities are still relatively few because basically stock split is only done by companies that have high share prices. if the performance of the company is good, the share price will be high, but if the stock price continues to rise, it will cause a decrease in investor interest to buy the company's shares due to high stock prices. this study aims to determine whether there is a stock price movement when the company is doing a stock split and to find out whether research on stock price movements caused by stock split is following signaling theory and trading range theory. fluitive stock prices that are affected by stock split can be seen by calculating the abnormal return of the company's close price.if the result of the calculation has a negative effect then the stock split does not have a good effect on stock price liquidity but if it has a positive effect then the stock split gives a positive effect on stock price liquidity.this is what influencing researchers to conduct research in indonesian syariah stock index because there is still little research on stock split event in islamic stock market. this study analyzes the movement of stock prices for 60 days, with following day calculation, 30 (thirty) days before the stock split, and 30 (thirty) days after the stock split. this study uses secondary data, namely data from reports of companies that have carried out a corporate action stock split and obtained data through the official website www.idx.co.id andwww.finance.yahoo.com. the researcherusescloseprice data ofdailystockpricesfromcompaniesthatmakestockpricesplitsandbecomepartof 2018 syariah indonesia stockindex. the independentvariable in this study isthestocksplitandthedependentvariableofthis study isthestock price. 10 companypopulations were used in this study, and its testing wasonlyconductedon 7 samplecompaniesthatmetthecriteriaaccordingtothepurposive sampling method. in analyzing data the researcher used abnormal returnanalysiswiththeactualreturnexpectedreturn method. thenormalitytestusediskolmogorov smirnovtest. hypothesis testing usedone-sample t-testandpairedsamples t-test, theauthor'sprocessthisresearch data usingthe program spss 18(yustisia, 2018). the final results of the test using paired sample t-test showed a very significant value that is 0.039 and smaller thanα= 0.05 which means there is a movement in stock prices for 30 (thirty) days before the stock split and 30 (thirty) days after the stock split, so this study concludes that the movement of sharia stock prices at issi 2018 is affected by the stock splitting event indicated by the results significant paired sample t-test. in the perspective of signaling theory and trading range theory of 7 companies that conduct stock split, the results shown by this study are following both theories, namely, when a company does a stock split, the stock market shows the existence of stock fluctuations, both before the split event and after the split event the results of the calculation of the actual return of 5 companies experienced good liquidity, while 2 companies experienced liquidity, but not so fluitive. keywords: stock split, signaling theory, trading range theory, abnormal returns, stock prices address correspondence: e-mail: femeipurnamasari@radenintan.ac.id femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 84 introduction indonesia stock exchange (2019) currently has 399 companies listed on indonesian sharia stock index (issi) in 2018, and only 7 (seven) companies have carried out corporate actions in the form of a stock split within 1 (one) period year. the company's expectation when conducting a corporate action stock split is to attract investors so that it is expected to have a positive effect on the liquidity of the company's shares. according to(mashdurohatun, 2011) in the world of conventional investment and sharia investment, the increase in share prices is usually influenced by market reactions such as demand and supply, but if the stock price is too high then the stock demand will decrease. vice versa, stock demand will increase if the company has good performance and the stock price is stable or not too high. investors consider if in the world stock market the price of shares becomes a priority, because it becomes a reference in making decisions to invest. therefore stock price is very important because it causes changes in investor consumption behavior. (group, 2017) indirectly claimed the thing that makes investors not interested in buying shares is a high stock price. if this continues, there will be a decline in the liquidity of these shares. therefore, the company will issue a corporate action policy. the right corporate action for this situation is a stock split, which is the split of shares with fixed capital but the number of shares increases. according to haris (2019), the right step to maintain the company's stock price by carrying out a stock splitting event. the issuer hopes that if the stock price decreases it will affect the liquidity of the shares to attract the interest of small investors so that demand rises and stock trading become optimal. generally, if the share price rises out of control, it reduces the purchasing power of investors to invest in companies and the company will do a stock split. the stock split causes the number of shares to increase, but the value of the shares remains the same. thus it attracts investors to buy shares because the value of circulating shares is smaller. therefore, all information relating to the stock split becomes important and consideration for investors to buy shares of the company. (kurniawati, 2013)in economics especially in the capital market said that stock split events are still an arguable science relating to their influence on the movement of company stock prices since there is difference opinion between practice and theory. overprice share prices result in decreased stock price liquidity. by doing a stock split, it provokes investors’ interest to increase stock liquidity by trading. generally research on stock split still produces different conclusion, especially in indonesia. information on the stock market will make a reaction when there is issue about the information that has an impact on the value of the stock, it can go up or go down. fluctuation in stock prices can be measured by looking for results from returns or abnormal returns. opinion difference resulting from the conclusion of this study is still very clear. the conclusion of the stock split produces opinion difference. it means that there are still many opinions that are pros and cons related to the movement of stock prices influenced by a stock split. this means that previous research does not agree with the principle of signaling theory and trading range theory which says if every event that contains information will affect the value of the company's shares. researchers are interested in reconducting the research since there are differences of opinion and inconsistency between previous research trading range theory, and signaling theory. problems that can be concluded as follows: how can stock split affect stock price movements? a positive signal is usually shown by the way of companies does corporate actions such as a stock split. this is because only companies that have good stock performance and high stock values are able to split stock prices. if an increase in stock liquidity occurs, it means investors have responded positively related to announcement of a stock split in the company so that there is an increase in demand. how is the movement of stock prices influenced by the stock split from the perspective of trading range theory and signaling theory? according to signaling theory, the prospect of a substantial increase in returns can be known from information about holding a stock split, whether the signal of long profits and short profits can be known through increasing returns. whereas increasing of stock liquidity can be seen from the trading range theory. methods the data used by the researchers in the form of a daily company stock price report on indonesian stock exchange and they are processed by using the spss 18 application. the approach used in this study is a quantitative method because it is in the form of processing data from the report(hartono, 2010). researchers use secondary data to be used as data processing materials, data obtained through official website sources www.idx.co.id, and www.finance.yahoo.com. (subalno, 2009)said data is data that has been archived, whether published or not. secondary data can be in the form of reports, notes, evidence, http://www.idx.co.id/ http://www.finance.yahoo.com/ femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 85 documents that have been archived by the company. according to (bhuvaneshwari & ramya, 2014) this study uses a period of 2 (two) months or 60 (sixty) days, by analyzing 30 (thirty) days before the stock price splitting event and 30 (thirty) days after the stock price breaking event. the study uses daily stock price report data taken from the close price the company's daily stock trading. the sample of this study is companies listed on indonesia stock exchange and included in indonesian sharia stock index which conducts stock split. according to the purposive sampling method was used as the determinant in this study, because this study used certain criteria to be used as analysis material(sugiyono, 2017). this research sample is a company with the following criteria: issuers included in issi 2018 data ofcompaniesdid a stocksplit in 2018 date ofeachcompanywhendoing a stocksplit stock split data which is seen from the daily stock price for 60 (sixty) days, with a calculation period of 30 (thirty) days before the stock split and 30 (thirty) days after the stock split, the processed stock price data is in the form of the closing price. this study uses secondary data and in the selection of samples using the method of purposive sampling method, out of 10 (ten) population companies that did a stock split in 2018, only 7 (seven) companies met the criteria, because 3 (three) companies were not included in issi 2018(prakoso, 2016) : table 1. companiesdid a stocksplit in issi 2018 date issuer corporate comparison 10/02/2018 pt mnc land tbk (kpig) 1: 5 08/01/2018 pt bukit uluwatu villa tbk (buva) 1: 2 07/13/2018 pt gemagrahasaranatbk (gema) 1: 5 07/09/2018 pt totalindoekapersadatbk (tops) 1: 5 6/25/2018 pt grahalayar prima tbk (bltz) 1: 2 06/04/2018 pt. mitraadiperkasatbk (mapi) 1:10 12/14/2018 pt bukit asamtbk (ptba) 1: 5 processed secondary data in 2019 this study uses 2 (two) variables namely dependent variable and independent variable, each of dependent variables and independent variable has 1 (one) variable, consisting of stock split (x) and stock price (y), as explained below: independent variable (x) (liana, 2009)independent variable is the cause or something that affects the change of dependent variable. in this study stock split (x) becomes an independent variable. the researchers divide calculation into 2 (two) calculation phases, which are 30 (thirty) days before the stock price split and 30 (thirty) days after the stock price split. dependent variable (y) (arikunto, 2006)dependent variable is a variable that is affected by independent variable. the researchers make stock price (y) as dependent variable. (bhuvaneshwari & ramya, 2014) measures return/fluctuation in stock prices. it can use abnormal returns, namely in the following ways: actual return pi.t-pi.t-1 ri.t = pi.t-1 information: ri.t = return stock price i at time t pi.t = stock price i in period t pi.t-1 = share price in period t-1 expected return ri.t = 𝑝𝑖.𝑡−(𝑝𝑖.𝑡−1) 𝑝𝑖.𝑡1 information ri.t = returnofthe 1st daystockpriceonthe t event pi.t = sharepriceafter pi.t-1 = sharepricebefore femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 86 abnornal return sickle = ri.tr𝑚t information sickle = abnormal returnonstockprice i onthe t-day ri.t = return i stockpriceonthe t-day rm.t = returnofstockpricesonthemarket data processing techniques to determine the formulation of the problem in this study, researchers analyzed by using the following techniques: the first problem formulation analyzing technique actual return (jones & williams, 1998)actual returns is the difference between stock price of yesterday and today which has occurred to analyze data to obtain the actual return result by calculating the difference between the daily stock price at a close price and yesterday stock price with today, or using this following formula: pi.t-pi.t-1 ri.t = pi.t-1 information: ri.t = difference stock price i at time t pi.t = stock price i in period t pi.t-1 = share price in period t-1 expected return. ri.t = 𝑝𝑖.𝑡−(𝑝𝑖.𝑡−1) 𝑝𝑖.𝑡1 information ri.t = differenceofthe 1st stockprice in the t-eventperiod pi.t = currentshareprice pi.t-1 = previousshareprice to obtain abnormal return in this study, researchers used market-adjusted return method by reducing the results of actual return minus expected return using to get the results of abnormal returns. the calculation formula of abnormal returns is as follows: abnornal return sickle = ri.tr𝑚t information sickle = abnormal returnonstockprice i onthe t-day ri.t = difference in shareprice i onday t rm.t = difference in stockpricesonthemarket kolmogorov-smirnov test to know two variables are distributed normal or not, they can be tested by using the kolmogorov smirnov test with regression models(yustisia, 2018). the rules in finding decisions must use the normality test. the formula of finding probability value (p-value) is as follows: if the probability value (p-value)> 0.05, it is normally distributed if the probability value (p-value) <0.05, it is not normally distributed with the following partial formula: no xi z= 𝑋1−𝑋 𝑆𝐷 ft fs [ft-fs.] 1 2 etc. information : xi = data number z = switchover from numbers to notations in normal distribution ft = normal cumulative probability fs = empirical cumulative probability femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 87 ft = cumulative proportion of normal curve size based on test of one sample t-test generally to compare the average sample examined with existing population averages, we use one sample t-test. in addition to test descriptive hypotheses with scale or interval research data, we can use a one-sample t-test(penelitian & bisnis, 2009). the level of significance of the one-sample t-test was α = 0.05 or 5%. from one-sample t-test if the value is greater than 5% (0.05) then ho is accepted and ha is rejected, but if the value is less than 5% (0.05) then ha is accepted and ho is rejected. the test formula is as follows: t = 𝑥− 𝜇 𝑠 √𝑛 information : x = sampleaverage µ = average population / previous research s. = standard deviation n = number of samples test of paired samples t-test (irmayani & wiagustini, 2015)the effect of stock prices on samples before split and after split can be measured by paired sample t-test. to know whether there is an abnormal return in stock price movements researchers analyzed abnormal returns 30 (thirty) days before the stock price split and 30 (thirty) days after the stock price breaking event. this research has a significance level of α = 0.05 or 5%(potochnik et al., 2018). if the hypothesis test produces a value greater than 5% (0.05) then ho is accepted, with the information that there is no significant difference, but if the value is less than 5% (0.05) then ha is accepted by showing that there is a significant difference. following is the formula of the paired samples t-test: x₁ = sample average before the stock split x₂ = sample average after stock split s.₁ = standard deviation before the stock split s.₂ = standard deviation after the stock split n₁ = number of samples before the stock split n₂ = number of samples after stock split the second problem formulation analyzing technique test of one samples t-test : (penelitian & bisnis, 2009)generally to compare the average sample examined with existing population averages, we use one sample t-test. in addition to test descriptive hypotheses with scale or interval research data, we can use a one-sample t-test. the level of significance of the one-sample t-test was α = 0.05 or 5%. from one-sample t-test if the value is greater than 5% (0.05) then ho is accepted and ha is rejected, but if the value is less than 5% (0.05) then ha is accepted and ho is rejected. the test formula is as follows: t = 𝑥− 𝜇 𝑠 √𝑛 information : x = sampleaverage µ = average population / previous research s. = standard deviation n = number of samples test of paired samples t-test the effect of stock prices on samples before split and after split can be measured by paired sample t-test. to know whether there is an abnormal return in stock price movements researchers analyzed abnormal returns 30 (thirty) days before the stock price split and 30 (thirty) days after the stock price breaking event. this research has a significance level of α = 0.05 or 5%. if the hypothesis test produces a value greater than 5% (0.05) then ho is accepted, with the information that there is no significant difference, femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 88 but if the value is less than 5% (0.05) then ha is accepted by showing that there is a significant difference. following is the formula of the paired samples t-test: x1 =average sample before stock split x2 =flataverage sample after stock split s1 =deviation raw before stock split s2 =deviation raw after the stock split n1 =total the sample before stock split n2 =total the sample after stock split theoretical framework for discussion 3.1 stock split (darmadji & fakhruddin, 2012) claimed stock split is a nominal breakdown of smaller shares, for example, one share with a value of rp. 5,000 then the company did a stock split with a ratio of 1: 5, then one share that had been valued at rp. 5,000 is now rp. 1,000 but the number of shares has increased.(pittaway & cope, 2007) said that corporate action of stock price split is a step of the company to improve stock liquidity by splitting stock prices or in the world of capital markets called stock split. the stock split action only increases the number of shares outstanding but does not increase capital, if at first 1 share is worth rp. 5,000 then company conducts a stock split of ratio 1: 5, the number of shares will be 5 shares with a value per share of rp. 1,000 3.2 abnormal return (bhuvaneshwari & ramya, 2014) argued abnormal return is the difference between the actual return and expected return. if the difference is positive then the stock price rises, which means the stock split has a positive influence on the movement of stock prices, but if the abnormal return is negative then the stock price decreases, which means the stock split has a bad influence on the movement of stock prices. 3.3 signaling theory according to (gumanti, 2009) signaling theory is a signal theory that if a company does something corporate action that is informational, there will be a reaction to investors. corporate action stock split is considered as a signal from company leaders to the public that a positive performance has been carried out by the company so that if investors buy shares there will be an increase in stock prices and it can benefit investors. 3.4 trading range theory (gumanti, 2009) said that corporate action is in line with trading range theory. according to this theory stock split can increase company stock liquidity because if stock prices are high then buying interest from investors decreases so that there is no movement in stock prices, but if the stock price is broken down and becomes smaller it is expected to attract investor interest and will increase company liquidity. (indarti & purba, 2011) conducted a survey that became the tendency of managers to split stock prices to maintain the equilibrium price of the company's shares so that investors were still many in number. applications of stock price movements that are affected by a stock split the value of the abnormal return (actual return-expected return) both before the stock split and after the stock split can be seen in the following table: table 2. abnormal return value before and after the stock split date before date after -1 0.009 1 -0,015 -2 0.066 2 -0.006 -3 -0,039 3 -0,301 -4 0.043 4 0.043 -5 .001 5 -0,029 -6 -0,027 6 -0,012 -7 .001 7 .001 -8 0.042 8 0.057 -9 0.031 9 -0.006 femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 89 -10 -0,012 10 -0,039 -11 0.013 11 0.027 -12 0.005 12 0.046 -13 -0.008 13 -0,041 -14 -0,036 14 0.051 -15 -0,029 15 -0,013 -16 0.011 16 -0.008 -17 -0,068 17 0.031 -18 -0,027 18 0.007 -19 -0.009 19 -0,041 -20 0.025 20 -0,039 -21 -0,023 21 -0,057 -22 0.041 22 0.041 -23 -0.009 23 -0,014 -24 -0,012 24 0.015 -25 0.009 25 -0,013 -26 -0,017 26 0.012 -27 -0,037 27 0.018 -28 -0,036 28 0.042 -29 0.005 29 0.019 -30 -0,087 30 -0.01 source: data processed using spss 18, (2019) from the results above,it is known that there is fluitive in abnormal stock return of companies that carry out a stock split. in this case,there is negative and positive stock return.(patel et al., 2016)after knowing that analyzed companies carried out a stock split and had abnormal return at their stock price,then the next phase is testing the normality of abnormal return result to find out whether those variables have been distributed normally or not.the normality test used kolmogorov-smirnov test.kolmogorov-smirnov test.(lopes, 2011)said to determine whether a data is normally distributed or not it can be seen from the regression results. to test the normality of data in this study researchers use the kolmogorov-smirnov test, the following table is results from the kolmogorov-smirnov test: table 3. normality test results (kolmogorov-smirnov test) one-sample kolmogorov-smirnov test before after n 30 30 normal parameters, b the mean 8.3333 -5.5333 std. deviation 26,84738 29.56201 most extreme differences absolute . 103 .121 positive .079 .999 negative -.103 -.121 kolmogorov-smirnov z .563 .662 asymp. sig. (2-tailed) .909 .774 a. test distribution is normal; b. calculated from data. data processed using spss 18, (2019) the p-value of abnormal returns before the stock split event in this study was 0.909, this value is greater than 0.05, which means it can be concluded that the normal return is normally distributed, and the p-value of the abnormal return after the stock price split event in this study is 0.774, this value is greater than 0.05, which means it can be concluded that the value of the abnormal return is normally distributed. based on the results of abnormal returns before and after the stock price split tested for normality using the kolmogorov smirnov test, it can be concluded that the abnormal return values are normally distributed, then paired sample t-test or statistical test will be conducted. test of one samples t-test abnormal return reactions caused by stock split events can be seen through test of one sample t-test. in the period of observation the researchers can see whether there is an effect caused by the stock split event using this test during the observation period. the level of significance in this test is 0.05. data femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 90 processing in this test uses the spss 18 application with the following results: table 4. result test of one sample t-test one-sample test test value = 0 t df sig. (2-tailed) mean difference 95% confidence interval of the difference lower upper before 1976 30 .058 8.333333 -.3112 17,9778 after 3,322 30 .002 14.00000 5.3812 22.6188 data processed by spss 18, (2019) observation from one sample t-test test shows that when the observation period before carrying out a stock split the abnormal return of the stock price is not significant, the result is 0.058> 0.05 which means that at 30 (thirty) days before the stock split there is no abnormal return, but when after a stock split occurs the market reaction is proven by testing this one-sample t-test the value is 0.002 <0.005, which means that at 30 (thirty) days after the stock split there is a reaction to the movement of its shares. this means the stock split event conducted by the issuer gives positive impact. test of paired sample t-test in testing the hypothesis of this study, researchers used paired sample t-test. this test method compares the average abnormal return at the time before the stock split and after the stock split. the significant value resulted from the paired sample t-test by processing the abnormal return results used the spps 18 application as in the table below: table 5. tested paired samples t-test paired samples test paired differences t df sig. (2tailed) the mean std. deviation std. error mean 95% confidence interval of the difference lower upper pair 1 before after 13,86667 35,19770 6.42619 .72363 27.00970 2,158 29 .039 data processed by spss 18, (2019) this test is to find out the results of the abnormal returns before the stock price split event and after the split event. it is known in the table above that there is significance in the abnormal return of this research that is equal to 0.039. this research has a significance value α = 0.05 or 5%, which means this solution affects the stock price movement. seeing from the abnormal return tested using paired sample t-test, so the hypothesis stating that "stock prices are influenced by stock split" is accepted. conclusion the results of paired sample t-test conducted by researchers show the results of the analysis of the significant value in the paired sample t-test is 0.039, smaller than 0.05. it means that in the observation period 30 (thirty) days before the stock price split and 30 (thirty) days after the stock price split had a positive effect on the stock price liquidity of the companies that carried out a stock split at the 2018 indonesia syariah stock index abnormal return on stock prices before and after stock splits is tested using a one-sample t-test to see whether there is an influence before and after stock splits. in testing, the results of the significance is 0.058, in other words it is bigger than 0.05. this means before stock split there is no significant stock price movements seen from abnormal returns tested, but when it has been done stock split there is a significant stock price movement seen from the results of 0.002 or 0.002> 0.05 which means there is a significant movement in stock prices after the company made a stock price split. this research is following the signaling theory and trading range theory which are used as theoretical foundation. it can be said stock prices on the stock market is strongly influenced by the activities of the company, including the activities of corporate action to split stock prices that have an impact on stock liquidity. yet many factors can affect stock prices including internal factors because companies have different stock prices which depend on the type of business of the company. besides internal factors, stock price movements are also influenced by external factors, usually due to economic, political, regulatory policies and stock market reactions that are influenced by issues(hermuningsih, 2014). furthermore, causes of femei purnamasari et al. / finance, accounting and business analysis 2 (2) 2020 91 changes in stock prices are believed to be related to those factors. references arikunto, s. (2006). data penelitian deskriptif. management penelitian analisis. bhuvaneshwari, d., & ramya, k. (2014). impact of stock split announcement on stock prices. in international journal of management. darmadji, t., & fakhruddin, h. m. (2012). pasar modal di indonesia. in salemba empat. group, w. b. (2017). global economic prospects: weak investment in uncertain times. in a world bank group flagship report. https://doi.org/10.1596/978-1-4648-1016-9 gumanti, t. a. (2009). teori sinyal manajemen keuangan. manajemen dan usahawan indonesia. hartono, j. (2010). teori portofolio dan analisis investasi (edisi sepuluh). in yogyakarta: bpfe. hermuningsih, s. (2014). pengaruh profitabilitas, growth opportunity, struktur modal terhadap nilai perusahaan pada perusahaan publik di indonesia. buletin ekonomi moneter dan perbankan. https://doi.org/10.21098/bemp.v16i2.27 indarti, i., & purba, d. (2011). analisis perbandingan harga saham dan volume perdagangan saham sebelum dan sesudah stock split. jurnal ilmu ekonomi aset. irmayani, n., & wiagustini, n. (2015). dampak stock split terhadap reaksi pasar pada perusahaan yang terdaftar di bursa efek indonesia. e-jurnal manajemen universitas udayana. jones, c. i., & williams, j. c. (1998). measuring the social return to r&d. quarterly journal of economics. https://doi.org/10.1162/003355398555856 kurniawati, d. d. (2013). analisis perkembangan sukuk (obligasi syariah) dan dampaknya bagi pasar modal syariah. al-iqtishad. liana, l. (2009). penggunaan mra dengan spss untuk menguji pengaruh variabel moderating terhadap hubungan antara variabel independen dan variabel dependen. jurnal teknologi informasi dinamik. lopes, r. h. c. (2011). kolmogorov-smirnov test. in international encyclopedia of statistical science. https://doi.org/10.1007/978-3-642-04898-2_326 mashdurohatun, a. (2011). tantangan ekonomi syariah dalam menghadapi masa depan. jurnal dinamika hukum. patel, m., dave, m., & shah, m. (2016). stock price and liquidity effect of stock split: evidence from indian stock market. international journal of management research & review. penelitian, m., & bisnis, m. p. (2009). metode riset. in jurnal manajemen. pittaway, l., & cope, j. (2007). entrepreneurship education: a systematic review of the evidence. in international small business journal. https://doi.org/10.1177/0266242607080656 potochnik, a., colombo, m., wright, c., potochnik, a., colombo, m., & wright, c. (2018). statistics and probability. in recipes for science. https://doi.org/10.4324/9781315686875-6 prakoso, r. e. (2016). pengaruh rasio keuangan terhadap harga saham pada perusahaan manufaktur yang terdaftar di bursa efek indonesia tahun 2010-2014. in jurnal adminika. subalno. (2009). analisis pengaruh faktor fundamental dan kondisi ekonomi terhadap return saham (studi kasus pada perusahaan otomotif dan komponen yang listed di bursa efek indonesia periode 2003-2007). tesis: universitas diponegoro. sugiyono. (2017). metode penelitian kombinasi (mixed methods). in alfabeta. yustisia, n. (2018). the impact of stock split on the performance in indonesian manufacturing companies. binus business review. https://doi.org/10.21512/bbr.v9i1.3790 26 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg the consequences of covid-19 on youth unemployment in the bulgaria stanimir stamatev1, vasil bozev2 department of management, university of national and world economy, bulgaria1 department of statistics and econometrics, university of national and world economy, bulgaria2 info articles abstract keywords: youth unemployment, covid-19, education level, bulgaria objective: the purpose of this article is to examine how covid-19 has an impact on unemployment among young people in bulgaria. it shows the impact of the achieved educational level on the change in the unemployment levels among young people. in addition, this academic work attempts to establish what the future tendency in the development of youth unemployment might be in a subsiding pandemic. methodology: the article uses empirical data from the nsi (national statistical institute) and eurostat regarding the level of youth unemployment in bulgaria on a general and educational scale. a forecast has been made, which is based on a trend model, whose parameters are estimated by the method of the least squares. results: our findings indicate that covid-19 has had a detrimental effect on unemployment among young people and it has risen during the pandemic. in addition, our forecast illustrates an increase in youth unemployment in the upcoming two years. despite this, according to the data for bulgaria, in 2021 compared to 2019, youth unemployment among people with primary and lower education has seen an increase by 7.4%; with 4.2% among those who have acquired secondary education and only with 1% among those with higher education. the analysis illustrates that during the covid-19 pandemic, young people in bulgaria with higher education are at a considerably lower risk in comparison to those with lower education. implication: the study’s results provides beneficial starting point in improving the performance of the labour market policy and the development of the educational system. *address correspondence: e-mail: sstamatev@unwe.bg1, v_bozev@unwe.bg2 finance, accounting and business analysis 4 (1) 2022 27 introduction the global pandemic covid-19 broke out in the beginning of 2019 and has set new challenges to the economies of the world, including bulgaria. the soaring growth of the gross domestic product (gdp) distinctive for the years before 2019, has rapidly declined in the following years. the declining economic activity has also had a detrimental impact on the labor market. this has given good reason to many economists and analysts to discuss the state of the labor market in bulgaria. these negative consequences have also taken their toll on the youth as the unemployment rate has gone up by close to 4 percentage points in 2021 compared to 2019. pursuing things further, the current conditions of the deteriorating economic and demographic tendencies have determined the growing interest in the state, dynamics, and prospects of the results of the realization of young people in the labor market. the importance of using young people as an economic resource is determined by two main factors. firstly, to date, they are around 25% of the workforce (nsi, demographic and social statistics, 2021). secondly, they are the future of the nation and the initial conditions of their economic activity are an important prerequisite for long-term economic growth. the scope of this paper is to examine the impact of covid-19 on the bulgarian youth unemployment rate. in order to achieve this goal, we must take into account the empirical data on the unemployment of the population aged between 15-29, which is defined in the article as “young people”1. our assumption is that even in a subsiding covid-19 pandemic, youth unemployment will continue to rise. it will have the strongest impact on those with the lowest form of education and to a lesser extent on those who have acquired higher education. the scope of this paper is to examine the impact of covid-19 on the bulgarian youth unemployment rate. in order to achieve this goal, we must take into account the empirical data on the unemployment of the population aged between 15-29, which is defined in the article as “young people”. our assumption is that even in a subsiding covid-19 pandemic, youth unemployment will continue to rise. it will have the strongest impact on those with the lowest form of education and to a lesser extent on those who have acquired higher education. literature review a study by the resolution foundation (henehan, 2021) established that in may 2020, a third of the people aged between 18-24 have been fired or have lost their main job. contrary to popular belief, in 2020 unemployment increased for both graduates and non-graduates (by the same percentage) despite the numbers of years that have passed since leaving school. for instance, among those who chose to discontinue their education a year earlier, the unemployment rate has jumped from 14% to 18% between 2019 and 2020. in addition, the unemployment rate for graduates rose from 10 to 14%. africanamericans took the biggest hit; nearly one in three had recently discontinued their education and were left unemployed in 2020 compared to 2019. asians are in second place where one in four young people were left unemployed in 2020 compared to 2019. another study is connected to our neighbor greece (katris, 2021). the conducted study examines the unemployment in greece compared to that of the european union. youth unemployment is in part also touched upon. the analysis studies what the possible consequences of covid-19 could be on the unemployment rate among a variety of groups – young people, men, women, etc. the findings show that greece will be less affected than the european union. unemployment among women in greece and youth unemployment in eu27 are expected to take the biggest hit from covid-19, which suggests the need for policy measures to be adopted in order to alleviate the effect it will have on the said groups. methods the unemployed and unemployment rate the levels of employment and unemployment characterize the state of a given labor market. together they form the labor force (the presently economically active part of the population) – all people of working age who put in or offer their labor for the production of goods and services (methodology of “monitoring of the labor force”, nsi). of key importance in the analysis of the labor market is the clear definition and identification of the unemployed individuals. 1 according to the bulgarian legislation, and in particular the "law on youth" in bulgaria, it is accepted that the population in the age between 15 and 29 should be included in the group of "young people". finance, accounting and business analysis 4 (1) 2022 28 according to the methodology of the periodic labor force surveys (plfs) conducted by eurostat unemployed individuals are those aged 15 to 74 who simultaneously meet the following criteria: firstly, they have no job in the week of the survey; secondly, they have actively looked for a job in the previous four weeks; thirdly, they are available to start working in the following three months (eurostat). therefore, the primary criteria, used to identify an unemployed individual, are to not have a job at the moment, to have actively looked for one and to have the necessary skills to work. these principles are written down in a separate resolution of the ilo (pavlov, 2008) and have been adopted by almost all market economies in the world, bulgaria included. there are two state institutions in bulgaria, which gather, summarize, and analyze information regarding unemployment – the employment agency (ea) at the ministry of labor and social policy (mlsp) and the national statistical institute (nsi). however, the methodologies of the two institutions differ drastically. the ea’s methodology of determining unemployment is based on a monthly registration through an “administrative system” (in labor offices) of jobless individuals and those on unemployment benefits (employment agency). ea data have certain advantages related to the frequency of collecting, processing, and announcing – all done monthly. the information includes important demographic characteristics such as sex, age, level of education, location, etc. for each registered unemployed individual. in spite of the reliability of the data, collected by the ea, there are certain weaknesses in the approach the agency uses. firstly, the data does not include unemployed individuals who are not registered with labor offices. secondly, it is possible for some of the unemployed to register in order to receive unemployment benefits while simultaneously working on the grey market. therefore, in practice, the unemployment level determined by the ea’s administrative system for registration may be far lower than its real value. unlike the methodology of the ea, which is generally based on the voluntary registration of unemployed individuals in labor offices, the nsi methodology consists of observations of the labor force via a sample statistical survey including 2438 nests (census sections) and 19504 regular households. according to the methodology of monitoring of national statistics, in line with ilo recommendations and eurostat requirements, unemployed are those individuals aged 15 to 74 who do not have a job in the calendar week of the survey but are actively looking for one over a four-week period and are available to start work within two weeks of the observed period (“labor force survey” methodology, nsi). when it comes to calculating the unemployment rate, the two institutions of bulgaria, the ea and the nsi, also use different methodologies. the ea calculates the unemployment rate as the ratio between the number of unemployed individuals and the number of economically active individuals (the labor force) as of the last census of the country, i.e., it uses the same basis for one period. on the other hand, the nsi does not use the numbers from the previous census, rather a dynamically changing basis, obtained as a result of quarterly surveys on a representative sample of the population. therefore, the unchanging basis for calculating the unemployment rate used by the ea and the above remarks on the approach to data collection in practice make the nsi’s methodology more preferred and realistic. aside from the general unemployment rate of the working age population in a given country, the unemployment rate is also calculated by age groups (aged 18-24; aged 25-34; aged 35-44; aged 45-54; 55 and over, etc.), as well as by sex, place of residence and level of education. since the first quarter of 2012, a new approach has been introduced in the weighing of the units from the labor force survey sample (“labor force observation” sample, nsi), the influence of which needs to be taken into consideration when utilizing data from the labor force survey. this is why the scope of the survey begins from the following year – 2013, and continues until the latest available data (2021). since the first quarter of 2021 some changes has been implemented in compliance with the regulation (eu) 2019/1700 of european parliament and of the council establishing a common framework for european statistics relating to persons and households, based on data at individual level collected from samples, and consequent implementing acts in the field of labour force statistics. these changes concern mainly employment and unemployment definitions, in particular: − persons on leave for looking after a child between 1 and 2 years of age who are receiving fixed compensation for the duration of the leave, are considered employed (they used to be considered economically inactive up to the end of 2020); − persons on unpaid parental leave for looking after a child between 2 and 8 years of age are considered employed only if the expected one-time duration of using that leave is at most three months. all persons on this kind of leave used to be considered employed up to 2020; − persons who are absent from work due to reasons other than holidays, illness, accident or maternity and parental leave are considered employed only if the duration of this absence is 3 months or less (even they are being partially compensated); finance, accounting and business analysis 4 (1) 2022 29 − persons who produce agricultural goods for self-consumption are excluded from the employed person’s category even if they satisfy their household’s main consumption needs by that production. employed are considered only persons growing agricultural produce, which main part is intended for sale or barter. due to changes in the lfs methodology data for the first quarter of 2021 are not fully comparable with those for previous periods. methodoly for predicting the unemployment rate a forecast for the unemployment coefficient will be made in order to establish how it will develop over the following two years. to do so a trend model with the following function will be used: y = ƒ(t) where: y – the unemployment coefficient; t – time as an independent variable. trend models eliminate the effect of random and periodic causes and consider only the development trend. the functions of these models can take many forms: linear model: cubic model: ŷ𝒕 = 𝛃𝟎 + 𝛃𝟏𝒕 ŷ𝒕 = 𝛃𝟎 + 𝛃𝟏𝒕 +𝛃𝟐𝒕²+𝛃𝟑𝒕³ quadratic model: exponential model: ŷ𝒕 = 𝛃𝟎 + 𝛃𝟏𝒕 +𝛃𝟐𝒕² y= 𝛃𝟎+(ɛ𝛃𝟏𝒕) logaritmic mocel: others…. y = 𝛃𝟎 + 𝛃𝟏𝑳𝒏 t where: 𝛃𝒊 – parameters in the equation; ŷ𝒕 – adjusted values of the unemployment coefficient. the model’s parameters can be found via the ordinadry method of least squares. this means that the sum of the squares of the residuals „ ɛk“ will be minimized. 1 2 1 n k t  − =  = 1 n t=  ( yk ŷ𝑘 )² = min in order for this condition to be met, a system of equations needs to be solved. the forecasted value is reached by following these steps (mishev and goev, 2010): 1. performing an adequacy check on 10 trend models using an f-test and leaving only the adequate ones; 2. choosing the most adequate model for the trend – the one with the highest coefficient of determination ( r²); 3. constructing the point estimate of the forecast, which represents the value of the dynamic array. the point forecast is obtained with a longer trend line in the future. the forecast is marked with с ŷ𝑁+𝐿 , where n is the final period and l is the forecast horizon. the forecast will be realized using the program ibm spss. findings analysis of unemployment rates among young people there are different tendencies in the levels of youth unemployment for the period 2013-2021 (figure 1): finance, accounting and business analysis 4 (1) 2022 30 source: nsi figure 1. unemployment rate among young people aged 15-29 due to the economic crises from 2008, unemployment rates from the discussed period amounted to 21.8. in 2014, the labor market in the country showcased signs of stabilization and youth unemployment, up to 2019, was going down with the lowest coefficient of 6.9%. the covid-19 pandemic has had a direct effect in the increase of youth unemployment. the deteriorating economic situation in the nation increases the indicator by 3.5 percentage points up to 10.4%. young people are most often the first ones to be terminated from employment in times of an economic recession. this can be seen from the following graph which illustrates the percentage change in the number of unemployed people aged 15-29 as a part of all the unemployed people in the country. the eurostat data indicates that in 2013, youth unemployment had reached close to 30% from the total number of people aged 15-74. these high numbers are due to the economic crisis from 2008 which has left its mark. the percentage gradually decreased to 22% in 2020 and increased to 24% in 2021. source: nsi figure 2. percentage change in the number of unemployed people aged 15-29 as a part of all the unemployed people in the country youth unemployment began to rise further after 2019 and in 2020 their number increased by 15% compared to 2019. in 2021, compared to 2020, the percentage increased by another 11%. in total, assuming that the rise in youth unemployment is due to the effect of covid-19, then we can say that the pandemic has caused an increase in the number of the unemployed by more than ¼. 21.800 17.700 14.400 12.200 9.900 8.300 6.900 8.800 10.400 .00 5.00 10.00 15.00 20.00 25.00 2013 2014 2015 2016 2017 2018 2019 2020 2021 4 3 6 3 8 5 3 0 5 2 4 7 2 0 7 1 7 3 1 4 3 1 6 9 1 7 1 1 2 9 1 0 0 7 8 6 1 5 1 3 9 3 2 3 7 4 1 2 9 .5 4 4 % 2 6 .0 3 4 % 2 5 .6 9 6 % 2 4 .8 3 8 % 2 4 .6 5 0 % 2 2 .5 6 2 % 2 2 .3 3 9 % 2 1 .7 6 7 % 2 3 .7 2 9 % 0 50 100 150 200 250 300 350 400 450 500 0% 5% 10% 15% 20% 25% 30% 2013 2014 2015 2016 2017 2018 2019 2020 2021 total uneployment 15 29 г. share of 15 29 г. from total unemployment number of people in thousnads share finance, accounting and business analysis 4 (1) 2022 31 despite the observed trends of declining unemployment over the last few years, a serious issue for young people in the labor market is “long-term unemployment” (eurostat, statistics explained). the main problem with this age group is the negative influence on future employment opportunities (gregg and tominey, 2007). it is considered that if a young person has been unemployed for a longer period of time, that leaves a bad impression on future potential employers, mainly due to an insufficient amount of knowledge, skills, and work experience (ryan, 2001). forecast based on the information on the unemployment rate from 2013 to 2021, a forecast of the coefficient for 2022 and 2023 will be made. as previously mentioned in the methodology section, this will be done on the basis of trend models. 10 trend models have been tested and their results are illustrated in table 1 таble 1. model summary and parameter estimates equation model summary parameter estimates r square f df1 df2 sig. constant b1 b2 b3 linear .727 18.670 1 7 .003 19.867 -1.520 logarithmic .900 63.345 1 7 .000 21.427 -6.440 inverse .873 48.007 1 7 .000 7.240 15.991 quadratic .987 222.485 2 6 .000 27.212 -5.526 .401 cubic .993 247.056 3 5 .000 25.251 -3.649 -.045 .030 compound .711 17.216 1 7 .004 20.460 .891 power .836 35.632 1 7 .001 22.623 -.476 s .757 21.856 1 7 .002 2.083 1.142 growth .711 17.216 1 7 .004 3.018 -.115 exponential .711 17.216 1 7 .004 20.460 -.115 source: calculations by autors’ the cubic model is the most appropriate one to make a forecast on as it has the highest coefficient of determination (r square = 0,993). this is what it looks like: ŷ𝑡 = β0 + β1𝑡 +β2𝑡²+β3𝑡³ а оценената му форма е: ŷ𝑡 = 25,25 − 3,65𝑡 −0,05𝑡²+0,03𝑡³ source: calculations by autors’ figure 3. forecast on youth unemployment for 2022 and 2023 according to our forecast, the unemployment rate is expected to increase up to 14% in 2022. with a 95% probability, it can be stated that the coefficient will be between 11% and 17%. these .00 5.00 10.00 15.00 20.00 25.00 30.00 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 unemployment rate forecast lower confidence limit upper confidence limit finance, accounting and business analysis 4 (1) 2022 32 numbers will continue to rise in 2023 and will reach 19%. once again, with a 95% probability, it can be stated that the coefficient will be between 14% and 25% the width of the interval is not very informative due to the short length of the dynamic array. despite this, the indications we have observed since the beginning of the year showcase that forecast will likely come true. a long-term forecast is not advisable as the economic situation is currently shifting at a rapid rate and other long-term forecasts would be untenable analysis of unemployment rates among young people at certain educational levels the data on the unemployment rate regarding young people who are at certain educational levels are also of great interest. due to the aforementioned restrictions, the nsi does not maintain publicly available statistics regarding the work performance of people aged between 15-29. therefore, we will once more use eurostat statistics to analyze the unemployment at certain educational levels. in the case of youth unemployment, the levels of education undoubtedly have an impact. the importance of education among youth unemployment can be seen in figure 4. source: eurostat figure 4. youth unemployment rate at different educational levels (15-29) the highest percentage of unemployment can be found among young people who have the lowest possible degree of education. in 2013, it began at 44% and reached 16.8% before the pandemic (eurostat). in 2020, there is a slight increase of the coefficient reaching 17.1% due to covid-19, however, in 2021 it is much more tangible, reaching 24.2%. the lowest percentage of unemployment can be found among young people who have higher education. in the beginning of the period, the unemployment rate is 3.3 times lower (13,5%) in comparison to the young people who only have primary education. at the end of the period, the unemployment rate becomes 4.5 times lower (5,2%) among young people who have a bachelor's degree, a master’s degree, and a phd. what is more, this is the only educational level whose unemployment rate has started to rise in 2020 as a result of covid-19 (from 4.1% to 5.5%), however, in 2021 it started to decrease from 5.5% of 5.2%). all other levels of education mark an increase after the pandemic. discussion and conclusions in times of economic crises, one of the most logical reasons for an increase in unemployment among young people is the lack of job opportunities. a large part of the produce is reduced, which equates to job losses. in this case, young people are considered at risk and suffer the most in the labor market. according to our forecasts, the consequences of covid-19 on the unemployment rate among young people are likely to increase over the next two years. what is more, the low level of education also contributes to this. according to the data for bulgaria, in 2021 compared to 2019, unemployment among young people with primary and lower education has increased by 7.4%, with 4.2% among those who have acquired secondary education, and only with 1% among those with higher education. the analysis shows that young people in bulgaria with higher education are at a considerably lower risk during the 00 05 10 15 20 25 30 35 40 45 50 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 primary education secondary education higher education finance, accounting and business analysis 4 (1) 2022 33 covid-19 pandemic in comparison to those with lower education. in addition, for the individuals with a low level of education, the salary for their work is lowered, close to minimum wage, which naturally leads to a lower standard of living. in general, these young people often become directly dependent on the social benefits of the social welfare system and thus fall into another group connected to the phenomenon known as the “welfare trap”. references 1. eurostat, official website www.ec.europa.eu/eurostat 2. eurostat, statistics explained, long-term unemployment, direct link: https://ec.europa.eu/eurostat/statistics-explained/index.php/glossary:longterm_unemployment 3. gregg, p. and tominey, e. (2007). the wage scar from youth unemployment, elsevier, netherlands, 2005, p. 487-509, the prince’s trust, the cost of exclusion. counting the cost of youth disadvantage in the uk, london 4. henehan, k. (2021). resolution fondation, changes in youth unemployment and study since the onset of covid-19: https://www.resolutionfoundation.org/app/uploads/2021/04/unevensteps.pdf 5. henehan, к. (2021). uneven steps: changes in youth unemployment and study since the onset of covid-19, 6. katris, к. (2021). unemployment and covid-19 impact in greece: a vector autoregression (var) data analysis, engineering proceeding, vol. 5 (41) https://doi.org/10.3390/ engproc2021005041 7. mishev, g., goev, v. (2010) statistical analysis of time series, avangard prima, sofia 8. nsi, demographic and social statistics, population and demographic data, official website www.nsi.bg 9. nsi, labor force survey methodology, official website www.nsi.bg 10. pavlov, n. (2008). labor standards and unemployment, faber, sofia, p. 59 11. ryan, p. (2001). the school-to-work transition: a cross-national perspective. journal of economic literature, 39, pp. 34–92 12. the employment agency, official website www.az.government.bg http://www.ec.europa.eu/eurostat https://ec.europa.eu/eurostat/statistics-explained/index.php/glossary:long-term_unemployment https://ec.europa.eu/eurostat/statistics-explained/index.php/glossary:long-term_unemployment https://www.resolutionfoundation.org/app/uploads/2021/04/uneven-steps.pdf https://www.resolutionfoundation.org/app/uploads/2021/04/uneven-steps.pdf http://www.nsi.bg/ http://www.nsi.bg/ http://www.az.government.bg/ 99 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg applying a binary logistic regression analysis to evaluate the distinction between conventional and islamic banks: a case study of djiboutian banks sadik aden dirir faculty of law, economics, and management, university of djibouti, djibouti info articles abstract keywords: conventional bank, islamic bank, logistic regression, size. customer trust, interest rate framework, accessibility and djibouti. the banking sector has developed dramatically during the past decades. many banks were established and prospered. however, the experience in each banking sector can be non-identical based on many factors. therefore, it will be ideal to investigate every aspect of conventional and islamic banks prior to deciding which bank is favorable. the actual paper compares the conventional and islamic banks in djibouti to identify which types of banks customers would find advantageous. in that context, variables such as the size of the banks, accessibility, financial instruments, and customer interest rate were explored. moreover, a binary logistic regression analysis was utilized in order to analyze the responses of 200 individuals who use djiboutian islamic and conventional banks. generally, the findings revealed that individuals have the likelihood to prefer cac international bank which is a conventional bank over salam africa bank. moreover, the predictors (the bank’s size, and accessibility) displayed a none significant p-value that is over 0.05. whereas customer trust and the interest rate exhibited a significant p-value. the current research is significant to better comprehend the main factors that drive djiboutian individuals to select a specific bank for their deposits. the findings will also contribute to the wide discipline of literature that always discussed the gap that exists between islamic and conventional banks. *address correspondence: e-mail: sadikaden1999@gmail.com finance, accounting and business analysis 4 (2) 2022 100 introduction djibouti is a small country located in the east of africa. in recent years, it has known an impressive increase in the number of islamic banks. the financial crisis in 2007 was the main reason for the banking sector to evolve. in the course of that period, islamic banks were stable, which as result increased their popularity among depositors and financial investors (imam p, 2010). since it was a better alternative for the conventional bank’s failure. few analysts even contended that islamic banks are the most suitable choice to advance economic growth, and overcome full-scall of macro-financial failure over conventional banks. nonetheless, will all of these features islamic banks are still inferior compared to other conventional banks. for the reason that investors and depositors prefer a traditional framework (dridi, j, & hasan, m, 2010) islamic banks are mainly administered by shariah. also, the guidelines are set up by the domestic countries. whereas some islamic banks are converted from conventional banks such as the banks in iran and sudan (sundararajan, 2002). religion is a fundamental factor to inspect market behavior, especially in the banking sector. which is the case with islamic banks that provides products\services based on islamic principles (junaidi, & anwar, 2022) consequently, islamic and conventional banks are widely different in many dimensions. the main differences are that conventional banks use the commodity as money and employ it to lend and use the interest rate differential as compensation. while islamic banks offer services such as profit & loss sharing and renting assets. in this paper, two banks from djibouti were contrasted and evaluated. the first bank is a conventional bank (cac international bank) a well-known bank among the djiboutians because it achieved three consecutive years as the best bank according to global finance. the other bank is an islamic bank (salam africa bank). this later offers a service that is in line with islamic regulations. we highlight that a binary logistic regression analysis will be applied so that the djiboutian citizen’s preferences and salam africa and cac international bank can be assessed and compared. the approach selected for this is important since we will be evaluating dichotomous variables. in general, this research aims to evaluate the djiboutian banking sector from both the islamic and conventional sides. additionally, it has a goal to inspect customers’ tendency to drift to a specific bank. the findings revealed that individuals have the likelihood to prefer cac international bank which is a conventional bank over salam africa bank. moreover, the predictors (bank’s size, and accessibility) displayed a none significant p-value that is over 0.05. on the other hand, customer trust and the interest rate exhibited a significant p-value. the rest of the paper is classified as the following. section 2 will offer a brief review of the previous articles. it will also present the methodology and the statistical approach that will be employed. then in section 3 we will observe and interpret the findings. after that section 4 will comprise the discussion and finally, setion5 will provide a general conclusion. literature review a systematic review of the performance of islamic banks and conventional banks the last subprime emergency uncovered the delicacy of the banking area and the customary financial framework was faulted for being the beginning of this emergency. (smolo, e, & mirakhor, a, 2010) allude to the contentions of the delicacy of the financial framework was overwhelmed by the high rate of interest rate obligation contracts. simultaneously, various academicians and specialists express that islamic banks did not experience the worldwide monetary crisis as conventional banks did (yılmaz, 5 october 2009). this conviction has expanded the consideration of researchers in the examination of the islamic financial framework in ongoing years. notwithstanding the rising discussion on this issue furthermore, the fast development of islamic banks mostly in muslim nations, there are somewhat scarcely any observational investigations that dissect the exhibition of islamic banks against conventional banks, particularly during the last worldwide financial emergency. (ahmad & luo, r, 2010) examined islamic banks against conventional banks including at the time of the financial crisis. at that time, they only examined just 9 islamic banks and 33 conventional banks. the aftereffects of the review showed that islamic banks are somewhat much more efficient and productive than conventional yet less allocative proficient, and both financial streams showed a most significant level of proficiency in 2007 and 2008. notwithstanding the cross-country examination of productivity in islamic and conventional banks, there are a few investigations that concentrate on the nature and development of banks. hence, the authors characterized banks by their size and age in view of the size of resources furthermore, on the idea of new and old banks, separately (hassan, mohamad, s & bade, m, 2009) their discoveries show that proficiency scores of islamic and conventional banks are not altogether shifted as well as the size and time of the banks finance, accounting and business analysis 4 (2) 2022 101 don't altogether impact their effectiveness score. a related examination was observed by (isik & hassan, k, 2002). islamic banks have gotten significant interest from different financial backers, directors, and depositors, especially after the 2008-2009 gfc. in comparison to our study, previous papers mostly focused on the link between islamic and conventional stock markets. see (hussein & m. omram, 2005) and (ajmi, hammoudeh, & nguyen, 2014). discovered that as the islamic nations give better diversification gain contrasted with the east nations, with solid strategy suggestions for the homegrown and worldwide financial backers as far as their portfolio diversification through supporting against unanticipated risks (saiti, b, bacha, & m. masih, 2014). additionally, authors such as (dewandaru, & masih, r, 2015) track down the distinctions in betas among those islamic and conventional banks in the vast majority of the time span that are not statistically important. a couple of exemptions reveal an equivalent return with lower risks in the term of islamic banks. the role of the bank’s size (bikker, j. a, & k. haaf, 2002) illustrated the connection between rivalry circumstances and the market structure in the financial business. they revealed that rivalry is becoming more vulnerable in local business sectors and more grounded in global business sectors, inferring that the more the size of the bank is bigger the more competitive it will be. additionally, (berger, a, & w. s. frame, 2007) track down that a more prominent market presence of huge banks essentially brings down the advance rate expenses of private venture credits. in any case, loan rate premiums expenses are not impacted by the loaning bank's size when the market presence of huge banks is thought of. (hannan, t. h, & r. a. prager, 2009). they contend that little and single market banks' benefit is profoundly connected with the existence of huge market banks in-country banking sector. they emphasized that an expanded presence of huge market banks adversely influences the benefits of little single market banks. what's more, huge banks' extreme market power is almost certain to prompt their imposing business model of prime credits, as their strength speeds up their pattern to borrowers with prime fico assessments. little banks have gigantic motivations to put resources into unsafe sub-or non-prime credits, which can adversely influence their monetary solidness. (demsetz, & p. e. strahan, 1997) and (hughes, 1999) further exhibit that huge banks' monetary dependability has not improved as they have a motivating force to further develop productivity by putting resources into hazardous resources, in spite of the fact that they are preferred to broadened over little banks. (kang, 2006) insist that monetary administrative specialists are less inclined to direct an exhaustive examination concerning enormous banks on the grounds that they are more perplexing than little banks and enormous banks can confront moral risk issues due to too big-to-fizzle. likewise, enormous banks for the most part have higher credit rating scores than little banks and huge banks' financing costs are by and large lower than those of little banks. accordingly, it might bring down huge banks' motivating forces to plan against pressing financing and to keep up with high fluid resource proportions. generally, past writing shows that exorbitant banks leveling up unfavorably affects their monetary steadiness. customer trust in islamic and conventional banks client trust and loyalty are considered the essence of client relationship management it is a huge component in firm endurance, given its critical relationship with productivity. the literature reports a positive connection between client loyalty and firm productivity. tasks of islamic banks depend on client direction to keep up with existing clients and draw in new are the essential client relationship goals that assist with supporting an association as per shariah targets seeking devotion of clients in this manner can be viewed as an element of relationship with the management in islam (firdaus, & yusuf, 2014). (reuters, 2018), disclose that out of 69 nations in the 2017 global islamic banks' execution report 82% announced benefits. also, islamic banks depend intensely on client trust to be productive. development has begun to draw in non-muslims to islamic banks equal to muslims. non-muslim clients by and large keep up with the relationship with regular banks that strategically pitch islamic financial items. notwithstanding, whether the client is muslim or non-muslim, winning client trust stays the main concern of banks however with various (kartika, t, firdaus, & najib, m, 2019). islamic financial clients have exceptional motivation to interface due to their strict convictions. this is rather than customary banks that are just benefit situated. islamic banking depends on shariah consistent benefit and misfortune sharing (pls) is the idea that infers that the client and the bank share benefits utilizing pre-decided proportions (hati, & wibowo, 2020). it was described that client commitment results from consumer loyalty to bank administration quality. the higher assistance quality compared with cost influences apparent worth. consequently, an expansion in the perceived value of islamic bank administration quality prompts more grounded client commitment (moliner, 2018). finance, accounting and business analysis 4 (2) 2022 102 the interest rate differential between islamic and conventional banks conventional banks gain cash by charging revenue and expenses for administrations, though islamic banks gain cash by benefit and misfortune sharing, exchanging, renting, charging expenses for administrations delivered, and utilizing other sharia agreements of trade. several islamic banks consider utilizing commercial rates of interest as nothing more than riba and there have been a large number of discussions and endeavors to examine this issue. some islamic banks use loan cost as a kind of perspective to highlight and compute the necessary benefit return by giving some administrations as long as the sum is sure, the return is fixed, the task is exchange related and the bank has a veritable stake in the result. be that as it may, since, islamic bank exercises must be exchange-based, include real exchange, keep away from disallowed practices, and should be conveyed out with the greatest possible level of uprightness and great confidence as shariah imply it becomes complex. a few other islamic banks use musharakah, to legitimize bank revenue. it implies that islamic bank works based on benefit also, misfortune sharing. in the event that the financial specialist has endured misfortunes, the bank will share these misfortunes based on the method of money utilized (mudarabah, musharakah). in a conventional financial framework, interest is charged even in the event that the association endures misfortunes by utilizing the bank's assets. accordingly, it did not depend on benefit and misfortune sharing as the islamic banks do. another distinction we have is the fixed deposit. the people who deposit their money in conventional banks get benefit from their interests as foreordained financing costs are independent of the bank's execution. contrary to islamic banking, bank depositors accept their profits, depending exclusively on the bank's achievement. not at all like regular banks, an islamic bank goes about as a delegate between the investor and the business visionary. islamic banking will in general make an interface with the real areas of the financial framework by utilizing exchange-related exercises. the feature of accessibility in islamic and conventional banks along with the improvement of methods of reasoning relating loaning exercises to profound standards, islamic banks started to pervade the market in both the muslim and non-muslim nations (akhtar, 2007). this cycle reflected the developing acknowledgment that islam's monetary and social messages were firmly adjusted (hassan, a., chachi, a, & latiff, s.a, 2008). according to an essential perspective, the special elements of islamic money have demonstrated the same time usefulness and uselessness. however, huge in its bid is the value-based exchanges and appropriations of hazards that ought to, in principle, lead to social government assistance gains (kuran, 2004). islamic banking has as a principal goal, the establishment of an adjusted and fair society, empowering the equivalent dissemination of abundance while disallowing exercises that might hurt people (kamla, 2006). such aims and obligations expect banks to embrace moral speculations and keep away from syndications while treating their representatives and clients decently. the cultural and societal duty of islamic monetary frameworks shouldn't be restricted to drawing nearer, teaching, and serving muslims. all things being equal, the authors contend that everybody ought to reserve the privilege to consume shariah-agreeable items, to secure business. and hold partakes in the organizations concerned (badawi, 1996). in terms of loans and financing accessibility, both banks differ. according to (demirgüç-kunt, a, 2012) conventional banks, a wide range of ventures are funded, just organizations considered illicit by the law are not supported. whereas islamic banks don't allow funding to businesses that hurt the general public like liquor and tobacco. methodology the sample and the data collection for this study to be conducted a sample size of 200 individuals from djibouti was collected. the structure involves sending a questionnaire to a different category of people who use islamic banks (salam africa bank) and conventional banks (cac international bank). at least 50 participants for every indicator are suggested (field, 2013) which is why the sample size is over 50 in this study, moreover, leblanc and fitzgerald (2000) recommend at least 30 perceptions for each autonomous variable. after the responses from the survey were gathered a binary logistic regression analysis was applied so that the two dependent variables will be inspected. see the conceptual model below. finance, accounting and business analysis 4 (2) 2022 103 figure 1. conceptual framework. measurement and statistical analysis to investigate the various independent variables that are influencing the two probable outcomes in a study a logistic regression analysis is utilized so that the model will estimate the logit of the predicting factors on the dependent variables. the most agreed formula is written (peng, 2002) and (james,2013). 𝑙𝑜𝑔(𝑜𝑑𝑑𝑠) = 𝑙𝑜𝑔𝑖𝑡(𝑃) = i𝑛 ( 𝑃 1 − 𝑃 ) ( 1) 𝑙𝑜𝑔𝑖𝑡(𝑃) = α + 𝑏1𝑥1 + 𝑏2𝑥2 + 𝑏3𝑥3 +⋯ ( 2) 𝑃 = ( exp⁡(𝑎 + 𝑏1𝑥1 + 𝑏2𝑥2 + 𝑏3𝑥3 +⋯) 1 + exp⁡(𝑎 + 𝑏1𝑥1 + 𝑏2𝑥2 + 𝑏3𝑥3 +⋯) ) ( 3) the above formula can be described as the following where: p stands for the probability of a particular category. exp signifies the exponential function. a is the intercept of the equation used and, b is considered the sloped of the independent variables. result in table 1, we have the processing summary that highlights the total number of participants in the study 200 respondents composed of 68% males and 32% females. table 1. case processing summary n percent included in analysis 200 100% males 136 68% females 64 32% missing cases 0 0 the coding in terms of the predicted variables consists of 1 for cac international bank (conventional bank) and 2 for salam africa bank (islamic bank). table 2. variable encoding original value internal value cac international bank 1 salam africa bank 2 the model summary of table 4 illustrates a pseudo-r square of 65.4% change in the criterion variable that can be computed to the predictor variables in the model. finance, accounting and business analysis 4 (2) 2022 104 table 3. model summary step -2 log likelihood cox & snell r square nagelkerke r square 1 104.200a .434 .654 a. estimation terminated at iteration number 6 because parameter estimates changed by less than .001. according to (lemeshow, s, & hosmer, 2020) if the significance value is lower than 0,05 it means a poor fit. however, in our model, the significance is above 5% so it adequately fits the data see table 5. table 4. hosmer and lemeshow test step chi-square df sig. 1 4.276 8 .831 with the correspondence of the observed and predicted membership based on the model. we have a total of 153 cases were in the data to have selected cac international bank as the first choice of preference. and 145 of those 153 were correctly predicted by the model to fully prefer cac international bank. with an accuracy rate of 94.8% when it comes to predicting those who support conventional banks. on the other hand, 47 individuals expressed their preferences for salam africa bank. but, only 35 were correctly predicted by the model. revealing a correct percentage of 74.5%. in general, the classification table exhibits 90% of our sample correctly being predicted to fall into their respective groups. table 5. classification table first of all, we attributed 1= cac international bank and 2= salam africa bank. the fact that some variables’ coefficients (bank size, trust, and accessibility) are below 1 indicates that cac international bank is considered the most likely to be an advantageous bank for djiboutian depositors compared to salam africa bank. whereas in terms of interest rate framework salam africa bank is considered convenient to djiboutians because of their islamic belief. nevertheless, the differences were not statistically significant in the bank’s size and accessibility predictor. while factors such as trust and interest rate framework displayed a significant p-value of 0.037 and 0.048 respectively which means that people select banks based on the trust they attribute to them and the different interest frameworks they offer. moreover, since most of the predicting factors are reflecting coefficient values of less than 1, it means we have a decrease in the likelihood of falling into target groups as we increase our predictor variable. therefore, cac international bank would predominantly be preferred in terms of bank size (0.220), trust (0.382), and accessibility (0.132) in relevance to salam africa bank. and given the values are less than 1 thus, it is going to be compatible with our coefficients. additionally, the confidence interval (ci) for the odds ratio reveals that some of the predicting factors of 1 fall between the lower and the upper intervals which imply that there is no relationship between depositors selecting a bank based on (the trust, and interest rate framework). for instance, the bank’s size is equivalent to (0.802<1<1.933). while accessibility is (0.397<1<3.278). inversely, the customer trust (1<1.023<2.101) and the interest rate framework (1<1.010<9.059) do not fall in the confidence intervals which confirms that the interest rate and customer trust are important predictors factor for people to select a bank. bank type percentage correct cac (conventional) salam (islamic) step 1 cac 145 8 94.8 salam 12 35 74.5 overall percentage 90.0 a. the cut value is 0.500 finance, accounting and business analysis 4 (2) 2022 105 table 6. variables in the equation the acceptable level of reliability for cronbach's alpha is varied between 0.6 and 0.7. and in this study, the results displayed a high inner consistency and good reliability of 0.79. table 7. reliability statistics cronbach's alpha n of items 0.796 6 discussion recently, the financial framework of the banking sector became complicated due to subprime crises, globalization, and the never-ending depositors’ and investors’ needs. in djibouti, there are four islamic banks and the people are drifting toward the services offered by those banks because it is convenient for their religious beliefs. however, with the increasing number of islamic banks, djiboutian depositors and investors still prefer a conventional framework as a means of financing. for instance, the findings demonstrated that the conventional banking framework (cac international bank) is more advantageous to djiboutian depositors and investors. nearly 94,8% of the study participants displayed the likelihood to prefer it over salam africa bank. furthermore, table 5 uncovered those factors such as (customer trust, and interest rate framework) unveiled a significant value of 0.037 and 0.048 sequentially when it comes to selection between conventional and islamic bank. this indicates that interest rate is an indisputable tool to affect when choosing a conventional or islamic financing service. whereas (bank size, and accessibility) displayed insignificant value which implies that depositors and investors do not select a bank based on these previous factors. additionally, the odds of individuals choosing salam africa bank offering an islamic interest rate framework is 3,024 times higher than conventional banks with 95% of ci of 0.267 to 0.842. conversely, people selecting a conventional bank over an islamic bank based on trust, size, and accessibility are 1.245, 1.466, and 1.141 higher. conclusion and implication this paper evaluates the financial framework differences between two banks in djibouti. salam africa bank, which is an islamic bank, and cac international bank a conventional bank. in order to conduct the analysis, a binary logistic regression analysis was applied. additionally, to carry on with comparison several factors such as the bank’s size, customer trust, interest rate, and accessibility were investigated. the results presented that the conventional financial framework is preferred over the islamic system among djiboutian citizens. moreover, the variables (bank size, and accessibility) revealed no significant value. thus, rejecting these factors as essential factors to determine the reason why individuals select a specific bank. however, the interest rate and customer trust generated a significant value which implies depositors and investors choose a bank based on these variables as mean financing. the paper contributes to the wide literature that always contrasted the financial system of islamic and conventional banks. it also contributes to comprehending the behavior of individuals when choosing a specific bank. additionally, to the theoretical contribution, the actual paper offers information about two banks located in djibouti and the way their activities differ. for that reason, the availability of these data will provide djiboutian banks, analysts, and the government to understand of the depositor’s and investors’ behavior. even though this research compares two different financial frameworks in terms of (size, loyalty, interest rate, and accessibility) many other factors are still not investigated and the djiboutian market is not fully assessed and analyzed in terms of the banking sector. therefore, future studies need to be conducted to uncover all the discrepancies in the djiboutian banking framework. for instance, inspecting the djiboutian government’s role in promoting the islamic and conventional banks. b s.e. wald df sig exp (b) 95% c.i.for exp(b) lower upper size .220 .224 .957 1 .328 1.245 .802 1.933 customer trust .382 .184 4.340 1 .037 1.466 1.023 2.101 interest rate framework 1.107 .560 3.909 1 .048 3.024 1.010 9.059 accessibility .132 .538 .060 1 .806 1.141 .397 3.278 constant -5.794 .774 56.028 1 .000 .003 a. variable(s) entered in step 1: size, customer trust, interest rate framework, accessibility. finance, accounting and business analysis 4 (2) 2022 106 references ahmad, w., & luo, r. 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(5 october 2009). governor of the central bank of the republic of turkey. speech at the conference on ‘islamic finance – during and after the global financial crisis. imf–world bank, annual meetings 2009. istanbul. 90 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg dynamics of bank credits to private sector in the central and eastern european countries gergana mihaylova-borisova finance department, university of national and world economy, bulgaria info articles abstract keywords: credits, banking sectors, central and eastern european countries non-performing loans objective: the purpose of the research is to analyze credits dynamics, provided by banking sectors in the cee countries from the international financial crisis to present. methodology: the study examines the data for domestic credits, provided by banks of the ten central and eastern european countries in particular bulgaria, romania, poland, hungary, czech republic, estonia, lithuania, latvia, slovenia, slovak republic. the used methods are descriptive analyses and synthesis. results: it is found that the bank credits were negatively affected by the observed crises in the last twenties years: international financial crisis, european debt crisis and pandemic crisis. after the covid-19 crisis the credit growth has started to recover, together with the economies. in 2021, all banking systems in cee countries reported a recovery of their loan portfolios, recording positive growth rates. however, rising and accelerated inflation since mid-2021 and the subsequent reaction by central banks to curb it faces new challenges for banks and countries. implication: the study’s results are important for policy makers, aiming to recover the economic development of countries, as well as to the bank managers, aiming to improve the activity of the managed banking institutions. *address correspondence: e-mail: gerym@abv.bg; gmihaylova-borisova@unwe.bg finance, accounting and business analysis 4 (2) 2022 91 introduction the dynamics of credit provided by banks to the private sector is of particular importance for an economy, since it is through the credit channel that central banks ensure the action of their monetary policy on the economy through the so-called transmission mechanism. this mechanism is disrupted in times of crisis, leading central banks to turn to non-conventional monetary policy instruments such as asset purchases, aiming to intervene directly in certain markets and providing the necessary liquidity for the purposes of economic recovery. in these processes, the role of banks, which are the main intermediaries in an economy, is also very important. this is particularly true for the financial sector of the cee countries. their non-bank financial intermediaries account for only about 10% of total assets in the financial system. the main activities of banks are related to the attraction of deposits and their provision of credit to economic agents experiencing a shortage of financial resources. lending by banks leads to a rise in demand for commodities in the economy and to an increase in investment. the study of the dynamics of bank credits to the firms and households is therefore a particularly topical issue. the objective of the research is to trace the dynamics of credit provided by the banking sector to the firms and households (private sector) in the cee countries. the study period is from the global financial crisis to the latest available data on banking sector lending in the countries analysed. the study uses data on credit extended by the banking systems of ten cee countries, namely bulgaria, romania, the czech republic, poland, hungary, slovakia, slovenia, estonia, lithuania and latvia. the methods used are descriptive analysis and synthesis. the statistical information used in the study is from the databases of the imf and the world bank. the study argues that the banking systems of cee countries are facing many challenges related to the observed crisis processes, new regulations and supervisory requirements of central banks, the level of nonperforming loans and economic development. the study has several parts. the next part reviews the literature from the perspective of studies on the analysis of credit dynamics in cee countries. the third part analyses the data on credit extended by the banking systems of the cee countries. the last section presents the main findings of the study and future research directions. literature review there are a lot of studies in the economic literature dealing with the dynamics of credit provided by banks to the private sector, as well as dealing with the development of banking systems. two groups can be distinguished among the studies in respect to the analised countries. on the one hand, these are studies concerning the development of credit and the banking sector in an individual country (vachkov, georgiev, valkanov and yambolov 2017; dimitrov 2018; mihaylova-borisova 2021a; sariiski 2011), and on the other hand, these are studies related to the dynamics of credit in several countries with similar development (kiss et al. 2006; aydin 2008; enoch and otker-robe 2007). studies on the performance of the banking system in bulgaria use a number of indicators characterizing banks. vachkov, georgiev, valkanov, and yambolov (2017) analyze the banking system stability by focusing on the asset quality, liquidity position of banks and their solvency. in analysing the development of the banks, the researchers also considered the crises impact in the last years the international financial crisis in 2008 and the covid-19 crisis. in this regard, dimitrov (2018) examines the influence of the international crisis in 2008 on the stability of bulgarian banks, concluding that they are highly liquid and maintain their high capital adequacy. sariiski (2011) also analyses the impact of the crisis on the banking system in bulgaria. the study concluded that bulgarian banks were not largely influenced by the crisis. mihaylova-borisova (2021a) examines the impact of the covid-19 crisis on the bulgarian banking sector. it concludes that banks are more stable than during the international financial crisis in 2008. in addition to studies on the stability of the banking system in bulgaria, there are those that calculate and analyze the bank efficiency dynamics (borisov 2017; borisov 2020; nenovsky, mihaylova, chobanov and koleva 2008). tsanevska (2017), vasileva (2017), peshev (2014) analyze the lending activity of bulgarian banks. peshev (2014) examines the factors that affect the demand for credit in several eu countries but outside the euro area. the period of analysis is from 2008 to 2012. the result showed that the significant impact of economic activity on credit demand is proved. among the group of comparative studies on banking systems is that of kiss et al. (2006). the authors investigate whether the cee countries are experiencing a more serious increase in lending due to convergence towards the euro area countries, or whether this increase in lending is more related to a credit boom that poses a risk to the financial stability of the countries. for this purpose, the researchers use data for the new eu member states including (estonia, lithuania, latvia, czech republic, slovakia, slovenia, finance, accounting and business analysis 4 (2) 2022 92 hungary, poland) applying a panel econometric model for the purpose of separating the equilibrium trend and the excess (boom) component. the results pointed out that for most countries the credit-to-gdp ratio appears to be below the level justified by macroeconomic fundamentals. for two countries, latvia and estonia, the increase in this ratio is found to be beyond the equilibrium level in the years 2004-2005. for this reason, credit growth in estonia and latvia is considered to be riskier, while there are no signs of excess credit growth for the czech republic, slovakia and poland (kiss et al. (2006), p. 23). aydin (2008) examines the importance of foreign banks in the credit boom in central and eastern european countries. the results show that they are essential for credit growth in these countries. banking sector credit activity in the countries analysed depends on foreign banks, for which economic activity and interest margin are determinants. emoch and otker-robe (2007) also investigate the concept of excessive growth of credit in central and eastern european countries. the credit dynamics for each country over a longer period, before the international financial crisis in 2008 is also analysed. overall, for the period 1996-2004, this indicator was at a much lower level than the european union average (emoch and otker-robe 2007, p. 54). by 1998, the countries of central and eastern europe (bulgaria, croatia latvia, lithuania,, estonia, slovenia, hungary, romania) had levels of this indicator below 40%, with the largest value in croatia at 40%, while bulgaria, romania, lithuania and latvia had levels below 20%. until 1997, the majority of these countries' loans were denominated in national currency, with the exception of latvia and romania. in 2004, only croatia and slovenia remained with loans predominantly denominated in local currency around 70-80% of total credits, while for most countries the part of loans in local currency was below 50% in the same year. as a result of the literature review, it worth to be concluded that there are numerous studies on both the development of banking systems for individual countries and groups of countries and the development of credit in individual countries and groups of countries. it is noteworthy, however, that the time period is very short and covers several years, i.e. they concentrate on periods of rapid credit growth, periods of global financial crisis or pandemic crisis. for this reason, a study of the dynamics of credit in the central and eastern european countries for the period from 2008 to the present would be particularly important. analyses of credit dynamics in the central and eastern european countries when analysing the loan portfolios of banks in central and eastern european countries, loans to the private sector have shown a steady downward trend in the years following the 2008 global financial crisis. in 2008, the countries, having the highest share of credit in gdp were estonia, latvia, slovenia, bulgaria (figure 1). the high levels of loans as a present of gdp are due to high growth rates in the years before the financial crisis. in bulgaria, for example, the credit growth was 63.3% in 2007. the minimum reserve ratio was used to limit credit growth, despite the action of the currency board. it was increased from 8% to 12% in september 2007, and additional reserves were introduced if a certain credit growth rate was exceeded. all these administrative restrictions introduced by the central bank aim to limit credit growth. estonia also recorded a credit growth rate of over 60% in 2004 and 2005. the high growth of banks' loan portfolios in estonia is associated with sound public finances and a favourable business environment, low real interest rates, high gdp growth, eu accession (oecd 2011). the expansion of the credit portfolio of banks in estonia is also due to the low level of lending in the years before the country's accession to the eu i.e. the low level of financial intermediation. the share of loans in gdp in 2004 was only 40.3% and reached 101.4% in 2009. at the same time, high credit growth is dangerous as it also reveals the presence of macroeconomic imbalances (fitch 2005). the only cee country that has seen an increase in the share of credit as a share of gdp over the period analysed is slovakia. in 2008, private sector claims as a share of gdp amounted to 40.7% and rose to 68.3% in 2021, reaching the highest level of credit as a share of gdp among all cee countries. following the country's accession to the european union, an accelerated increase in the banking sector's lending to the non-financial sector began (harvan et al. 2015, p. 3). in the loan portfolio structure of banks in slovakia, it can be observed that until the 2008 international financial crisis, loans granted to nonfinancial enterprises increased, while after that the increase stopped. at the same time, loans granted to households continued to grow at double-digit rates as they were used to finance the purchase of a house. housing loans accounted for 77% of total credits extended to households at the end of 2014 (harvan et al., 2015, p. 3). with the accelerated growth of the banks' loan portfolio, the level of non-performing loans is also important, as it is possible that at some point a larger part of these loans will become non-performing with a more substantial increase in borrowers' indebtedness. countries with higher levels of credit as a share of gdp, such as latvia and estonia, experienced a more substantial deterioration in the quality of their banking systems' loan portfolios within a year of the global financial crisis (figure 2). after this increase, there was an improvement in their loan portfolios. for most countries, an improvement in the quality of finance, accounting and business analysis 4 (2) 2022 93 banks' loan portfolios is observed several years after the 2008 financial crisis until 2013-2014. these are several countries such as bulgaria, hungary, romania, whose non-performing loans reached 16.7%, 15.6% and 13.9% in 2014, respectively. due to the financial crisis and the slowdown in credit growth, a gradual stabilisation and improvement in the quality of banks' loan portfolios in cee countries has also been seen. in 2021, non-performing loans account for less than 5% of the loan portfolios of banks in the countries analysed. an additional factor for banks' loan quality improvement is the pandemic crisis, which has a restraining effect onthe new loans due to business closures, job cuts, and income restrictions. in some countries, moratoriums are being introduced on payments on loans already received by households and businesses to deal with the negative effects of the pandemic crisis, while in other countries moratoriums are being introduced on loan payments to deal with inflation. for example, bulgaria is introducing a private moratorium from 13 march 2021 for the purpose of easing the difficulties faced by households and businesses in servicing their obligations. on december 2, 2020, a decision of the bulgarian national bank’s managing board extended the deadline for deferring loans to households and firms (mihaylova-borisova 2021a). this has a favourable impact on the quality of bulgarian banks' loan portfolios. in 2020, the deterioration was by 0.82 percentage points to 5.8% by year-end. there is an improvement in bulgarian banks' credit portfolios’ quality (4.6% non-performing loans (npls) as a share of total loans at end-2021), despite some increase in npls to 6.4% at end-september 2021. figure 1. claims to private sector as a share of gdp, % sources: world bank database 20 30 40 50 60 70 80 90 100 110 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 bulgaria estonia latvia lithuania poland czech republic hungary slovak republic finance, accounting and business analysis 4 (2) 2022 94 figure 2. bank non-performing loans (% of total gross loans) sources: world bank database from the beginning of july 2022 romania introduces a temporary moratorium on the servicing of bank loans by households and companies. the measure is part of an overall eur 1.1 billion package aimed at reducing the impact of accelerating inflation. households eligible for the temporary moratorium must have demonstrated that their monthly expenditure has increased by 25% year-on-year over the past three months. businesses are required to prove that their annual revenues have fallen by 25% year-on-year over a three-month period. credit dynamics depend on credit interest rate levels. since the global financial crisis, there has been a steady downward trend in lending rates in most countries. this is the result of the expansionary policy of the european central bank (ecb) and other non-euro area central banks, which initially moved to lower key interest rates to support constrained lending after the 2008 global financial crisis. after interest rates reached zero levels, even after introducing negative interest rates in mid-2014, the ecb moved to directly inject liquidity into specific markets (mihaylova-borisova 2021b). in 2022, the ecb starts to increase interest rates and tighten monetary policy because of rising inflation, which will affect future lending and deposit rates upwards. figure 3. lending interest rates (%) sources: world bank database 0 5 10 15 20 25 30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 bulgaria estonia latvia lithuania poland czech republic hungary slovak republic slovenia romania 0 2 4 6 8 10 12 14 16 18 20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 bulgaria czech republic hungary romania finance, accounting and business analysis 4 (2) 2022 95 over the period analysed in the countries covered, the most significant decline in lending rates was recorded in romania, which went from 17.3% in 2009 to 5.6% in 2021 (figure 3) . in 2018 and 2019, a slight increase in lending rates was observed in romania, but it was also associated with a slight increase in deposit rates in these two years, from 0.89% in 2017 to 1.3% in 2018 and 1.9% in 2018, respectively. at the same time, the real interest rate in romania fell below 1%, the lowest since the financial crisis, which is reflected in the slowdown in the country's credit growth rate in 2018-2019. in hungary, lending rates are the lowest compared to romania, the czech republic and bulgaria since 2014. over the period 2015-2021, lending rates in the country range from 1.36% to 1.95%. these low interest rates on loans granted by the banking system have a favourable impact on economic agents in terms of loan withdrawals. the growth rate also reached double-digit levels in this period, accelerating rapidly from 5.3% in 2017 to 16.8% in 2021 (figure 4). the crises have had a negative impact on credit dynamics in central and eastern europe. the global financial crisis has had a significant impact on the growth rate of credit extended by banks to the private sector. in 2009, there was a significant slowdown in the growth rate of credit in all countries compared to the previous year, due to the loss of jobs, the slowdown in economic activity, the decline in the incomes of economic agents. in estonia and hungary, there was even a fall in lending of 3.9% and 1.9% respectively in 2009. over the period 2012-2013, there was also a drop in bank private loans in almost all countries except bulgaria, estonia, poland, slovakia and the czech republic. the most significant decline was recorded in slovenia, with a 17.1% year-on-year decline in 2013. following the gradual recovery of economies from the debt crisis in europe in 2012-2013, positive credit growth rates were also observed. however, the pandemic crisis again had a negative impact on their growth rate. the dynamics of lending in the countries analysed show that banks are facing the challenge of coping with the crisis developments, economic instability, stricter regulations related to high capital adequacy and liquidity requirements after the global financial crisis. however, thanks to the stricter regulatory requirements after the global financial crisis, banks are better prepared for the next two crises, and therefore their recovery is faster. in 2021, all banking systems in central and eastern european countries reported a recovery of their loan portfolios, recording positive growth rates. -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 bulgaria poland czech republic hungary romania finance, accounting and business analysis 4 (2) 2022 96 figure 4. private sector claims growth rate (%) sources: world bank database, own calculations discussion and conclusions the study analyses the dynamics of credit provided by banks to the private sector in central and eastern european countries. data for the ten central and eastern european countries bulgaria, romania, czech republic, poland, hungary, slovakia, slovenia, estonia, lithuania and latvia are used. it is found that most countries have seen a decline in the level of credit extended to the private sector as a share of gdp due to the impact of a series of crises: the global financial crisis, the european union debt crisis and the pandemic crisis. the only country in central and eastern europe that has seen an increase in the credits as a share of gdp over the period analysed is slovakia. in 2008, private sector claims as a share of gdp amounted to 40.7% and rose to 68.3% in 2021, reaching the highest level of credit as a share of gdp among all countries in the region. the level of non-performing loans is also of concern to banks, as accelerated growth in banks' loan portfolios could lead to deterioration in the quality of loan portfolios. countries such as latvia and estonia, which had higher levels of loans as a share of gdp before the global financial crisis, also experienced a more significant deterioration in the quality of loan portfolios in the year after the crisis. for most countries, there was an improvement in the quality of banks' loan portfolios several years after the 2008 financial crisis until 2013-2014. these are several countries such as bulgaria, hungary, and romania, whose bad loans reached 16.7%, 15.6% and 13.9% in 2014, respectively. due to the financial crisis and the slowdown in credit growth, a gradual stabilization and improvement in the quality of the loan portfolios of banks in central and eastern european countries is also reported, reaching levels below 5% of the loan portfolios of banks in the countries analyzed in 2021. taking the importance of credit for countries' economic development, future work will focus on identifying the determinants of credit dynamics in central and eastern european countries. this is also important for economic policy makers, as expectations of recession in the countries and rising inflation, they will face new challenges. acknowledgements this work was supported by thе unwe research programme (research grant no10/2021 „economic activity and development of the banking sector in central and eastern europe in the context of contemporary crisis processes“) references adusei, m. 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(2007). does financial development precede growth? robinson and lucas might be right. applied economics letters, 14(1), 15-19 120 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg tax revenue structure and its components in bulgaria: where does tax revenue come from? diyana metalova*, presiana nenkova university of national and world economy, bulgaria info articles abstract keywords: tax, tax structure, tax burden, bulgaria the public sector can raise the resources needed in order to provide public services through a mix of taxes levied on individual and corporate incomes, consumption taxes, social insurance contributions and wealth taxes. the mix of taxes on which a country relies could differ significantly, while it should also be noted that the manner in which a tax system is structured is one of the factors defining the impact of taxation on the growth of an economy and the redistribution of income in society. in this respect, the tax system design as a mix of the taxes levied and their organisation poses a major challenge. the purpose of the current study is to offer an overview of bulgaria’s tax structure and the dynamics of its components since the country joined the eu in 2007. the paper presents the sources of tax revenue in bulgaria in the period 2007-2020, describes the main features of the tax system and analyses the size and structure of tax burden in order to highlight the challenges in front of the tax policy. *address correspondence: e-mail: pnenkova@unwe.bg finance, accounting and business analysis 3 (2) 2021 121 introduction a contemporary tax policy is expected primarily to achieve its goals in terms of efficiency and minimum harms to economic growth, and fairness on the other hand. as those goals are often contradicting, the tax system design as a mix of the taxes levied and their organisation poses a major challenge. the public sector can raise the resources needed in order to provide public services through a mix of taxes levied on individual and corporate incomes, consumption taxes, social insurance contributions and wealth taxes. the mix of taxes on which a country relies could differ significantly, while it should also be noted that the manner in which a tax system is structured is one of the factors defining its impact on the growth of an economy and the redistribution of income in society. the ratio between direct and indirect taxes is one of the key features characterising a tax structure. the impact of a pursued tax policy, in terms of tax burden and a mix of the taxes levied, on the capacity to generate economic growth is widely researched in literature. a number of economic analyses agree that direct income taxation has a more negative impact on the economic growth (kneller, bleaney and gemmell, 1999; arnold et al., 2011; acosta-ormaechea and yoo, 2012) and in this regard, the tax policy should aim to restructure the tax system in a way that would increase the burden of those taxes that cause the least distortion in the economy such as property and consumption taxes. on the other hand, taxes are one of the main policy instruments used for redistribution in order to achieve a socially desired distribution of income. the extent to which the income gap between the rich and the poor is being narrowed depends mainly on the progressivity of personal income taxes that attack directly income inequality. the higher burden of indirect taxes implies a weakening of the tax system's ability to reduce income inequalities thus presenting a compromise between economic efficiency and social justice. the purpose of this paper is to analyse the size and structure of tax burden in bulgaria and the changes that have occurred over the past 14 years. the scope of the study is bulgaria's tax structure, its main features and components during the period 2007-2020. this analysis focuses, inter alia, on the impact of the covid-19 pandemic on tax revenue and tax structure. the paper is organised into three sections. section 1 deals with the relative significance of taxes in forming the revenue side of the budget and the changes in the tax burden over the period of examination. it offers a comparative analysis vis-a-vis with other european countries. section 2 presents the structure of tax revenues and tracks the dynamics of tax revenues from the various taxes in gdp terms. section 3 deals with the vertical tax structure and the changes that have occurred in it over the past 14 years. tax burden trends in bulgaria and in the eu tax revenue (including social security contributions) accounts for over 80 % of total consolidated public sector revenue in bulgaria (80.9 % in 2020). in nominal terms, tax revenue in 2020 stood at bgn 35 484.3 million, which is 30.2 % in gdp terms (against a nominal gdp of bgn 118 605 million). compared to the beginning of the period under examination, the tax burden is down, from 31.6 % in gdp terms. over the entire period examined here, the tax burden in bulgaria is significantly below the eu average. the average tax burden for the eu countries has remained relatively stable, ranging from 38 % to 40 % over the period of examination (ec, taxation trends in the european union, 2021, p.152). there are, however, large differences between the various eu countries, from 22.1 % in ireland to 46.1 % in denmark in 2019. bulgaria ranks fourth in the eu in terms of the lowest tax burden (fig.1), ranking after ireland, romania (26 %) and lithuania (30.1 %). finance, accounting and business analysis 3 (2) 2021 122 source: ec, taxation trends in the european union, 2021, appendix tax-main-aggregates figure 1. total tax revenue (including compulsory actual social contributions) as a percentage of gdp in most eu countries, the tax burden went up from the start of the period, which drives the eu average slightly upwards as well. apart from its size, the structure of the tax burden is also a significant indicator. one of the main features defining the character of tax systems is the ratio among direct taxes, indirect taxes and social security contributions. the information on the figure below shows the tax burden structure in each eu country in 2019. source: european commission, annual report on taxation, 2021, p.25 figure 2. tax revenue by major type of taxes (including compulsory actual social contributions) as a percentage of gdp the eu average tax burden exhibits almost an equal distribution among the three main groups (fig.2). in some countries such as sweden, malta and ireland, social security contributions have a very low weight (shown as direct taxation for denmark). bulgaria ranks second, preceded by romania, in terms of the lowest share of direct taxes. conversely, indirect taxes in bulgaria have the prevailing share and its tax system is mainly consumer-focused. that type of tax system is unable to ensure sustainability of revenues in times of an economic downturn, when consumption by large social groups shrinks. a more balanced tax system, less vulnerable to economic shocks and more conducive to adequate counter-cyclical tax policies would be preferable. the period under examination does not exhibit any major change in taxation by economic function. the volume of consumption taxation remains the highest, followed by labour taxation, while capital is taxed in the lowest extent. in the period under examination, the tax burden on labour income increased by 1.3 percentile points, while capital taxation and consumption taxation showed a decrease of finance, accounting and business analysis 3 (2) 2021 123 1.3 percentile points and 1.4 percentile points respectively. source: ec, taxation trends in the european union, 2021, p.59 figure 3. tax structure by tax base in bulgaria (as a percentage of gdp) one can also observe a significant disproportion in the tax burden distribution among capital, consumption and labour as measured by their implicit tax rates. the implicit tax rate provides important information on the average effective tax burden on labour, capital and consumption. in bulgaria, the implicit tax rate on consumption is relatively high — 20.7 % in 2019, against an eu average of 17.4 % (ec, taxation trends in the european union, 2021, p.60, p.153). the implicit tax rate on labour income in bulgaria went down from 30.4 % in 2007 to 25.4 % in 2019, ranking it second, behind malta (the eu average for 2019 was 38.1 %). within the implicit labour taxation, the main share is that of social security contributions at the expense of the employee and of the employer. the implicit tax rate on capital in bulgaria is also among the lowest in the eu. tax structure and its components as discussed above, bulgaria’s tax system consists of direct and indirect taxes. in terms of the type of tax basis, there are income taxes (represented mainly by the personal income tax and corporate tax), consumption taxes (vat, excise and customs duties) and property taxes (on real property, gifts, inheritance, property acquisitions, and on motor vehicles). labour taxation includes also social security contributions, with the burden being shared between employees and employers. the figure below shows the structure of tax and social security revenue in the national budget in the 2007—2020 period. source: data eurostat, consolidated fiscal programme, ministry of finance of the republic of bulgaria figure 4. tax structure by type of tax in bulgaria the structure of tax revenue in bulgaria has not undergone any significant change over the past 14 years. as shown in the figure, receipts from vat and social security funds are of major significance. the main tax revenue source for the public budget is the vat, accounting for almost one-third of the tax and finance, accounting and business analysis 3 (2) 2021 124 social security revenues, or half of the tax revenue. adding the excise duties reveals that indirect taxes provide for half of the tax and social security revenue. excise revenue is almost equal to the revenue from income taxes. income taxes levied on the income of individuals and legal entities bring less than one-fifth of the total revenue, with individuals bearing a higher tax burden. the analysis of the structure and dynamics of tax revenue indicates that the income taxation policy aims to increase the share of tax revenue from individuals and decreasing that from legal entities: in 2008, profit tax revenue exceeded the revenue from personal income tax, while 10 years later their ratio is 2 to 3. the social security burden increased its share, while the weight of corporate tax declined over the period under examination. the relative weight of each of the taxes in gdp terms is illustrated in the figure below. source: data eurostat, consolidated fiscal programme, ministry of finance of the republic of bulgaria figure 5. tax structure by type of tax in bulgaria as a percentage of gdp observing the dynamics of tax burden, the impact of the 2008—2009 global economic crisis on tax revenue in bulgaria is noticeable. in 2009, the share of vat and profit tax in gdp contracted, while that of personal income tax was maintained, as a result of the shrinking of economic activity and in the absence of any specific discretionary measures in the tax area to overcome the crisis more quickly. the tax burden declined due to the embedded automatic stabilisers, not because of targeted tax measures. it can be assumed that the reason lies in the strong dependence of the bulgarian tax system on consumption taxes, while crises are associated with a contraction in consumption (nenkova, metalova, 2019). in 2020, the covid-19 pandemic and the measures subsequently taken to contain its spread had a strong negative effect on economic development worldwide. urgent fiscal measures were needed, forcing many governments to review their fiscal positions (including tax policies). as can be seen from the figure above, the tax burden in bulgaria in 2020 did not change in gdp terms, but it should be noted that gdp fell by 4.2 % in real terms. the tax changes adopted by bulgaria as part of the anti-poverty measures and applied until the end of 2021 had to do with the introduction of a reduced vat rate (down from 20 % to 9 %) on restaurants and catering services, books, baby food and diapers, as well as an exemption from vat and customs duties on imports of certain medical goods for the treatment of covid-19 patients (mof, convergence programme 2021-2023, p.49-50). the reduction of tax revenues due to the above-mentioned tax relief measures in 2020 is insignificant: a mere bgn 95 million, which represents 0.9 % of vat revenues (ministry of finance, 2020 report). despite the crisis and the newly introduced tax preferences, vat revenues remained almost the same as in 2019. this means that the tax changes have not had much effect as an anti-crisis fiscal tool in bulgaria, even though they were put in place with such an intention. in addition to the effect that a tax policy can have on addressing the impact of the pandemic, tax revenues can also be affected by the evolution of the pandemic and the associated response measures. the data for 2020 show that the pandemic has not significantly affected the performance of tax revenues overall and has not changed the tax structure in any way. tax revenue in 2020 went up by bgn 568 million from 2019, an increase of 1.6 %. from a macroeconomic point of view, the increase in revenues in a period of crisis does not seem justified; if we look at the individual taxes, however, we can see that the increase in tax revenues was driven by the revenue from taxes and social security contributions charged on personal income caused by the increase in average income chargeable for social security purposes. thus, finance, accounting and business analysis 3 (2) 2021 125 despite the lower employment rate due to the introduction of restrictive anti-epidemic measures, the treasury received 4.4 % more in revenues from personal income tax and social and health insurance contributions. corporate income tax revenues are almost the same as in 2019 (fiscal council of the republic of bulgaria, 2021, p. 9). in personal income taxation, the most significant reform is the shift, in 2008, from a progressive 4tier scale, with a maximum marginal rate of 24 % (in 2004, it was 29 %) with a tax-exempt minimum, to a proportional taxation at a flat rate of 10 % with no tax-exempt minimum income. despite the significant reduction in the tax rate, there was no major reduction in the share of personal income tax revenue in 2008, implying that the broadening of the tax base and the expected ‘coming out of the shadows’ of incomes has largely offset the decline in revenues. the rate of corporate income tax (profit tax) in bulgaria is currently 10 %, and that rate has been in force since 2007 when it was reduced from 15 %. the contribution of corporate income tax to the tax mix is around 2 % in gdp terms, having accounted for 4.1 % at the beginning of the period. the revenue from this tax was seriously affected by the subsequent financial and economic crisis in 2008—2009. the group of direct taxes also includes social security contributions, which, despite being tax-like revenues, are its main component. in the area of social security policy, there are two discrete periods: 2007—2011, when it was aimed at reducing the burden of contributions (they dropped from 7.7 % to 6.7 % in gdp terms), and 2012—2020, when their share rose to 9.3 % (5.6% at the expense of the employer and 3.7% at the expense of the employee). as of 2020, social security contributions amount to 32.8 % of gross wages and consist of 24.3 % in social security contributions (including 19.8 % for pension schemes) and 8 % in health insurance contributions. a maximum social security income basis has been set, which rose from bgn 1 400 in 2007 to bgn 3 000 in 2019. social security contributions decreased from 29.5 % in 2007 to 20.5 % in 2010, followed by a period of increasing rates, bringing them to 24.3 % in 2020. in the period under review, the health insurance contribution was modified only once, in 2009, from 6 % to 8 %. vat is the ‘backbone’ of the tax system and accounts for almost half of all tax revenue. its share in gdp has fluctuated between 8.1 % in 2011 and 10.4 % in 2008, with no identifiable trend. changes are rather due to fluctuations in the value of gdp. the standard rate is 20 % and has not changed throughout the period under examination. a reduced rate of 7 % was introduced for tourism services in 2007, and that was raised to 9 % in 2011. in 2020, the application scope of the reduced rate was temporarily extended as part of the anti-crisis government policy in response to the effects of the covid-19 pandemic. the second most important tax in bulgaria in fiscal terms is excise duties; its share averaged around 5 % of gdp for the period under review. a more significant change in the direction of increasing excise duties was observed in 2007, when bulgaria joined the eu and hence became obliged to align its excise policy with the relevant european directives. excise goods are divided into three groups: tobacco products, energy products (including electricity) and alcoholic beverages. the fiscal role of customs duties in bulgaria sharply declined in 2007, due to the country's accession to the eu common market. since 1 january 2007, only imports of goods from non-eu countries are subject to customs duties. in 2006, customs duty revenues represented 1.8 % of gdp, while in 2007 they accounted for just 0.3 % of gdp. the property taxes fiscal contribution to total tax revenues is a mere 3 % (less than 1 % of gdp). the group of property taxes includes the following five taxes: real property tax, inheritance tax, gift tax, tax on property acquisitions and motor vehicle tax. revenues from these are collected in local budgets and tax rates are set by local authorities within legally defined limits. regarding the main tax elements, namely tax rates and tax bases, it can be concluded that the bulgarian tax system is characterised by low tax rates and a broad tax base. as is well known, high tax rates cause greater distortions in the behaviour of economic agents and generate a higher excessive tax burden. from the analysis of the structure of tax revenues it follows that bulgaria adheres to the taxation of consumption with the highest weight, followed by taxes on labour income and the most sparing is taxation on capital. tax policy is oriented towards proportional personal taxation and does not use the opportunities for redistribution of income through progressive taxation. of course, taxes are not the only tool to narrow income inequality, but they directly attack income and can be very effective for this purpose. non-tax redistributive instruments, i.e. social transfers obviously do not lead to good results, as bulgaria ranks first in the eu in terms of income inequality. in 2019 the income quintile share ratio or the s80/s20 ratio exhibits value of 8.1 for bulgaria with average value of 5 for the eu countries. the most commonly used indicator for measuring income inequality is gini coefficient, the value of which for bulgaria in 2019 is also significantly above the eu average 40.8 compared to 30.2. the next country in the ranking is lithuania and the value of its gini coefficient is much lower than that of bulgaria (35.4). finance, accounting and business analysis 3 (2) 2021 126 source: eurostat figure 6. gini coefficient of equivalised disposable income, 2019 during the last 14 years income inequality in bulgaria has deepened the value of gini coefficient has risen from 35.3 in 2007 to 40 in 2020 (fig.6). high levels of income inequality have not only a social dimension, but also an economic one. the low purchasing power of a large part of the population has a restraining effect on the pace of economic development. in this respect, there are serious arguments for rethinking the proportional taxation in bulgaria and moving to a progressive scale of personal income taxation (or at least the introduction of a non-taxable minimum). source: eurostat figure 7. gini coefficient of equivalised disposable income, bulgaria, 2007-2020 vertical tax structure the distribution of tax revenues accumulated by the public sector in bulgaria among the structural units of the general government sector remained unchanged in the period 2007—2013. approximately 3 % of the consolidated tax revenue is generated at the local level, about 70 % at the central level and the rest is channelled to the sub-sector of social security funds (fig.7). since 2014, there has been an upward trend in social security proceeds, with their share reaching 31 % of consolidated tax revenues in 2020, and a downward trend in tax proceeds at the central level, which account for 66 % of consolidated tax revenues in 2020 (compared to 72 % in 2007), with the share of tax receipts in the local public sector remaining unchanged. finance, accounting and business analysis 3 (2) 2021 127 source: data on consolidated fiscal programme, ministry of finance of the republic of bulgaria figure 8. tax revenue and expenditure structure by level of government it is interesting to observe the changes in the structure of public expenditure: in the period up to and including 2015, when no significant changes in the revenue structure were observed, there was a clear increase in the relative share of the social security funds sub-sector and in the local public sector in total public expenditure, at the expense of a shrinking burden of the central government. since 2016, a trend of centralisation of expenditure in the vertical public sector has emerged. the funds provided by central government to the local public sector are declining and this is reflected in the declining share of municipal spending in consolidated public spending. at the same time, in the last three years of the period under review, the expenditure of the social security funds sub-sector started to increase again, at the expense of the expenditure of the central government sub-sector. source: eurostat, own elaborations figure 9. tax revenue by level of government (2019) despite the fact that 'there are considerable differences in the tax structure by level of government from one member state to another' (ec, taxation trends, 2021, p. 20), the comparison of bulgaria's tax finance, accounting and business analysis 3 (2) 2021 128 structure by level of government with that of other european countries enables insights into certain specificities. bulgaria is one of the countries with the lowest share of the local public sector in consolidated tax revenues: 3 %, compared to an eu-28 average of around 10 %. the burden of the social security funds sub-sector in bulgaria is close to the eu-28 average of 31 %, while the burden of the central government sub-sector is higher than the eu-28 average. a comparison with belgium and germany, which are federal states, shows a significantly higher share of consolidated tax revenue going to the central government in bulgaria, which can be explained by the fact that some of the consolidated tax revenue in belgium and germany is collected at the provincial level. at the same time, a comparison with other unitary states such as poland, croatia, latvia and finland, shows a higher degree of centralisation of tax revenues in the public sector. one of the commonly used indicators used to measure the degree of decentralisation of financial resources in the vertical public sector is the size of the share of local tax revenues in consolidated tax revenues. however, this indicator often overestimates the tax autonomy available to local authorities: even with significant values of the indicator, a large part or even all of the revenue may come from taxes the rates and bases of which are not within the remit of local authorities, or from shared tax revenues over which local authorities, again, have no influence. therefore, in addition to the indicator of tax decentralisation, the assessment of tax autonomy at the local level also includes a more detailed evaluation of the powers of local authorities with regard to the taxes the revenues from which are received in local budgets. nevertheless, the indicator of the share of local tax revenues in consolidated public revenues gives a good idea of the centralised or decentralised nature of the vertical structure of tax revenues. the share of tax revenues entering local budgets from consolidated tax revenues increased very slightly until 2008 and then remained relatively stable up to and including 2019 (fig.9.), with the eu-28 average ranging from 8.4 % to 9.7 % in the period under review. local tax revenues in bulgaria reached a maximum of 3.3 % of consolidated tax revenues during the period under examination, and 3 % in 2019. by comparison, in sweden, the value of the tax decentralisation indicator reached almost 30 % in 2019, and in denmark and finland, it exceeds 20 %. in nine countries, the share of tax revenue collected at the local level in consolidated tax revenue exceeded the eu-28 average. source: eurostat, own elaboration figure 10. tax decentralisation (local government tax revenue as a percentage of general government tax revenue) tax revenue at the local level is mainly accumulated through three major local taxes: property tax, property acquisition tax and vehicle tax, and over the years, they have had a relatively equal weight in the structure of local government tax revenue. since 2008, local authorities in bulgaria have been able to set local tax rates within fixed statutory limits. although the property tax has, for a long period of time (up to and including 2014), played a leading role in municipal tax revenues, ‘its fiscal importance in consolidated tax revenues is insignificant’ and, in terms of the indicator of the share of real property tax revenues in gdp, ‘bulgaria takes one of among the last places in the ranking, together with the rest of the central and eastern european countries’ (nenkova, kalcheva, 2018, p. 100). the rest of the taxes — patent tax, tourist tax, inheritance tax and tax on taxi services, account for an insignificant part of tax revenues at the local level. patent tax has an extremely narrow scope, not only because of the existence of a ceiling for the previous year turnover, but also because the tax is not levied on each form of business operating in the municipality but only on small businesses and only if they carry out an activity specified in the law. (nenkova, 2014, p. 348). with the introduction, in 2010, of a new tax for municipalities, the tourist tax, there have been no significant changes in the amount of tax revenues coming in at the local level in general and the reason is that only about twenty of the 265 municipalities in total in bulgaria have well-developed developed tourism. the fiscal burden of the local tax on taxi activities that was introduced in 2017 is also finance, accounting and business analysis 3 (2) 2021 129 insignificant, accumulating in a limited number of municipalities: those that are regional centres and those with developed tourism. source: the annual reports on the state budget execution (2011-2019), ministry of finance of the republic of bulgaria figure 11. local government tax revenue structure (2019) since most of the tax burden in bulgaria is imposed by the central government, the increase in the tax burden at the local level needs to be very significant before it can bring about any substantial change in the vertical tax structure. therefore, one suitable option for implementing such a change would be to share tax revenues already accumulated by the central government with local authorities, which is in fact also a widely used mechanism. the practice in this regard is highly diverse: in some countries, in addition to local tax revenues, significant revenues are accumulated in local budgets in the form of shared or assigned tax revenues (local public finance in europe, 2019). conclusions bulgaria is among the countries with the lowest tax burden in the eu. the tax system is characterised as consumer-oriented, since half of the revenue is generated through indirect taxes. the most significant tax reform is the shift from progressive to proportional taxation of personal income and the reduction of the corporate tax rate at the beginning of the period. direct taxes account for the lowest share of the tax burden. income tax rates are among the lowest in the eu (10 %). there is no redistribution of income through the tax system, as progressive taxes are not applied. the structure of tax revenues in bulgaria is favourable and conducive to faster economic growth, but the high share of indirect taxes and the absence of reduced rates for taxing necessities puts a greater burden on poorer social groups. the existence of a maximum income threshold for social and health insurance contributions (bgn 3 000 since 2019) is also regressive for higher earners. the introduction of a tax-exempt minimum for personal income taxation would ease the tax burden for the lowest income groups and make the tax system fairer. the tax reforms undertaken as part of the government's anti-crisis measures in an attempt to overcome more quickly the negative economic effects of the covid pandemic are merely symbolic, with little fiscal effect. tax revenues in bulgaria are highly centralised, with just 3 % from local taxes, which is 3 times lower than the eu average. property taxes are the main tax revenues for local authorities, and their fiscal importance is very low, at less than 1 % of gdp. there is a potential for an increase in the burden of property taxes; besides, that would have no deterring effect on economic growth. at the same time, the degree of fiscal decentralisation would increase. acknowledgement this work was supported by the unwe research programme (research grant no. 4/2020). finance, accounting and business analysis 3 (1) 2021 130 references acosta-ormaechea, s., yoo, j., 2012. tax composition and growth: a broad cross-country perspective. international monetary fund working paper 12/257. arnold, j., brys b, heady c, johansson a, schwellnus c, vartia l. 2011. tax policy for economic recovery and growth. the economic journal 121(550): f59–f80. kneller r, bleaney m, gemmell n. 1999. fiscal policy and growth: evidence from oecd countries. journal of public economics 74(2): 171–190. local public finance in europe – country reports. rene geissler, gerhard hammerschmid and christian raffer eds. hertie school, bertelsmann stiftung, 2019. available at: https://www.bertelsmannstiftung.de/fileadmin/files/projekte/kommunale_finanzen/lpf_country-mappings190918.pdf nenkova,p., 2014. fiscal decentralization and local finance reforms in bulgaria: a review of ten years’ experience. mediterranean journal of social sciences, vol.5, no 23, pp.342-352 nenkova,p., kalcheva,d., 2018. fiscalna rolya i znachenie na danaka varhu nedvizimite imoti v bulgaria – sravnitelen analiz na 265 obshtini. biznes posoki, broy 2, 2018, pp.91-110 nenkova, p., metalova, d., 2019. an overview of tax policy and taxation trends in bulgaria during the period 2005-2019, научные вести, №7(12)/2019, pp.35-43 european commission, 2021. taxation trends in the european union. data for the eu member states, iceland, norway and united kingdom. directorate-general for taxation and customs union, publications office of the european union, luxembourg european commission, 2021. annual report on taxation, review of taxation policies in the eu member states, directorate-general for taxation and customs union, publications office of the european union, luxembourg ministry of finance of the republic of bulgaria, 2021. report on state budget execution in 2020. available at: https://www.minfin.bg/bg/1408 ministry of finance of the republic of bulgaria, 2021. convergence programme 2021-2023. available at: https://ec.europa.eu/info/sites/default/files/2021-bulgaria-convergence-programme_en.pdf fiscal council of the republic of bulgaria, 2021. stanovishte otnosno otchet za izpalnenieto na darjavnia budget na republika bulgaria za 2020g available at: https://www.fiscalcouncil.bg/bg/publikacii/stanovishte-otchet-izpalnenie-darzaven-buydzet2020-godishen-otchet-dalg-31-12-2020 https://www.bertelsmann-stiftung.de/fileadmin/files/projekte/kommunale_finanzen/lpf_country-mappings190918.pdf https://www.bertelsmann-stiftung.de/fileadmin/files/projekte/kommunale_finanzen/lpf_country-mappings190918.pdf https://www.minfin.bg/bg/1408 https://ec.europa.eu/info/sites/default/files/2021-bulgaria-convergence-programme_en.pdf https://www.fiscalcouncil.bg/bg/publikacii/stanovishte-otchet-izpalnenie-darzaven-buydzet-2020-godishen-otchet-dalg-31-12-2020 https://www.fiscalcouncil.bg/bg/publikacii/stanovishte-otchet-izpalnenie-darzaven-buydzet-2020-godishen-otchet-dalg-31-12-2020 118 finance, accounting and business analysis volume 4 issue 2, 2022 http://faba.bg the end of the negative interest rates elena ralinska department of finance, university of national and world economy, sofia, bulgaria info articles abstract keywords: negative interest rates, inflation, european central bank, government securities following the covid-19 pandemic the world faced another crisis – the rapid increase in the inflation rate. in some countries, including in bulgaria, the inflation rate reached two-digit values. disrupted supply chains as a result of the war in ukraine caused shortages of goods and increased prices of basic raw materials, particularly energy sources. the loose monetary policy conducted by the central banks, especially during the past few years also contributed for the inflation rate to increase rapidly. in response the european central bank in july 2022 for first time in 7-8 years increased its key interest rates. the main goal of this policy is to fight inflation and achieve the target level of inflation by decreasing credit activity. through the transmission mechanism of monetary policy, the increase in key ecb interest rates caused an increase in market interest rates. the negative interest rates are in the past and it is about to be seen whether the performed monetary policy will be effective. objective: this paper examines the effect of increased interest rates on government securities yield, public finance and financial results of ecb and commercial banks. methodology: the study presents the dynamics in government securities yield of germany, spain and italy by examining bloomberg data for the period january – september 2022. also, in the paper is presented the dynamics of dax and euro stoxx 50 indices for the above mentioned period. for illustration of results are used graphs based on observations, comparative analysis and systematization. through the methods of analysis and synthesis the risks of the increased key interest rates of ecb on public finance and financial results of ecb and commercial banks, are investigated. results: the analysis indicates that the adjustment of the interest rates on government securities to changes in key interest rates of ecb is immediate, and sometimes with some haste. the increase in the key interest rates of ecb caused an increase in government securities yield which will make it harder for the most indebted countries to service their government debt because it will raise their financial costs. *address correspondence: e-mail: e.ralinska@yahoo.com finance, accounting and business analysis 4 (2) 2022 119 introduction in the last few years, economies around the world, and in particular in the eu, have been operating in an environment of unprecedentedly low and even negative interest rates. this trend is a result of the expansionary monetary policy of central banks that began in response to the global financial crisis. despite expectations that this loose monetary policy by all central banks, and the ecb in particular, would be shorter-term, it lasted more than 10 years. during this period, the ecb poured large amounts of liquidity into the banking system through measures called quantitative easing, as well as in the form of special instruments for rescuing financial institutions in a difficult financial situation. quantitative easing are large-scale purchases of assets by central banks, and especially of government securities, which inflates their balance sheets and increases liabilities in relation to the monetary base (mihailova, g.). the ecb buys not only government securities, but also other securities, influencing their yield downwards. it also restructured the maturity of its purchases — selecting longer-term instruments to influence long-term interest rates. this, in turn, leads to an increase in the prices of the securities acquired by the ecb and to a decrease in their yield. interest rates on other assets are also beginning to fall due to rebalancing of portfolios of assets and securities ((reza, santor, suchanek (2015). along with the quantitative easing and the tools for injecting liquidity support to commercial banks under favorable conditions, after the outbreak of the crisis, ecb undertook a policy of lowering its main interest rates, which are three – deposit facility rate, lending facility rate and interest rate on main refinancing operations. for the period from 2008 to 2019, the ecb repeatedly lowered its key interest rates (see figure 1), with the interest rate on the deposit facility even moving into negative territory. the european central bank, for the first time in history, resorted to reducing the main interest rate on deposits (deposit facility) to a negative value in mid-2014. from july 2012 to the beginning of june 2014, this interest rate was fixed at 0% by the management board of the ecb. from june 11, 2014, the negative value of "-0.1%" on deposit facility came into force, with the lowest value it reached being -0.50% after the ecb's decision of september 18, 2018. the ecb has adopted a policy of low and negative interest rates in order to stimulate lending and reduce interest rates in conditions of prolonged low inflation (kamelarov, 2018). the other two key interest rates of the ecb do not go into negative territory, but they are also reduced significantly, with their lowest values being recorded in 2016 – 0.0% for the main refinancing operations and 0.25% for the marginal lending facility. source: european central bank figure 1 european central bank key interest rates from mid-2022, a market correction began in the opposite direction, with negative ecb interest rates becoming a thing of the past, which began to affect market interest rates as well. within a few months from july 2022, the ecb increased its key interest rates three times, which from the beginning of november reached respectively 1.5% on the deposit facility, 2.25% on the marginal lending facility and 2% on the main refinancing operations (european central bank). by using a variety of instruments to conduct its monetary policy, the ecb regulates liquidity and -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 1 5 .1 0 .2 0 0 8 1 2 .1 1 .2 0 0 8 1 0 .1 2 .2 0 0 8 2 1 .1 .2 0 0 9 1 1 .3 .2 0 0 9 8 .4 .2 0 0 9 1 3 .5 .2 0 0 9 1 3 .4 .2 0 1 1 1 1 .7 .2 0 1 1 1 3 .7 .2 0 1 1 9 .1 1 .2 0 1 1 1 4 .1 2 .2 0 1 1 8 .5 .2 0 1 3 1 3 .1 1 .2 0 1 3 1 1 .6 .2 0 1 4 1 0 .9 .2 0 1 4 9 .1 2 .2 0 1 5 1 6 .3 .2 0 1 6 1 8 .9 .2 0 1 9 2 7 .7 .2 0 2 2 1 4 .9 .2 0 2 2 2 .1 1 .2 0 2 2 deposit facility marginal lending facility main refinancing operations finance, accounting and business analysis 4 (2) 2022 120 short-term interest rates, thereby influencing both the money market and various economic indicators. the relationship between the money market and monetary policy is two-way. on the one hand, the money market (and the financial market in general) plays an important role in the implementation of monetary policy, and on the other hand, changes in monetary policy directly affect the money market. the way in which the monetary policy conducted by the ecb can influence the price level and, respectively, the entire economy is called a transmission mechanism. the transmission mechanism of the ecb's monetary policy is a complex process in its nature, which can be different in different member countries and change over time and take place through different channels. at the heart of this transmission mechanism is the money market, which is directly influenced by monetary policy decisions and through which impulses are transmitted to the real sector and to the financial market as a whole. the change in the official interest rates is transmitted to the economy through 4 different but interrelated channels – market interest rates, expectations, asset prices and the exchange rate. the change in the official interest rates has a direct impact on money market interest rates, as it is evident by the dynamics of the euribor index presented in the following figure. the dates shown in the figure correspond to the dates on which the ecb changed its key interest rates. for the period under review, the index for all three maturities follows the dynamics of the key interest rates of the ecb, and since the end of 2015, the index has registered negative values. this trend of negative index values continues until 2022, and from july 2022, euribor for all three presented maturities registered positive values. euribor with maturity 12m already in april started to register positive values, which reflected the expectations of economic agents that the ecb will very soon take a step to raise interest rates. source: www.euribor-rates.eu figure 2 dynamics of the euribor index with maturities of 3m, 6m and 12m (%) the euribor affects the interest rates, applied by the banks, as it is used as a benchmark for calculating interest rates on bank loans. the effects of the transmission mechanism spill over into the real sector as the rise or fall of interest rates in the banking market affects companies' decisions to invest and households' decisions to borrow or save. bank loans and deposits represent the largest fraction of the total financial assets and liabilities of the eurozone, therefore they also have a key role in the interest rates channel. according to empirical data for the eurozone, published by the ecb, the transmission mechanism of monetary policy operates similarly in all participating countries. in a number of studies devoted to the impact of the monetary policy of the ecb on the financial market, it is established that among financial assets the effect of the monetary policy and, in particular, of the change in the main interest rates, is stronger for government bonds (kolev, s., 2018, andrade et al., 2016). this is also confirmed by the following three figures, which show the yield on german, italian and spanish government securities with terms of 2 year, 5 year and 10 year, for the period january october 2022. the figures show that the dynamics of the yield of bonds of the three represented countries is identical and corresponds to changes in ecb interest rates and reflects the expectations of economic agents. in the case of german government securities in january, the yield for all three maturities was in negative territory, gradually moving into positive territory. thus, from april 2022, the yield on all maturities of german government securities is positive and, with certain exceptions, shows a constant -1 0 1 2 3 4 5 6 1 7 .1 0 .2 0 0 8 1 2 .1 1 .2 0 0 8 1 0 .1 2 .2 0 0 8 2 1 .1 .2 0 0 9 1 1 .3 .2 0 0 9 8 .4 .2 0 0 9 1 3 .5 .2 0 0 9 1 3 .4 .2 0 1 1 1 1 .7 .2 0 1 1 1 3 .7 .2 0 1 1 9 .1 1 .2 0 1 1 1 4 .1 2 .2 0 1 1 8 .5 .2 0 1 3 1 3 .1 1 .2 0 1 3 1 1 .6 .2 0 1 4 1 0 .9 .2 0 1 4 9 .1 2 .2 0 1 5 1 6 .3 .2 0 1 6 1 8 .9 .2 0 1 9 2 7 .7 .2 0 2 2 1 4 .9 .2 0 2 2 2 .1 1 .2 0 2 2 euribor 3m euribor 6m euribor 12m finance, accounting and business analysis 4 (2) 2022 121 increase. in the case of spanish government securities, at the beginning of the considered period, the yield was negative for the 2-year and 5-year bonds, and similarly to the german government securities, they gradually moved into positive territory, but at a slightly faster pace. among the italian government securities, only the bonds with maturity of 2 year registered negative values, and already at the end of january they recorded positive values. it can be seen that the increase in the yield on government securities of all three countries began to be observed even before the ecb increased its interest rates, which is in response to investors' expectations that this will happen as soon as possible. investors' expectations were dictated by the strong acceleration of the rate of inflation in europe and by the increase by the fed of the main interest rate. this is also the reason that already in march the yields on government securities of the three represented countries entered positive territory. overall, the fed raised its key interest rate much earlier and more aggressively. source: bloomberg figure 3 yield on german government securities (in %) source: bloomberg figure 4 yield on italian government securities (in %) -1 0 1 2 3 2 year 5 year 10 year -1 0 1 2 3 4 5 2 year 5 year 10 year finance, accounting and business analysis 4 (2) 2022 122 source: bloomberg figure 5 yield on spanish government securities (in %) in every economy there are many interest rates on deposits, on loans, government securities, interest rates of the central bank, etc. at the same time, the yield on government securities is considered the socalled risk-free interest rate, because theoretically it is considered that these securities do not carry the risk of default. all other bonds carry the risk of default, so their yield includes two components the risk-free interest rate and the default risk premium. that is, the risk-free interest rate enters as an ingredient in all other interest rates, which are theoretically always higher than the risk-free interest rate. this means that when interest rates on government securities rise, an increase in interest rates on other financial instruments is also observed. or it is empirically found that different interest rates tend to move in parallel. in practice, there are differences in the extent and speed with which different interest rates adjust to changes in the ecb's key interest rates and in government securities, i.e. these adjustments are not always immediate. on the other hand, as can be seen from the presented dynamics of interest rates on government securities of the examined countries, the adjustment to changes in key interest rates is immediate, and sometimes with some haste. one of the main concerns from the increase in the key interest rates by the ecb is the high indebtedness of some of the countries in the eurozone. the public debt of the eurozone countries at the end of the first quarter of 2022 is 96% of gdp, and of the eu countries it is slightly smaller 88%. looking at individual countries, the share of government debt in gdp is highest in greece (189%), italy (153%), portugal (127%) and spain (118%). an increase in interest rates will make it harder for the most indebted countries to service their government debt because it will raise their financial costs. for the most indebted countries, this means an increase in the cost of servicing their public debt by tens of billions of euros per year. changes in interest rates also affect the balance sheet value of government securities held by the ecb and commercial banks. when interest rates rise, the value of government securities falls, which leads to their depreciation. thus, the value of the assets falls and, at the same time, the financial costs rise. if the interest rate increase is very sharp, the devaluations will be significant, which could lead to large losses for both the ecb and the commercial banks, thus undermining the stability of the banking system. a major part of the ecb's assets are government bonds, and in recent years the ecb's balance sheet has been greatly increased (see figure 6). this increase of the balance sheet poses a risk of serious losses for the ecb in the event of a sharp devaluation of assets and in particular of government securities. -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 2 year 5 year 10 year finance, accounting and business analysis 4 (2) 2022 123 source: federal reserve economic data (https://fredhelp.stlouisfed.org/) figure 6 assets of ecb (in mln. euro) changes in the main interest rates of the ecb also have an impact on the stock markets, but this impact is not as pronounced as in the case of market interest rates and yields on government securities. figure 7 and figure 8 shows the dynamics of the euro stoxx 50 and dax indices for the period january september 2022. both indices recorded a decrease in march, which reflects the concerns of investors as a result of the war in ukraine and the acceleration of the rate of inflation in the countries from the eu. following the increase in the interest rates by the ecb in july, both indices saw an increase. although with this action the ecb started to tighten the monetary policy, the stock indices did not lose their value, on the contrary. this market reaction shows that investors perceive this action by the ecb as safe and prudent and as a signal of the central bank's intention to fight inflation. that is, regardless of whether monetary policy is loose or tight, as long as it relevant to economic conditions, it will be well accepted by the market. source: bloomberg figure 7 dynamics of the main european index euro stoxx 50 0 1,500,000 3,000,000 4,500,000 6,000,000 7,500,000 9,000,000 10,500,000 2 0 0 7 -0 1 -0 1 2 0 0 8 -0 1 -0 1 2 0 0 9 -0 1 -0 1 2 0 1 0 -0 1 -0 1 2 0 1 1 -0 1 -0 1 2 0 1 2 -0 1 -0 1 2 0 1 3 -0 1 -0 1 2 0 1 4 -0 1 -0 1 2 0 1 5 -0 1 -0 1 2 0 1 6 -0 1 -0 1 2 0 1 7 -0 1 -0 1 2 0 1 8 -0 1 -0 1 2 0 1 9 -0 1 -0 1 2 0 2 0 -0 1 -0 1 2 0 2 1 -0 1 -0 1 2 0 2 2 -0 1 -0 1 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 finance, accounting and business analysis 4 (2) 2022 124 source: bloomberg figure 8 dynamics of the main german index dax and while raising interest rates poses a risk to the solvency of indebted countries, this move currently is in sync with price stability, i.e. it is one of the tools to fight inflation. maintaining inflation within certain limits is the main objective of the monetary policy of almost all central banks and indicates the effectiveness of economic policy, including monetary policy, the stability and dynamics of the entire economic system. central banks and countries around the world have taken various steps to fight inflation, a problem further complicated by the war in ukraine and disrupted supply chains. unlike the ecb, the federal reserve took steps to fight inflation much earlier, raising interest rates as early as march 2022, followed by several larger increases. the ecb's response to inflation was rather slow and timid. inflation is one of the main macroeconomic indicators that has an adverse effect on the entire economy and leads to a decrease in the real income of the population, devaluation of the population's savings, disruption of the production process, etc. inflation also has a negative impact on all units of the financial system, exacerbates the crisis of public finances, and stimulates the increase of the budget and government spending. uncontrolled inflation can destroy entire social systems, and that why price stability is a major goal of central banks around the world. economists agree that inflation is a monetary phenomenon, which is confirmed by empirical data showing a strong correlation between money supply and inflation. historically, countries that have experienced high and prolonged inflation have also had excessive growth in the money supply. milton friedman also came to this conclusion, who in the book "monetary history of the united states: 18671960" together with anna schwartz claimed that "inflation is always and everywhere a monetary phenomenon." however, this does not mean that the increase in the money supply is the sole and immediate cause of inflation (mladenov, m., 2009) . at the eu level, in the period after the global financial crisis, there were no significant changes in the rate of inflation, and its values were below the target set by the ecb. there were even periods of deflation. the situation began to change from the beginning of 2021, initially with a gradual increase in the price level, with the pace accelerating at the end of the year and in the period after the start of the military conflict in ukraine. disrupted supply chains as a result of the war caused shortages of goods and increased prices of basic raw materials, particularly energy sources. this in turn provokes an inflationary spiral, raising the prices of all other goods and services, since energy and fuels are a major component of costs in any production. in some countries, including bulgaria, inflation reached double-digit values for several months. at first, there was no consensus among economists as to whether inflation was a transitory effect or would continue for a longer period. almost a year after the beginning of the inflationary processes, it is clear that it is not a transitory effect and will have a long-term effect. the specific methods for controlling of inflation depend on clarifying the nature of inflation, identifying the main and related factors that cause inflationary processes. based on this, two directions of anti-inflationary policy were formed: keynesian and monetarist. 0 3000 6000 9000 12000 15000 18000 finance, accounting and business analysis 4 (2) 2022 125 according to the keynesian trend, the main cause of inflation is the increase in aggregate demand, therefore any policy that is aimed at reducing the components of aggregate demand will be effective in fighting inflation. aggregate demand can be limited in several ways reducing consumption by increasing taxes, reducing public spending, increasing interest rates, which will make debt and investment more expensive (totonchi, j., 2011). according to monetarists led by m. friedman, inflation occurs when the growth rate of money supply exceeds the growth rate of the economy. according to them, the causes of inflation, which is generated by improper intervention in the economy, must be completely eliminated, and since it is a purely monetary phenomenon, it can be controlled by controlling the money supply (hetzel, r., 2013). they based their concept on the quantity theory of money, viewing money as the basic element of a market economy. limiting inflation is a serious challenge for economies today and requires targeted actions from both the central bank and fiscal policy. external factors must also be considered. the central banks have already taken the first steps towards limiting inflation, but this will certainly be a long-term process, which will largely depend on the development of the military conflict in ukraine. confidence in central banks is critical to controlling long-term inflation. this includes managing long-term inflation expectations and avoiding situations where fiscal policy is out of sync with anti-inflationary monetary policy. conclusion the covid-19 pandemic and the outbreak of the war in ukraine have put eu economies under serious challenges, the biggest of which is high inflation. while for a long time inflation in the eurozone was below the target and the ecb was trying to raise it, in 2022 the situation changed radically, as we witnessed rapidly rising prices and high inflation rates that have continued to date. the ecb took steps to fight inflation by raising its key interest rates several times and starting to taper asset purchases. money market interest rates reacted immediately and rose. treasury yields also responded immediately, with treasury yields moving into positive territory after a long period of negative interest rates. other interest rates have also started to react, with the degree of adjustment varying across instruments. the ecb is seen to be more cautiously than the federal reserve on the increase of interest rates. the main reason for that is the fact that some countries in european union are highly indebted and the increase in interest rates will make it harder for them to service their government debt because it will raise their financial costs. the negative effect on the book value of the government securities held by ecb and commercial bank should also be taken into consideration. given the fact that central bank actions operate with lags, i.e. they require time to affect the real economy, it is still too early to analyze the effects of an increase in key interest rates on inflation. references andrade, p., et al., the ecb's asset purchase programme: an early assessment, ecb working paper no. 195, 2016 https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1956.en.pdf bloomberg (https://www.bloomberg.com/europe) european central bank, тhe monetary policy of ecb, 2011, european central bank, 2011, https://www.ecb.europa.eu/pub/pdf/other/monetarypolicy2011en.pdf european central bank (https://www.ecb.europa.eu/home/html/index.en.html) finance research ipedr vol.4 (2011) © (2011) iacsit press, singapore http://www.ipedr.com/vol4/91-f10116.pdf hartmann, p., smets, f., the first twenty years of the european central bank: monetary policy, european central bank, 2018 https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2219.en.pdf hetzel, r., the monetarist-keynesian debate and the phillips curve: lessons from the great inflation, economic quarterly volume 99, number 2 second quarter 2013 kamelarov, а., does the monetary policy in the euroarea change the focus?, eu – the altered center and the new periphery, sofia, 2018 kolev, s., analyzing the impact of unconventional monetary policy measures taken by the world's leading central banks on the government securities yield through the interest rate channel, institute for economic policy sixth academic competition "dr. ivanka petkova”, 2018 https://www.epi-bg.org/images/award_ip/svilen_kolev_paper_bg.pdf mladenov, м., money, banks, credit, publishing house trakia-м, 2009 mihailova-borisova, g., effectiveness of the ecb's quantitative easing https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1956.en.pdf https://www.ecb.europa.eu/home/html/index.en.html finance, accounting and business analysis 4 (2) 2022 126 totonchi, j., macroeconomic theories of inflation, 2011 international conference on economics and 39 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 the relationship between parenting styles and parental financial socialisation adam ndou department of finance, risk management and banking, university of south africa, pretoria, south africa info articles abstract history article: submitted 20 february 2023 revised 04 april 2023 accepted 25 may 2023 purpose: parenting styles are an important factor in how parents raise their children. this study investigated the relationship between parenting styles and parental financial socialisation. parenting style was measured through authoritarian, neglectful, authoritative, and permissive. while parental financial socialisation was determined through parental financial teaching. design/methodology/approach: this study adopted quantitative research approach and used self-administered questionnaire to collect data from young adults in two provinces (gauteng and mpumalanga) in south africa. correlation analysis was used to analyse data. findings: the results showed that there is a significant positive relationship between authoritarian, authoritative, and a permissive parenting styles with parental financial teaching. the results further showed that there is a significant negative relationship between a neglectful parenting style and parental financial teaching. thus, this indicated that there is a significant positive relationship between parenting styles and parental financial socialisation. practical implications: parents should invest more time in understanding and evaluating their parenting styles and adopt authoritarian, authoritative and permissive parenting styles as they were found to support and foster parental financial socialisation. financial educators and government must design and implement financial programmes aimed at making parents aware of different parenting styles. originality/value: this study contributes to the existing body of knowledge by empirically testing the relationship between parenting styles and parental financial socialisation. there is no study that has been conducted before in south africa. paper type: research paper keywords: parents, financial socialisation, parenting styles, financial teaching jel: d14, g51, g53 * address correspondence: e-mail: endouaa@unisa.ac.za https://orcid.org/0000-0001-7103-0184 adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 40 introduction parent–child interaction is amongst the most important predictors of children’s financial development (strom et al. 2008). how parents interact with their children from childhood to adulthood determines how and whether norms, attitudes, and behaviours are learned and adopted (drever et al. 2015). parents may interact with their children in distinct ways that can be linked to children’s financial behaviours and practices (sabri et al. 2020). parental influence differs according to certain factors that characterise how the parents interact with their children (carlson et al. 2011). for example, richman and mandara (2013) found that parenting styles differed substantially across race and ethnic groups. parenting styles are an important factors in how parents raise their children, and a choice or adoption of a particular parenting style may have an influence on how parents interact with their children and ultimately how children are raised and transition from childhood to adulthood. however, with such great influence or parent-child interaction, parenting styles have been underexplored by studies in parental financial socialisation. thus, studies are very scant, and more studies are needed in this field. there are few notable studies conducted, however, these were conducted in developed countries in europe (koonce et al. 2008; serido et al. 2010; fang et al. 2013; wisenblit et al. 2013; serido and deenanath 2016), leaving developing countries and african countries in particular unintentionally unattended. south africa is one of those countries who are underserved by studies exploring parenting styles and parental financial socialisation. there is no study in south africa that has investigated the relationship between parenting styles and parental financial socialisation. thus, this study is very important in a south african context. the other thing that makes this study important is that parenting styles in developed countries may be different to the ones in south africa, considering race, culture, and socioeconomic status. the more parents talk about finances, teach their children how to manage finances, and model healthy financial practices, the more financially independent, capable, and confident children will be as they transition into independent adulthood (bleazard 2022). parental financial teaching is critical in developing the values, norms, and behaviours that will positively affects young adults’ financial well-being (grohmann et al. 2015; van campenhout 2015). batten (2015) indicates that parents often use an allowance to teach their children about money matters. the allowance is used as a mechanism to reward or punish certain behaviours. parents who explicitly teach their children have a greater influence on their children than parents who do not (kim et al. 2012). studies have also shown that parental financial teaching influences borrowing behaviour. grinstein-weiss et al. (2012) assert that greater parental teaching is associated with reduced loan delinquency and foreclosure, as well as with asset accumulation, in young adults. homan (2016) found that young adults who received the most parental financial teaching have fewer loans than those who were never taught. this study contributed to literature and filled the research gap which has been there for a long time in financial socialisation. the objective was to determine the relationship between parenting styles and parental financial socialisation. parenting styles were measured through authoritarian, neglectful, authoritative, and permissive as proposed by baumrind (1967), while parental financial socialisation was determined through parental financial teaching. therefore, the following hypotheses were formulated: h1: there is a significant positive relationship between an authoritarian parenting style and parental financial teaching. h2: there is a significant positive relationship between a neglectful parenting style and parental financial teaching. h3: there is a significant positive relationship between an authoritative parenting style and parental financial teaching. h4: there is a significant positive relationship between a permissive parenting style and parental financial teaching. the remainder of this article is structured as follows: sections 2 provides literature review. section 3 explores research and methodology of the study. section 4 covers analysis and findings the study. section 5 discussions of the study. section 6 provides conclusions. literature review parenting styles a parenting style is defined as a collection of attitudes, behaviours, and styles of interaction with children that produce the emotional family context in which socialisation occurs. it is also considered a pattern of childrearing that is characterised by traditional and specific responses to child behaviours (coplan et al. 2002). baumrind (1967) proposed four dimensions of parenting: control, clarity of communication, demandingness, and responsiveness. control refers to behavioural control — the demands of parents in order to integrate children into the family, and psychological control, which refers to attempts to control the psychological and emotional development of the child. clarity of information relates to transmission of information at an appropriate developmental level, so that the child’s understanding is maximised. demandingness refers to parents’ expectation of their children to behave or react in line with adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 41 their developmental level, and responsiveness refers to parents’ expression of warmth, concern, involvement, and pleasure in parenting. baumrind (1967) created a typology of parenting styles, namely authoritarian, authoritative, permissive, or indulgent, and uninvolved or neglectful, which have been linked to children’s consumer socialisation processes and outcomes (carlson et al. 2011). however, there is limited review of this typology in financial socialisation literature (bucciol and veronesi 2014), and more research is required, which is why it was applied in the present study. parenting style was measured through authoritarian, authoritative, permissive, and neglectful. authoritarian the authoritarian parenting style is characterised by high demandingness and low responsiveness and represents total control of the child by the parent (baumrind 1968). according to maccoby and martin (1983), parents who follow this style show high levels of control and maturity demands and low levels of nurturance and clarity of communication. these parents are very involved in their children’s lives and believe in giving children rules and guidelines to follow. they also expect their rules to be obeyed without question (carlo et al. 2007). authoritarian parents seek high levels of control over their children because they view children as dominated by egotistical and impulse forces. these parents judge their children’s conduct according to religious, cultural, or other standards endorsed by authority. they believe in parental authority, keeping children in subordinate roles, restricting expression of autonomy, and not encouraging verbal exchanges between parents and children (baumrind 1968). authoritarians believe children have few rights but have adult responsibilities. these parents are more restrictive, and they display more hostility towards their children (mikeska et al. 2017). baumrind (1967) noted a widely held view that the authoritarian parenting style is more effective in the socialisation and shaping of children’s behaviour because of the level of parental power, which is exacted through reinforcement contingencies. children’s complex behaviour patterns, especially social behaviours, are learned because of the positive or negative consequences with which their behaviours have been associated. thus, these parents believe that their children will only display socially competent behaviours if they are shaped by the parents. behaviourists and traditionalists both stress the need for learning and the duty of parents to make uncompromising demands of their children, thus supporting the authoritarian parenting style (baumrind 1967). authoritative the authoritative parenting style includes high demandingness and high responsiveness. it permits the child a high degree of autonomy, and is regarded as parenting that is rational, consistent, and warm (baumrind 1968). these parents value children’s independence but expect disciplined conformity. authoritative parents are characterised by an effort to direct children in an issue-oriented and rational manner (mikeska et al. 2017). they have firm control, but do not overly restrict the child. they affirm the child’s present qualities, but also set standards for future conduct. children from authoritative homes appear to be higher on a number of outcomes than their peers who experienced a different type of parenting, specifically social assertiveness, social responsibilities, and cognitive competence (maccoby and martin 1983). soward (2006) revealed a positive relation between authoritative parenting and children’s impulse control, which is associated with a stronger future orientation, which, in turn, has been shown to affect financial behaviours like saving and retirement planning. highly involved parenting has also been linked to a range of other behaviours that have potential impacts on financial outcomes, including cognitive development and motivation to learn financial matters. bucciol and veronesi (2014) argue that receiving an allowance, in itself, does not foster saving behaviour amongst young adults; however, it was found to be effective when combined with parental oversight of budgeting and how the money is spent. thus, children of authoritative parents benefit from financial monitoring by their parents. permissive permissive or indulgent parents are less controlling and avoid the use of punishment. they also make fewer maturity demands of their children and are characterised by high responsiveness. permissive parents attempt to behave in a non-punitive, acceptant, and affirmative manner towards their children’s impulses, desires, and actions. they allow their children to regulate their own activities as much as possible, avoid the exercise of control, and do not encourage them to obey externally defined standards (baumrind 1967). the main characteristic of the permissive parenting style is children’s self-regulation; children are considered to have the right to live freely, without outside authority over things psychic and somatic, meaning that children are allowed to eat when they are hungry, clean only when they want to, are never adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 42 scolded, or spanked, and are always loved and protected (baumrind 1968). neill (1960) argues that to impose anything by authority on children is wrong. children should not do anything until they are of the opinion that is should be done. thus, any attempt to shape children’s behaviour prematurely involves an unnatural and unnecessary infringement on children’s freedom, and results in neurosis and insufficiency. permissive parents believe that children should be given freedom to regulate their own behaviours. the permissive style of parenting has received much criticism. pong et al. (2005) posit that children of permissive parents have less ability to delay gratification. they want to buy something immediately, and if they do not have the money, they will borrow it. this indicates a possible relationship between impulsivity and lack of parental guidance (pong et al. 2005). permissive parents employ little control in their interactions with their children. they communicate total acceptance of the child’s behaviour, do not use punishment, and often give in to the child’s desires and pleading, because they do not believe in a family hierarchy. these parents tend to avoid confrontation and encourage children to be responsible for their own actions (estlein 2016). neglectful neglectful or uninvolved parents are characterised by low demandingness and responsiveness. thus, they are low in nurturing, and also low in authoritarian characteristics. they are not involved emotionally with their children, provide minimal supervision, and maintain distant relations with their children (estlein 2016). they neither seek nor exercise much control over their children, perhaps because they are self-involved and deny or wish to avoid obligations to provide guidance. their limited restrictiveness is coupled with a relative lack of warmth or anxious concern about the child’s development. they see children as having few rights or responsibilities that require parental attention, and as being capable of meeting many of their own needs, therefore requiring little communication and reinforcement (pong et al. 2005). neglectful parents do little or nothing to monitor or directly encourage their children’s ability to function autonomously, and do not encourage their children’s self-regulation or impose control over the children’s behaviour (carlson and grossbart 1988). this leads to their children having low selfesteem and slower emotional development. neglectful parents are unresponsive; they do not provide structure or monitor their children’s behaviour, and, in many cases, they neglect their parenting responsibilities altogether (bednar and fisher 2003). parental financial teaching young people spend a considerable amount of time with their parents; therefore, direct parental financial teaching could occur in a very natural way, particularly when adolescents participate in financial affairs by obtaining and handling financial resources within the family environment (gudmunson and danes 2011). moreover, parents can share their own knowledge, financial choices, and financial norms with their adolescent children while teaching them. this enables young people to accumulate objective financial knowledge and increases the likelihood that they will emulate their parents’ financial behaviours. parental financial socialisation through a mechanism of direct financial teaching could influence adolescents’ financial behaviour and financial outcomes. thus, parents should intentionally teach financial knowledge, and convey clear and positive financial norms to their adolescent children (zhu 2018). parents also actively influence their children to make better decisions and learn about finance by trying to instil good financial behaviour in their children (grohmann et al. 2015). parental financial teaching has an influence on financial literacy (antoni and saayman 2021). direct financial teaching relates to how parents teach their children about financial matters throughout childhood, until adulthood (moschis 1985). shim et al. (2010) assert that explicit financial teaching is linked with children’s financial learning and future behaviours. conceptual model and hypotheses this study adopted the financial socialisation theory by danes (1994) to develop hypotheses and conceptual model, which posits that financial socialisation is the process whereby people obtain and develop financial knowledge, values, and behaviour that affect their financial behaviour and money management. financial socialisation is a life-long process that is influenced by numerous socialisation agents, such as family, teachers, peers, and the media. factors such as gender, socio-economic conditions of the family and the surrounding community, race, ethnicity, types of financial products that are available, public policies, and macro-economic trends are likely influential in financial socialisation (gudmunson et al. 2016). figure 1 indicates the conceptual model and four hypotheses of the study. adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 43 independent variables dependent variable h1 h2 h3 h4 source: author figure 1. conceptual model of the study as depicted in figure 1 the following hypotheses were developed: h1: there is a significant positive relationship between an authoritarian parenting style and parental financial teaching. h2: there is a significant positive relationship between neglectful parenting style and parental financial teaching. h3: there is a significant positive relationship between an authoritative parenting style and parental financial teaching. h4: there is a significant positive relationship between a permissive parenting style and parental financial teaching. methods this research used a quantitative research approach, as it allows for stable and predictable world which gives the research more control over external factors in testing the relationship between variables and expressing or explaining a phenomenon in amount or quantity (adams et al. 2014). when using this approach, researchers gather data in such a way that the data are easy to quantify, allowing for statistical analysis (patten and newhart 2018). this study used self-administered questionnaire which were distributed to respondents’ homes to collect data. questionnaire were design in line with the objective of the study and used existing likert type scales adopted from literature and also self-constructed scales. the likert scale consisted of 5-point scales that ranged from strongly disagree (1) to strongly agree (5). the population for this study is young adults in south africa between the age of 18 and 35 from all races. to ensure representation of the population of young adults in south africa, urban areas, and rural areas were included in the sample. this was done through purposive sampling method where sampling is done to meet a particular motive (babbie 2013). south africa has nine provinces, three provinces (gauteng, western cape, and free state) are predominantly urban, while six provinces (eastern cape, limpopo, mpumalanga, north-west, kwazulu-natal and northern cape) are predominantly rural. simple random sampling was used where firstly urban provinces were sampled and thereafter rural provinces were sampled. provinces names were written on a piece of paper ,folded and placed in a small box, shuffled and picked one by one, the first province picked was included in the sample, in total two provinces were selected, one from urban and the other one from rural. thus, from urban provinces, gauteng was selected and mpumalanga from the rural provinces. therefore, young adults in gauteng and mpumalanga were visited at their homes to collect data. a sample size 0f 500 was set, calculated through yamane (1967) formula, krejcie and morgan’s (1970) table and considering the recommended sample size for conducting exploratory factor analysis (efa). a total of 423 young black african adults completed the questionnaire, giving a response rate of 94%, which is good and acceptable. to ensure validity and reliability, construct validity and cronbach alpha were used in this study. construct validity was assessed through efa by conducting a kaiser-meyer-olkin (kmo) and bartlett’s test of sphericity. the acceptable value of kmo which is suitable and adequate for efa is 0.50 and above. neglectful style authoritarian style permissive style authoritative style parental financial teaching adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 44 while bartlett’s test of sphericity is significant for efa if the significance value is (p < 0.05). factors loadings of ±0.30 to ±0.40 are minimally acceptable, values greater than ±0.50 are generally considered necessary for practical significance (hair et al. 2014). this study retained a minimum factor loading of 0.30 for interpretation. cronbach alpha was used to measure reliability, as is the most widely used reliability measure of internal consistency (vanderstoep and johnson 2009). cronbach alpha with a score of 0.60 and more were accepted and considered to be reliable (cohen et al. 2018). thereafter, correlation analysis was used in this study to test the relationship between parenting styles and parental financial socialisation. result and discussion the objective of this study was to determine the relationship between parenting styles and parental financial socialisation. so, before this relationship can be tested it was important to assess the suitability of data for conducting factor analysis. kmo and bartlett’s test of sphericity were used in this study. table 1 shows the results of the kmo and bartlett’s test of sphericity. table 1. kmo and bartlett’s test factors kaiser-meyer-olkin measure of sampling adequacy (kmo) bartlett’s test of sphericity approx. chi-square df sig. authoritarian parenting style 0.699 715.134 9 0.000 neglectful parenting style 0.766 2314.514 38 0.000 authoritative parenting style 0.612 316.733 11 0.000 permissive parenting style 0.869 2145.534 12 0.000 parental financial teaching 0.768 1924.345 13 0.002 source: spss table 1 showed that the kmo for all factors ranged from 0.612 to 0.869, above 0.60. the p-value of the bartlett’s test for all factors (p = 0.000) is smaller than 0.05, is significant. this result is an indication that the correlation structure of construct is adequate to conduct a factor analysis on the items and that all factors are regarded as valid and reliable. table 2 shows the results of the efa, reliability by depicting the cronbach’s alphas, and descriptive statistics for the constructs and factors of the study. table 2. validity, reliability, and descriptive statistics results factors efa factor loadings ca descriptive statistics variables items highest lowest α μ sd authoritarian parenting style 7 0.837 0.642 0.931 3.42 1.53 neglectful parenting style 3 0.636 0.524 0.645 3.83 1.32 authoritative parenting style 5 0.882 0.531 0.932 3.14 1.24 permissive parenting style 4 0.826 0.509 0.906 2.80 1.42 parental financial teaching 6 0.951 0.320 0.909 3.03 1.29 source: spss table 2 indicated that five factors were extracted by the efa, with all items loaded onto the factors as expected, with loadings of above 0.30. the overall factor loadings range from 0.320 to 0.951. the cronbach’s alpha coefficients were above 0.6 and were acceptable and considered reliable. the descriptive statistics provided the means and standard deviation. regarding the means, majority of respondents agreed with the statements measuring neglectful parenting style (3.83), authoritarian parenting style (3.42), authoritative parenting style (3.14), parental financial teaching (3.03) and disagreed with statements measuring permissive parenting style (2.80). the standard deviations of all factors are high showing that the respondents’ responses varied. however, authoritarian parenting style had a highest standard deviation of 1.53 indicating that the responses varied mostly with regard to this factor’s statements. while authoritative parenting style had the lowest standard deviation of 1.42. correlation analysis was used in this study to test the relationship between parenting styles and parental financial socialisation. correlation analysis is a statistical test that examines the strength of association between two variables by calculating a correlation coefficient (verma 2013). table 3 shows the adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 45 correlations between parenting style, namely authoritarian (autr), neglectful (ne), authoritative (autv), and permissive (per), and the components of parental financial socialisation, namely parental financial teaching (pft). all the factors had a p-value of less than 0.05, and all were significant. table 3. correlation analysis pft autr ne autv per pft autr ne autv per 1 0.0733** -0.377** 0.697** 1 -0.349** 0.673** 1 0.357** 0.499** 1 -0.677** 1 0.640** -0.701** **. correlation is significant at the 0.01 level (2-tailed). h1: there is a significant positive relationship between an authoritarian parenting style and parental financial teaching. pearson’s r-value for authoritarian style and parental financial teaching was 0.733. therefore, 54% (0.733)2 of the variation in parental financial teaching was explained by authoritarian style. this meant that, when authoritarian style increased, parental financial teaching also increased. therefore, there is a large significant positive linear relationship between an authoritarian parenting style and parental financial teaching. therefore, this hypothesis was accepted. h2: there is a significant positive relationship between a neglectful parenting style and parental financial teaching. pearson’s r-value for neglectful style and parental financial teaching was -0.377. thus, -14 % (−0.377)2 of the variation in parental financial teaching was explained by neglectful style. this meant that, when neglectful style increased, parental financial teaching decreased. thus, there is a medium significant negative linear relationship between a neglectful parenting style and parental financial teaching. thus, this hypothesis was rejected. h3: there is a significant positive relationship between an authoritative parenting style and parental financial teaching. pearson’s r-value for authoritative style and parental financial teaching was 0.697. therefore, 48 % (0.697)2 of the variation in parental financial teaching was explained by authoritative style. this meant that, when authoritative style increased, parental financial teaching also increased. therefore, there is a large significant positive linear relationship between an authoritative parenting style and parental financial teaching. therefore, this hypothesis was accepted. h4: there is a significant positive relationship between a permissive parenting style and parental financial teaching. pearson’s r-value for permissive style and parental financial teaching was 0.640. therefore, 41 % (0.640)2 of the variation in parental financial teaching was explained by permissive style. this meant that, when permissive style increased, parental financial teaching also increased. thus, there is a large significant positive linear relationship between a permissive parenting style and parental financial teaching. therefore, the hypothesis was accepted. considering the results of the correlation the decision to accept or reject hypothesis is indicated in table 4. table 4: hypotheses decision hypotheses decision h1: there is a significant positive relationship between an authoritarian accept parenting style and parental financial teaching. h2: there is a significant positive relationship between a neglectful parenting reject style and parental financial teaching. h3: there is a significant positive relationship between an authoritative accept parenting style and parental financial teaching. h4: there is a significant positive relationship between a permissive accept parenting style and parental financial teaching. source: author’s own compilation adam ndou / finance, accounting and business analysis, volume 5, issue 1, 2023 46 therefore, based on table 4 hypotheses h1, h3, and h4 are accepted, while h2 is rejected. thus, because three hypotheses are accepted while one is rejected, it indicates that there is a significant positive relationship between parenting styles and parental financial teaching. the results indicated that there is indeed a significant positive relationship between parenting style and parental financial socialisation. this result supports those of other studies that examined this relationship (koonce et al. 2008; serido et al. 2010; fang et al. 2013; wisenblit et al. 2013; serido and deenanath 2016). for example, wisenblit et al. (2013) investigated the influence of parental styles on children’s consumption, and also compared the different parenting styles. they found that nurturing mothers are more aware of advertising aimed at children, and that they talk more to their children about advertising and consumption than authoritarian mothers. conclusion the objective of this study was to determine the relationship between parenting styles and parental financial socialisation. parenting style was measured through authoritarian, neglectful, authoritative, and permissive. while parental financial socialisation was determined through parental financial teaching. four hypotheses were formulated and tested. h1: there is a significant positive relationship between an authoritarian parenting style and parental financial teaching, h2: there is a significant positive relationship between a neglectful parenting style and parental financial teaching, h3: there is a significant positive relationship between an authoritative parenting style and parental financial teaching, h4: there is a significant positive relationship between a permissive parenting style and parental financial teaching. correlation analysis was used to test these relationships. the results showed that there is a significant positive relationship between an authoritarian, an authoritative, and a permissive parenting styles with parental financial teaching. the results further showed that there is a significant negative relationship between a neglectful parenting style and parental financial teaching. therefore, hypotheses, h1, h3 and h4 were accepted, while h2 was rejected. thus, it can be concluded, based on the results, that there is a significant positive relationship between parenting styles and parental financial socialisation. this study’s results are in line with those of the previous studies that found a positive relationship between parenting style and parental financial socialisation. parenting style is very important in financial socialisation. thus, parents must understand that a parenting style they adopt will have an impact on parental financial socialisation because are also expected to teach their children about money matters at an early age, so that they develop financial skills and are able to become financially independent during adulthood. therefore, this study recommends that parents invest more time in understanding and evaluating their parenting styles and adopt authoritarian, authoritative and permissive parenting styles as they were found to support and foster parental financial socialisation. financial educators must design and implement financial programmes aimed at making parents aware of different parenting styles and their impact of parental financial socialisation. government must introduce a course in basic adult education programme to teach parents about parenting styles and financial socialisation. there is an increasing need to explore the field of financial socialisation 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campenhout, g. 2015. revaluing the role of parents as financial socialisation agents in youth financial literacy programs. the journal of consumer affairs, 49(1): 186-222. vanderstoep, s. w. and d. d. johnson. 2009. research methods for everyday life: blending qualitative and quantitative approaches. san francisco: wiley. wisenblit, j.z., r. priluck, s. f. pirog. 2013. the influence of parental styles on children’s consumption. journal of consumer marketing, 30(4): 320-327. yamane, t. 1967. statistics: an introductory analysis, 2nd edition. new york: harper and row. zhu, a. y. f. 2018. parental socialisation and financial capability among chinese adolescents in hong kong. journal of family and economic issues, 39: 566-576. note* this study is based on the phd’s thesis entitled “the influence of parental financial socialisation on financial literacy of young black african adults in rural and low-income area in south africa” of the corresponding author. 159 finance, accounting and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 the impact of covid-19 on the risk factors affecting the south african bond market mmakganya mashoene1* , mishelle doorasamy2 department of finance, university of kwazulu-natal, durban, south africa1 department of accounting, university of kwazulu-natal, durban, south africa2 * corresponding author info articles abstract history article: submitted 8 june 2023 revised 5 december 2023 accepted 13 december 2023 purpose: the purpose of this study is to analyse the effect of covid-19 on the risk factors affecting the south african bond market. as such, the global economy resulted in a couple of total shutdowns in 2020 to minimise the spread of the covid-19 virus. this has resulted in significant adjustments in monetary and fiscal policies to address the impact on the fiscus. south africa also adopted a couple of adjustments which saw a drastic spike in the nominal debt issued to fund the increased budget shortfall. this came immediately after south africa's exit from the world government bond index after being rated subinvestment by all three major rating agencies. design/methodology/approach: the study takes inference on experiences from leading emerging markets with the same attributes as south africa. findings: it was found that, even though south africa is still well below the risk measures for debt management, the quantum of debt has increased significantly, thus putting pressure on the fiscus in absolute terms. paper type: research paper. keywords: south african bond market, market risk, covid-19. jel: g12, g32, h63 * address correspondence: e-mail : 217077847@stu.ukzn.ac.za1 doorasamym@ukzn.ac.za2 https://orcid.org/0000-0002-4789-7113 https://orcid.org/0000-0001-9320-3461 mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 160 introduction during the 2020/21 fiscal year, when the global economy was affected by the covid-19 pandemic (international monetary fund (imf) 2020), the imf made recommendations to sovereign debt managers to curb the effect of the stress effected by the covid-19 pandemic on the fiscus. the covid-19 pandemic resulted in many states shutting down their economic activities, resulting in poor revenue collections, poor funding performance in the secondary market, and drastically increasing government expenditures in addressing the pandemic. it was indicated that the effect of the global stress on short-term funding liquidity is critical as most governments might be expected to experience increased financing requirements due to policies/strategies adopted to respond to the crisis. this was also evident in the case of south africa, where significant adjustments were made to boost the unsustainable fiscal position observed over the past couple of years and then worsened by a severe decline in the economic and revenue outlook (national treasury 2020). a review is done on the leading emerging economies for more progressive reforms to address stressed economic environments on managing the government debt and government funding strategies. south africa is part of the world's leading emerging economies group brics (brazil, russia, india, china and south africa), which was founded in 2009. according to the south african government (2013), the main aim of this group was to 'promote peace, security, development and cooperation; and further contribute significantly to the development of humanity and establishing a more equitable and fairer world'. the recognition of the country's contribution to shaping the socio-economic regeneration of africa and its involvement in peace, security and reconstruction efforts on the continent led to south africa's offer to join brics. further, a developed financial system, and fiscal and monetary policy frameworks added to south africa's advantage. table 1. credit ratings for emerging markets country credit rating during 2008 crisis credit rating before covid (2019) credit rating after covid (2022) brazil standard and poor: bbb negative fitch: bbbnegative moody’s: ba1 positive standard and poor: bbpositive fitch: bbnegative moody’s: ba2 negative standard and poor: bb stable fitch: bbstable moody’s: ba2 stable russia standard and poor: bbb negative fitch: bbb+ negative moody’s: baa1 negative standard and poor: bbb negative fitch: bbb negative moody’s: baa3 negative standard and poor: nr fitch: nr moody’s: nr india standard and poor: bbb negative fitch: bbbnegative moody’s: baa3 negative standard and poor: bbb negative fitch: bbbnegative moody’s: baa2 negative standard and poor: bbb stable fitch: bbb stable moody’s: baa3 stable china standard and poor: a+ negative fitch: a+ negative moody’s: a1 positive standard and poor: a+ negative fitch: a+ negative moody’s: a1 negative standard and poor: a+ stable fitch: a+ stable moody’s: a1 stable south africa standard and poor: bbb+ negative fitch: bbb+ negative moody’s: a3 negative standard and poor: bb negative fitch: bb+ negative moody’s: baa3 negative standard and poor: bb stable fitch: bbstable moody’s: ba2 stable source: world bank and trading economics it is evident that political instabilities and policy reforms have been significant drivers of deteriorating credit ratings in south africa, brazil and russia, refer to table 1. brazil started to feel pressure from three major rating agencies in 2014 after being downgraded to one notch above the sub-investment grade by standard and poor. according to korby (2014), standard and poor indicated a combination of 'fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, the constrained ability of government to adjust policy ahead of presidential elections, and some weakening in the country's external accounts'. it was further indicated by bisseker (2014) that these reasons, which resulted in a rating downgrade for brazil, do apply equally to south africa, which was also subjected to political instabilities, poor economic growth and increasing debt levels. brazil tasted the first sub-investment/junk credit rating 2015 due to mounting political problems that have muddled economic policy (brandimarte 2015). fitch and moody's followed in placing brazil on submmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 161 investment credit rating, citing a further deterioration in debt ratios amid economic contractions, (watts 2016). south africa followed through in 2017, where it was rated sub-investment by standard and poor and fitch citing economic contractions and political uproars that resulted in the removal of the finance minister in a late-night cabinet reshuffle by then-president jacob zuma. moody's finally followed through in 2020, which resulted in the exclusion of south africa from the wgbi after being downgraded to sub-investment grade by all three major rating agencies, which is the minimum requirement to stay in the index. according to hamill (2022) and ftse russel (2021), china was the only country in brics, which is part of the wgbi, thus holding 3.07 per cent of the wgbi on a market value-weighted basis at its total exposure. india remained on a watchlist by ftse russel for possible country reclassification and inclusion in the wgbi and emerging markets government bond index (emgbi). both india and china have investment credit ratings with a stable outlook. further, south africa, brazil and china remained in the emgbi, which has the minimum requirements of a c rating from standard and poor and a ca rating from moody's. russia enjoyed being above investment grade with all three major rating agencies, even during the 2008 global crisis and the covid-19 stress. however, a significant decline was realised in 2022 following the financial fallout over russia's invasion of ukraine. russia saw a six-notch downgrade to b3, which is six notches below investment grade. it was further indicated that all three major rating agencies had withdrawn their rating mandates following european union's decision to impose sanctions on russia to ramp up economic pressure on the country (chappell 2022). table 2. deciding factors for emerging markets economic variable brazil russia india china south africa economic growth (2021) 5.00 % 5.60 % 8.70 % 8.40 % 4.90 % income per capita (2021) $15 600 $32 070 $7 130 $19 160 $14 340 cpi inflation (2022) 9.59 % 13.80 % 6.70 % 2.00 % 6.90 % debt to gdp (2022) 72.90 % 13.40 % 55.10 % 21.40 % 71.00 % 10-year gov yield (dec 2022) 12.69 % 10.34 % 7.33 % 2.88 % 10.19 % repo rate (dec 2022) 13.75 % 7.50 % 6.50 % 2.75 % 7.00 % source: world bank and trading economics south africa and brazil's economic positions are relatively equivalent, which could be attributed to the same political and economic instabilities realised as it was learned in table 2. the countries are both rated on sub-investment credit rating where rating agencies have cited almost the same issues faced by these two emerging economies. subdued economic growth has been evident for the past decade, with an average growth rate of 0.98 per cent and 0.36 per cent for south africa and brazil, respectively. while south africa's cpi inflation was above the target band of 3 and 6 per cent in 2022, it was observed that over the past decade, it remained well within the band with only two exceptions. a downward trend was observed a few years before the covid-19 pandemic (statistics south africa 2023). the uptick in 2022 above the upper band was mainly driven by heightened geopolitical uncertainty from the ukraine/russia war, which resulted in persistent increases in food and energy prices in both developed and emerging markets (national treasury 2023). the south african 10-year government bond yield remained relatively stable over the past decade, just before the covid-19 pandemic, at an average of 8.5 per cent. a 300 basis point weakening was observed in march 2020 immediately after the wgbi exit, coupled with a total shutdown impacted by the covid19 shock. even though some level of stability normalised back to pre-covid shock, the global volatility impacted by ukraine/russian war had fuelled some instabilities and increases in the year 2022 (national treasury 2023). this has resulted in weaker yields above 10 per cent for most of 2022. in the case of brazil, cpi inflation has averaged around 5.79 per cent over the past decade, which is within the desired target range. however, there were some jumps in 2015 and 2016 way above the then target range of 2.5 and 6.5 per cent which resulted in band tightening in 2017 from ±2 per cent allowance on the mid target of 4.5 per cent to ±1.5 per cent (oxford analytica 2015). after a spike in prices during 2015 and 2016, the move was to boost their credibility to regain the market's trust and ensure government commitment to lowering inflation. de bolle (2015) indicated that the main driver for the inflationary spike was the electricity and fuel price correction policy implemented when the current government took office in 2015. the hikes constituted of 50.4 cent spike from residential energy, a 22 per cent spike from cooking gas and an 18.6 per cent spike from gasoline, thus leading to a 12-month inflationary spike of 14 per cent in administered prices, which account for a 25 per cent of brazilian cpi inflation. however, a couple of years pre-covid stress, inflation in brazil was well contained below the midpoint inflation target of between 4.25 and 4.5 per cent. given that brazil is a commodity country, international increases in commodity prices and continued political instabilities fuelled the inflation spike to 8.3 per cent in 2021 (carrara 2022). the same volatilities were observed on the 10-year government bond yield over the past decade. at the height of political instabilities in 2015, the 10-year government yield weakened to above 15 per cent. a downward trend was mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 162 also observed a couple of years before covid-19; however, in line with global volatility tracking the pressures due to ukraine/russia war, weaker rates were observed in 2022. over the past decade, russia's economic growth has been performing relatively better pre-covid crisis, except for a -2 per cent contraction observed in 2015. according to dabrowski and collin (2019), the contraction was driven by a combination of a sharp decline in the international price of oil, which is russia's main export item, and the conflict with ukraine, which resulted in united states and european union sanctions against russia, and russian countersanctions. this has also negatively affected the inflation rate, which increased to 15.53 per cent due to the same geopolitical issues. a recovery trajectory was observed pre/post-covid stress, hammered by russia's recent unprovoked and unjustified ukraine invasion in february 2022 (welt 2022). this has resulted in the european council adopting a couple of sanctions against russia and belarus, which aimed to weaken russia's ability to finance the war and to specifically target the political, military and economic elite responsible for the invasion. as such, inflation increased by over 100 per cent to 13.8 per cent in 2022 compared to the prior year. a 10-year government bond yield also weakened by around 200 basis points over the same period. while the economy still showed positive growth in 2022, the world bank, the imf, and the organisation for economic cooperation and development (oecd) expect the russian economy to continue to shrink in the short term. methods per the overall objective of this study, the study is qualitative and looks at the performance of measures of the risk factors affecting the south african bond market. in 2014, the south african government adopted some risk measures and benchmark ranges/limits for debt portfolio management (national treasury 2014). these risk measures were adopted to manage the government debt portfolio against inflation risk, refinancing risk in the short-term and currency risk. table 3 indicates that, as of 31st march 2023, most risk factors are well within the benchmark range/limit except for the weighted term-to-maturity of inflationindexed/linked bonds, which is 1.2 years below the lower limit of 14 years. table 3. south african debt risk benchmarks source: (national treasury 2023: pp.82) the total value of the south african government bonds/debt listed in the johannesburg stock exchange (jse) was over r2 trillion in 2018, accounting for around 90 per cent of the reported liquidity (johannesburg stock exchange 2018). as such, the south african government debt is exposed to the following market risks:  liquidity risk: as jonasson and papapioannou (2018, 7) indicate, liquidity risk refers to 'the risk of investors facing a sudden diminishing trading volume of a bond or a series of bonds in the secondary market'. a lower trading volume/tradability in a bond might result in a higher cost of borrowing or low demand. a government institution issuing a bond should usually assess the market's demand around the prospective maturity before issuing the bond. the study looks at the performance of the weekly auction for inflationindexed bonds in the primary market over the covid-19 period. this is due to the illiquid nature of the instruments, and the poor auction performance might result in a funding shortfall for the fiscus. weekly auctions are measured by the bid ratio which is defined as the total bid amount (in rand terms) as a ratio of the nominal amount offered for instrument 𝑖: bid ratioi = total bid amounti nominal amount on offeri (1) mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 163 the average bid for the week 𝑘 is calculated as the weighted average taking into consideration the total nominal amount issued into instrument 𝑖 at time 𝑘: average bidk = ∑ total nominal issuedi,k ∗ bid ratioi,k n i=1 ∑ total nominal issuedi,k n i=1 (2) where: 𝑛 is the total number of instruments issued in a week. this is further averaged over a month to obtain monthly average bid ratios. the study further looks at bond holdings by different institutions to analyse the effect of covid-19 on investor preferences. bond holding per institution is defined in a relative form as: holdingi,t = xi,t ∑ xi,t n i=1 (3) where: 𝑡 is time in months, 𝑖 is the investing institution with a total sample of 𝑛, 𝑥𝑖,𝑡 is the total amount of inflation-linked bonds held by investing institution 𝑖 at time 𝑡.  refinancing risk: government institutions rarely aim to pay off the capital amount owed when the bond matures. this process is mainly due to most governments running substantial budget shortfalls. jonasson and papapioannou (2018) defined refinancing risk as 'the ability to refinance a debt exposure at maturity as a result of a loss of market access or low investor appetite'; this is very crucial, which might lead to a costly refinancing process for government institutions who are at the mercy of investors. this study assesses the effect of increased borrowing in south africa during the covid-19 period, which aimed at addressing the impact of the crisis on the fiscus. this methodology follows the same presentation by major emerging countries to analyse refinancing risk. national treasury of brazil (2020), institute for international monetary affairs (2020) and bloomberg (2020) analyse the debt growth of brazil, india and china, respectively; and the analysis further incorporates the effect of covid-19 on debt levels and the impact of refinancing pressures in the short-term.  inflation risk: inflation risk plays a critical role in bond pricing given that nominal bond yields are a function of, among others, inflation premium and real interest rate (hördahl 2008). the consumer price index (cpi) rate in emerging markets is relatively higher (ha et al. 2018), thus translating into a higher cost of borrowing in emerging economies. the study analyses the historical relationship between the movements in south africa's cpi and the cost of borrowing in real terms over the covid-19 stress period. correlation analysis is further used to quantify the relationship on historical movements between the cpi and the real prime rate. mukaka (2012) defined the correlation as the strength of the assumed linear association between variables in question and it ranges between -1 and 1. a sample correlation coefficient 𝑟 is defined as: r = ∑ (𝑥𝑖 − 𝑥)𝑛 𝑖=1 (𝑦𝑖 − 𝑦) √[∑ (𝑥𝑖 − �̅�)2𝑛 𝑖=1 ][∑ (𝑦𝑖 − �̅�)2𝑛 𝑖=1 ] (4) where: 𝑥𝑖 and 𝑦𝑖 are values for variables 𝑥 and 𝑦. turney (2022) also indicated that pearson's correlation coefficient could be treated as an inferential statistic. this implies that the correlation coefficient can be used to test the statistical hypothesis of whether a significant linear relationship between two variables does exist.  sovereign risk: as defined by jonasson and papapioannou (2018, 7), sovereign credit riskiness is 'associated with the credit risk of a sovereign and the ability of a counterparty to fulfil its debt commitments'. economic factors and the political environment are considered when determining this risk factor. most foreign investors will require a government institution to achieve a particular credit rating standard by one or two big global rating agencies. the study analyses south africa's historic credit rating by the three major rating agencies (i.e. standard and poor, moody's and fitch). further, it incorporates the effects on the government bond market. mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 164 discussion liquidity risk 0% 10% 20% 30% 40% 50% 60% inflation-linked bonds holdings jun-22 mar-20 dec-19 figure 1. historical inflation-indexed bond holding in south africa it can be observed in figure 1 that during the period of covid-19 high stress in march 2020, monetary institutions came through for government inflation-indexed bonds. they did increase their overall holdings in this instrument by five percentage points to 18 per cent; however, overall holdings for other institutions remained relatively the same compared to normal market conditions in december 2019. this implies that increased issuances into this bond instrument to cover the effect of the covid-19 pandemic on the social economy are mainly carried by monetary institutions in line with the south african reserve bank mandate to boost funding liquidity by buying government stock during this period. a significant decrease of five percentage points in the overall holding was observed in june 2022 on both monetary institutions and official pension funds, while an increase of 3 percentage points and four percentage points was observed in foreign investors and private self-administered funds holdings. this could be attributable to a cut in sarb's mandate to buy government stock and a redemption of the r212 (4.71 %, 2022) bond in january 2022. holdings into the r212 bond were mainly dominated by monetary institutions and official pensions funds, which held 26 and 53 per cent of the nominal amount outstanding, respectively. however, given the illiquid nature of inflation-indexed bonds, official pension funds remain the instrument's biggest buyer, with the mandate to hedge their long-term liabilities against future inflation risk (national treasury 2021). 0,00 1,00 2,00 3,00 4,00 5,00 6,00 0 2 000 4 000 6 000 8 000 10 000 12 000 r m illi on months total issuance average bid (times) average yield (%) figure 2. primary market bond auction performance it is evident from figure 2 that pre-covid-19 pandemic, government-issued inflation-indexed bonds mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 165 in the south african market had a slightly higher demand compared to during and post-covid-19 crisis. pre covid-19, the average bid ratio was, on average, around 2.88 times the paper offered in the market. there is a practical level of stability in the average clearing yields over the 2019/20 financial year. a considerable dive was observed from may 2020, when issuances increased drastically to over twice precovid levels. this happened at the same time when a significant decline in the demand for this bond instrument was observed. during the covid-19 period, south african reserve bank's mandate to buy government stock helped to mop up most of the increase in government bond issuances which peaked at around r10 billion a month compared to the prior average of r3.6 billion a month in inflation-indexed bonds. the same liquidity continued in the 2021/22 financial year, where monthly bid-to-cover ratios averaged below two times the amount on offer; however, monthly average bond issuances into inflationindexed bonds had declined to around r4.2 billion. in light of heightened global volatility and continued domestic political and economic instabilities in the 2022/23 financial year, average clearing yields weakened steadily by over 170 basis points between march 2022 and february 2023. sovereign risk since the south african government gained independence in 1994, it is evident in figure 3 that, over time, south african local debt has been regarded as of value by the top three global credit rating agencies. the local debt credit rating improved over time and peaked at bbb+ for s&p and fitch and a3 for moody's. it is also observed that during the 2008 global financial crisis, credit ratings remained resilient at the highest credit rating rank. this could be attributable to relatively better economic and political conditions during that period. mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 166 s o u rc e : w o rl d g o v er n m en t b o n d s (2 0 2 1 ) n b : g re en m ea n s a p o si ti v e o u tl o o k a ss ig n e d b y t h e r a ti n g a g en cy , b lu e m ea n s a s ta b le o u tl o o k a n d r ed m ea n s a n eg a ti v e o u tl o o k f ig u re 3 . s o u th a fr ic a n h is to ri ca l cr ed it r a ti n g o n l o ca l b o n d s mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 167 source: south african reserve bank (2012: pp.1) figure 4. south african bond inclusion in the wgbi due to relatively better market sentiments in 2012 which included an adequately more robust domestic long-term credit rating and a market capitalisation exceeding us$50 billion, it has made it possible for the south african domestic bonds to be included in the wgbi. as a result, south african bond yields strengthened significantly towards mid-2012, coupled with lower-than-expected inflation data and a cut in the repurchase rate, and further higher levels of global liquidity as foreign investors turned to emerging markets looking for higher returns. this is evidenced by a significant increase in the foreign/non-resident investors' holdings of south african government domestic bonds from 12.8 per cent in 2008 to 29.1 per cent in 2011 (national treasury 2012). south africa was the initial african country to participate in the wgbi, accounting for 0.45 per cent of the index's market value, with 12 south african government bonds included in the wgbi in october 2012 (south african reserve bank 2012). however, it is noted in figure 4 that these benefits were short-lived due to domestic volatility in the second half of 2012. the marikana massacre, which bruce (2015) indicated that it resulted in the fatalities of 34 mineworkers and seventy-eight left seriously injured following the open fire assault by the members of the south african police service in an attempt to contain a wildcat strike at lonmin platinum mine in north west province. this resulted from a week-long protest in which the miners demanded a wage increase. secondly, sovereign credit rating downgrades initially by moody's from a3 to baa1 and later by standard and poor from bbb+ to bbb with a negative outlook from both credit rating agencies. south african reserve bank (2012) indicated the main drivers for this change were weakening government's institutional strength, reduced fiscal capacity, adverse investment climate because of infrastructure shortfalls, relatively high labour costs notwithstanding lower employment rate, and bigger concerns about future stability in the political space. lastly, a more significant budget deficit was estimated to be 4.8 per cent of gross domestic product (gdp) for the 2012/13 financial year in the 2012 medium term budget policy statement from 4.2 per cent of gdp for the 2011/12 financial year (national treasury 2012). however, the cost of borrowing in south african bonds remained almost 100 basis points lower than before the announcement of possible inclusion in the wgbi. this could imply that these listed domestic issues could have been well expected and included in the bond yield estimation. however, over the past decade to date, the south african political and economic state has deteriorated significantly. the government budget deficit worsened to 5.8 per cent of gdp in 2023 (national treasury 2023), and, it was further indicated by national treasury (2012) that the budget deficit above 4.5 mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 168 per cent of gdp is unsustainable. this has resulted in sub-investment sovereign credit ratings for south african debt, with "a clear path towards government debt stabilisation" being the main reason given by all three major credit rating agencies (cliffe dekker hofmeyr 2020). global financial volatilities also aggravate the poor economic performance in the south african/ emerging markets. according to the world bank (2022), the effect of the war in ukraine will compound the damage in the global macroeconomic environment caused by the covid-19 pandemic, which might see the situation in developing economies being worse than pre-pandemic levels. this could be associated with the recovery from the stagflation of the 1970s; steep increases in interest rates in major advanced economies were required, thus triggering a string of financial crises in emerging markets and developing economies. due to the global crisis and domestic volatilities (i.e. political instability, continued rolling electricity load-shedding and heavy reliance of more poor-performing state-owned entities on the state for bailouts), the south african economic state continues to tumble. in trying to contain the situation, national treasury (2023) indicated that the state continues to hand over bailouts to these state-owned entities to avoid total failures given the direct role they play in the well-functioning of the economy. among other bailouts, the biggest one was to help the ailing state energy generator. national treasury (2023) indicated that the state is proposing a r254 billion debt relief to eskom over the medium term, which comprises r168 billion capital and r86 billion debt service cost. this continues to add to the already high level of debt and debt service cost faced by the south african government, thus resulting in a poor credit rating and the credit outlook for government debt stock. based on figure 4, it could be observed that the south african domestic debt is rated bbby s&p and fitch; and ba2 by moody's, which is further down the investment grade of bbb-/baa3 and also significantly lower than the credit rating of bb ranked by s&p and fitch in 1995 when the south african government stock was first rated. the situation then was far worse, given that the south african government experienced political and financial crises due to several sanctions imposed by several international bodies (levy 1999). the sanctions involved a ban on any form of trade, investments in the country and lending activities. it was estimated that the south african external debt was around $24 billion by the mid-1980s, of which two-thirds was shortterm (i.e. less than five years). after most lenders decided not to renew their short-term loans, south africa ended in a liquidity crisis where the state depended on foreign lenders' willingness to refinance. the intensity of the crisis was so deep and it resulted in a significantly weaker rand, and the state decided to close both the stock exchange and foreign exchange markets, with interest payments on the debt being suspended. this could be considered very bad compared to the current market conditions where south africa still has access to funding. arnold and winning (2020) indicated that south african domestic bonds' attractiveness relative to other emerging markets peers and the depth of the south african domestic market has helped minimise the effect of the wgbi exit. inflation risk it could be observed in figure 5 that over the past decade, the south african cpi inflation rate averaged above the 4.5 per cent midpoint; however only 25.48 per cent of the time, the cpi inflation rate was above/below the sarb's 6 or 3 per cent inflation target. a lower cpi inflation rate of 2.1 per cent was realised in may 2020, which was last seen over 15 years ago in september 2004 when a cpi inflation rate of 1.3 per cent was realised. a lower cpi inflation rate might negatively affect demand for inflation-indexed bond instruments, given that interest rates already do not include the future inflation component; as such, the future value of the investment might be eroded by lower inflation accruals, making the bond instrument less attractive. primary market auction bid-to-cover ratios support this; refer to figure 2, which declined drastically over the covid period and was influenced by a lower cpi inflation rate. it could also be observed that the cost of borrowing in real terms has a somewhat antagonistic relationship with annual changes in the headline cpi inflation rate. it was observed that over 60 per cent of the time, changes in the real prime rate and cpi inflation rate moved in opposite directions for the past decade. the cpi inflation rate is seen increasing towards the end of the 2021/22 financial year, and this peaked at 7.8 per cent in july 2022, with this rate last seen 13 years ago in may 2009 when the cpi inflation rate was 8 per cent. mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 169 0 2 4 6 8 10 p er ce nt months real prime rate cpi inflation figure 5: relationship between cpi inflation and real prime rate in south africa refinancing risk the government maturity profile for domestic debt in figure 6 indicates a much-clustered profile in the short-to-medium term, with an outstanding amount of at least r100 billion per year. a considerable amount is also outstanding on the treasury bills, which must be rolled over weekly. the issue of rolling over the debt implies that even though it is not expected to redeem the amount outstanding on treasury bills, new issuance is made every week to redeem the outstanding portion and also raise funds for cash management purposes. the ability to raise cash every week to meet these responsibilities adds to the already pressurised government's ability to raise cash every week to fund the increasing budget deficit and also build cash reserves for bonds maturing in the short term. 100 000 200 000 300 000 400 000 500 000 600 000 r m ill io n fiscal year treasury bills long term bonds figure 6: south african government domestic debt profile south african government is projecting bond redemptions of above r100 billion in the medium term for every fiscal year. this is relatively higher than the average fiscal year bond redemptions of r60 billion realised in the preious fiscal years (national treasury 2021). this brings the issue of bond switches to minimise the risk of being unable to meet financial obligations in a particular fiscal year. bond switches phenomena/programme is defined as a transaction of exchanging a series of existing source bonds held by mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 170 investors with a series of selected destination bonds where both source and destination bonds have to be determined by bond issuers. according to national treasury (2000), this phenomenon was introduced in the south african market in early 2000 when the south african government faced declining borrowing requirements and reduced the number of new bond issues. the switch programme was introduced to manage liquidity by repurchasing in advance, less-liquid maturities while financing these bond purchases through more significant new issuances into the benchmark bonds. the switch programme gives the bond issuer an advantage of rapidly restructuring the maturity profile of outstanding debt. the refinancing issue is not entirely addressed when switches are done to minimise the government's redemption obligations in the short term; however, it is transferred to longer maturities. given the highly clustered south african government debt maturity profile in figure 6 and the growing primary deficit, the issue of a switch programme will always be needed to minimise the eminent pressure in the short term for the government's ability to meet other fiscal policy needs. however, the switch programme might not always be feasible as it depends on the willingness of the bondholders to switch maturities, which might not always favour their investment plans. this implies that the switch programme will remain costly for the government. conclusion different economic and monetary policy regimes characterise the period under review. the effect of the covid-19 pandemic on the country's economic and social aspects necessitated increased borrowing requirements and some measures from monetary policy to help the government borrowing plans, which were faced with increased liquidity issues. in march 2020, south africa was downgraded to sub-investment grade by moody's, the third most prominent credit rating agency, to grade south african sovereign bonds on junk/sub-investment grade following standard and poor and fitch rating agencies in 2017. current domestic political volatilities and worsening debt levels fuelled by the growing budget deficit and poor economic conditions remained the most significant drivers for this decision. this resulted in a dire situation where south african bonds were excluded from the wgbi, and foreign investors sell-off of government bonds amounting to r3.2 billion a month after the exclusion (arnold and winning 2020). however, this was a long waited decision and has long been priced in the bond prices and further clouded by the effect of the covid-19 crisis. as a result of the covid-19 pandemic, the global economy was shut down from trading, and emerging markets realised further sell-off from most foreign investors as they looked for safer markets. further, to address the social impact of the continued shutdowns in the country, the south african government made fiscal adjustments to minimise the impact on livelihood. this has further aggravated the poor position of the south african government's funding/borrowing levels while faced with liquidity issues driven by the wgbi exit and the covid-19 crisis. south african government resorted to tapping on available resources for cash management purposes in line with (international monetary fund 2020) guidelines [i.e. drawing down its cash deposits held with the reserve bank, increased short-term funding (treasury bills and bridging finance from the corporation for public deposits) and receiving loans from international financial institutions]. the south african reserve bank also helped manage liquidity issues by buying government stock. this has helped in reducing the cost of borrowing by almost 200 and 350 basis points on inflation-indexed bonds and fixed-rate/nominal bonds, respectively, during the peak of covid19 stress around march/april 2020; and further boosted primary market bond auction's bids from 1.7 to 4.31 and 2.25 to 4.24 for both inflation-indexed bonds and fixed-rate/nominal bonds, respectively. even though the south african debt seems to be well managed from a risk management perspective, it is noted that the quantum of debt has increased drastically, and this might be masking the bigger picture. short-term refinancing pressure remains, thus putting the country at the mercy of investors for funding and further shifting the eminent refinancing obligations to the long term. references arnold, t., and a. winning. 2020. local investors cushion impact of south africa bond index exit for now. reuters. 30 april 2020 bisseker, c. 2014. 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http://www.treasury.gov.za/documents/national%20budget/2022/default.aspx http://www.treasury.gov.za/documents/national%20budget/2023/default.aspx https://sisweb.tesouro.gov.br/apex/f?p=2501:9::::9:p9_id_publicacao:42554 https://doi.org/10.1108/oxan-es200583 https://www.gov.za/events/fifth-brics-summit-general-background https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/boxes/2012/7105/2012bond-yields-since-the-announcement-of-south-africa-s-possible-wgbi-inclusion.pdf https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/boxes/2012/7105/2012bond-yields-since-the-announcement-of-south-africa-s-possible-wgbi-inclusion.pdf https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/boxes/2012/7105/2012bond-yields-since-the-announcement-of-south-africa-s-possible-wgbi-inclusion.pdf https://www.statssa.gov.za/publications/p0141/p0141march2023.pdf https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets mmakganya mashoene and mishelle doorasamy/finance, accounting and business analysis, volume 5, issue 2, 2023 172 watts, j. 2016. ‘brazil: moody’s becomes third rating agency to label country’s debt junk’. the guardian, 24 february 2016. welt, c. 2022. crs insight prepared for members and committees of congress insight. congressional research service. https://crsreports.congress.gov/product/pdf/in/in11869 world government bonds. 2023. central bank rates of the world. http://www.worldgovernmentbonds.com/central-bank-rates/ https://crsreports.congress.gov/product/pdf/in/in11869 http://www.worldgovernmentbonds.com/central-bank-rates/ 43 finance, accounting and business analysis volume 4 issue 1, 2022 http://faba.bg promotion analysis through media social to improvement of small business and medium femei purnamasari*, weny rosilawati, dania hellin amrina faculty of economics and islamic business, uin raden intan lampung, indonesia info articles abstract keywords: social media, economic moderation, development small and medium enterprises (sme). the development of the internet today, e-marketing is a new form of business in marketing products or services and building communication with consumers through social media. the use of social media marketing as media communication in marketing is influenced by the more fast development of communication technology, especially the internet. over time, instagram, which is one of the social media that is currently trending used as a place to the promotion of various forms of business, many forms of the business are promoted via social media instagram that is an effort culinary and social media technology are also a means of connecting in increasing moderation in the economy. development smes being one of the pillars in supporting the economy of the region, region, and country, it is necessary to promote small and medium enterprises, one of which is through social media instagram through the food blogger account that can be accessed by the whole community. destination study this is for knowing how to influence promotion food blogger the sample is @kuliner_lampung on instagram social media and find out if promotions are through food bloggers @kuliner_lampung could improve the development of smes, especially in the sample of this study, namely culinary. the type of research used in this research is descriptive qualitative research in the study in form of results interviews with 8 . sample smes in way halim in observation or observation. the technique used in the sampling of this research is a purposive technique sampling, the criteria for respondents who became the sample in this study were respondents who had small and medium enterprises (smes) especially culinary in way halim district, bandar lampung which is a user instagram and those who promote a product or the restaurant through account food bloggers. based on the results obtained from interviews and observations regarding promotion through food bloggers and interviews with 8 smes culinary in way halim, could be concluded that occur an increase in sales turnover in the 8 smes. promotion via food blogger @kuliner_lampung over and over again in accordance needs, because feel effect which positive after promotion, the business owner earns more profit than usual and can continue his efforts. indications of equity in economic moderation through welfare can be seen from the increase in the income of sme economic actors, social media is used as a promotional platform that is cheap, easy, and can achieve access to all lines, making social media one of the links in increasing economic moderation. *address correspondence: e-mail: hristina_ femeipurnamasari@radenintan.ac.id finance, accounting and business analysis 4 (1) 2022 44 introduction development internet moment this, e-marketing is formed effort new in-market products or services and build communication with consumers via the internet. the use of internet marketing as a communication medium in marketing is influenced by: the rapid development of communication technology, especially the internet. the internet is the face of the world today, especially in the business world, the internet is growing very rapidly and has been a part of which important life public (edwin kiky aprianto, 2021). indonesian people are included in active access on social media. it is supported in a survey summarized on the “we are social” website (site management services content that provides online media services linked to various networking sites and social media) stated that the total population (total population) in indonesia in january 2019 there are 268.2 million souls, user active social media reach 150 million souls (hootsuite, 2020). figure 1. use the internet and media social in indonesia lots reason for accessing the internet is known according to a survey we are social 88% of indonesians use the internet to access youtube, 83% access whatsapp, 81% access facebook, and 80% access instagram (hootsuite, 2020). figure 2. use the internet and social media in indonesia year 2019 according to the figure above, instagram is the 4th most frequent social media user and become the favorite social media of the indonesian people. instagram allows users to share photos and videos and can share everyday stories in instastories. along with running time, instagram is now also used as a place promotion. various forms of business are promoted through instagram, one of the many businesses promoted through instagram, namely culinary businesses. known from lamppost.co on the 6th february 2019, that economic growth in lampung experienced a positive increase in terms of production, the highest growth was dominated by the accommodation provider business field and eat and drink by 10.49% . economic growth is a good thing, but because of that culinary business owners will have more competitors, therefore culinary sme owners are required to innovate and promote to survive and can still exist and can develop their business. the development of smes is one of the pillars of supporting the country's economy. in indonesia small and medium enterprises are the business groups that have the largest number. in addition, this group has proven to be resistant to various kinds of shocks from the economic crisis. so it has become imperative to conduct sme groups involving many groups. here is the sme data which exists in the city of lampung. finance, accounting and business analysis 4 (1) 2022 45 table 1. bandar lampung city sme datauntil december 2020 per subdistrict no subdistrict effort small medium enterprise 1 tanjung karang pusat 893 342 2 tanjung karang timur 712 246 3 tanjung karang barat 789 241 4 kedaton 845 309 5 rajabasa 714 270 6 tanjung senang 788 326 7 sukarame 915 267 8 sukabumi 672 315 9 panjang 917 268 10 teluk betung selatan 798 236 11 teluk betung barat 654 220 12 teluk betung utara 635 291 13 kemiling 857 232 14 teluk betung timur 788 301 15 enggal 945 240 16 bumi waras 683 270 17 way halim 683 266 18 kedamaian 732 287 19 labuhan ratu 828 257 20 langkapura 720 261 amount 15.568 5.445 source: dinas msme one way to develop a business is to promote products for sale. promotion is activity marketing that tries spread information, influence or persuades, and remind the target market of the company and its products so that readily accept, buy, and are loyal to the product offered by the company (kotler & keller, 2009). there are many ways to do promotions. the new trend now consumers like to look for references to culinary past media social, so perpetrators effort even use applications and social media to sell their products. one of them is promotion through the account food blogger this interest by various perpetrators effort culinary to introduce their restaurant because many people seek information through social media before making a purchase. culinary business people also take advantage of this food blogger for communicating business culinary with promotion through account food bloggers. following are multiple accounts of food bloggers in bandar lampung. table 2. a number of food account blogger bandar lampung at instagram name account followers posts culinary_lampung 296,000 9.197 sigerfoodies 104,000 5.744 lampung culinary 71,000 3.584 iwan admiral 21,000 6,998 source: www.instagram.com, in access 23 august 2021 data on table 2, shows that account food blogger culinary lampung has amount followers which most many from on account food blogger other, this shows that culinary lampung is the account which many interested public lampung so that it makes followers want to try because there are more followers which owned so the bigger also possibility will be seen by many people which then interested even interested to buy what which promoted, so occur enhancement sales and smes can expand their business. return to promotion, using e-marketing, internet marketing, or digital marketing is very important. digital marketing is a source of entertainment, news, online shopping, and social interaction. users have full access to information which they want to, where and anytime. because that promotion through media social help smes for finding consumer and building an image about a brand product for sale, increase productivity, could develop the product to the market larger again, could increase volume sales, thus impacting for business development of the sme alone. based on the description that has been explained previously, the researcher then wishes to conduct more in-depth research which is then compiled in the form of a research thesis with the title " analysis of promotion through media " social for small business improvement and intermediate ”. based on the background of the existing problems, the formulation of the problem in the research these are: how form promotion through social media (instagram food blogger @kuliner_lampung )?; is promotion via social media (instagram food blogger @kuliner_lampung) could increase the development of smes, especially in the culinary business? method 1. type and nature study the type of research used in this research is qualitative research. study qualitative is a method study based on philosophy postpositivism, used for researching on condition object natural one (sugiyono, 2017). this research is descriptive. descriptive research is research that is intended to investigate the state of the condition or other things that have been mentioned, the results of which are displayed in the form report study (sugiyono, 2017). 2. source data a. data primary. primary data is a data source that directly provides data to collectors data(sekaran & bougie, http://www.instagram.com/ http://www.instagram.com/ http://www.instagram.com/ finance, accounting and business analysis 4 (1) 2022 46 2017). primary data in this study is the result of interviews with sme owners focused on the region way halim in observation or observation. b. data secondary. data secondary is data obtained from documents graphic (table, notes, meeting minutes, sms, etc.) which can enrich primary data(sugiyono, 2017). data secondary in a study this obtained from the journal, book, as well as information other which relate with research. 3. population and sample a. population. the population is a region generalization which consists of an object or subject which have quality and characteristics certain set by the researcher for studied and then drawn the conclusion (prof. dr. a. muri yusuf, 2016). in a study on this population the target is 44 smes in way. district halim. following is smes culinary which to promote account culinary lampung on the moon august 2021. table 3. list of 44 smes in bandar lampung promoting through culinary_lampung in august 2021 no. region no. name account 1. way halim 1. @abahduren81 2. @ seblak.jagobdl 3. @nasikapauuniyanti 4. @martabakmanisminibos 5. @kulinerjogja_larise 6. @hompizzlampung 7. @solorialuwes 8. @cushychurros_lampung 2. kedaton 1. @ kopituya.lampung 2. @shabukkitchenonago 3. @ chanoyu.indonesia 4 @dripscoffeelampung 5 @ayam_gebrak_bikes 6 @inikebab_bdl 7 @mie_djudes_lpg2 3. tanjung karang 1 @babebakery 2 @dapoermbokrondo 3 @ encim.fat 4 @kinarresto 5 @pucha.co 6 @rmcabemas 4. sukarame 1 @bamieta 2 @kuebalok412.bdl 3 @oyacookies.lpg 4 @ ayamasix.korperilampung 5 @king_frozenfood_n_sanck_2 5. pahoman 1 @ezesteak.id 2 @dapoergober.lpg 3 @kebabdurianbecek 4 @kedaikopikulo 5 @kopipai.co 6. sukabumi 1 @ soonfat.lampung 2 @rajapisangkeju_arjunasurab aya 3 @brasselcoffee 7. teluk betung 1 @ hungrill.lampung 2 @waroenkrakyat_wr 3 @xcoffe.id 8. kemiling 1 @merapizza 2 @pempekmikayla 9. rajabasa 1 @hotpangsitnyonyor.lpg 2 @ramenmecepat_rajabasa 10 . enggal 1 @tuank.id 2 @phanphan.bdl 11 . kedamaia n 1 @ kopiitukata.lampung source: instagram, august 2021 b. sample. the sample used in the sampling of this study is a non-probability method sampling, which is a method of taking samples by not providing sufficient opportunities same for every element or member population for chosen becomes sample and using a purposive sampling technique. according to sugiyono, purposive sampling is a technique determination sample with certain considerations. 21 the sme sample criteria used in this study are as follows: own assets rp 50,000,000.00 – idr 10,000,000,000.00; have turnover maximum idr 50,000,000,000.00 per year.; is at in region way halim, because way halim is a district where there are many smes who promote through the internet; the sample social media, namely instagram, was further elaborated through food blogger @kulinerlampung. here are 8 resource persons who have culinary small and medium enterprises (smes) in indonesia: way halim sub-district which promotes its products through a food blogger account culinary lampung as of august 2021; @abahduren81; @seblak.jagobdl; @nasikapauuniyanti; @martabakmanisminibos; kulinerjogja_larise; @hompizzlampung; @solorialuwes; @cushychurros_lampung 2. method collection data observation. according to creswell, observation is processed for getting data from hand first with the observed person and the place when conducted study (sugiyono, 2017). interview. interviews are used as technique collection data if the researcher will doing studies preliminary for find problems that must be researched, and also researchers want to know things from respondents who are more in-depth and amount the respondent little/small. the interview used in a study with submitting questions structured because the researcher used an interview guide arranged systematically and completely to collect data which searching for. technique interview is source data primary in research this. documentation. documents are records of events that have passed. documents can be in the form of writing, picture, or works monumental from somebody (sekaran & bougie, 2017). for example documentation media social account instagram @kuliner_lampung and also which relate with smes culinary in way halim. 3. method analysis data data analysis in qualitative research, is carried out at the time of data collection takes place, and after the completion of data collection within a certain period. at the time of the interview, the researcher had already done an analysis to answer which interviewed. when the answer interviewed after being analyzed feels unsatisfactory, then the researcher will continue after another question, to a certain extent, data that is considered credible is obtained. miles and huberman suggest that activities in qualitative data analysis are carried out interactive and take place continuously until complete so that the data is saturated. activity in data analysis, that is reduction data, presentation data, verification (sugiyono, 2017). data reduction. reducing data means summarizing, choosing the main things, finance, accounting and business analysis 4 (1) 2022 47 focusing on the important thing, look for themes and patterns. thus the reduced data will give a description that more clear, and make it easy researcher for to do collection data to continue and look for it when needed; data display. in qualitative research, data presentation can be done in the form of a brief description, chart, connection between category, flow chart, and the like. in thing, this miles and huberman stated “which most used to serve data in study qualitative is with text which character narrative. with display data, it will make it easier to understand what is happening, and plan work next based on what understood; verification. step third in the analysis of data qualitative according to miles and huberman is drawing conclusions and verification. the initial conclusions put forward are still temporary and will change if not found evidence strong that supports the next stage of data collection. but when the conclusion is put forward on step beginning, supported by the evidence which valid and consistent moment researcher return spaciousness gather data, so conclusion put forward is the credible conclusion. theory 1. marketing the term marketing appeared for the first time since the emergence of the term barter. marketing is research activities needs and desires of consumers, producing goods and services by the needs and wants of consumers, determining the price level, promoting it so that product is known to consumers, and distributing the product in place to the consumer. 28 philip kotler defines marketing as a managerial process by which individuals and groups get what they need and want with methods that create as well as exchange products and value from other parties(kotler & amstrong, 2012). kotler and keller state that marketing is a function organization from one set of processes for creating, communicating, and delivering value to customers and to building customer relationships that benefit the organization and parties interested in the organization (kotler & keller, 2009). according to hair jr., marketing is the process of planning and implementing draft pricing, promotion, and distribution of products, services, and ideas aimed at creating satisfaction among the company and its customers. according to shimp, marketing is the set of activities by which businesses and other organizations create exchanges value between business and the company itself, and para the customer (laub, 1999). marketing is something process social and managerial where individuals and groups obtain what they need and want by creating and exchanging products and services and values between one person and another. role marketing moment not only conveys product and service to hand consumers but also how the product or service can provide satisfaction to consumers customer by sustainable so that profit company could obtain with happening online purchase repeated. marketing goals is to attract new customers by creating a product that matches consumer desires, promise superior value, set attractive prices, distribute products easily, promote effectively and maintain customer already there is with permanent adherence to the principle of customer satisfaction (dr. budi rahayu tanama putri,s.pt., 2017). the marketing function in a business is not only limited to concept understanding, forecasting, behavior consumer, and segmentation marketing, marketing also covers these important variables including product, place, price, promotion, and distribution. four variables it is called the marketing mix (dr. budi rahayu tanama putri,s.pt., 2017). 2. islamic marketing the term marketing is not widely known at the time of the prophet. at that time there were many concepts what is known as buying and selling (bay') which already existed before islam came. marketing can be carried out through communication and friendship to introduce products or merchandise. in the hadith of the prophet from anas ibn malik narrated by al-bukhari and muslim: "whoever wants his sustenance to be expanded and his influence expanded then" should he connect rope friendship" (alma, 2009). md. mahabub alom and md. shariful haque defines islamic marketing as falah (welfare and success) which means well-being and success world hereafter, which is a value that must be upheld in every economic activity. size prosperity and success is certainly not how much profit you get, but must also pay attention to ethical and moral aspects.” this definition emphasizes the importance of meeting the needs of the world and the hereafter in the islamic marketing concept. islamic marketing concept must be able to represent the interests of companies that want to get optimal profits but must still pay attention to the halal products and services offered to consumers. besides that, must there is a balance between employee welfare and owner share (alma, 2009). islamic marketing is all marketing activities with values, principles, and basics marketing is based on sharia law. bribes (rishwah), supply manipulation (ihtikar), manipulation of demand or supply (najash), deceit and cheating (tadlis), and injustice (zdulm) are actions that must be avoided by marketers in carrying out their activities the marketing. in islamic economics which is accompanied by sincerity is only to seek a happy god, so form the transaction god willing becomes the value of worship before allah swt. there is a number of that makes prophet muhammad succeed in to do business ie (alma, 2009): siddiq (honest or true) in trading the prophet muhammad was always known as a marketer which honest and true in informing the product; fathanah (intelligent) in thing this leader which capable understand, appreciate, and know the task and business responsibility with very good; tabligh (communicative) if a marketer must capably convey superiorityproduct excellence by attracting and staying on target without abandoning honesty and truth. the forerunner of islamic marketing knowledge has been seen from the business practices of the prophet muhammad and muhammad saw para muslim merchant earlier. here are some tips for prophet muhammad's marketing pbuh: honest is a brand; love customer; fulfill promise. segmentation of the style of the prophet muhammad, pbuh. rasulullah saw have traits glorious which push success is in doing business, such as shiddiq finance, accounting and business analysis 4 (1) 2022 48 (honest or true), amanah (trustworthy), fathonah (intelligent and wise), and tabligh (argumentative and communicative). marketing in islam (islamic marketing) as a study developed with the islamic framework has principles that should not conflict with the principle of aqeedah, shari'ah, and morals which is a three-part big which there is in the discussion of islam as a comprehensive way of life islamic marketing principles among other as following (abbas et al., 2020): rabbaniyyah / spiritual (faith) to god allah swt underlies every activity in marketing so that these activities are a form of worship to allah swt and include good morals (akhlaqiyyah) and using appropriate strategies allowed (wisdom); based on needs, no desire; humanistic (including inside mutual consent, honesty, justice, balance, etc); realistic (flexible, large, and flexible, but religious); well-being man (falah). 3. e-marketing internet marketing (marketing internet) also called marketing-i, web marketing, online marketing, e-marketing or e-commerce is the marketing of products or services service through the internet (kayumovich & annamuradovna, 2020). kotler and armstrong state that e-marketing describes the efforts of companies to inform, communicate, promote, and market products and services via the internet. according to strauss and frost, e-marketing is the use of technical information in the process to make, communicate, and give a score ( values ) to a customer. e-marketing influences marketing traditional in two methods. first, e-marketing increases efficiency in traditional marketing functions. second, the technology of e-marketing consists of many marketing strategies. the result of changes in the new business model can add value ( value ) to customers and increase the profit company (kotler & amstrong, 2012). according to chaffey, e-marketing is a development from marketing traditional where marketing traditional is something that processes marketing through media communication offline like through deployment brochures, advertisement on television and radio, etc (chaffey & hemphill, 2019). after the rise of the internet and the ease of communication it offers, the application of marketing in companies began to adopt internet media, which was then called e-marketing. meanwhile, according to kotler in widodo, internet marketing has five advantages: big for a company that uses it. first, both small and large companies can do it. second, there is no real limit in advertising space if compared with media print and media broadcasting. third, access and search for information are very fast when compared to express mail or even fax. fourth, the site can be visited by anyone, anywhere in this world, anytime. fifth, shopping can be conducted more fast and alone. according to hermawan, there are two points main benefits of internet marketing ie (hermawan, 2012): the relatively inexpensive cost. internet marketing is relatively more inexpensive if calculated based on the ratio of cost to target audience reach. companies can reach a wide audience when compared with traditional means of advertising. the nature of the medium allows consumers to examine and compare products conveniently; load information that big. benefit other related to internet marketing is the availability amount big information. compared to traditional media such as print, radio, and tv, internet marketing only use costs relatively low compared with media other. companies that use internet marketing can also store data accurately and save financial transactions. overall, internet marketing helps expand business from market local going to market international with more fast. internet marketing has the characteristic typical that is the utilization of media internet to do activity marketing and promotion a product or service. appearance the use of marketing by using internet media, encourage the emergence of the term new to this, namely inbound marketing. this term is something that different from the technique of conventional marketing or which is more known for outbound marketing. in outbound marketing activities to advertise a product or service no can free media billboards, tv/radio commercials, print advertisements, and direct mailings. temporary in inbound marketing use method which new on basically can not be separated from the relationship with the internet world, for example blogging, social media marketing/ post, seo, and online newsletters (yustim, 2015). channel which used for in e-marketing or digital marketing that is among other (chaffey & hemphill, 2019): optimization machine finder ( search engine optimization ). the search engine is a machine seeker which worn to looks for information and access other sites. no need to know the specific location of the web address, just type say the key, and the machine seeker will look for all site that provides the information. search engine optimization (seo) is a strategy for optimizing content so that it is on the first page of search engine results such as google; search engine marketing (sem). search engine marketing (sem) is a form of marketing that utilize site search engines such as google, yahoo, baidu, and other search engine sites to make the site advertiser will enter in line top when there is the consumer looking for something on search engine site; advertising display (display advertising). advertising display used for promote page. strategy this conducted besides for bringing traffic to but also get transaction sale. installation advertisement chooses channels which can do target in installation the ad, it means for reach consumer which expected, para digital marketers have to work with many sites in the hope that consumer site the can be consumer our; program community ( community platforms). program community ( community platforms) is a strategy so that users could write on a page which provided with various review products as well as story inspirational and informative about experience shop, where every writing written on page community will get points which can be exchanged with the present; media social marketing. social media is the most widely used means of communication today. social media which was originally used as a place to communicate and share information now used by businessmen as a means of product or service promotion which they offer. examples of social media which often used as means of promotion is like facebook, instagram, youtube, twitter, and blogs. use social media as a means of promotion is considered very effective and efficient because almost everyone is using social media most likely the promotion will be seen by many people as well spend relatively a little even free; e-mail marketing. e-mail by his name means marketing this use e-mail. e-mail marketing can be obtained when you have registered on a website or a website application that requires users to register an account using e-mail. e-mail marketing is conducted to guard the consumer for permanent get information about products which are offered. with e-mail marketing, user or consumer finance, accounting and business analysis 4 (1) 2022 49 will keep going to get the information updated _ about the company's products. information about promos and vouchers as well as products interesting, and information on other different periodically; press release. a press release is a form of public relations conducted by a company to increase awareness. public relations online, not only awareness which got but also traffic, because inside it can be included link going to a site. 4. social media marketing currently, internet users are no strangers to conducting marketing activities for their products. with the development of increasingly sophisticated technology, internet users compete for attempts to promote the product through media which is often called media social. marketing conducted through internet specifically media social has a very potential opportunity in capturing as many consumers as possible. more through social media does not require much more expensive marketing costs than other media such as tv or radio. directly, consumers can dig up information knowledge about products which wanted and feel convenience in to do search products on a social media and can interact with the same time with seller. social media is a medium of socialization and interaction, as well as interesting others to view and visit links that contain information about products, etc. so it's natural that its existence is used as the easiest marketing medium and cheap (low cost) by the company. this is what ultimately attracts business people to make social media a promotion media mainstay. media social is a medium on the internet that allows users to represent themselves as well as interact, cooperate, share, communicate with a user other, and shape bond social virtual. 62 social media has been used as one of the tools used to do marketing products or the usual too called social media marketing (neneng nurmalasari & masitoh, 2020). media social is technical information based on internet as a tool for communication and as a promotional medium in business. as for the various media social according to follows rulli nasrullah (2017) is as: blog. a blog is a social media that allows users to upload daily activities, comments, and sharing, both other web links, information, etc; microblogging. types of social media that facilitate users to write and publish activities or opinions. the presence of this type of social media refers to the emergence of twitter which only provides space for a certain or maximum of 140 characters; facebook. facebook is a social networking site that humans use to interact with a man others within a distance which far. facebook has various types of applications addition as games, chat, video chat, page communal, etc; therefore, facebook has been considered a social media with features that are considered most familiar with various the good old and young; twitter. twitter is a website owned and operated by twitter.inc and is an online social networking and microblog service that allows its users to send, receive and read text-based messages amount the character reaches 140 characters, which is known by the designation chirp (tweets); instagram. instagram is a social network in which the focus is on sharing photos with its users. the name instagram consists of two words, namely "insta" and "gram". insta comes from the word instant, which can be interpreted with ease in taking and viewing photos. gram comes from the word telegram, which can be interpreted as sending something (photo) to people other; line. line is a free instant messaging application that can be used on various platforms such as smartphones, tablets, and computers. line is enabled with the use of the internet network so that line users can perform activities such as sending message texts, sending pictures, videos, messages voice, etc. 5. development of smes definition effort small, and intermediate (smes), many definitions of small and medium enterprises put forward by several institutions or agencies and even laws. pemerintah republik indonesia, (1995) defines small businesses as follows: productive businesses are owned by indonesian citizens in the form of individual business entities, a business entity that is not a legal entity, or a business entity that is a legal entity, including cooperative; subsidiaries or branches of companies that are owned, controlled, or affiliated, either directly or indirectly, with medium or large businesses are not included in the category of small business; has a maximum net worth of idr 200,000,000. 00,-, excluding land and building a place of business, or having sales of a maximum of rp. 100,000,000.00,per year. inpress number 10 the year 1999 about empowerment effort intermediate defines medium-sized enterprises as productive businesses owned by indonesian citizens who in the form of an individual business entity, a business entity that is not a legal entity, or legal entities, including cooperatives; stand-alone and not child companies or branches of companies that are owned, controlled or affiliated, either directly or indirectly, with great effort; and has a net worth greater than idr 200 million up to idr 10 billion, excluding land and buildings for business premises, or have results most sales a lot rp100 million per year . based on the explanation of constitution number 20 the year 2008 chapter i chapter 1 concerning micro, small and medium enterprises, then what is meant by micro, small enterprises and medium ie (menengah et al., 2017): effort micro is effort productive owned by a person individual and or business entity individuals who meet the criteria for micro enterprises as regulated in the law law; small business is a stand-alone productive economic enterprise, which is carried out by an individual or business entity that is not a subsidiary or not a branch of a company that is owned, controlled, or becomes a part either directly or indirectly of medium enterprises. or large businesses that meet the business criteria small as referred to in this law; medium enterprises are productive economic businesses that stand-alone, which are carried out by individuals or business entities that are not subsidiaries or a branch of a company that is owned, controlled, or becomes a part either directly or indirectly of small businesses or large businesses with a total net worth or annual sales results as regulated in constitution this. discussion how to form promotion via social media (instagram food blogger @kuliner_lampung ) ? promotion is a marketing activity carried out by a person or organization to disseminate information to consumers about their products so that consumers are interested and willing to accept and buy the products offered by the company. promotion through social media is important because it helps smes to find consumers so that they can finance, accounting and business analysis 4 (1) 2022 50 increase volume sales, which impacts for development of business smes themselves. in this case, according to the theory put forward by heuer in m. fariz syahbani and arry widodo there is 4c in use media social as media promotion, 4c it has been applied by @kuliner_lampung that is as follows: a. context (context) context is how to form a story or message (information) and the content of the story the message is interesting. in this case, @kuliner_lampung can convey information interesting by paying attention to the quality of the photo or video and the use of captions and clear language is also detailed, so it can help inform things that important things such as a culinary address, operating hours, telephone number of the culinary owner, price range product promoted. following example post @kuliner_lampung: b. communication (communication) communication is how to convey the message as best as possible in various ways which make the user feel comfortable and the message is conveyed well. in terms of communication, @kuliner_lampung did a smart review and honest review. a smart review is an intelligent review, and an honest review is a review honestly. when currently reviewing food, @kuliner_lampung (alejenes) will review honestly and intelligent, if it feels good then he will say that the food is good, but if food the felt not enough by tongue so he will review _ without exaggerating, and he will highlight more about the advantages that the culinary has, example like price which inexpensive, or the place eat which clean and other, etc. @kuliner_lampung applies smart reviews and honest reviews in every review food because they do not want to deceive potential consumers or culinary customers. when consumers believe what has in reviewed by @ culinary_lampung so will more and more people are interested and want to try, so there is an increase in sales and naturally good to develop business culinary the. for example review @kuliner_lampung with smart reviews and honest review: c. collaboration (collaboration) collaboration is how to work together to make things better. @kuliner_lampung doing a good collaboration with other brands such as gofood, bank mega, shopee pay, bri, and many others that they will indirectly follow the advice that has been recommended by @kuliner_lampung, to try and buy a product which promoted. here's an example post by @kuliner_lampung: d. connection (connection) connection is how to maintain a connection that has been built. with this @kuliner_lampung make it happen by uploading regularly photos, videos, too stories on the account instagram @kuliner_lampung every day. expected with routine and istiqomah could satisfying reader for always follow information about culinary up to date. admin @kuliner_lampung mentioned that it would be consistent to upload 5 photos or videos can also be more or not enough, if not enough so @kuliner_lampung will post the paid ones that work together and the unpaid ones like merchants around or foot five. product culinary which he promotes is a good product and quality and information can be trusted without badmouthing other products. promotion based on this honest attitude (siddiq) can be trusted (amanah) by potential consumers who will buy culinary products that have been promoted. fathanah in promotion which has been applied by @kuliner_lampung, which is smart in reading the situation of the target market and looking for loopholes so that promotion use account food blogger @kuliner_lampung this can different from promotion offline or personal social media because it is very helpful to introduce restaurants and product that is being offered. promotions that are by the nature of the prophet muhammad that is tabligh, could make para candidate consumer enthusiastic with a promotion that the. communicative here is meant to be between the seller, the promoter, and all the candidate's buyers who read the promotion through the food blogger account know the product the culinary offer. is promotion via social media (instagram food blogger @kuliner_lampung) could increase the development of smes, especially in the culinary business? in this study, 8 (eight) smes that used the promotion services of the instagram account @kuliner lampung received positive feedback for their business. in the first 2-4 weeks, it not only affected their increasing business income but also affected the number of followers on instagram accounts in the 8 samples of this study. however, the promotional services carried out by @kulinerlampung must be carried out continuously. this is because the @kulinerlampung account promotes food/beverage from various businesses, so for the 8 samples of this study, the promotions carried out by the @kulinerlampung account must continue. with 300 thousand followers and connections to various lampung celebrities, the @kulinerlampung account is one of the promotions that are still widely used today by msme actors in lampung province. the number of followers of an account will affect the good results received. the number of followers of the @kulinerlampung account has a positive effect on the income results of business actors. in addition, the impact of promotions carried out by the @kulinerlampung account besides affecting income also affects the number of followers of smes that are promoted, especially in the sample of this study. 5 of the 8 research samples have expanded to open branches after being promoted by the @kulinerlampung account. this proves that the number of followers of an account will provide potential consumers it will effect increasing sales results and provide inspiration for business actors to innovate in their business and increase the amount of production so that in the end it opens up opportunities to establish business branches. conclusion based on the results obtained from interviews and observations regarding promotions through food bloggers on culinary business development for working business owners same with @kuliner_lampung could conclude that: form promotion which does by @kuliner_lampung by theory 4c in the use of media social among other: context (context). finance, accounting and business analysis 4 (1) 2022 51 @kuliner_lampung pays attention to the quality of photos or videos and the use of captions and clear and detailed language so that it can help inform important things such as a culinary address, operating hours, owner's phone number culinary, the price range of the product being promoted; communication (communication). @kuliner_lampung doing a smart review and honest review in every food review, because they don't want to deceive potential customers and also to keep the trust of the consumer; collaboration (collaboration). @kuliner_lampung to collaborate which good with a brand other like gofood, bank mega, shopee pay, bri and many others that indirectly direct they will follow suggestion which has recommended by @kuliner_lampung, for a try and buy a product that promoted; connection (connection). @kuliner_lampung builds connections by regularly uploading photos, and videos, to stories on the instagram account @kuliner_lampung every day. it is hoped that routinely and istiqomah could satisfy readers for always following information about culinary up _ to date. promotion via social media (instagram food blogger @kuliner_lampung) could increase the development of smes, especially in the culinary business: based on results from the interview with 8 smes culinary in way halim, could conclude that occur enhancement turnover sales on 8 smes the. para perpetrator smes the to promote food blogger @kuliner_lampung by over and over again in accordance needs, because feel effect which positive on developing his business after to do work same. whereas for the asset, from 8 smes only there are 5 smes which already have branch effort, 3 smes other say promotion through food blogger @kuliner_lampung has an effect, but only endure during 2 week until 1 month after to do promotion. however, it could be confirmed that after to do promotion, the owner effort earns more profit than usual and can continue their business. development effort in perspective economy islam of course must be grounded in values that have been set by allah and his messenger. likewise, the form of business which is run by smes culinary in way halim corresponds, with operating effort no cheat customer, no compel and also each other open among buyer and also seller, as in developing his business must base on faith to god s.w.t, operate his commands and stay away from all his prohibitions, so that just effort _ for getting pleasure and blessing life in the world and the hereafter. references abbas, a., nisar, q. a., mahmood, m. a. h., chenini, a., & zubair, a. 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(2015). teknologi inbound marketing sebagai alternatif. majalah ilmiah unikom, 13(01). https://doi.org/10.34010/miu.v13i01.16 64 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 assessment of regional economic integration in bulgaria through eu funding and implementation of financial instruments under the operational program "regions in growth" 2014-2020 mladen dilov finance and accountancy faculty, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 28 april 2024 revised 14 may 2024 accepted 17 may 2024 the study aims to monitor whether the implementation of investment projects in the 2014-2020 programming period is in line with the approved national strategic framework for economic integration of the regions in bulgaria. the focus of the report is on financial instruments as an alternative form of financing. a method of deduction was used to describe the financial instruments. in order to investigate the effectiveness of the implementation of investments through them, an analysis of 10 selected municipal projects was made by tracking the progress of the financial resource absorption on a quarterly basis. from the official website of the institute for market economics, data on the level of asymmetry of the different regions in terms of investments made and infrastructure are obtained. as a result of the study, it was found that despite the successful implementation of the operational programme "regions in growth" 2014-2020, the imbalance in the development of the different regions in bulgaria remains significant. the lack of sufficient administrative capacity of municipalities and various procedural delays make municipal projects financed by the financial instrument unfeasible within the deadlines set for them. the findings of the study could be useful while new financial instruments in bulgaria are implementing. the increased risk of non-compliance with municipal projects has be taken into consideration along with targeted action for the economic and social integration of bulgaria's lagging regions keywords: financial instruments, regional integration, project investments. jel: f15, r42 address correspondence: email: mladendilov@mail.bg mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 65 introduction the european union provides support to all 27 counties in various forms of funding grants, longterm loans, and/or combined support. supporting sustainable development is linked to completing the single internal market of the european union and mobilizing various common policies economic development, social policy, and environmental policy (boneva 2011). the main goal is to supply investment intentions that lead to economic growth, development, and innovative solutions to reduce harmful emissions in the environment. in underdeveloped countries such as bulgaria, eu funding holds significant important to overcome problems with imbalances in the development of different regions. effective implementation of european financing could result in sustainable development for the country. the signing of the contract for eu membership in april 2005 was the first stage of bulgaria's integration process in accordance with european politics. in the context of full membership, the need for a coherent national integration policy that is not only responsible for compliance with eu requirements is growing (hubenova 2022). analyzing official data under 2014-2020 program period in bulgaria for the type and amount of investments could be important for determining the effective utilization of financial resources from european union. the opinions of economic experts are that the lack of financial experience causes ineffective fund disbursement. further action has to be made to optimize these processes to overcome the transition to green energy, improving macroeconomic performance, and societal well-being. along with grant funding, the eu offers an alternative option to support projects in accordance with cohesion policy. the official website of the european commission provides detailed information on financial instruments, which help to trigger investments on the ground for revenue-generating and costsaving activities while maximizing private investment with minimum public support to deliver the cohesion policy objectives of economic, social and territorial cohesion. financial instruments represent a more efficient and sustainable alternative to complement traditional grant-based support. the european regional and development fund and the cohesion fund support projects on the ground through financial products, such as loans, guarantees and equity (european commission 2024). the european regional development fund (erdf) is part of the five european structural and investment funds whose main goal is to deliver the eu's cohesion policy. all funds foreseen under financial instruments in bulgaria for 2014-2020 program period come from the erdf. the goal of the study is to analyze the entire process of financial instrument disbursement in the country, from budget allocation to actual project implementation, in order to accomplish the main national strategic goal – achieving sustainable regional development. literature review theories of regional economic integration the process of regional convergence in european union is inextricably linked to policies aimed at integrating lagging regions by providing financial resources. on the official website of the cfi, economic integration is defined as an agreement that eliminates trade barriers and introduces a single monetary and fiscal policy to create an interconnected global economy. the first theories to define regional economic integration emerged in the 1950s and 1960s. according to liberal theory unrestricted market competition is the best regulator of the economy, which cannot be equally replaced by instruments of state economic regulation (hadjinikolov et al. 2004:28). a well-known representative of neoliberal theory is the hungarian economist bela balassa. in 1976, his scientific work „types of economic integration“ defended the thesis that full economic integration requires the creation of supranational institutions whose decisions are mandatory for the members of the union. effective international integration, according to dirigistes, requires not only the elimination of national discrimination but also the development and consistent implementation of an effective general policy by integrating countries in a wide range of areas (hadjinikolov et al. 2004:33). according to the publication in „european economic integration“ from 2004, developing countries due to limited potential for pure market integration have supported dirigiste theory (hadjinikolov et al. 2004). in reality, for countries like bulgaria, excessive political-institutional support causes conflict within the union. an example of this is the controversy over the country's entry into the schengen area. the liberal theory is also inapplicable because it completely denies political support that could optimize integration processes. in reality, the liberal theory could lead to unfair competition from developed countries that have a huge production capacity, allowing them to realize economies of scale. only neoliberal theory is close to actual economic integration in the eu, which approves of free trade availability with support from european institutions. mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 66 national strategy for regional development implementing european cohesion policy at the national level is linked to activities aimed at identifying the main threats to the european community over a period and transposing them at the local and regional levels. the national strategy for regional development (nsrd), published on the mrdpw official website, is the primary document that defines the strategic framework of state policy for achieving balanced and sustainable development of the country's regions and for overcoming intra-regional and interregional within the framework of the eu-wide cohesion policy. the information from the nsrd confirms disturbing data regarding the lag of bulgaria's regions, which are far behind the european average. the only region that is close to the european average in economic and social indicators is the southwest region. the reasons can be summarized as population decline, migration, and depopulation of underdeveloped areas, as following graphic shows: source: national statistical institute figure 1. population of bulgaria in the bulgarian national strategy for urban development 2012-2022, it is not mentioned that the demographic crisis in the country is the worst among all eu member states. in that case, the main goals of nsrd should mainly focus on social development. nevertheless, the nsrd focuses on achieving cohesion in three dimensions economic, social, and territorial. according to ministry of regional development and public works, the main strategic goal is ‘achieving sustainable, integrated, and balanced regional development by building on local potential and bringing regions more closely together economically, socially, and territorially’ (national strategy for regional development 2012-2022). professor stoykov (2012) confirms the statement that regions in bulgaria are far behind the european average in his study „the bulgarian economy in the terms of european integration“, published in 2011. according to the study, the economic crisis is the cause of continuing lag behind for weaker economies, increasing their dependence on developed countries. in professor stoykov's opinion, bulgaria's membership in the eu should create favorable financial and organizational conditions which, in the long term, could lead to an equal level of convergence in economic and social development with other eu member states. in the first few years of the programming period 2007-2013, problems have been identified with a lack of administrative capacity, a clear economic outlook, and strategic objectives. moreover, there are weak project and organizational readiness, as well as incorrect use of funds. all of these reasons are prerequisites for ineffective financial instrument disbursement in bulgaria. the experience gained in the first program period for bulgaria have to be taken into consideration while programme periods are implementing. study the study uses the method of deduction to analyze the implementation of cohesion policy in bulgaria. as mentioned in the introduction, erdf is the only source of fi funds. the european regional and development fund invests in four key areas: innovation and research; the digital agenda; support for smes; the low-carbon economy. the official website of the european commission provides data about the total erdf (2014-2020) planned budget for every member of the eu. the scope of the study includes 10 mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 67 countries, including bulgaria, along with poland, czech republic, romania, greece, hungary, croatia, lithuania, latvia and estonia. the data is illustrated in the following graphic: source: author's calculations with data from european commission figure 2. erdf (2014-2020) budget allocation financial resources for bulgaria under erdf are smaller compared to countries like romania, greece, and croatia. the amount of the funds is eur 4,521 million, which accounts for 1.5% of the total budget of the fund. in comparison, funding for croatia is 1.8%, for greece 4.4%, and for romania 4.8%. among all 27 members, poland has the largest financial resource – eur 49,513 million, which is 16% of the total budget of erdf. according to the scope of the study, next are czech republic and romania with a difference of 3 million from the total funding budget – eur 17,862 million and eur 14,802 million, respectively. the countries with the lower budget than bulgaria are lithuania – eur 4,285 million, latvia – eur 3,101 million, and estonia – eur 2,692 million. the operational programme 'regions in growth' 2014-2020 makes a major contribution to the implementation of the funds planned by the european commission under the european regional development fund, accounting for 36% of all planned financing for bulgaria for that period. according to the official website of the ministry of finance, the op fund amount is eur 1,609 million, including eur 1,378 million of european financing and eur 231 million of national funding. financial instruments in the operational programme 'regions in growth' 2014-2020 help to overcome problems with trade limitations for private investors and the lack of projects to improve the urban environment and raise the standard of living among the residents of the regions. the idea of fi is to support investments per a viable financial perspective but cannot generate sufficient funding from market sources. the financial resource for implementing fi under operational programme "regions in growth" 2014-2020 is eur 369.7 million, including additional private co-financing from financial intermediaries. investments are allocated to the following two priority axes:  priority axis 1“sustainable and integrated urban development“ – eur 138.7 million  priority axis 6 „regional tourism“ eur 50.3 million. on the official website of the fund manager for financial instruments in bulgaria, detailed information is published about the main goals of the financial instruments. they include improvement of the urban environment, energy efficiency, development of economic areas in cities, as well as tourism development. an advantage of fi over grant funding lies in terms of the final recipients, which can include, in addition to municipalities and municipal enterprises, private companies, public-private partnerships, and individuals. the financing is provided in the form of low-interest investment and working capital loans, including non-recoverable vat of up to bgn 40 million, with a repayment term of 20 years, a grace period of 36 months, a beneficiary's self-participation of up to 15% of the loan amount, and reduced collateral conditions. the managing authority in bulgaria delegates execution rights of financial instruments to two 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000 49 513 17 862 14 802 13 541 13 257 5 650 4 521 4 285 3 101 2 692 erdf budget in million eur mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 68 financial intermediaries – the sustainable cities fund and the regional fund for urban development. the scope of investments for the sustainable cities fund includes regions in southern bulgaria and sofia, with funding of eur 175.1 million. northern regions in bulgaria are eligible for funding from the regional fund for urban development with a financial resource of eur 102.4 million. financial instruments have many advantages over other types of credit financing and are the preferred financial product among investors with project initiatives:  more efficient use of public resources – fi provide additional financial resources to supplement grant support for municipalities.  overcoming market failures – providing opportunities for „funding for target groups with limited access to private sector financial resources whose economic activity is important for achieving the objectives of the relevant european programme, that is confirmed in official website of fund manager of financial instruments in bulgaria.  recycling of financial resources – from the beginning of 2024 there is strong possibility for financial intermediaries to reinvest accumulated finance resources from principal repayments on existing loans into new projects. result and discussion alongside the range of opportunities available to beneficiaries using a financial instrument, there are some constraints observed in the past programming period: 2014-2020 in order of regional development success. implementation of the financial projects on time one of the big challenges facing the financial intermediaries for the 2014-2020 program period is linked with the timely implementation of approved projects for funding. unlike private investments for the majority of municipalities, there is a tendency for non-observance of deadlines for credit utilization, despite the existence of a 'commitment' fee in the terms of the contract. this fee is charged as a percentage of the unused amount of the credit. when the deadline is not respected, it causes unnecessary administrative burden linked with the approval of changes in contract clauses. a meeting of the investment committee is formed to approve changes, and an annex is concluded with the beneficiaries. this could also lead to deviations from the set implementation goals along with the operational agreement for managing funds for sustainable cities. in most cases, there is a deviation from the planned funding amount to a specific reporting date, which has a negative impact on the financial intermediaries. some of the reasons for delayed implementation of fi projects are:  public procurement law procedures – in the procedures for the selection of contractors with public procurements there are risks of delays because of appeal of the procedure or refusal of contractor after has been already selected. this may lead to deviation from the initial deadlines for projects implementation.  approval from national institute for immovable cultural heritage (nich) – approval linked with projects under priority axis 6 tourism and cultural heritage. for their implementation, opinion from nich is required but the procedures are long and unpredicted which cause significant delays for the investments  projects with combined support – projects with combination of financial instruments and grants have more complicated procedures for applying, approval and follow up changes in the contract that again results in implementation of the investments. to confirm the problem with delays in project implementation, a study will present 10 municipal projects funded by the sustainable cities fund in the south region during the 2014-2020 program period. ten different municipalities are included in the study: burgas, kazanlak, pernik, gotse delchev, yambol, smolyan, karlovo, blagoevgrad, dupnitsa, and kardzhali. the total amount for the projects is eur 30,969,117, including funding from the fund for eur 9,432,033, or 30.46% of the total project financing. the scope of the study is the initial absorption period, excluding annexes for deadline extensions. the main goal is to analyze the percentage of funds that have been absorbed until the end of the contract period. the scope of the study is 36 months, which is the maximum period allowed under the operational agreement with the managing authority. the values are presented as a percentage of the total amount of the projects (without accumulation) for the relevant quarter from the first day of contract signing until the contract deadline for absorption. the following information is from scf's official website: mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 69 table 1. percentage of amount disbursed under contracts with fud south beneficiary/ name of project total 3 months 6 months 9 months 12 months 15 months 18 months 21 months 24 months 27 months 30 months 33 months 36 months burgas "the power of the water" 74,3% 0,0% 0,0% 15,0% 9,0% 26,2% 8,5% 4,6% 11,0% kazanlak „тhe world of the thracians „ 34,0% 0,0% 0,1% 0,3% 1,3% 0,8% 2,7% 12,4% 1,9% 0,3% 3,4% 4,2% 6,6% pernik „palace of culture“ 41,3% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 34,4% 6,8% gotze delchev „house of culture" 18,9% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 4,7% 14,2% 0,0% 0,0% yambol „renovation of the art gallery“ 3,9% 0,2% 0,5% 0,4% 0,6% 0,3% 0,5% 0,9% 0,4% smolyan „planetarium“ 31,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 31,0% karlovo "tourism" 31,6% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 10,1% 0,0% 0,0% 21,5% 0,0% blagoevgrad " chamber opera and community centre“ 31,0% 0,0% 0,0% 0,0% 0,0% 0,0% 1,4% 0,0% 0,0% 26,2% 3,4% dupnitsa „youth house“ 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% kardzhali „perperikon" 22,2% 0,0% 0,0% 0,0% 0,0% 9,4% 0,0% 0,0% 11,1% 0,0% 0,0% 1,8% 0,0% source: author's calculations with data from sustainable cities fund the analysis of the funds that have been absorbed on a quarterly basis as a percentage of the total amount of the projects can be summarized as follows:  none of the municipal projects included in the study has been fully implemented by the absorption deadlines specified in the financing contracts. burgas municipality has the highest implementation rate, with 74% of the total funding amount absorbed. on the other hand, the absorption rate in dupnitsa municipality is 0% for a period of 30 months. the average absorption rate for the ten chosen projects is extremely low 28.8%  during the first 12 months from the conclusion of contracts between beneficiaries and scf for the analyzed projects, it is confirmed that municipalities do not take the initiative to provide disbursement documents to financial intermediaries for project implementation. the average amount of absorbed funds for the ten projects is lower than 1%.  the tendency for most of the chosen municipal projects is active absorption in the last 6 months of the contractual term. in order to prove this thesis, a calculation was made for two periods: 1) period 1: from the contract signing until the quarter before the last 6 months; 2) period 2: the last 2 quarters before the end of the contractual term. two of the ten projects are excluded from the calculation – municipal burgas due to its high level of amount absorption, and municipal dupnitsa for its 0% implementation rate. both projects would cause a significant deviation that would distort the final result. the average percentage of investment activity to total investment for the 8 projects in period 1 is 1.1%, confirming low investment activity. the percentage for period 2 is 9.7%. although the difference between the two periods isn't significant, the investment activity increases by the end of the contract period. the study, conducted with 10 municipal projects financed by fi, confirms that investments do not meet contractual deadlines. implementation of key activities is delayed due to various administrative and procedural obstacles, combined with shortcomings in project management by beneficiaries. as a result, the established deadline for the absorption of funds under op "regions in growth" 2014-2020 could not be met. a disbursement mechanism beyond 2023 for fi and combined support with grants is created with the goal mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 70 of completing projects financed by the urban development funds that were not finalized at the end of the period. the procedure is related to municipalities' accounts blocking of the unspent amount within the partner bank, pending submission of supporting documents and preparation of a disposition of funds by the financial intermediary. nine of the 10 municipal projects in the study fall under the post-2023 disbursement mechanism. only the project "the power of water" has disbursed 100% of the sustainable cities fund south approved funding. the average percentage of the amount transferred for absorption in 2024 is high – 54% of the total amount for funding. the study showed that implementation of municipal projects funded with financial instruments is difficult process to manage because of administrative obstacles that disrupted the originally planned absorption deadlines. on the other hand, private projects are much more effective with high level of loan absorption due to willingness of beneficiaries for project completion in order to generate incomes. to confirm this thesis, there is a study with two private projects, funded by scf for program period 2014-2020. the name of project 1 is „electronics manufacturing facility with warehouse and administrative part“ with approved funding from scf for eur 9.73 million and 24 months period for disbursement. project 2, named „construction of a new commercial and service complex of the company "megatron ead on the territory of the city of sofia“ for eur 3.55 million and the same period of amount absorption. comparison of the above 2 projects is with the average absorption amount of the ten municipal projects on a quarterly basis. the results are shown in the next graph: source: author's calculations with data from sustainable cities fund figure 3. rate of absorption of private and municipal projects with fi information from the sustainable cities fund about absorption of fi projects confirms that private projects are much more effective. both of them implementing 100% of approved funding for the disbursement period in contracts. in comparison, the average absorption of the ten municipal projects is 37.6% and for longer period. project 1 has almost even allocation of disbursements on a quarterly basis unlike project 2 where the total amount has been disrupted within 3 quarters. asymmetry in development indicators in the official website of the institute for market economy (ime) a study about „regional profiles – indicators of development“ is available. the scope are the 28 regions in the country in total 73 economic and social indicators have been analyzed in such a way that the data can be systemized and reported dynamically. by drawing up separate profiles for each area and supplementing them with thematic analyses, the publication in ime describes both the economic and social aspects of life in the regions. as the focus of the report is implementation of the fi, the main goal of the study is to confirm or deny the statement that op „regions in growth“ 2014-2020 helped to solve the national problem with regional underdevelopment. moreover, the national strategy for regional development 2012-2022 focus is about conducting cohesion policy. mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 71 investments: the total investments made in the country are a strategically important indicator for achieving economic growth. the data from ime should confirm or reject the statement that the operational programs 2014-2020, including fi, have a negative effect of asymmetric reinforcement. a limitation of the analysis is the scope of the study, which includes all investment activities for a specific region. for the goal of the report, it is assumed that funding from the eu is crucial for a period of 2 years – 2022 and 2023. according to the information, there is an uneven distribution of investments in national regions in 2022, excluding sofia city, sofia-region, gabrovo, and burgas. in the other 24 regions, there is a low level of financial support for implementing projects. the coefficient for amounts paid under op to municipalities per person varies. the two regions sliven and targovishte are last due to the coefficient with 1,659 leva paid from op to one person, in comparison to sofia, which receives 4,264 leva. after 12 months, changes in the development of the 28 regions in bulgaria are observed, according to the total amount of implemented investments. the information is shown in the following figure: source: official website of ime figure 4. investment by regions 2023 the derived data from the institute for market economics in 2023 indicate some improvement in the distribution of investments made by regions, but the strong imbalance trend remains valid. the decrease in investments made in the burgas region leads to the conclusion that only 3 regions in the country report high investment activity – sofia city, sofia region, and gabrovo. the capital city is a leader in the indicator under study. for example, sofia has the largest number of enterprises relative to the population – 95 per thousand people (the country's average is 60) the main analyzed indicator, in line with the objective of the report, is the value of funds disbursed under op per capita. the data from ime shows that the average value of that indicator for 2023 is eur 1,464. for the three regions with high investment activity, the paid amounts under operational programs are eur 2,180 for sofia city, eur 1,416 for sofia region, and eur 2,215 for gabrovo region. compared to the previous year, an increase in op injections is reported respectively with 7.4%, 8.37%, and 13.0%. the region with the lowest per capita disbursement of funds under op is sliven – eur 817, or bgn 1,598, or eur 647 lower than the country's average. only nine out of 28 regions in bulgaria exceed the average size of the analyzed indicator. statistics confirm the study made 10 years ago about the lag of bulgarian regions behind the average european levels of development. unfortunately, for pp 2014-2020, this lag has still not been overcome. infrastructure: the lack of easy access to good transport infrastructure, water supply, electricity, and telecommunications can pose significant barriers to the key priority of balanced sustainable regional development. infrastructure development is directly related to the number of investments made in the country. regarding financial instruments in bulgaria for the 2014-2020 period, part of the approved investment for private beneficiaries includes the construction of connecting infrastructure. on the other mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 72 hand, municipal investments for street renovation and inter-block spaces were successfully implemented with the support of scf. following a logical sequence of the report, the scope of the study covers regional profiles for infrastructure, according to data from ime. according to information from the official website, 11 regions in bulgaria had well-developed infrastructure by the end of 2022. the average percentage for well-developed infrastructure in the country is a concerning 42%, according to 2022 data from ime. motorways and firstclass roads in bulgaria are equally poor, averaging 18.5% (based on 2021 data). only household internet access is acceptable, with more than 80% coverage in 2022. in order to analyze the dynamics of the regional profile indicators for infrastructure, the data for the last reporting year is illustrated: source: official website of ime figure 5. regional infrastructure 2023 compared to the previous year, regions with well-developed infrastructure remain at 11, but with some changes. the analyzed indicator in regions pernik, haskovo, stara zagora, and veliko tarnovo is improving, unlike in pazardzhik, targovishte, sliven, and sofia region, where the condition of the infrastructure is deteriorating. the average percentage for well-developed infrastructure in the country is 1% lower than in 2022, down to 41%. household internet access rate is improving by 3.8%, up to 87.3%. the average percentage for motorways and first-class roads for 2023 remains the same as the previous year. the average rail network density is 3.6 km per 100 square kilometers, also unchanged in recent years. many problems with depreciated and obsolete rail transport, combined with a lack of initiatives to renew rail routes, remain an unattractive way of deliveries for businesses. according to ime data, infrastructure asymmetries in the regions are confirmed. the condition of the road network is a major problem at the national level. according to data, nearly 60% of the national network is in bad condition despite the implementation of infrastructure projects for street renovation in the 2014-2020 program period. the poor condition of the existing asphalt pavement is causing emergency repairs. these repairs lead to additional difficulties for businesses and reduce opportunities for making new local or foreign investments. conclusion based on the results of the study on financial instruments in bulgaria for the programme period 20142020, the following conclusions can be made:  in general, the process for implementing financial instruments in bulgaria should be optimized. although the financing environment improved, problems identified in prof. stoykov’s study such as lack of administrative capacity, clear economic outlook, and strategic objectives persisted during the 2014-2020 period.  implementation of municipal finance projects on time was identified as a serious obstacle to the completion of the financial instruments, according to the study. this aspect must be taken into consideration when planning new financial instruments for the 2021-2027 period. mladen dilov / finance, accounting and business analysis, volume 6, issue 1, 2024 73  despite the successful implementation of the "regions in growth" 2014-2020 operational programme, including the financial instruments as indicated by data from ime, bulgaria's regional economic development still lags seriously behind average european regions. this implies that the primary goal of the national strategy for regional development has not been achieved, and efforts need to be focused on priority funding to increase economic and social integration in the country. the analysis of regional economic integration in bulgaria under the operational program "regions in growth" 2014-2020 provides empirical evidence of process weaknesses based on which the following recommendations can be made:  increasing the administrative capacity of beneficiaries of projects funded by financial instruments, especially municipalities, to manage more effectively administrative obstacles that cause delays in the implementation of investments. this could be achieved through targeted training and seminars, including exchanges with other eu member states.  reducing asymmetries in regional development can be resolved through the focus of the national development strategy. more financial resources should be made available for investment in less developed regions, including through preferential terms in the implementation of financial instruments for 2021-2027. references boneva, s. 2011. european economic integration: budget and eu budget policy. university publishing house "economy", sofia, 248. cohesion open data platform. 2023. european regional development fund (erdf) https://cohesiondata.ec.europa.eu/funds/erdf/14-20. euro-lex. 2023. consolidated version of the treaty on the functioning of the european union. https://eur-lex.europa.eu/legal-content/en/all/?uri=celex%3a12016e177. european commission 2023. 2014-2020 european structural and investment funds. https://commission.europa.eu/funding-tenders/find-funding/funding-management-mode/20142020-european-structural-and-investment-funds_en. european commission. 2024. financial instruments in cohesion policy https://ec.europa.eu/regional_policy/funding/financial-instruments_en. fund manager of financial instruments in bulgaria. 2024. financial instruments. https://www.fmfib.bg/bg/page/9-finansovi-instrumenti. hadjinikolov, d., s. krastev, v. marinov, m. petrov, m. savov, and m. slavova 2004. european economic integration. university publishing house "economy", sofia, 409. hubenova, t. 2022. bulgaria's economic integration into the eu: stages of development and contemporary challenges" in the proceedings of the conference "bulgaria's economy in the european union, bas, sofia, p. 14. institute for market economics. 2023. regional profiles. https://www.regionalprofiles.bg/bg/. ministry of regional development and public works. 2024. national strategy for regional development 20122022. https://www.mrrb.bg/bg/nacionalna-strategiya-za-regionalno-razvitie-2012-2022-g/. ministry of regional development and public works. 2024. use of financial instruments 2014-2020. https://www.mrrb.bg/bg/infrastruktura-i-programi/operativna-programa-regioni-v-rastej/finansoviinstrumenti/. national statistical institute. 2024. population of bulgaria. https://www.nsi.bg/en/content/2974/population. operational program „regions in growth“. 2023. detailed rules for providing co-financing through fi in combination with grants under the 2014-2020. www.eufunds.bg/sites/default/files/uploads/oprd/docs/201904. operational program „regions in growth“. 2023. financial instruments. https://jessicafund.bg/finansoviinstrumenti/. regional urban and development fund. 2024. about us. https://jessicafund.bg/en/about-us. stoykov, i. 2012. the bulgarian economy in the conditions of european integration. economic thought, (3): 3-19. https://etj.iki.bas.bg/storage/app/uploads/public/62a/6fe/041/62a6fe0419230321031296.pdf. sustainable cities fund. 2024. about scf. https://www.citiesfund.bg/en/?cid=2. https://cohesiondata.ec.europa.eu/funds/erdf/14-20 https://eur-lex.europa.eu/legal-content/en/all/?uri=celex%3a12016e177 https://commission.europa.eu/funding-tenders/find-funding/funding-management-mode/2014-2020-european-structural-and-investment-funds_en https://commission.europa.eu/funding-tenders/find-funding/funding-management-mode/2014-2020-european-structural-and-investment-funds_en https://ec.europa.eu/regional_policy/funding/financial-instruments_en https://www.fmfib.bg/bg/page/9-finansovi-instrumenti https://www.regionalprofiles.bg/bg/ https://www.mrrb.bg/bg/nacionalna-strategiya-za-regionalno-razvitie-2012-2022-g/ https://www.mrrb.bg/bg/infrastruktura-i-programi/operativna-programa-regioni-v-rastej/finansovi-instrumenti/ https://www.mrrb.bg/bg/infrastruktura-i-programi/operativna-programa-regioni-v-rastej/finansovi-instrumenti/ https://www.nsi.bg/en/content/2974/population https://jessicafund.bg/en/about-us https://etj.iki.bas.bg/storage/app/uploads/public/62a/6fe/041/62a6fe0419230321031296.pdf https://www.citiesfund.bg/en/?cid=2 99 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.01 tax avoidance of companies in the sri kehati index dwi septa aryani1* , crystha armereo2 faculty of economics and business, tridinanti university, palembang, indonesia1 faculty of economics and business, tridinanti university, palembang, indonesia2 * corresponding author info articles abstract history article: submitted 1 april 2024 revised 5 june 2024 accepted 20 june 2024 purpose: the aim of this study is to find out the extent to which executive character, firm size, and fixed asset intensity influence tax avoidance. design/methodology/approach: this research uses quantitative methods. the research population consisted of 25 companies listed on the sri kehati index. the sample in this study was made up of 13 companies. the sampling technique used was purposive sampling. the analytical method used in this research is multiple linear regression. particular implication: these research findings would deepen understanding, assist businesses in deciding how to approach their tax policies, and provide information to the government as it formulates tax laws to close loopholes that allow for tax avoidance. originality/value: this research uses a different company from the previous research, so it is hoped that it can provide broader insight into tax avoidance practices. paper type: research paper keywords: tax avoidance, executive character, firm size, fixeds asset intensity jel: h26, m41, g32 * address correspondence: e-mail: dwiseptaaryani09@gmail.com1 crystha_armereo@univ-tridinanti.ac.id2 http://faba.bg/ https://doi.org/10.37075/faba.2024.2.01 mailto:dwiseptaaryani09@gmail.com mailto:crystha_armereo@univ-tridinanti.ac.id https://orcid.org/0009-0006-2794-605x https://orcid.org/0009-0000-7855-1417 dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 100 introduction the financing of the country's needs and national development requires no small amount of funds, so the government must optimize tax receipts (masrullah et al. 2018:3). on the other hand, corporate management often commits inevitable tax avoidance. tax avoidance is an attempt to evade taxes legally by exploiting the gray areas of the law so that the government cannot impose sanctions. but on the other hand, the government does not expect this to happen because it could lead to a decrease in state tax receipts. so this could lead to a conflict of interest between the company and the government. there are three measurements of tax avoidance: the cash effective tax rate (cetr), the effective tax rate (etr), and the book-tax differences (btd). in this study, we used the measurement of the effective tax rate (etr). the etr is the percentage of the effective tax rate used to calculate the tax payable by the taxpayer, where the lower the value of the actual tax rate, the less tax payments are due to the taxable person. action to minimize the amount of taxpayers' payments can be influenced by many factors, including executive character, corporate characteristics, and fixed asset intensity. the first factor is executive character. corporate leaders have influence over tax avoidance. corporate executives who occupy top positions both as top executives and top managers have different characteristics. a risk averse and a risk taker are two characteristics of an executive. an executive's risk aversion means that leaders tend to be less brave to make decisions that are potentially beneficial to the company. the higher the risk taker character of an executive, the more daring it will be to avoid taxes. corporate risk assessment is a method of calculation used to determine the type of character and how bold a company executive is to take risks. previous research by ayu et al. (2021:15) found that executive character partially has no influence on tax avoidance. the results of this study differ from the rahayu et al. study (2020:4), which found that executive character influences tax avoidance. the second factor is firm size. firm size is a measure that can describe its revenue and activity as well as the size of the company’s smallness. the amount of company assets can be used to determine how big the company is. richardson and lanis (2017) say that the larger the size of the company, the greater the tendency to tax avoidance, as indicated by a low effective tax ratio (etr). large companies have larger resources and are more able to manage the tax burden than small companies, which leads to a tendency toward tax avoidance. research conducted by fatmawati (2017) found that corporate size significantly affects tax avoidance. on the other hand, research conducted by yosef rago et al. (2020) found that corporate characteristics do not affect tax avoidance. fixed asset intensity is the third factor that affects tax avoidance. permanent assets can be used by the company for tax avoidance because the fixed assets will undergo a reduction (except land); this reduction will subsequently be the reduction burden that can be deducted from income in the calculation of corporate tax. the amount of reduction burden deducted from income will affect the taxable profit, which is then used to calculate the amount of corporate debt. the greater the intensity of the fixed assets invested in the assets, the larger the reduction burden is reduced, so that the basis for calculating taxes is smaller. small tax calculations are an opportunity for companies to avoid taxes. so it shows that the higher the fixed asset intensity, the higher the tax evasion the company experiences. the results of the study by ida ayu putu wira yanti and i nyoman putra yasa (2022) indicated that partially the intensity of assets remained nonimpact on tax avoidance. according to nugraha (2019), asset intensity has a significant positive impact on tax avoidance. previous research on tax avoidance is still interesting to study because it shows different empirical results. this research was conducted on companies listed in the sri kehati index. the sri kehati index is an index that contains the 25 best shares of esg performance assessment results and has good liquidity. sri kehati index is a collaboration between pt bursa efek indonesia (bei) and the foundation for biodiversity (kehati). the company selected to join sri-kehati is a company that applies the principles of sustainable responsible investment (sri) and environmental, social, and good governance (esg). the sri kehati index expects many companies to advance the implementation of good corporate governance and corporate social responsibility in order to reduce tax avoidance. in indonesia, tax avoidance is still practiced by many companies. an example of a tax avoidance case is pt garuda indonesia (giaa), which was listed in the sri kehati index before the harley and brompton smuggling cases. this case has caused the country to potentially lose tax receipts of up to rp. 1.5 billion. in 2013, tax avoidance was also carried out by indofood sukses makmur tbk. in 2013, it evaded taxes of rp 1.3 billion by establishing a new company and transferring the assets, liabilities, and operational assets of the noodle division (instant meat factory) to indofood cbp sukses makmur tbk (icbp). (www.gresnews.com, 2013). the practice of tax avoidance has also been carried out by pt unilever indonesia tbk (unvr) which is pt nestle. in 2013, nestle evaded taxes by means of transfer pricing aimed at increasing central profits, resulting in a considerable turnover of money in its financial statements. all this was done by nestle dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 101 purposefully to reduce the cost of product acquisition and the tax burden. it is estimated that the country has suffered a loss of rp 800 billion (news.ddts.co.id 2017). the aim of this study is to find out the extent to which executive character, firm size, and fixed asset intensity influence tax avoidance. conceptually, it can be described as follows: figure 1. conceptual framework literature review agency theory the concept of agency theory was initially introduced by jensen and meckling (1976), who contended that there existed a conflict of interest when principals gave other individuals (agents) the power to make decisions on the operation of the business. according to mulyani et al. (2021), agency theory explains why organizations' principals, or owners, and agents, or managers, have different interests. agency theory states that noncompliance by individuals or firms leading to tax evasion, namely by lowering tax payments explicitly, is caused by disparities in interests between the tax authorities and companies. tax avoidance according to chairil anwar pohan (2017:41) said that: "tax avoidance is an attempt to avoid tax done legally and safely for the taxpayer without violating the applicable taxation provisions (not contrary to the law) in which the methods and techniques used tend to exploit the grey areas contained in the taxation act and regulations themselves to reduce the amount of tax owed." tax avoidance can be measured using the effective tax rate (etr). etr = tax expense earning before income tax (1) executive character butje and tjondro (2014:4), in their research, revealed that executive character is a specific character that each leader at the top level that exists in a company possesses. these characteristics can influence the leader to give directions for running his business according to the goals that the company wants to achieve. then a decision made by a company leader is expected to have an impact on the survival of the business that exists in the company. the method of calculation used to know the type of character and to assess how bold a company executive is in taking risks can be done by assessing corporate risk. the risk of this company is calculated through the deviation standard of ebitda (earnings before interest, tax, depreciation, and amortization) divided by the total assets of the company (sopyanto 2018). higher low corporate risk indicates executive character, risk taking or risk averse. the company ratio can be measured using the formula as follows: risk company = ebitda total assets (2) firm size the size of a company, according to riyanto (2011:313), is the size of the company’s smallness as seen from its equity value, sales value, or value of assets. in this study, firm size is measured by the natural logarithm of the total assets of the company, which is formulated as follows (sugiarto 2011: 145): dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 102 corporate size = ln total assets (3) fixed asset intensity fixed asset intensity shows the proportion of fixed assets within the company. according to artinasari and mildawati (2018:5), fixed asset intensity shows how much a company invests in its assets in the form of fixed assets. in this study, the fixed asset intensity is measured using the intensity ratio of the assets by dividing total fixed assets by total assets. fixed asset intensity = total fixed assets total assets (4) hypothesis the effect of executive character on tax avoidance merkusiwati et al. (2019:4) stated that agency theory concerns solving problems that can occur in agency relationships, one of which is risk problems that arise when the principal and agent have different views of risk. the different positions, roles, and purposes of the principal and the agent will result in a conflict of interest. the decision to undertake tax evasion depends on the individual executive of the company. lerid's study (2020) states that executives who dare to take risks or are called risk-takers will have more influence on tax evasion than executives that dare not take risk-averse risks. the statement is also supported by a study conducted by pratiwi (2022), which explains that the more an executive is a risk-taker, the higher the rate of tax evasion the company carries out. therefore, this first hypothesis is as follows: h1: executive character has an effect on tax avoidance. the effect of firm size on tax avoidance firm size is the classification of the company into large or small categories based on total assets. companies that are large tend to have greater resources for managing taxes because of the costs attached to these resources compared to smaller companies. the larger the firm, the more aggressive management is usually involved in tax avoidance (suyanto et al. 2019). the size of the company will attract great attention from the government regarding compliance with the amount of tax paid. however, not all companies can use their resources for tax avoidance because companies are subject to government-regulated decisions and policies (kim et al. 2010). so a hypothesis is prepared: h2: firm size have an effect on tax avoidance. the effect of fixed asset intensity on tax avoidance fixed asset intensity is how much a company invests in its assets in the form of fixed assets and stocks (sugiarto 2019:5). according to the agency theory, the difference of interest between the principal and the agent can affect a variety of things concerning the performance of the company, one of which is the company's tax policy. which, in practice, will increase the company's investment in fixed assets. ownership of a fixed asset can reduce the tax payments paid by the company due to the depression costs inherent in the fixed property. depression fees can be used by managers to minimize the taxes paid to the company. the higher the fixed asset intensity ratio that the company has, the lower the etr. the statement is also supported by research conducted by merkusiwati et al. (2019:3) and sopyanto (2018:2), which found fixed asset intensity to have a positive influence on tax avoidance. h3: fixed asset intensity has an effect on tax avoidance. methods this research uses quantitative methods. the research population consisted of 25 companies listed on the sri kehati index. the sample in this study was made up of 13 companies. the sampling technique used was purposive sampling, with the following criteria:  companies listed on index sri kehati in 2020–2022  companies have the complete data required for research.  companies that did not merge between 2020-2022 the analytical method used in this research is multiple linear regression. the following is the model used in this research: y = a+b1x1+b2x2+b3x3+e (5) dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 103 result and discussion results of the normality test in this study, we used the one sample kolmogorov-smirnov test method (k-s). the basis of the residual distribution is normal when the significance value is greater than 0.05 or 5%. here are the results of the normality test: table 1. one-sample kolmogorov-smirnov test classical assumption test results table 2. multicollinearity test coefficients2 model collinearity statistics tolerance vif 1 (constant) executive c 0,927 1,079 corporate c 0,798 1,253 fixed asset 0,778 1,286 a. dependent variable: tax avoidance b. source : spss 26, 2024 from the calculations presented in the table above and the results of the multicollinearity test, the independent variable shows that the third value of the variable is less than 10 and the tolerance value is greater than 0.1, so the regression model is free of multicollinearity problems. heteroscedasticity test the heteroscedasticity test is used to determine the variance inequality of the residual for all observations in the regression model. unstandardized residual n 39 normal parametersa,b mean 0,0000000 std. deviation 1,57617781 most extreme differences absolute 0,140 positive 0,128 negative -0,140 test statistic 0,140 asymp. sig. (2-tailed) 0,051c a. test distribution is normal. b. calculated from data. c. lilliefors significance correction. dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 104 source: spss 26, 2024 figure 2. heteroscedasticity test based on the image of the scatterplot above, the spread point is placed so that no heteroscedasticity occurs. autocorrelation test to detect autocorrelation can be seen from the durbin watson test (dw). table 3. durbin watson test (dw) source: spss 26, 2024 based on the table above dw values between -2 and 2 so there is no autocorrelation. multiple linear regressions test table 4. multiple linear regressions test coefficientsa model unstandardized coefficients standardized coefficients b std. error beta 1 (constant) -2,352 1,613 executive c -1,107 1,573 -0,111 corporate c -0,017 0,071 -0,041 fixed asset -2,960 1,214 -0,419 a. dependent variable: tax avoidance source: spss 26, 2024 model summaryb model r r square adjusted r square std. error of the estimate durbin-watson 1 0,443a 0,196 0,127 1,642340 0,603 a. predictors: (constant), fixed asset, corporate c, executive c b. dependent variable: tax avoidance dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 105 y = −2,352 – 1,107 x1 − 0,017 x2 − 2,960 x3 + e (6) result of the hypothesis test 1. partial test (t test) if the significance value is > 0.05, then it can be assured that the partial test t is nonexistent. here are the statistical results of the t test: table 5. t-test coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -2,352 1,613 -1,458 0,154 executive c -1,107 1,573 -0,111 -0,704 0,486 corporate c -0,017 0,071 -0,041 -0,239 0,812 fixed asset -2,96 1,214 -0,419 -2,439 0,020 a. dependent variable: tax avoidance source: spss 26, 2024 based on the above table, it can be concluded that the test of the hypothesis of each independent variable against the dependent variable is: 1. the t test result for the executive character variable showed a significant value of 0.486 greater than 0.05. so it can be concluded that executive characters have no influence on the tax avoidance variable. 2. the t test results of the firm size variable showed a significant value of 0.812 greater than 0.05. so it can be concluded that firm size have no influence on the tax avoidance variable. 3. the t test results of the fixed asset intensity variable showed a significant value of 0.020 smaller than 0.05, so it can be concluded that fixed asset intensities influence the tax avoidance variable. simultaneous test (f test) table 6. f-test anovaa model sum of squares df mean square f sig. 1 regression 23,063 3 7,688 2,85 0,050b residual 94,405 35 2,697 total 117,468 38 a. dependent variable: tax avoidance b. predictors: (constant), fixed asset, corporate c, executive c source: spss 26, 2024 the above table shows that the significance value of f is 0.05, equal to 0.05, so it can be concluded that executive characters, firm size, and fixed asset intensity as independent variables simultaneously influence tax avoidance as its dependent variable determination coefficient test (r2) here are the results of the determination coefficient test: table 7. determination coefficient test model summaryb model r r square adjusted r square std. error of the estimate 1 0,443a 0,196 0,127 1,64234 a. predictors: (constant), fixed asset, corporate c, executive c b. dependent variable: tax avoidance source: spss 26, 2024 dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 106 adjusted r square value of 0.127. the results showed that executive character, firm size, and fixed asset intensity had a positive and significant influence on tax avoidance of 12.7%, while the remaining 87.3% were influenced by other factors that were not studied. discussion the effect of executive character, firm size, and fixed asset intensity on tax avoidance the test results showed that executive character, firm size, and fixed asset intensity simultaneously influenced tax avoidance for sri kehati index companies in 2020-2022. tax avoidance is a rather complicated and unique issue because, on the one hand, it is permitted because it does not violate the law, but on the other, it is undesirable by the government. that leads to the emergence of differences of interest between the company and the government. where companies are always trying to reduce their tax burden as low as possible, while governments are always striving to maximize the possible increase in state receipts from the tax sector each period has been targeted according to the national purchasing revenue budget (apbn). the effect of executive character on tax avoidance the results of the statistical t-test indicate that executive character has no partial influence on tax avoidance among sri kehati index companies in 2020-2022. it means that the higher the executive character, the lower the rate of tax avoidance. corporate leaders who have long held positions and are older are more likely to avoid the big risks that lead to companies being viewed badly by market reactions. the decision to undertake tax evasion depends on the individual executive of the company. low (2006) mentions that executives with a risk averse character tend not to like a risk, so in decision-making, always choose the lower risk. these characters are usually of older age, have long held positions, and have a dependence on the company, so they prioritize security over profits that have high risks for the company. the results of this study are consistent with the study of radiansyah and nofryanti (2015), showing that executive characters have no influence on tax avoidance; the more risk averse the executive, the less tax avoidance. however, the results of this study are inconsistent with sopyanto (2018) and malinda (2017), which explain that executive character influences tax avoidance. the more executives are risk-takers, the higher the rate of tax evasion carried out by companies. the effect of firm size on tax avoidance the results of the statistical t test indicate that firm size have no influence on tax avoidance. this means that when the size of the company increases, it will not affect tax evasion by the company. larger companies, which have a lot of assets, are less likely to make efforts to avoid paying taxes. companies with larger total assets are better able to fulfill their obligations and report more detailed and accurate company conditions. the size of the company has no effect on tax evasion because paying taxes is an obligation for the entire citizen, whether it is a personal taxpayer or a corporate tax payer. apart from that, the government also pays close attention to large companies and ensures they pay taxes properly. if a large company tries to avoid paying taxes, they can get into trouble and have a bad reputation. companies that violate tax rules, whether they're large or small, will be pursued equally by the fiscal authorities. it shows that the size of the company does not affect management's consideration of tax avoidance. the results of this study are in line with the research of khomsiyah et al. (2021), which states that firm size has no effect on tax avoidance. the effect of fixed asset intensity on tax avoidance the results of the test of the hypothesis show that the variable fixed asset intensity has a partial influence on the tax avoidance of the sri kehati index 2020-2022. then it can be concluded that very large companies invest their assets in the form of fixed assets. the fixed asset intensity of a large corporation will result in a reduction of the burden on large assets, so that the fixed asset intensity will potentially suppress the corporate tax burden. therefore, a high fixed asset intensity in an agency conflict will be exploited by managers to avoid tax burdens by increasing investments in fixed assets so as to maximize the company's profits and the desired performance satisfaction of managers. the larger the amount of ownership of the fixed assets that dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 107 the company holds, the greater the reduction burden and the lower the tax burden. then, from there, tax evasion practices will become more aggressive. the results of this study are consistent with the findings of setiawan (2019) and firman (2017) that fixed asset intensity has a positive effect on tax avoidance. however, these findings are inconsistent with merkusiwati (2019) and sopyanto (2018), who stated that fixed asset intensity has no significant impact on tax avoidance. conclusion based on the results of hypothesis testing, it can be concluded that, partially, executive characteristics have no effect on tax avoidance; firm size has no effect on tax avoidance; and fixed asset intensity has an effect on tax avoidance, while simultaneously executive characters, firm size, and fixed asset intensity have an effect on tax avoidance. this research still has several weaknesses, such as the fact that the observation data used is relatively short. for further researchers, it is recommended to add periods of research so as to find more accurate results and different research objects. and also, use other variables beyond the variables studied, such as intellectual capital and managerial ownership. references artinasari, n., and t. mildawati. 2018. pengaruh profitabilitas, leverage, likuiditas, fixed asset intensity, dan inventory intensity terhadap tax avoidance [effects of profitability, leverage, liquidity, fixed asset intensity, and inventory intensity on tax avoidance]. jurnal ilmu dan riset akuntansi [journal of science and accounting research], 7(8): 1–18. butje, s., and e. tjondro. 2014. pengaruh karakter eksekutif dan koneksi politik terhadap tax avoidance [the impact of executive character and political connections on tax avoidance]. journal accounting review. 4(2). fatmawati. 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(2012). corporate social responsibility and tax aggressiveness: an empirical analysis. journal of accounting and public policy, 31(1), 86–108. https://doi.org/10.1016/j.jaccpubpol.2011.10.006 lerid, f., f. sianturi, f., and d. pratomo. 2020. pengaruh karakter eksekutif, gender diversity eksekuti dan insentif eksekutif terhadap tax avoidance [impact of executive character, gender diversity and executive incentives on tax avoidance]. e-proceeding of management, 7(2): 2945-2952. low, a. 2006. managerial risk taking behavior and equity based compensation. fisher college of business.working paper, 03(003). malinda, k. p. 2017. pengaruh karakter eksekutif dan good corporate governance terhadap tax avoidance [the impact of executive character and good corporate governance on tax avoidance]. skripsi, universitas pamulang; tangerang selatan. https://doi.org/10.1016/j.jaccpubpol.2011.10.006 dwi septa aryani and crystha armereo / finance, accounting and business analysis, volume 6, issue 2, 2024 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sector companies listed on the indonesian stock exchange 2016-2020)]. jurnal akuntansi dan keuangan feb universitas budi luhur [journal of accounting and finance feb university of budi luhur] p-issn: 2252-7141 e-issn: 2622-5875 setiawan, y. 2019. pengaruh intensitas modal, kualitas audit dan kompensasi rugi fiskal terhadap tax avoidance [impact of capital intensity, audit quality and tax loss compensation on tax avoidance]. skripsi, universitas pamulang; tangerang selatan sopyanto. 2018. pengaruh corporate social resposibility, capital intensity dan karakteristik eksekutif terhadap tax avoidance [impact of corporate social responsibility, capital intensity and executive characteristics on tax avoidance]. skripsi, universitas pamulang; tangerang selatan. sugiarto. 2019. pengaruh koneksi politik, risiko perusahaan, dan capital intensity terhadap penghindaran pajak [the impact of political connections, corporate risk, and capital intensity on tax evasion]. skripsi, universitas pamulang; tangerang selatan. 60 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 accounting conservatism and earnings responsiveness: an empirical study of public companies in indonesia adi gunanto study program, master of accounting, universitas muhammadiyah surakarta, indonesia info articles abstract history article: submitted 9 may 2023 revised 27 may 2023 accepted 1 june 2023 purpose: the purpose of this study is to analyze the influence of accounting conservatism, profitability, growth opportunities, and default risk on the earnings responsiveness coefficient of mining sector companies listed on the indonesia stock exchange during the period of 2020-2022. design/methodology/approach: this study utilizes a quantitative research design with purposive sampling technique to select a sample of 60 mining sector companies listed on the indonesia stock exchange during the period of 2020-2022. the data collected from the financial reports of the selected companies is analyzed using classical assumption tests and multiple regression analysis. findings: the results of this study indicate that accounting conservatism has a significant positive effect on the earnings responsiveness coefficient of mining sector companies listed on the indonesia stock exchange during the period of 2020-2022. however, profitability and default risk variables do not have a significant effect on the earnings responsiveness coefficient. on the other hand, growth opportunities have a significant negative effect on the earnings responsiveness coefficient. practical implications: the findings of this study can be useful for practitioners in making managerial decisions, especially in enhancing the earnings responsiveness of mining sector companies listed on the indonesia stock exchange. practitioners can utilize accounting conservatism as a tool to improve earnings responsiveness. additionally, this study provides insights for regulators in determining policies related to the earnings responsiveness coefficient. regulators can consider growth opportunities in their decision-making processes. originality/value: this study contributes to the accounting literature by revealing the influence of different factors on the earnings responsiveness coefficient of mining sector companies in indonesia. the results of this study can also serve as a basis for further research on other factors that influence the earnings responsiveness coefficient of companies in other sectors. paper type: empirical research. keywords: accounting conservatism, profitability, growth opportunities, default risk, earnings responsiveness coefficient jel: g32, g11 * address correspondence: e-mail : adigunamanusia@gmail.com mailto:sadikaden1999@gmail.com https://orcid.org/0009-0003-9578-1814 adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 61 introduction the increasingly competitive market requires every company to maintain transparency in disclosing financial and non-financial information, especially for those already listed in the stock market (alia and sarees 2023). financial reports are important factors in the development of the stock market, as users of financial reports can predict the company's performance and evaluate the potential for investment in the stock market. investors pay close attention to earnings information as an indicator of company performance. however, in addition to earnings information, other information is needed to predict a company's stock returns, such as the earnings responsiveness coefficient. a high value of the earnings responsiveness coefficient indicates that the reported earnings are of good quality, while a low value of the earnings responsiveness coefficient can indicate market distrust in the quality of earnings (xue 2020; cui et al. 2023). therefore, the earnings responsiveness coefficient can be used as one perspective in assessing the quality of a company's earnings based on market response. in addition to profit information, investors also need to pay attention to other factors that can affect a company's performance, such as conservative accounting policies (wu et al. 2022). information on the application of conservatism in accounting can influence the decisions of financial statement users. the concept of conservatism in accounting results in lower recognition and measurement of revenue and assets and higher recognition of liabilities (houaneb et al. 2023). this leads to a reduction in profit in the current period and an increase in profit in the following period. this means that investors will feel confident and creditors will be satisfied with their decision to invest in the company. profitability is also closely related to the value of earnings. in companies with high profitability, the influence of accounting earnings on stock prices will be greater than in companies with low accounting earnings growth (khalilov and osma 2020). therefore, the higher the level of profitability of a company, the greater the likelihood of unexpected earnings that will increase the value of the company's earnings response coefficient. the next factor, growth opportunities, is also very important in describing the growth prospects of a company in the future. investors tend to respond more strongly to companies with high growth opportunities, as they are considered capable of providing promising returns in the future. thus, investors must be able to identify the right investment decisions based on accurate and balanced information. there are several reasons why this research is highly relevant and interesting to conduct. firstly, in the era of digitization and globalization like today, competition among companies is becoming increasingly fierce, requiring companies to have the right strategies to survive and grow in the competitive market. one such strategy is optimizing the use of company resources to create growth opportunities that will provide long-term benefits for the company and investors. secondly, default risk and uncertainty of investment returns still pose significant problems in the stock market, so understanding how factors such as accounting conservatism, profitability, default risk, and growth opportunities affect the earnings response coefficient can help investors and stakeholders make wiser investment decisions. finally, this research has significant novelty as it uses more specific data and research objects, namely mining sector companies listed on the indonesia stock exchange (idx) during the period of 2020-2022. literature review a systematic review of accounting conservatism accounting conservatism is one of the accounting principles commonly used in accounting practice. a systematic review of accounting conservatism can help us understand this principle more deeply (zhang et al. 2019; sharma and kaur 2021; sun et al. 2022; tambolo and cevolani 2023). one example of a systematic review that can be conducted is to study the effect of accounting conservatism on the quality of financial information. in this case, accounting conservatism can help minimize the risk of errors or inaccuracies in financial statements, thus improving the quality of financial information presented. however, on the other hand, the application of accounting conservatism can also cause bias in the presentation of financial information, as it tends to report losses rather than gains. in addition, a systematic review of accounting conservatism can also be conducted by considering the factors that influence its application. one factor that affects the application of accounting conservatism is the level of uncertainty in the business environment. the higher the level of uncertainty, the more likely accounting conservatism is to be applied, as it can help reduce the risk of loss. in addition, another factor that affects the application of accounting conservatism is the stakeholders' interests in financial reporting. for example, if stakeholders prioritize the safety and stability of the company over growth or profit, they may be more likely to apply accounting conservatism in financial reporting (hsieh et al. 2019; sun et al. 2023). adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 62 the role of profitability profitability plays an important role in calculating the earnings response coefficient. the earnings response coefficient is a ratio calculation that measures how much a company's earnings will change when revenue changes (hakim et al. 2023). in calculating the earnings response coefficient, profitability is measured using return on assets, which is a ratio that measures how efficiently a company generates earnings from its assets. the higher a company's return on assets, the greater the likelihood of having a higher earnings response coefficient. thus, the level of profitability of a company greatly affects the earnings response coefficient. companies with a high return on assets can more easily generate profits when their revenue increases and, therefore, have a higher earnings response coefficient. however, it is important to remember that the calculation of the earnings response coefficient is also influenced by other factors, such as cost structure and leverage (biddle et al. 2022). therefore, it is important for financial managers to pay attention to various factors that affect the earnings response coefficient, including profitability, when making financial decisions. investor confidence growth opportunities, or growth prospects, are an important factor considered by investors in making investment decisions (noh et al. 2023). this is because company growth is seen as an indicator of success and potential for high investment returns. investor confidence in growth opportunities can be reflected in the increase in stock prices and trading volume in the capital market. however, investor confidence in growth opportunities must be accompanied by careful evaluation of potential risks involved. companies that focus on growth often experience a decrease in short-term profitability due to their investments (cerqueira and pereira 2020; le and moore 2022). therefore, it is important for investors to understand how companies manage their growth and how it affects the overall performance of the company. with proper evaluation, investors can benefit from the potential growth generated by the company. confidence level of the difference in corporate default the earnings response coefficient is a measure of a company's net income sensitivity to changes in revenue. one factor that can affect the earnings response coefficient is default risk. default risk refers to the likelihood of a company failing to pay its debt or failing to meet other financial obligations. as default risk increases, the earnings response coefficient tends to decrease (zhang 2023). this is because investors are less confident in companies with high default risk, so they are more cautious in responding to changes in a company's revenue. the difference in default risk in the coefficient of profit response can be observed among companies with different risk categories. companies with low default risk tend to have higher profit response coefficients than those with high default risk (jin and wu 2022; ho et al. 2023). this can be explained by the higher investor confidence in companies considered to have low default risk. on the other hand, companies with high default risk are considered to have a greater likelihood of defaulting on debt, so investors tend to be more cautious in responding to changes in company revenue. therefore, the difference in default risk in the coefficient of profit response can be an important factor in analyzing a company's financial performance. methods this research was conducted using a quantitative method that relied on secondary data derived from the annual financial reports of mining sector companies listed on the indonesia stock exchange during the period of 2020-2022. the data was obtained through direct access to the official website of the indonesia stock exchange, www.idx.com. meanwhile, the population used in this research consisted of mining sector companies in indonesia during the specified period. the research sample was selected using purposive sampling technique, where the samples were chosen based on specific criteria. the criteria for sample selection included: companies that published financial reports on the indonesia stock exchange during the research period, companies that used the indonesian rupiah as the currency in their financial statements, and companies that had positive profits or equity. the analysis conducted will involve processing the collected data, such as statistical analysis and hypothesis testing, to identify and examine the relationships between the variables under investigation. subsequently, the analysis results can provide a better understanding of the contribution of accounting conservatism to the mining sector, as well as its implications for financial reporting and decision-making within it. therefore, the research can also provide valuable and in-depth insights for stakeholders in the http://www.idx.com/ adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 63 mining sector, academics, and accounting practitioners in understanding the importance of accounting conservatism in the context of the mining industry in indonesia. there are 60 companies that meet the criteria as samples in this research. here is the list of selected companies. table 1. list of sample mining sector companies in indonesia no. company name no. company name 1. pt. adaro energy tbk. 31. pt. transcoal pacific tbk. 2. pt. akbar indo makmur stimec tbk. 32. pt. astrindo nusantara infrastruktur tbk. 3. pt. atlas resources tbk. 33. pt. energi mega persada tbk. 4. pt. borneo olah sarana sukses tbk. 34. pt. medco energi internasional tbk. 5. pt. baramulti suksessarana tbk. 35. pt. mitra investindo tbk miti 6. pt. bumi resources tbk. 36. pt. sugih energy tbk sugi 7. pt. bayan resources tbk. 37. pt. super energy tbk sure 8. pt. dian swastatika sentosa tbk. 38. pt. merdeka copper gold tbk. 9. pt. golden energy mines tbk. 39. pt. resources asia pasifik tbk. 10. pt. garda tujuh buana tbk. 40. pt. wilton makmur indonesia tbk. 11. pt. harum energy tbk. 41. pt. saranacentral bajatama tbk. 12. pt. indika energy tbk. 42. pt. betonjaya manunggal tbk. 13. pt. indo tambangraya megah tbk. 43. pt. citra tubindo tbk. 14. pt. resource alam indonesia tbk. 44. pt. gunawan dianjaya steel tbk. 15. pt. mitrabara adiperdana tbk. 45. pt. gunung raja paksi tbk. 16. pt. bukit asam tbk. 46. pt. hk metals utama tbk. 17. pt. golden eagle energy tbk. 47. pt. steel pipe industry of indonesia tbk. 18. pt. tbs energi utama tbk. 48. pt. krakatau steel (persero) tbk. 19. pt. trada alam mineral tbk. 49. pt. lionmesh prima tbk. 20. pt. trans power marine tbk. 50. pt. optima prima metal sinergi tbk. 21. pt. batulicin nusantara maritim tbk. 51. pt. aneka tambang tbk. 22. pt. capitol nusantara indonesia tbk. 52. pt. bumi resources minerals tbk. 23. pt. exploitasi energi indonesia tbk. 53. pt. central omega resources tbk. 24. pt. dwi guna laksana tbk. 54. pt. ifishdeco tbk. 25. pt. alfa energi investama tbk. 55. pt. vale indonesia tbk. 26. pt. mitrabahtera segara sejati tbk. 56. pt. tembaga mulia semanan tbk. 27. pt. pelita samudera shipping tbk. 57. pt. alakasa industrindo tbk. 28. pt. indo straits tbk. 58. pt. alumindo light metal industry tbk. 29. pt. rig tenders indonesia tbk. 59. pt. cita mineral investindo tbk. 30. pt. sumber global energy tbk. 60. pt. indal aluminium industry tbk. source: indonesia stock exchange, www.idx.com, 2023 the above company is divided into sub-sectors of coal production, oil refining production, natural gas production, gold production, iron production, steel, and metal production, mineral production, copper, and aluminum. the reason why researchers chose these sub-sectors is because the companies have implications that can be analyzed, namely, the companies tend to operate in environments with high risks, allowing them to adopt a conservative approach in financial reporting. the profitability of the companies is also highly influenced by fluctuations in commodity prices and market volatility. growth opportunities can be related to new explorations, operational expansions, or product diversification within this sub-sector. default risk in terms of debt payments and business sustainability are important considerations in examining the financial aspects of companies in this mining sub-sector, and the earnings responsiveness coefficient reflects the extent to which a company can generate changes in earnings in response to changes in sales or economic conditions. by selecting companies in this sub-sector and analyzing aspects such as accounting conservatism, profitability, growth opportunities, default risk, and earnings responsiveness coefficient, we can gain better insights into the financial condition, risk management, and growth potential of companies in the industry. http://www.idx.com/ adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 64 source: data processed by researchers, 2023 figure 1. conceptual framework the above framework is a model of theoretical study, empirical study, and synthesis of the framework study that will underlie the hypotheses, so that they can be tested for their validity. formulation of hypotheses based on the indication of the phenomenon that occurs and supported by relevant theories, prior to being based on the facts obtained through data collection, the hypotheses proposed in this study are as follows: h1: accounting conservatism affects earnings response coefficient h2: profitability affects earnings response coefficient h3: growth opportunities affect earnings response coefficient h4: default risk affects earnings response coefficient this hypothesis is in line with the researcher's objective, as the process of discovery has the characteristics of being systematic, empirical, and based on relevant theory. in this study, a research model is used that involves testing the coefficient of determination (r2) and classical assumption tests consisting of tests for normality, multicollinearity, autocorrelation, and heteroscedasticity. the coefficient of determination test is used to evaluate how much variability in the dependent variable can be explained by the independent variable. meanwhile, classical assumption tests are used to examine the basic assumptions that must be met in regression analysis, such as data normality, no multicollinearity, no autocorrelation, and no heteroscedasticity (chen et al. 2023; azarifar 2023). by using these tests, it is expected that the research results obtained have met the basic assumptions required for analyzing data through regression. earnings response coefficient: car(t) = 𝛴(𝐴𝑅(𝑖)) 𝑓𝑟𝑜𝑚 𝑖 = 1 𝑡𝑜 𝑖 = 𝑡 (1) where, car(t) : accumulated abnormal return at time t ar(i) : abnormal return in the i-th time period σ : shows the abnormal return addition operation from i=1 to i=t i=1 to i=t : shows the 1st time range and ends at the tth time input analysis phenomenon : accounting conservatism, profitability, and growth opportunities influence the earnings responsiveness coefficient, which can assist investors and stakeholders in making wiser investment decisions process analysis methods : used to measure the extent of the influence of accounting conservatism, profitability, growth opportunities, and default risk as antecedent variables on the earnings responsiveness coefficient as the consequent variable. in this context, hypothesis testing and measurement are conducted to examine the relationship between these variables. accounting conservatism earnings responsiveness coefficient consclusions & advice : obtained from the discussions output analisis outcame analisis profitability growth opportunities default risk research hypothesis adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 65 𝑅𝑖 − (𝛼 + 𝛽𝑅𝑚)𝑅𝑖 − (𝛼 + 𝛽𝑅𝑚) (2) where ; ri : rate of return of the asset or security being analyzed α : intercept estimation constant from the market (rm) or systematic risk β : beta regression coefficient of asset sensitivity to changes in market returns (rm) ri, t = (𝑃𝑡 – 𝑃𝑡 − 1) / 𝑃𝑡 − 1 (3) where, ri,t : rate of return on securities in asset prices from period t-1 to period t pt : asset price in time period t pt-1 : asset price in time period t-1 accounting conservatism: ρ = 1 − (6 ∗ σ(d²)) / (n ∗ (n² − 1)) (4) where ; ρ : correlation between this year's profit and previous year's profit σ : sigma denoting the sum d : difference in ranking between this year's profit and the previous year's profit n : the number of observations of this year's profit pair and the previous year's profit the concept of accounting conservatism is related to a conservative approach in recognizing revenue and expenses in financial statements calculated with earnings persistence. as a result, the correlation coefficient can be calculated to evaluate the sustainability of profits between two time periods. a correlation coefficient approaching 1 indicates a strong relationship, while a coefficient approaching 0 indicates a weak relationship between this year's profit and the previous year's profit. profitability: roa = ( net income / (( beginning total assets + ending total assets ) / 2)) x 100% (5) growth opportunities: m/b = stock market price per share / book value per share (6) default risk: lit = 𝑇𝑈𝑖𝑡 / 𝑇𝐴𝑖𝑡 (7) lit : liquidity ratio, measuring the company's ability to fulfill obligations tuit : total short term debt, total short term liabilities of a company in a given time period tait : short-term total assets, the total amount of assets available in the short term in this study, a multiple regression analysis model is used to test the relationship and influence of several independent variables on one dependent variable. this analysis is used to estimate the population mean value or the value of the dependent variable's average based on the independent variables used. this regression model can measure the strength and direction of the relationship between variables and is used to test hypotheses in this study. the following is the formula for the regression model used. coefficient of earnings response y = β0 + β1 accounting conservatism + β2 profitability + β3 growth opportunities + β4 default risk + βkxk + ε (8) where ; y : is the dependent variable β0 : is the constant intercept β1 : to βk are the regression coefficients that indicate the influence of independent variables x1 to xk on y. x1 to xk are independent variables ε : is the error or residual adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 66 this formula is used to estimate the average value of the dependent variable (y) based on the values of the independent variables (x1 to xk) using a linear equation model. the process of estimating regression coefficients is done by minimizing the error (ε) between the observed values of y and the predicted values by the regression model. result and discussion multiple linear regression analysis is a statistical method used to study the relationship between independent variables and a dependent variable. in this analysis, the basic assumption is that the relationship between independent variables and the dependent variable is linear, and there is homoscedasticity and residual independence. the methodology used in multiple linear regression analysis includes selecting the appropriate regression model, testing basic assumptions, testing significance, testing model feasibility, partial regression analysis, and testing for multicollinearity. a good understanding of this methodology ensures accurate and reliable results. table 2. multiple linear regression analysis modeling unstandardized residual variable β tcount sig. (constant) 0,072 0,586 0,569 accounting conservatism 0,411 2,053 0,031 profitability -0,090 -0,187 0,894 growth opportunities -0,008 -2,902 0,004 default risk -0,061 -0,607 0,571 fcount 2,409 r2 0,101 adjustedr2 0,098 sig. 0,001b sources: the data is processed, researchers from ibm spss statistics version 25.0. the significance value of the accounting conservatism variable indicates that accounting conservatism has an effect on the earnings response coefficient, thus h1 is accepted. however, the significance value of the profitability variable indicates that profitability does not have an effect on the earnings response coefficient, thus h2 is rejected. in addition, the significance value of the growth opportunities variable indicates that growth opportunities have an effect on the earnings response coefficient, thus h3 is accepted. however, the significance value of the default risk variable indicates that default risk does not have an effect on the earnings response coefficient, thus h4 is rejected. after conducting data testing, the classical assumption analysis consisting of kolmogorov-smirnov normality test showed that the data is normally distributed, followed by the variance inflation factor indicating the absence of multicollinearity issues. furthermore, it is free from heteroscedasticity as shown by the glejser test and does not contain indications of autocorrelation as durbin watson test for data distribution. the following are the results of the classical assumption analysis : table 3. classical assumption analysis variable kolmogorovsmirnov p-value variance inflation factor glesjer test durbin watson unstandardized residual : 0,118 2,250 accounting conservatism 1,211 0,966 profitabilitas 1,970 0,327 growth opportunities 1,828 0,971 default risk 1,220 0,264 sources: the data is processed, researchers from ibm spss statistics version 25.0. discussions in this study, the variable of accounting conservatism has a significant influence on the earnings response coefficient. this indicates that the higher the accounting conservatism of a company, the lower its earnings response coefficient. this is supported by the test results, where the significance value of t-test is obtained as a p-value of 0.031 < α 0.05. the earnings response coefficient reflects the extent to which changes in a company's earnings can be explained by changes in market earnings. therefore, investors should consider the factor of accounting conservatism when making investment decisions. this means that behind adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 67 the influence of accounting conservatism on the earnings response coefficient is the fact that a conservative approach requires companies to be more cautious in recognizing earnings. in situations where companies face uncertainty or risk, they are more likely to delay the recognition of earnings or reduce their value. this can reduce earnings fluctuations and result in a lower earnings response coefficient. meanwhile, the profitability variable does not have a significant influence on the earnings response coefficient. this indicates that investors do not need to pay too much attention to profitability factors when making investment decisions. this is supported by the test results, where the significance value of t-test is obtained as a p-value of 0.894 > α 0.05. however, this does not mean that profitability is not important for the sustainability of a company. profitability remains an important factor in business continuity. the nonsignificant influence of profitability in this study on the earnings response coefficient indicates that in a specific context, profitability does not have a direct relationship with the extent to which changes in a company's earnings are influenced by changes in market earnings. furthermore, the growth opportunity variable has a significant influence on the earnings response coefficient. this indicates that the higher the growth opportunity of a company, the higher its earnings response coefficient. this is supported by the test results, where the significance value of t-test is obtained as a p-value of 0.004 < α 0.05. investors should consider the growth opportunity factor when making investment decisions because companies with high growth opportunity can provide greater returns in the future. this finding can conclude that companies with high growth opportunity tend to have higher earnings response coefficients. growth opportunity reflects the potential of a company to generate earnings growth in the future. therefore, investors should consider this factor in investment decision making. lastly, the default risk variable does not have a significant influence on the earnings response coefficient. this is further supported by the test results, where the significance value of t-test is obtained as a p-value of 0.571 > α 0.05. this indicates that investors do not need to pay too much attention to default risk factors when making investment decisions. default risk reflects the risk of a company's failure to pay in the event of bankruptcy. however, investors still need to consider default risk. nevertheless, default risk does not directly affect the extent to which changes in a company's earnings are influenced by changes in market earnings. the findings of this research are consistent with previous studies (hamdan 2020; wijayanti et al. 2020; paramita et al. 2020; khalifa et al. 2022; du et al. 2022; liu et al. 2023; sa'ad et al. 2023; basu et al. 2023) that show the influence of the accounting conservatism and growth opportunity variables on the earnings response coefficient, as well as the lack of influence of the profitability and default risk variables on the earnings response coefficient. this indicates that these factors indeed have a significant influence on the earnings response coefficient and should be considered by investors in making investment decisions. furthermore, the findings of this research are not in line with studies conducted by (jaggi et al. 2022; jategaonkar et al. 2023; ivanov and faulkner 2023; d’augusta and grossetti 2023; ritonga et al. 2023) that indicate a negative influence of the accounting conservatism and growth opportunity variables on the earnings response coefficient. this means that both variables indicate that the increase in a company's earnings is not fully reflected in the reported earnings changes and the focus of the company on long-term growth and development weakens the earnings response to changes in earnings under certain conditions. overall, this research recommends that investors consider accounting conservatism and growth opportunity factors when making investment decisions, while profitability and default risk factors should not be considered as primary factors. however, investors still need to consider all these factors holistically when making investment decisions. researchers, in the context of this scientific study, observe opportunities in terms of collaboration between net profit margin, tax efficiency, return on equity, and return on investment, which can have a significant impact on future research. this is because the collaboration of these strategies provides companies with opportunities to enhance profit growth by optimizing profitability, managing taxes efficiently, increasing their own capital returns, and selecting investments that yield high returns. in future research, these factors can be combined in the analysis to provide deeper insights into how the collaboration between these indicators supports company profit growth. conclusion to make better investment decisions, investors need to consider all relevant factors holistically and not just focus on a single factor. the conclusion of this research indicates that accounting conservatism and growth opportunities are significant factors in determining earnings response coefficients, thus these factors need to be seriously considered in investment decision-making. additionally, investors should also take into account profitability and default risk as part of the holistic consideration in investment decisions. although these two factors do not have a significant impact on earnings response coefficients, they still play an important role in determining a company's performance. adi gunanto / finance, accounting and business analysis, volume 5, issue 1, 2023 68 therefore, investors need to conduct comprehensive holistic analysis involving all relevant factors in investment decision-making. investors should pay attention to accounting conservatism and growth opportunities as significant factors in determining earnings response coefficients. furthermore, profitability and default risk factors should also be considered in holistic analysis, despite not having a significant impact on earnings response coefficients. by conducting comprehensive holistic analysis, investors can make better investment decisions and minimize the risk of losses. these findings emphasize that investors need to conduct in depth analysis involving all these factors to make better investment decisions, supported by theoretical studies such as accounting conservatism theory, earnings response theory, investment theory, and firm performance theory. in addition, companies should provide transparent financial reports, maintain a focus on long-term growth, strive to strengthen profitability, and have effective risk management strategies to demonstrate to investors. this will provide confidence and aid in investment decision making. the findings of this research are not directly related to the post-covid-19 outbreak, either globally or in indonesia. however, these findings are more general and applicable to the overall investment situation. the values discussed are related to the importance of considering relevant factors holistically in making investment decisions, which include accounting conservatism, growth 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and world economy, sofia, bulgaria info articles abstract history article: submitted 15 october 2024 revised 23 november 2024 accepted 10 december 2024 purpose: advances in technology inevitably come with new potential methods for performing already established activities. artificial intelligence, in turn, is one of the most talked-about technological innovations. its impact on the financial sphere is still being analyzed and explored. this article examines the effect of these tools on the established market valuation methodology. the purpose of this paper is to show how digitalization and improvements in the usage of new digital technologies could prove to be useful in increasing the efficiency of already established processes such as the selected methodology for enterprise valuation: the market approach. more specifically it focuses on artificial intelligence as a tool which can be used to improve said efficiency. design/methodology/approach: the research method used in this paper is a case study, based on a practical execution of the chosen valuation method in three different scenarios, which differ depending on the usage of ai technologies. all of the executions of the methodology are timed using a stopwatch. a subsequent comparison of results is carried out, based on the findings, and the three executions are analyzed based on speed, accuracy of results, relevancy of results and relevancy of peers. findings: the analysis displayed a concrete result, in which the ai used, although proving to be extremely useful in shortening the execution time of the chosen valuation method, the accuracy of the results provided by it remained very far from the truth, as is the relevance of the peers provided by the artificial intelligence. this shows that the usage of ai could be an integral part of financial analysis in the future and could significantly improve the efficiency of the market valuation method. however, at this point in time, it should be used as a tool to facilitate analysis but not to replace it altogether. practical implications: in practice, this would be able to help execute valuations significantly faster and easier than ever before, but with the necessity of the valuator to make sure the peers provided are relevant to the company being valuated. originality/value: no similar study has been done regarding the implications of ai in enterprise valuation methodologies and therefore this would bring significant added value to this area of study. paper type: case study keywords: market method, artificial intelligence, finance, valuation, efficiency jel: g39 address correspondence: e-mail : stoyan.b.stoyanov@unwe.bg https://doi.org/10.37075/faba.2024.2.10 https://orcid.org/0009-0005-4516-4425 stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 218 introduction the rapid development of technology reveals a trend of necessity and dependence on it. this dependence, in turn, leads to the need for adaptability and the use of these technologies to improve and build on already accepted methodologies and approaches used both professionally and personally. one area of technology that is gradually becoming an integral part of everyone's daily life is artificial intelligence. its effects and usefulness have been widely discussed but are currently still unclear and subject to research and comment. the purpose of this paper is to reveal whether the use of artificial intelligence could improve the efficiency of applying the market method to enterprise valuation. for the purpose of the analysis, two types of artificial intelligence are considered. two hypotheses are considered, which are: 1) h0 artificial intelligence can help make market valuations significantly easier and faster. 2) h1 artificial intelligence could not adequately support the application of the market valuation method. the topic is modern and up to date, because the development of technology implies its inclusion and use in the daily professional needs of each person. this is only possible with a thorough understanding of the benefits and negatives of the respective technologies. artificial intelligence is one of the most relevant fields of development in the field of digitalization and in modern society, and new and improved benefits related to it are constantly emerging. because of this, the subject of this research is the effect ai has on the use of the market valuation approach, which takes the role of the object. the main task, which has been realized in this work, consists in the implementation of the selected valuation model and the subsequent comparison of the obtained results in order to draw conclusions and inferences regarding the described hypotheses. digitalization in the financial sector the digitalization of the financial sector is a topic addressed by a number of authors. the integration of technology into the banking and insurance sectors and its daily use by both consumers and the institutions themselves is clear evidence of the significant benefits that technology brings to the financial sphere. it is also important to mention the potential downsides of the technological boom, namely the "cyber" risks it brings with it. their importance is also noted by the authors aleksandrova et al. (2023) who state that terms such as "cyber security", "cyber risk", etc. are progressive entrants, across all industries, terms that are evolving at a pace no slower than technology. in terms of artificial intelligence, they maintain that it can be used to manage risks as well as enable rapid computing capabilities, gradually making this tool more common in financial institutions (aleksandrova et al. 2023). implementing artificial intelligence in the financial sphere has several benefits, many of which are automation of certain tasks and facilitated analysis of markets and historical data (bonaparte 2023). other authors advocate the idea that artificial intelligence could help identify risks, weaknesses in processes, etc. (kumar et al. 2019). this is further corroborated by authors bahoo et al. (2024) who summarize several benefits of artificial intelligence in the financial domain, including: forecasting systems, early warning systems, and analysis of large data sets . the authors described above agree around the general idea that artificial intelligence has significant benefits for the financial sphere and the functions performed in it. some of these benefits could also be directly linked to methods of valuing companies, namely forecasting systems and analytics systems. for the purpose of the study, an explanation of what constitutes a company's valuation is necessary. this process is extremely complex because the true value of companies is defined as "hidden and invisible" (nenkov and hristozov 2023). in order to determine the value of a company, it is important to understand when a company actually creates value. theoretical frameworks on this issue are mixed. damodaran (2002) views value as the set of a company's growth prospects, as well as its risk profile and the free cash flows available to it. on the other hand, koller et al. (2015) view it as the difference between the cash inflows a company receives from an investment and its ability to keep its earnings constant. a third perspective on company value views it as the benefits derived from an investment, which in turn lead to an increase in capital and a corresponding increase in value (miciuła et al. 2020). to summarize the above, the value of a company should be defined as its ability to generate income, derive benefits from its activities and its ability to manage, maintain and increase them in the future as measurement is done precisely through valuation methods. it is important to note that the extent to which the value obtained through the models approximates the actual value depends mainly on the quality and durability of the valuation process, as well as the valuation approaches and methods used (nenkov and hristozov 2022). the determination of value can be done in many ways, one of which is through dcf valuation models, comparative valuation models and the like (nenkov and hristozov 2023). the approach chosen for stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 219 this study is the market valuation method, which is part of the comparative models. it is also considered as one of the most popular valuation methods, which is supported by the research of bancel and mitoo (2014). company value under this approach is a comparison of a company's stock price with that of a selected group of similar "peer" companies (damodaran 2006). the corporate finance institute defines it as a method that reveals the value of a company using financial metrics such as market multiples "ev/ebitda, ev/revenue, p/e etc." comparing them to similar companies in the market (cfi team). nenkov (2015) defines them as an approach where assets are valued based on the market price of similar assets. in international valuation standards, it is defined as a method of determining the value of an asset by comparing it to identical or comparable assets for which price information is available (ivs 2023). this method was chosen for the analysis because of its ability to reveal the usefulness of artificial intelligence in providing necessary financial information, while testing its ability to provide up-to-date and accurate data that would be useful to any valuator who put this digital tool into practice. the use of artificial intelligence in the process of assessing the value of companies could increase the efficiency of execution and could save significant time. an example of this is a study done by several researchers at harvard university who use this type of machine learning software to determine the potential success of startups. they came to the conclusion that thanks to these software, they were able to predict with a reasonable degree of confidence the value and potential success of these startups through a set of variables (ang et. al. 2022). this suggests that these and similar ai-based algorithms should be potentially useful in other aspects of financial analysis. something similar can be seen in a study by hoang and weigratz (2023), who used a machine learning algorithm to forecast property market prices in germany. the results of their study showed that the models that used machine learning algorithms to predict prices came significantly closer to the actual value of properties than using the standard linear regression model. taking these examples into account, it is safe to assume that considering machine learning models in terms of improving the efficiency of financial valuations is a topic that requires consideration. for this purpose, two artificial intelligence models are used and analyzed:  a language model that provides information in the form of chat (openai 2023)  a platform integrating machine learning algorithms and data analytics to deliver market intelligence (comparables.ai 2023). research methodology the increasing use of artificial intelligence and its corresponding application in various aspects of both finance in general and valuation models, as described in the previous section, raises the need for a practical analysis of its effects. to this end, a detailed methodology of the study and the constraints placed on it are constructed and described in order to maximize objective results. the results are then evaluated based on a number of measurable criteria set in place. for the purpose of the study, a public company was randomly selected, which is an active enterprise and the shares of which are actively traded on the relevant stock exchange for the company. the selection of the company was made on the basis of a lottery principle, out of 50 listed companies 1 was drawn to be the subject of the study. the only restriction regarding the industry in which the company operates is that credit institutions are avoided due to their specificity of activity and the specifics in their financial information. an additional constraint placed is for the company to not be bulgarian since, based on the research of nenkov (2023), the confidence of bulgarian experts in the chosen method is not particularly high. he notes that the reason for this is the small stock market in bulgaria, which limits both the number of analogues and the reliability of their multiples. the chosen company is the hungarian pharmaceutical company richter gedeon nyrt. using publicly available information, three valuations of the selected company were performed. the market valuation method was applied, and the choice of analogues was limited to 5 for each of the valuations. the financial multiples used are limited to 3, namely the price/earnings (p/e) ratio, the enterprise value/ebitda (ev/ebitda) and the enterprise value/revenue (ev/revenue). they were chosen because they most clearly represent a company's ability to generate earnings and present an objective picture of its condition, while also being among the most widely used valuation multiples under the chosen methodology, which is supported by the empirical research of bancel and mitoo (2014). this is further supported by the research of fernandez (2023), who identifies them as the most relevant when valuing companies in almost any sector of the economy. the date as of which the valuations were carried out is 31.12.2023, as this is the last completed fiscal year and the traceability of the data is significantly more correct and facilitated. the valuation method has been applied as follows: 1) a market valuation method performed using specialized artificial intelligence that provides market analogs based on a given company and predefined filters. this software also provides the multiples of these market analogues and their financial information. stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 220 2) a market valuation method carried out using a chat bot type artificial intelligence. a set of parameters were created, which include: a. which is the company being valuated b. what analogues are sought in concreteness c. a requirement to provide the maximum information necessary to implement the method. for this purpose, the following question to the software is built: “i will perform a valuation using the market valuation method. the company i will be valuating is richter gedeon nyrt. for this purpose, i need market analogues that are as close as possible financially to the company i have chosen. these analogues must have similar: financial ratios, scale of operations and possibly be in similar areas of activity. please provide me with up to 5 market analogues that have the above characteristics. i would also like the maximum amount of publicly available financial information to be provided for each of these peers (total revenue, ebitda, net profit, cash, debt, enterprise value, market capitalization, shares outstanding) as well as their market multiples p/e, ev/ebitda, ev/revenue. let the data be limited to 31.12.2023. in tabular form." 3) a market-based valuation method performed by applying an already established valuation methodology where the valuator chooses a list of analogues that are as close as possible in financial terms to the selected company, including financial data, market multiples and other information necessary for the application of the model. the measurement of potential efficiency improvement is based on five main criteria. these criteria are as follows:  speed of execution this criterion aims to show to what extent the use of the particular ai would save time for the application of the market valuation method.  timeliness of the information this criterion aims to clarify whether the companies that the ai offers as analogues are actually in the given state and to what extent there is a difference in their market multiples, comparing the data provided by the ai against the actual market state of the company.  adequacy of analogues this criterion aims to check to what extent the companies provided by the ai can be considered as analogues. this is verified by a test of consistency of coefficients, consistency of business area and consistency in scale.  adequacy of the obtained results a criterion indicating to what extent the results obtained by the 3 methods are as close as possible to the real market value of the selected company. this is done on the basis of a comparison of the results of the three executed point valuations with the market value of the shares of the selected company. for the purpose of the study, it is assumed that the market value at the time of valuation of the company coincides with its real value.  financial resources required this criterion aims to verify the financial resources that would be required by a company or an evaluator to use the relevant ai. timekeeping is done with a stopwatch and starts from the moment the selected web browser is opened for use. in order to maximize objectivity, all data will be applied to the same template in ms excel, which is open and ready to integrate input data before the timer starts. the data for the selected company (richter gedeon nyrt.) is pre-integrated with data from the annual consolidated financial statements. checks on the timeliness and adequacy of the information and results are not subject to timing. due to the involvement of companies from different countries, the amounts presented are in us dollars for the purpose of objectivity. results of the study valuation using specialized artificial intelligence. the time required to load and start the software is 46 seconds. the filters that are set up in the ai include company selection and keywords to focus the search on peer companies. when a valued company is selected, the software recommends keywords to use to find analogs. for the purpose of the valuation, 2 keywords tied to the selected company were used: 'pharmaceuticals' and 'pharmacy'. the time required to set up the filters and load the companies is 1 minute and 26 seconds. the software provides at least 30 options for analogue companies in its free version and at least 5000 in its paid version. companies are selected at the discretion of the evaluator. the 5 selected analogue companies are the first 5 proposed, namely roche holding ag; merck & co., inc; gsk plc; johnson and johnson; teva pharmaceutical industries limited (appendix 1). a limitation of the selected software is that the free version does not provide the ability to access the financial information of the analogue companies, forcing the collection of information from other sources. the time taken to retrieve the required data from the respective exchanges is 23 min and 36 sec (yahoo finance 2024). the market multiples are sourced directly from the stock exchanges and no further calculation is required for them. based on the market multiples and the financial data of the selected company, intermediate market prices are derived for each of the multiples, which are subsequently weighted stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 221 at the discretion of the valuator. the median of the market multiples of the analogue companies listed by the specialized software is used for the valuation. the medians, the resulting intermediate prices and the weights to the final valuation by the respective market multiples are presented in table 1: table 1. results from first methodology p/e ev/ebitda ev/revenue median of each coefficient 14.10 9.80 4.39 interim price for each coefficient 32.72 33.71 54.22 weight of each multiple 40% 40% 20% weighted price for the chosen method 37.41 source: personal calculations weighting the resulting interim market prices forms a final market valuation per share of the selected company of $37.41. the final time to complete the valuation was 25 minutes and 48 seconds (appendix 2). valuation using a "chat bot" language model ai the time required to load and start the model is 1 minute and 15 seconds. the command input to the ai is pre-prepared for objectivity and to remove the “writing speed” factor. upon entering the pre-described command into the selected language model, 5 analogues of the selected company are proposed with the requested financial data information and market multipliers. the list of companies obtained includes teva pharmaceutical industries limited; hikma pharmaceuticals plc; sanofi s.a.; bayer ag; novartis ag (appendix 2). the time taken for the artificial intelligence to provide the information, from the time the query is sent until the full dataset is loaded, is 25 seconds. the data generation was done as it was set in the prompt, in tabular form. the software allows downloading the table in ".csv" format. this greatly facilitates the transfer of the data from the software to the prepared template. the table generated by the artificial intelligence adjusts the columns to match the specified required information in the order it is requested. therefore, when the condition is set, the evaluator can set the columns that the language model should generate for him. the total time required to transfer the data from the generated table to the already prepared template is 12 minutes and 9 seconds. the financial coefficients provided by the ai were used and no further calculation was performed for them. since the template has already set formulas, no further calculation or setting of additional formulas is needed. based on the market multiples and the financial data of the selected company, market prices are derived for each of the multiples, which are subsequently weighted at the discretion of the valuator. the median of the market multiples of the analogue companies listed by the language model is used for the valuation. the medians, the resulting intermediate prices and the weights to the final valuation for the respective market multiples are presented in table 2 as follows: table 2. results from second methodology p/e ev/ebitda ev/revenue median of each coefficient 11.60 8.10 2.33 interim price for each coefficient 26.92 28.02 29.21 weight of each multiple 40% 40% 20% weighted price for the chosen method 27.82 source: personal calculations weighting the resulting interim market prices forms a final market valuation per share of the selected company of $27.82. the final time to complete the valuation was 13 minutes and 49 seconds (appendix 3). valuation using a standardized methodology, without the use of ai the standardized methodology includes an analysis of potential peer companies based on their financial ratios. market analogues are selected by reviewing companies operating in the same field as the selected one (pharmaceutical industry), without limitation of the country of operation and selecting the most relevant ones. return on equity (roe) and net operating margin (nom) are the main weights in the selection. the selected peers are innoviva, inc; faes farma, s.a.; virbac sa; bavarian nordic a/s; ipsen s.a. the time required to analyze and select the analogue companies was 48 min and 35 sec. for the purpose of the valuation, the financial data of the companies (yahoo finance 2024; gfo of the analogues) were procured and their data were plotted in the valuation template. time required to collect and insert the financial stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 222 information is 22 min and 21 sec. their market multiples were calculated based on the imported data. the template automatically calculates them, and no additional time is needed. based on the calculated market multiples and the financial data of the selected company, interim market prices are derived for each of the multiples, which are subsequently weighted at the discretion of the valuator. the median of the market multiples of the selected peer companies is used for the valuation. the medians, the resulting interim prices and the weights for the final valuation by the respective market multiples are presented in table 3 as follows: table 3. results from third methodology p/e ev/ebitda ev/revenue median of each coefficient 14.05 6.25 2.12 interim price for each coefficient 32.60 21.83 26.62 weight of each multiple 40% 40% 20% weighted price for the chosen method 27.10 source: personal calculations weighting the resulting interim market prices forms a final market valuation per share of the selected company of $27.1. final time to complete the valuation was 70 minutes and 56 seconds (appendix 4). measurement of potential improvements in efficiency after reviewing the three assessments, each was evaluated using the criteria described above. in terms of speed of execution, the second approach, using a language model, was the clear winner. the speed of data generation and the ability to summarize the data in a table significantly shortened the time required for valuation. the first approach is almost twice as slow, but it is important to note that its main delay comes from the need for the software to be paid for in order to function in its fullness. the third approach is the slowest in terms of implementation time due to the need to do a thorough analysis of the market and all similar companies from which to sift a set of peers that have a certain level of comparability. in terms of the timeliness of the information, the first approach cannot be evaluated since the information acquired is from the exchanges and not from the software itself. the linguistic model, on the other hand, provided coefficients that, although extremely close to those of the evaluated company, did not match the current state of the analogues. for example, hikma pharmaceuticals plc, according to the artificial intelligence, has a p/e ratio=14.3, while a reference to many trading platforms as well as the company's own reports, this ratio is equal to 26.47. similar variances are found in other peer companies, which calls into question the timeliness and truthfulness of the financial data provided by the model. in terms of the adequacy of analogues, the first approach provides peers from the same industry as the company being valued, but after reviewing for comparability, each of the companies has a significantly larger scale of operations as well as higher returns. this, in turn, distorts the result under this approach. the second approach provides both peers that are in the same industry as the valued company and significantly more similar in financial terms of scale to the previous approach. again, companies of larger scale are present, but have comparable rates of return as well as margins, meaning that the companies can be considered market analogues. the companies selected in the third approach are both comparable in scale, industry and financial ratios, but the analysis and selection in turn took almost five times longer (appendix 5). the adequacy of the results obtained was tested based on a comparison of the price per share under each of the approaches compared to the market price per share of the selected company as of 31.12.2023 of $25.2. the first approach shows the largest deviation, which is largely due to the incomparability of the peers and their multiples. the second approach shows an extremely close result to the market price per share, but since the multipliers are distorted and not real, it cannot be fully accepted as correct. the third approach shows an equally close price as a result, but with the actual coefficients and multipliers of the peers, it is the only approach that passes this test. the financial resources required to use the software are equally important. the first approach is the most limited and requires the most significant resources to use, but since the paid version has not been tested, its benefits are unclear. the free version shows benefits in terms of systemizing and suggesting potential options that would facilitate the analysis when applying the standard approach. the second method, on the other hand, does not require financial resources to provide the information, but does not provide up-to-date and truthful information, so its benefits are also limited to systematizing and summarizing potential options for analogues, which would save time in applying the 3rd approach. resources required for the 3rd approach are not considered. stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 223 conclusion this research is based on the ever-increasing consumption of machine learning-based software and platforms, namely artificial intelligence. its aim is to reveal whether this software can improve the efficiency of one of the well-established valuation methods, the market approach. a thorough review of the analysis reveals an interesting picture. artificial intelligence speeds up the execution of the valuation with the chosen method significantly. the data is available within seconds, and anyone could have access to it. the set filters and requirements set by the user further ensure specificity and systematicity in the information obtained. platforms and software that are based on these machine learning algorithms are largely free to use, albeit with limitations in some cases. an examination of this topic also reveals negative aspects of artificial intelligence. it is very important that when a person uses these tools, they are aware of what their goal is, what they want to achieve and how they aim to achieve it. otherwise, these tools would only further confuse their user and be a prerequisite for serious mistakes. another negative, which is of great importance, lies in the information that these software products provide. artificial intelligence, although an extremely fast and useful tool, is still not a sufficiently reliable source of up-to-date and correct data. this is evident in the second valuation approach, where the most important element of the valuation, namely the market multipliers, are distorted and show a favorable result, but are a lot further from the actual result. in conclusion, the 2nd hypothesis (h1) can be rejected because artificial intelligence could significantly improve the efficiency of the market valuation method. at the same time, the first hypothesis described in this paper (h0) can be accepted, although not in its completeness, because artificial intelligence has its benefits in improving the efficiency of the process, by simultaneously reducing the required execution time and facilitating the selection process. it can provide many and systematized different potential options for market analogues needed to perform the analysis. it is important to note, however, that this type of software should not be trusted for financial data to its fullest extent. these remain the responsibility of the valuer to collect and calculate the necessary factors for the valuation. there is undoubtedly much scope for further development of the subject and research into how it can be most effectively implemented. it is safe to say that artificial intelligence could be an integral part of financial analysis in the future and could significantly improve the efficiency of the market valuation method. however, at this point in time, it should be used as a tool to facilitate analysis but not to replace it altogether. references aleksandrova a., v. ninova, and z. zhelev. 2023. a survey on ai implementation in finance, (cyber) insurance and financial controlling. risks; 11(5):91, 6-8. https://doi.org/10.3390/risks11050091. ang, y.q., a. chia, and s. saghafian. 2022. using machine learning to demystify startups' funding, postmoney valuation, and success, innovative technology at the interface of finance and operations. springer series in supply chain management, 11: 271-294 https://doi.org/10.1007/978-3-03075729-8_10 annual consolidated financial statements of all companies used. 2023. bahoo, s., m. cucculelli, x. goga, and j. mondolo. 2024. artificial intelligence in finance: 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dispersion. useful to compare and to negotiate. iese business school, university of navarra http://dx.doi.org/10.2139/ssrn.274972. hoang, d., and k. wiegratz. 2023. machine learning methods in finance: recent applications and prospects. european financial management (29): 1657-1701. https://doi.org/10.1111/eufm.12408. ivs. 2023. international valuation standards. london: ivs council. isbn 978-0-9931513-0-9 kumar, n., j. d. srivastava, and h. bisht. 2019. artificial intelligence in insurance sector. journal of the https://doi.org/10.3390/risks11050091 https://doi.org/10.1007/978-3-030-75729-8_10 https://doi.org/10.1007/978-3-030-75729-8_10 https://doi.org/10.1007/s43546-023-00618-x https://dx.doi.org/10.2139/ssrn.2420380 https://dx.doi.org/10.2139/ssrn.4475689 https://www.comparables.ai/ https://corporatefinanceinstitute.com/resources/valuation/private-company-valuation/ http://dx.doi.org/10.2139/ssrn.274972 https://doi.org/10.1111/eufm.12408 stoyan stoyanov/ finance, accounting and 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accounting and business analysis (faba), 5(1):1-13. https://faba.bg/index.php/faba/article/view/150. openai, j. achiam, s. adler et. al. 2023. gpt-4: technical report. https://arxiv.org/abs/2303.08774. https://doi.org/10.48550/arxiv.2303.08774. peer group financial data, ratios, market capitalization. https://finance.yahoo.com/. appendix 1. information provided by ai models comparables.ai – table table 4. peer group data table as per comparables.ai name website industry employees founded roche holding ag https://www.roche.com/ biotechnology research 97413 1896 gsk https://www.gsk.com/en-gb/ pharmaceutical manufacturing 106892 1830 merck & co., inc. 0 johnson and johnson https://www.johnsonmedsolutions.com/ 5 teva pharmaceutical industries limited https://www.tevapharm.com/ pharmaceutical manufacturing 24909 1901 source: www.comparables.ai, specialized ai language model – chat gpt 4.0 – tables table 5. peer group data table as per gpt comparable companies’ financial data total revenue (billion $) ebitda (billion $) net profit (billion $) cash (billion $) debt (billion $) enterprise value (billion $) market capitalization (billion $) shares outstanding (million) teva pharmaceutical industries limited 14.93 3.52 0.417 2.2 23.4 34.8 19.26 1158 hikma pharmaceutical plc 2.88 0.871 0.19 0.287 1.15 4.85 4.4 221 sanofi s.a. 45.37 13.14 6.21 10.56 21.87 106.15 118.92 2516 bayer ag 53.42 11.67 4.13 4.19 39.34 91.34 53.42 982.42 novartis ag 52.73 16.16 11.73 13.95 21.26 227.43 227.43 2265 source: chatgpt.com, language model ai https://faba.bg/index.php/faba/article/view/150 https://arxiv.org/abs/2303.08774 https://doi.org/10.48550/arxiv.2303.08774 https://finance.yahoo.com/ http://www.comparables.ai/ https://chatgpt.com/ stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 225 table 6. market multipliers data table as per chat gpt company p/e ev/ebitda ev/revenue teva pharmaceutical industries limited 10.9 9.88 2.33 hikma pharmaceuticals plc 14.3 7.8 1.84 sanofi s.a. 11.6 8.1 2.34 bayer ag 9.8 7.8 1.71 novartis ag 13.2 12.6 4.32 source: chatgpt.com, language model ai appendix 2. market multipliers for the first approach valuation table 7. market multipliers of the peer group for the first approach company p/e ev/ebitda ev/revenue richter gedeon nyrt. 10.93 7.74 2.13 roche holding ag 17.47 11.99 3.68 gsk 9.83 7.61 2.47 merck & co., inc. 60.57 24.54 5.10 johnson and johnson 10.73 7.34 15.56 teva pharmaceutical industries limited n/a n/a n/a arithmetic average 24.65 12.87 6.70 median 14.10 9.80 4.39 source: www.comparables.ai and personal calculations of multiples table 8. valuation for the first approach richter gedeon nyrt. p/e ev/ebitda ev/revenue enterprise value per multiple 5 893 000 000 6 076 000 000 9 877 500 000 total debt 150 000 000 150 000 000 150 000 000 cash and cash equivalents 320 000 000 320 000 000 320 000 000 market capitalization per multiple 6 063 000 000 6 246 000 000 10 047 500 000 total shares outstanding 185 310 000 185 310 000 185 310 000 interim price for each coefficient 32.72 33.71 54.22 weight of each multiple 40% 40% 20% weighted price per multiple 13.09 13.48 10.84 weighted price for the chosen method 37.41 source: personal calculations appendix 3. market multipliers for the second approach valuation table 9. market multipliers of the peer group for the second approach richter gedeon nyrt. company p/e ev/ebitda ev/revenue richter gedeon nyrt. 10.93 7.74 2.13 teva pharmaceutical industries limited 10.90 9.88 2.33 hikma pharmaceuticals plc 14.30 7.80 1.84 sanofi s.a. 11.60 8.10 2.34 bayer ag 9.80 8.80 1.71 novartis ag 13.20 12.60 4.32 arithmetic average 11.96 9.24 2.51 median 11.60 8.10 2.33 source: chatgpt.com and personal calculation of averages https://chatgpt.com/ file:///a:/учебни%20материали/editorial%20board/faba/faba62/одобрени/www.comparables.ai https://chatgpt.com/ stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 226 table 10. valuation for the second approach richter gedeon nyrt p/e ev/ebitda ev/revenue enterprise value per multiple 4 818 000 000 5 022 000 000 5 242 500 000 total debt 150 000 000 150 000 000 150 000 000 cash and cash equivalents 320 000 000 320 000 000 320 000 000 market capitalization per multiple 4 988 000 000 5 192 000 000 5 412 500 000 total shares outstanding 185 310 000 185 310 000 185 310 000 interim price for each coefficient 26.92 28.02 29.21 weight of each multiple 40% 40% 20% weighted price per multiple 10.77 11.21 5.84 weighted price for the chosen method 27.82 source: personal calculations appendix 4. market multipliers for the third approach valuation table 11. market multipliers of the peer group and valuation for the third approach company p/e ev/ebitda ev/revenue richter gedeon nyrt. 10.93 7.74 2.13 innoviva, inc. 5.73 5.53 4.19 faes farma, s.a. 10.86 7.79 2.12 virbac sa 17.30 6.25 1.59 bavarian nordic a/s 14.05 5.80 1.76 ipsen s.a. 15.05 10.69 2.87 arithmetic average 12.60 7.21 2.50 median 14.05 6.25 2.12 source: personal calculations table 12. valuation for the third approach richter gedeon nyrt. p/e ev/ebitda ev/revenue enterprise value per multiple 5 871 325 924 3 875 153 192 4 762 738 048 total debt 150 000 000 150 000 000 150 000 000 cash and cash equivalents 320 000 000 320 000 000 320 000 000 market capitalization per multiple 6 041 325 924 4 045 153 192 4 932 738 048 total shares outstanding 185 310 000 185 310 000 185 310 000 interim price for each coefficient 32.60 21.83 26.62 weight of each multiple 40% 40% 20% weighted price per multiple 13.04 8.73 5.32 weighted price for the chosen method 27.1 source: personal calculations stoyan stoyanov/ finance, accounting and business analysis, volume 6, issue 2, 2024 227 appendix 5. compatibility tests table 13. compatibility test of the peer group for the first approach compatibility test roa net margin roe market cap (mln. $) richter gedeon nyrt. 14.00% 19.11% 12.00% 4 700 roche holding ag 12.44% 19.02% 37.86% 202 110 gsk plc 9.31% 14.59% 38.78% 75 260 merck & co., inc. 10.26% 3.76% 5.31% 276 260 johnson and johnson 19.50% 41.28% 49.20% 340 110 teva pharmaceutical industries limited -1.30% n/a -7.60% 19 260 source: personal calculations table 14. compatibility test of the peer group for the second approach compatibility test roa net margin roe market cap (mln. $) richter gedeon nyrt. 14.00% 19.11% 12.00% 4 700 teva pharmaceutical industries limited -1.30% n/a -7.60% 19 260 hikma pharmaceutical plc 8.46% 6.61% 8.81% 4 400 sanofi s.a. 4.30% 11.60% 7.30% 118 920 bayer ag -4.04% n/a -8.13% 53 420 novartis ag 8.65% 31.94% 19.83% 227 430 source: personal calculations table 15. compatibility test of the peer group for the third approach compatibility test roa net margin roe market cap (mln. $) richter gedeon nyrt. 14.00% 19.11% 12.00% 4 700 innoviva, inc. 7.46% 33.30% 16.24% 1 030 faes farma, s.a. 8.46% 19.66% 14.93% 998 virbac sa 5.45% 11.50% 10.69% 31 720 bavarian nordic a/s 7.85% 14.82% 10.20% 13 830 ipsen s.a. 9.02% 19.49 17.30% 9 700 source: personal calculations 31 finance, accounting and business analysis volume 3 issue 1, 2021 http://faba.bg the impact of tax burden and tax structure on the economic growth of the balkan region angelov angel1, nikolova velichka2 department of finance, university of national and world economy, sofia, bulgaria1 department of economics, university of national and world economy, sofia, bulgaria 2 info articles abstract history article: submitted 12 january 2021 revised 4 march 2021 accepted 20 april 2021 purpose: the present study is aimed at the analysis of the extent to which the collected taxes and the structure thereof have an impact on the economic growth of the balkan region. design/methodology/approach: linear regression models have been developed and applied. data for the period 2005-2018 have been used from the annual reports on the execution of the consolidated budget, published by the ministries of finance of the balkan countries and macroeconomic data from their central banks and national statistical institutions. the estimation is made using the ordinary least squares (ols) method. findings: the results of the applied models show that the increase of the tax burden during the period under review and the restructuring of the tax systems have a restraining effect in the search for higher economic growth. the countries in the balkan region where the tax burden is lower, as well as the countries where indirect taxes occupy a larger relative share, show better economic results. practical implications: the present study provides a good starting point for the conduct of fiscal policy by the ruling governments in the countries of the balkan region. the guidelines are on how these governments manage the tax burden on the economic agents and what the appropriate structure of applicable taxes would be to achieve sustainable economic development. originality/value: the study contributes to the scientific literature by conducting an extensive analysis of some of the already studied relationships between taxation and economic growth, on the one hand, and examines the extent to which opinions already expressed are applicable to balkan countries‟ policy, on the other hand. the study also identifies the reason for some of the dynamic processes in the balkan economies in the period 2005-2018. keywords: tax burden, tax structure, balkan countries, economic growth. *address correspondence: e-mail : angelov@unwe.bg1 vnikolova@unwe.bg2 angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 32 introduction tax systems management is of particular importance in conducting fiscal policy in modern societies. changes in tax systems can stimulate the economic agents and their activity and contribute to better economic performance, respectively. on the other hand, these changes can lead to the cessation of production activities that are specific for an area or region, to discourage foreign investors and the persons employed in private sector as well as to stimulate the spreading of shadow economy. the object of this study is the tax structure in the countries from the balkan region. the subject of the study is the influence of the tax burden and the tax structure on the economic growth of the balkan region. the aim of the study is to examine the extent to which the tax burden, on the one hand, and the structure of taxation, on the other hand, have an impact on the opportunities for achieving economic growth in the period 2005-2018 within the balkan region. the study is structured in several sections. the first section reviews the literature available so far, which analyzes the impact of taxes on economic growth, changes in the tax burden and the channels of influence of the main types of taxes. the second section presents a descriptive analysis of the tax burden, tax structure and economic growth of the countries in the balkan region. the third section describes the methodological framework of the analysis, while the fourth and fifth sections present and analyze the results obtained. literature review the modern theoretical and empirical scientific studies do not provide an unanimous answer to the question of the effects of taxation on economic growth. most authors, including marsden (1984), king and rebelo (1990), plosser (1992), engen and skinner (1992), bassanini et al. (2001), lee and gordon (2005) and ilzetzki (2011), argue that taxes have a predominantly negative impact on the attempts to achieve economic growth. most often, such a conclusion is reached when assessing the direct effect of taxation on economic performance. other authors, such as scully (1998) and terzi et al. (2017) aim to determine the optimal level of taxation that would promote a higher rate of economic growth. the effects of the conducted tax policy are sought in the following directions: the influence of the tax burden and the influence of the tax structure. the tax burden on society can be measured by tax rates and tax revenue to gdp ratio. in this regard, the applicable tax rates affects the behavior of taxpayers, and are considered as a fiscal instrument for macroeconomic and microeconomic impact, respectively. when a government needs additional funds to finance its expenditures, it can look for an option to generate them by increasing the marginal tax rate, but the higher tax burden may shrink economic activity and this, in turn, may not lead to the collection of projected budgetary resources. marsden (1984) focuses on the impact of taxation on economic growth, taking into account the level of development of countries and concludes that in countries with significantly lower incomes the impact of the tax system on the opportunities for achieving economic growth is almost twice as negative. in addition, ilzetzki (2011) applies various econometric techniques and examines the burden of personal income tax in 28 countries. the reached conclusions show that for developing countries reduction of the average marginal tax rate by 1 p.p. will lead to an increase in gdp between 1.5 and 2.5 times higher compared to the effect for the general sample. lee and gordon (2005) empirically test the relationship between the growth rate of gdp per capita and tax structure for 70 countries, emphasizing on the change in the corporate tax rate for the period 19701997. the main conclusions show that there is an inverse relationship, i.e. if the government reduces the tax burden by 10 p.p., the growth rate of gdp per capita on an annual basis will increase in the range of 0.6 p.p. to 1.8 p.p. king and rebelo (1990) came to a similar conclusion by applying the basic neoclassical model and additional endogenous growth models. on the other hand, in the contemporary scientific literature it is also investigated the indirect effect of taxation. for instance, nantob (2014) highlights that the revenue collected from applicable taxes can be channeled as a public resource in productive areas and thus eliminate the initial negative effects of taxation, and why not contribute to greater economic growth. engen and skinner (2011) investigate the relationship between fiscal policy and the growth rate of the economy for 107 developing and developed countries in the period from 1970 to 1985. in their study it is established that an increase in the tax burden by 10 p.p. would lead to a decrease in the rate of economic growth by 3.2 p.p. per annum in the medium term, while in the long term a balanced budget increase in taxes and public expenditure by 10 p.p. would lead to a decrease in growth by 1.4 p.p. per annum. bassanini et al. (2001) found a direct negative effect of the tax burden on gdp per capita for countries of the organization for economic co-operation and development (oecd). their empirical results show that growth of the tax burden by 1 p.p. would lead to a twofold decrease in gdp per capita, taking into account the indirect effect through changes in investment activity. kotlán and machová (2013) also examine the impact of the taxation on economic angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 33 growth for 34 oecd countries in the period 2000-2010 and confirm the negative impact of overall tax burden on growth. sachsida and memdonca (2016) use quarterly data from 2002q1 to 2015q2 for the brazilian economy and conclude that an increase in the total tax burden of 1% will lead to a decrease in gdp per capita of 0.3%. the study also analyzes the structure of taxation and its impact on some macroeconomic variables (labor force participation rate, private investment, total productivity factor), i.e. the aim is to show the transmission (indirect) tax effects on the development of the economy. nowadays, in order to achieve competition between countries, measures to reform tax systems as an essential part of their fiscal policy is often used by governments. the proponents of supply-side economics advocate the idea that the lower levels of tax burden can be used in order to attract more investors. marsden (1984) notes that reducing the tax burden may result in stimulating economic activity, which in turn could provide additional budget revenues. however, in economic theory there is another concept, that is laid down as the basis in the keynesian doctrine and according to it the government has a significant role in managing the economy of a country. it should be noted that when budget revenues are insufficient, this may affect the financing of public activities that are important for the development of modern society, such as public infrastructure, socio-economic activities, education, defense and security and health. this can negatively reflect on fiscal sustainability and economic growth, both in the short and long term. on the other hand, evans et al. (2018) emphasize that the large revenues in the state budgets, or higher public expenditures, respectively, may not always lead to improved economic development. what is important is how efficiently the budget resource will be used, i.e. whether it will be invested in more productive capital expenditures, or will be focused on covering current expenditures. the topic of the tax structure and its impact on opportunities for achieving economic growth is debated in many scientific studies (tanzi 1996; lee and gordon 2005; johansson et al. 2008; xing 2011; mcnabb and lemay-boucher 2014; stoilova 2017; gashi et al. 2018, neog and gaur 2020). although, there is no consensus which is the most optimal tax structure that can be applied. in some countries especially from northern and western europe (e.g. belgium, germany, sweden, denmark, the netherlands, ireland), east asia (e.g. the republic of korea, china) and northern america (e.g. usa and canada), the emphasis is on labor and capital taxation. in another group of countries mostly from southeastern europe (e.g. croatia, bulgaria, lithuania, hungary) the use of indirect taxes is preferred. the scientific literature brings to the fore the debate about the effect of income taxes in view of their connection with the factors of production such as labor and capital. a large part of researchers (skinner 1987; arnold 2008; acosta-ormaechea and yoo 2012; masca et al. 2015) conclude that the impact of income taxes is more negative on economic growth than the impact of taxes on consumption. romeroavila and strauch (2008) indicate that this is one of the reasons for fiscal reforms in most european countries observed in the 80s and 90s of the twentieth century associated with the change in the tax structure and the transfer of burden from income taxes to consumption taxes. benos (2009) advocates the idea of the endogenous growth theory related to the fact that the income taxes distort the behavior of economic agents. the personal income tax and social security contributions can impact on the workleisure choice, i.e. on incentives to supply labor. on the other hand, bujang et al. (2013) mention that the corporate income tax has a large impact on the market-positioned entities, as well as on aggregate supply. according to tanzi and zee (1996) and skinner (1987), corporate tax can influence the decision to develop entrepreneurial, investment and innovation activity. arnold et al. (2011) and dackehag and hansson (2012) complete that the effects of taxation with corporate income tax are particularly negative in conditions of economic downturn. marsden (1984) deduces that increase in the tax revenue to gdp ratio would lead to a decrease in the growth rate of investment, but equivalent increase in the corporate income tax burden would lead to three times more negative effect on the investments. leibfritz et al. (1997) use simulation model to determine the effect of the change in the tax burden or change in the tax structure on the macroeconomic development in eu member states, the usa and japan. from the conducted simulation one can draw conclusions that the corporate income tax, personal income tax and consumption tax have a negative impact on gdp both in the eu and the usa and japan. the corporate income tax has the strongest negative effect on the value of gdp as a tax cut will lead to gdp growth with 2.85% in japan, 3.09% in the eu and 5.28% in the usa. this once again shows that income taxes are detrimental to the fiscal ability to contribute to economic growth through a direct assessment of the impact of taxation. proponents of endogenous growth theory emphasize that the indirect taxes do not affect the incentives for work and investment activity and define them as non-distorting taxes (kneller et al. 1999). however, indirect taxes and especially vat have often been criticized for increasing income inequality. the reason is that these taxes are regressive in nature on the income of the population. in case the government increases the tax burden, this may lead to an increase in the prices of taxable consumer goods and services, and to shrinkage of consumption and the value of gdp, respectively. according to the macroeconomic statistics of the world bank (2019), consumer expenditure of households and non-profit angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 34 institutions serving households consist 57.8% of the value of the gdp worldwide. within the eu member states this percentage is slightly lower (around 53.8%), and in the euro area member states 54.1%. for most eastern european countries, consumer expenditure is formed as the main determinant in the structure of gdp (over 70% or 80%), the indirect taxes are essential source of revenue in the state budget of these countries, respectively. fernandez et al. (2018) study the effects of simulation changes in the tax system in france. the aim is to monitor how the replacement of direct with indirect taxes would affect various macroeconomic indicators, including consumption levels, investment activity, real wages, employment, price competition and other fiscal indicators. the main directions of the simulation are related to the equivalent replacement of social security contributions with vat (equal to 0.4% of gdp), on the one hand, and a similar replacement between a reduction in corporate tax and an increase in the vat rate, on other hand. the mixed effects are also traced. the final conclusion reached by fernandez et al. (2018) is that such changes in the tax system have a net positive effect on the french economy. stoilova (2017) uses regression models in order to investigate the impact of fiscal policy on economic growth in the eu-28 member states in the period 1996-2013. the obtained results show that indirect taxes on production and imports have a rather positive impact on the growth of economies, but this is not the case with the impact of vat. ilaboya and mgbame (2012) and szarowská (2013) reach to a similar conclusions. in particular, szarowská (2013) uses a panel regression for eu-24 member states in the period 1995-2010 and establishes the positive impact of consumption taxes on gdp growth, as well as also proves a negative impact of labour taxes on gdp growth. in turn, ilaboya and mgbame (2012) use engle-granger two-step test for cointegration and additional error correction model based on annual data from 1980 to 2011 in nigeria and establish that the custom and excise duties have a positive effect on growth rate while the effect of taxation with vat is negative, but statistically insignificant. similarly, korkmaz et al. (2019) use the autoregressive distributed lag approach and study the impact of direct and indirect taxes on the turkish economy for the period 2006-2018. their findings show that the direct taxes have a negative impact on economic growth, while indirect taxes have a stronger and positive impact on the gdp of turkey. al quraan (2020) tests the influence of general sales tax on economic growth in jordan and proves that there is a positive effect in short term and negative effect in long term. johansson et al. (2008) emphasize that if the total tax burden is unchanged, but the share of revenues from indirect taxes is increased, this would lead to a higher value of the gdp per capita. tax burden, structure of taxation and economic growth of the balkan region the present study focuses on the impact of the tax burden on economic development and especially on the possibility of achieving economic growth, on the one hand, and on determining the extent to which the structure of taxation with different types of taxes affects the potential for economic development, on the other hand. the study is based on an analysis of the relationship between these variables within the balkan region (balkan-13). the scope of the analysis includes 13 countries, 12 of them (bulgaria, romania, greece, turkey, serbia, north macedonia, bosnia and herzegovina, albania, kosovo, croatia, slovenia and montenegro) are included because of their geographical positions, and the thirteenth (cyprus), as highly dependent and bound territorially, administratively and economically with other countries in the region. we calculate the overall tax burden within the balkan region using data based on the execution of the state budgets of the countries for the period 2005-2018. for measuring the overall tax burden, total tax revenue to gdp ratio is used. while in 2005 the tax revenue in the countries of the balkan region is equal to about 28.03% of gdp, in 2018 it reached 30.03% of gdp, i.e. there is a gradual increase in the tax burden. countries with high tax burdens include slovenia, montenegro, bosnia and herzegovina, greece, croatia, serbia and cyprus. each of these countries has an average tax revenue to gdp ratio of over 32% for the period 2005-2018. at the same time, the tax burden in kosovo is between 18.45% (2005) and 23.25% (2018) and an average of about 21.25% for the analyzed period. albania also has a relatively low tax burden (23-24%). for the other countries (turkey, romania, north macedonia and bulgaria) the tax burden is between 25% and 28%. for the period under review, the largest increase in the tax revenue to gdp ratio is observed in greece (+8 p.p.) and kosovo (+4.8 p.p.), while slovenia (-1.7 p.p.) and romania (-1 p.p.) register the largest decrease in the indicator. in structural terms, revenues from direct taxes dominate. the group of direct taxes for the analysis includes personal income tax, corporate income tax and revenues from social security contributions. while the share of these taxes in total tax revenue in 2005 is 50.5% (14.17 % of gdp), in 2018 it reaches 55% (16.52% of gdp). the group of indirect taxes is formed by the revenues from vat, excises and customs duties and marks a decline in the general structure of tax revenues. while in 2005 their share reaches 41.83% of tax revenues (11.72% of gdp), in 2018 it is 36.79% (11.05% of gdp). there is also a third angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 35 group, which includes all other tax revenues, the share of which fluctuates within the range of 7.61% in 2005 to 8.21% in 2018. this group is not reflected in the models developed below, given that it is composed of a wide variety of applicable taxes with a small relative share. therefore, the countries of the balkan region rely mainly on revenues from direct taxes, and it should be emphasized that about 60% of revenues from direct taxes are due to the funds raised from social security contributions. the analysis made so far can be supplemented by considering the structure of tax revenues in the formed groups of taxes above (with emphasis on the first two groups) by individual countries within the balkan region. the data show that in some countries direct taxes have a predominant importance throughout the period under review (slovenia, cyprus, greece, romania and turkey), while in other countries indirect taxes are predominant (kosovo, montenegro, albania and bulgaria). in the third group of countries one can distinguish those in which there is a change in the structure of tax revenues (bosnia and herzegovina, serbia, north macedonia and croatia). the most significant representatives of the three groups are: kosovo, where the share of indirect tax revenues is over 85% of total tax revenues, slovenia, where the share of direct tax revenues is over 60% of total tax revenues, and bosnia and herzegovina, where with a significantly higher share of indirect taxes in 2005 (53% ↔ 42%), in 2018 there is a reverse trend (43% ↔ 49%). it is also worth noting the dynamics observed in turkey, where in 2005 the share of direct and indirect taxes is almost the same, while in 2018 the difference is quite large in favor of direct taxes (56% ↔ 33%). the economic development of the countries of the balkan region is relatively stable over time. with slight exceptions in 2009, 2014 and 2018, in the rest of the years there is an increase in the value of total gdp. in 2005 the value of total gdp in the balkans increases by about 15.7% compared to a year earlier. until 2008, there is a double-digit annual increase in gdp (in the range of 10-15%), and only in 2008 it is about 7.46%. in 2009, given the onset of the global economic crisis, the value of gdp decreases by 8.37%. after 2010 the economy of the balkans has been growing, albeit at a much slower pace (ranging from 1-2% to 5-6%). in 2018 there is an economic downturn of 4.61%. regarding the growth of the economies of the balkan countries, generated in time, it is also possible to group the countries into three larger groups. the first group includes countries that show higher average gdp growth rates (over 6% on average for the period 2005-2018), including romania, montenegro, bulgaria, north macedonia, and albania. the second group is formed by turkey, serbia, bosnia and herzegovina, where the growth rate is between 5% and 6%, while the third group includes greece, cyprus, slovenia and croatia, where the average economic growth rate is below 3.7%, and in greece we can even talk more as an economic downturn than as an economic growth. methods the methodological framework of the analysis is based on the development of regression models in which the dependent variable is the rate of economic growth within the balkan region (bregr). for the purposes of the analysis an aggregate value of the annual gdp is calculated from the gdp values of all 13 countries, after which the growth of the balkan economy is calculated through a chain-linked growth rate on an annual basis for the period 2005-2018. ∑ ∑ ∑ (1) where: bregr economic growth rate gdp gross domestic product i = 1…13 t = 2005…2018 two linear regression models have been developed, the first of which aiming to show the impact of the overall tax burden on economic growth and the second one the impact of the tax structure represented by direct and indirect taxes on economic growth. in the models public expenditure is added as a percentage of gdp as a factor (control) variable, because, as specified above in the theoretical part, expenditures also have an impact on economic growth, which makes it possible to estimate both the direct and indirect effect of taxation. model 1: (2) where: bregr economic growth rate brtaxburden – overall tax burden (measured by the ratio of total tax revenue to gdp, %) angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 36 brpubexp public expenditure to gdp ratio (%) ε residual component t = 2005…2018 in the second model, as independent variables are set the tax burden of indirect taxes and the tax burden of direct taxes, calculated as ratios of the respective type of taxes and the value of gdp for the respective year. ∑ ∑ (3) where: brindtax tax burden of indirect taxes vat – budget revenue collected from value added tax duttax – budget revenue collected from custom duties exctax – budget revenue collected from excises gdp – gross domestic product i = 1…13 t = 2005…2018 ∑ ∑ (4) where: brdirtax tax burden of direct taxes pit – budget revenue collected from personal income tax cit – budget revenue collected from corporate income tax ssc – budget revenue collected from social security contributions gdp – gross domestic product i = 1…13 t = 2005…2018 in this way the extent to which the tax structure influences the growth of the economy is examined. a linear regression model is used, having the following form: model 2: (5) where: bregr economic growth rate brindtax tax burden of indirect taxes brdirtax tax burden of direct taxes brpubexp public expenditure to gdp ratio (%) ε residual component t = 2005…2018 the estimation is made using the ordinary least squares method (ols). table 1 below presents descriptive statistics of the variables used in the subsequent analysis. the data are aggregated for the whole balkan region (balkan-13). the data set used in the analysis is obtained from the annual reports on the execution of the consolidated budget, published by the ministries of finance of the balkan countries and macroeconomic data from their central banks and national statistical institutions for the period 20052018. we also use the international monetary fund's macroeconomic statistics (2020) and eurostat (2020) as a source of data. table 1. descriptive statistics of the variables used for the balkan region for the period 2005-2018 variable mean median min max standard deviation coefficients of variation skewness kurtosis bregr 0,046 0,044 -0,084 0,157 0,068 1,486 -0,156 -0,662 brindtax 0,115 0,115 0,108 0,119 0,003 0,027 -0,847 0,056 brdirtax 0,178 0,180 0,163 0,190 0,008 0,047 -0,363 -0,977 brpubexp 0,391 0,386 0,370 0,432 0,018 0,046 0,852 0,008 brtaxburden 0,292 0,296 0,280 0,303 0,008 0,027 -0,363 -1,540 source: authors' own calculations angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 37 results and discussion the results of the constructed regression models are presented in table 2 below. the applied models in table 2 are adequate, which is certified by the value of the significance level (significance f), as in model 1 the adequacy is proved at a significance level of 5%, and in model 2 at a significance level of 1%. adequacy is assessed by applying fisher's f-test. the coefficient of determination (r square) shows that nearly 42% of the variation in economic growth can be linked to the joint action of taxation and public expenditure in the balkan region. in addition, about 80% of the variation in economic growth is explained by changes in the tax structure and the impact of public expenditure. it is generally accepted that the adjusted coefficient of determination (adjusted r square) is a more accurate measure, in this case its value is 0.32 in model 1 and 0.74 in model 2 (or 32% and 74% explanatory variation in the dependent variable). table 2. ordinary least squares (ols) regression results dependent variable: bregr independent variables model 1 model 2 coefficients standard error p-value coefficients standard error p-value intercept 1.890513 0.665232 0.016028** 0.178164 0.572342 0.761973 brtaxburden -4.098822 1.963301 0.060880* brpubexp -1.654239 0.874493 0.085144* -1.009903 0.562550 0.102849 brindtax 9.383967 3.355414 0.018902** brdirtax -4.583147 1.221478 0.003771*** regression statistics multiple r 0.649275 0.893158 r square 0.421557 0.797731 adjusted r square 0.316386 0.737050 standard error 0.056376 0.034964 observations 14 14 anova df ss ms df ss ms regression 2 0.025479 0.012739 3 0.048245 0.016082 residual 11 0.034961 0.003178 10 0.012194 0.001219 total 13 0.060440 13 0.060440 fem 4.008290 13.146381 significance f 0.049253 0.000836 note: *** indicate significance at 1% level, ** indicate significance at 5% level, * indicate significance at 10% level. source: authors' own calculations. on the other hand, the correlation coefficient (multiple r) between the independents and the dependent variable is also quite high (0.89) in model 2, which indicates a strong relationship between the tax structure and public expenditure, on the one hand, and economic growth, on the other hand, while in model 1 the relationship is significant (the correlation coefficient is 0.64). model 1: model 2: 0.178164 the data in table 2 help to assess the statistical significance of the model parameters and their influence on the dependent variable, and for this purpose two hypotheses are defined. the results are derived based on the level of significance (p-value). the data from model 1 show that the increase in the tax burden has a rather negative impact (β1 < 0) on the opportunities for achieving economic growth, while in terms of the tax structure there are divergent effects in model 2. the net impact of indirect taxes on economic growth in the balkans for the period 2005-2018 is positive (μ1 > 0). this confirms the statements set out in the theoretical part above. this is not the case with the impact of direct taxes, which lead to a slowdown in economic growth, i.e. their influence is negative (μ2 < 0). the increase of overall tax burden and raise the share of the income taxes can be regarded as one of the reasons for the lower growth. the results explain to a great extent the lower average growth rates of the economies of some of the countries angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 38 in the balkan region, such as greece, croatia, slovenia and cyprus. at the same time, the lower tax burden in kosovo, north macedonia and bulgaria and the larger share of indirect taxes (although in north macedonia there is a significant change in the tax structure) contribute to higher economic growth in these countries. gashi et al. (2018) confirm a similar thesis, finding a positive impact of vat on kosovo's economic growth. the higher share of indirect (consumption) taxes contribute to higher growth and the economy of montenegro, although the overall tax burden is one of the highest in the balkans. romania is the balkan country with the highest average economic growth rate, which may be due to the relatively low overall tax burden and its downward trend. however, the share of direct (income) taxes in romania is growing significantly, which could create serious problems in economic development in the future. bosnia and herzegovina, serbia, turkey and albania are experiencing similar economic growth rates. all these countries report an increase in the share of direct taxes and, in some of them the tax burden also increases. however, with the exception of turkey, in the other countries the share of indirect taxes is higher or close to that of direct taxes. in turkey, there is a significant difference and predominance of direct taxes. although the overall tax burden in turkish economy increases, the tax revenue to gdp ratio remains low. the data in table 2 also show some negative response to growth from changes in public expenditure, as far as model 1 can be interpreted with an allowable significance level of up to 10%. this confirms the thesis of evans et al. (2018) that not always the higher tax burden on economic agents, which provides a greater budgetary resource, can serve as a sufficient argument in search of higher economic growth. nenkova and mihaylova-borisova (2020) conclude that after the global economic crisis, the efficiency of public expenditure in the balkans tends to decrease, which also supports the thesis of irrational spending of part of the tax revenues over time. the developed and estimated regression models are subjected to an additional diagnostics, which confirmed results obtained (table 3). hypotheses are defined and tests were conducted for normal distribution and homoskedasticity of the residuals, absence of multicollinearity and autocorrelation. table 3. regression diagnostics and specification tests model 1 model 2 breusch-pagan test for heteroskedasticity н0: heteroskedasticity not present h1: heteroskedasticity is present н0: heteroskedasticity not present h1: heteroskedasticity is present test statistics: lm = 4.04986 test statistics: lm = 2.71093 p-value = 0.132003 p-value = 0.438372 test for normality of residual (chi-square) н0: error is normally distributed н1: error is normally distributed н0: error is normally distributed н1: error is normally distributed test statistics: chi–square(2) = 0.546067 test statistics: chi–square(2) = 0.440011 p-value = 0.761067 p-value = 0.802514 breush-godfrey test for autocorrelation lagrange multiplier (lm) н0: no autocorrelation h1: there is autocorrelation н0: no autocorrelation h1: there is autocorrelation test statistics: lmf = 0.450705 test statistics: lmf = 5.03417 p-value = 0.517207 p-value = 0.0515313 variance inflation factor (vif) minimum possible value = 1.0 minimum possible value = 1.0 values > 10.0 may indicate a collinearity problem values > 10.0 may indicate a collinearity problem brpubexp 1.000 brtaxburden 1.000 brindtax 1.162 brdirtax 1.095 brpubexp 1.076 source: authors' own calculations the data in table 3 confirm the adequacy of both models. conclusion despite the relatively sustainable economic development in the period 2005-2018 the balkan countries mark gradual increase in the tax burden, and it becomes clear from the applied tests that there is a restraining effect on the opportunities for achieving economic growth. at the same time, there is a change in the structure of applicable taxes. most of the countries in which direct taxes (personal income angelov angel et al. / finance, accounting and business analysis 3 (1) 2021 39 tax, corporate income tax and social security contributions) have a larger share in the tax structure, continue to maintain this trend even when a larger increase in their share is observed. in the other countries from balkan region, where the main indirect taxes (vat, custom duties, excises) have a higher relative share in the tax structure, they begin to restructure their tax systems over time, reducing the share of indirect taxes and increasing the share of direct taxes. the available 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project: “problems and challenges of fiscal policy in the balkan region countries”, carried under contract nid ni-4/2020 at university of national and world economy, sofia, bulgaria. https://hal.archives-ouvertes.fr/hal-01541131/document https://hal.archives-ouvertes.fr/hal-01541131/document https://data.worldbank.org/indicator/ne.con.prvt.zs 159 finance, accounting and business analysis volume 3 issue 2, 2021 http://faba.bg impact of sharia financing life insurance products on sharia banking performance and sharia insurance industry reza ronaldo*, yul maulini stebi lampung, indonesia info articles abstract keywords: sharia financing life insurance, sharia banking performance, bprs, sharia insurance industry. sharia financing life insurance is an insurance that must be followed by every participant related to financing in a financing transaction in sharia banking and sharia people's financing bank to anticipate the occurrence of non-performing financing caused by the customer's death due to illness or accident. however, the high claims of sharia financing life insurance since 2016-2020 have resulted in an increase in claim reserves and high reinsurance premiums for sharia financing life insurance products as the background for writing this article. the research method used is a comparative phenomenon method by comparing factual phenomena to the variables studied. the impact of sharia financing life insurance products on the performance of islamic banking and rural banks has a positive impact, as evidenced by the increased claim payments from 2016-2020 and the relatively small non-performing bank loans, but had a negative impact on sharia insurance and reinsurance. the increase in claims reserves and high reinsurance rates will burden customers. we advise sharia insurance companies that experience losses to temporarily stop selling these products with shifting business or carry out risk selection on age and occupation, while sharia insurance companies that have a good loss ratio can apply stop losses the business if claim above 70% for more safety.. *address correspondence: e-mail : rezaronaldo@stebilampung.ac.id finance, accounting and business analysis 3 (2) 2021 160 introduction the need for sharia banking and sharia rural financing banks to cover sharia financing life insurance is now an indispensable thing to protect unforeseen risks in banking operations and sharia rural financing banks. the existence of sharia insurance and sharia reinsurance, which is called the sharia insurance industry, is now very important, because insurance is an effort to obtain guarantees and protection for both insurance customers and banks and sharia rural financing banks who need certainty and protection from risks that arise. may arise in the future (maksum, 2011). along with the growth of sharia banking performance, sharia insurance companies in indonesia continue to improve themselves and continue to grow even though it is not yet significant. sharia insurance and sharia reinsurance companies in indonesia consist of 7 life insurance companies (spin off), 5 (five) general insurance (spin offs), 1 (one) sharia reinsurance, 23 sharia life units, 21 sharia general units and 2 reinsurance units as follows: table 1. sharia insurance market share 2020 source: insurance statistics data 2020-ojk. sharia banking as a source of sharia insurance business, since 5 (five) years 2016 2020 has experienced very rapid development in conducting sharia financing transactions to improve the economy and the needs of the community, so that more and more customers must get protection and protection from sharia insurance companies. attached is the 2016-2020 islamic banking growth sourced from islamic banking statistics, december 2020 as follows: table 2. performance of indonesian islamic banking 2016-2020. source; sharia banking statistics 2020 finance, accounting and business analysis 3 (2) 2021 161 table 2 shows that the performance of islamic banking in indonesia continues to grow and increase in almost all islamic banking indicators (total assets, financing, third party funds, car, roa, bopo and others) except for the wadiah current account product which in december 2020 decreased by -7.21% or 17.44% compared to the achievement in december 2019 which reached 32.14%. table 3. performance of indonesian sharia bpr for the 2019-2020 period source; banking statistics 2020 the same thing is seen in other islamic finance companies such as the islamic people's financing bank (bprs), which continues to grow steadily although it does not increase significantly. however, the rapid development of transactions for sharia life insurance products (ajk) from banking and sharia financing in recent years, has been followed by an increase in the loss ratio or even greater claims, according to data from the ojk insurance statistics for 2020, as follows; table 4. growth of sharia insurance claim ratio 2016 2020 source; ojk insurance statistics 2020 from the data above, it can be seen that life insurance claims increased sharply by 378%, since 2016 by rp. 3.06 trilion to rp. 11.57 trilion in 2020. meanwhile, sharia financing insurance products covered by sharia general insurance companies rose steadily, from 2016 of 1.23 trilion to 1.51 trilion in 2020. the high claim ratio indicates that the risk management carried out by each related party is not adequate and not maximized so that better risk mitigation must be carried out, for example improving rates and terms & conditions from sharia insurance and reinsurance companies as well as selection of risk as an improvement. by the islamic banking and the islamic people's financing bank. these facts and data make the financing life insurance business (ajk) an unprofitable business for sharia insurance companies and sharia re-insurance companies. another fact shows that the high loss ratio from 2016 to 2020 has made the price of reinsurance contributions to increase every year, which has an impact on disrupting the business relationship between sharia insurance and sharia reinsurance to sharia banking and sharia people's financing banks and is indicated to be burdensome for customers due to the increase. the price of the contribution/contribution to be paid to the sharia insurance company. formulation of the problem. based on the background described above, the authors formulate the problem formulation, finance, accounting and business analysis 3 (2) 2021 162 through the questions to be studied, as follows; a) is there an impact between life insurance products and financing financing performance of islamic banking & sharia rural banks? b) is there an impact between sharia financing life insurance products on sharia insurance & sharia reinsurance? c) have the principles of ta'awun and takafuli in sharia banking and sharia rural banks occurred in sharia financing life insurance products from sharia insurance and sharia reinsurance companies? theoretical basis sharia insurance sharia insurance or takaful comes from the language kafala-yakfulu-kafalatan, which means to bear. al-fanjari defines sharia insurance as tadhamun, takaful, at ta'min which means mutual responsibility or social responsibility. the encyclopedia of islamic law states that insurance is a contractual transaction between two parties, one party is obliged to pay contributions and the other party is obliged to give full guarantees to the contributor if something happens to the first party in accordance with the agreement made. in the fatwa of dsn number 21/dsn-mui/x/2001 concerning general guidelines for sharia insurance to take care of each other and help each other through contracts (commitments) in accordance with sharia principles, namely contracts without elements of gharar (fraud), maysir (gambling), usury, zhulum (persecution), risywah (bribes), illegal goods and immorality. sharia insurance according to the law of the republic of indonesia number 40 of 2014 concerning insurance is a collection of agreements, consisting of agreements between sharia insurance companies and policyholders and agreements between policyholders, in the context of managing contributions based on sharia principles in order to help and protect each other by method: a. provide compensation to participants or policyholders due to losses, damages, costs incurred, lost profits, or legal liability to third parties that may be suffered by participants or policyholders due to the occurrence of an uncertain event; or b. providing payments based on the participant's death or payments based on the participant's life with benefits whose amount has been determined and/or based on the results of fund management. the practice of sharia insurance is not explicitly stated in the qur'an, there is not even a verse that clearly explains the practice of insurance. the qur'an only accommodates a few verses that contain the basic values that exist in insurance practice, such as the basic value of mutual assistance, cooperation, or the spirit to protect against losses suffered in the future.(sula, 2020). with this, the practice of insurance is not prohibited in islamic law, because the principle in the practice of insurance in islam is to invite human goodness. the verses of the qur'an in question are: al-quran surah al-maidah (5) verse 2, allah says which means: "... and help you in (doing) goodness and piety, and do not help in committing sins and transgressions. and fear allah, verily allah is severe in punishment." the verse contains the command to help each other in social life. in the insurance sector, customers are expected to be able to give some of their money to be used as social funds (tabarru') which is used to help an insurance member who experiences a disaster. next inal-quran surah al-hasyr (59): 18. which means as follows: "you who believe, fear allah and let everyone pay attention to what has been made for tomorrow (future) and fear allah, verily allah is knowing of what you do." the qur'an teaches us a lesson that extraordinarily valuable, in the dream event of the king of egypt which was later interpreted by the prophet yusuf with great accuracy, as a plan for the country to face a food crisis in the next seven years.” and in the hadith narrated by the hadith of muslim history from abu hurairah ra. which mean: "whoever relieves a muslim of a difficulty in this world, allah will relieve him of a difficulty on the day of resurrection and allah will always help his servant as long as he (likes) helps his brother." in this hadith, it is implied that there is a suggestion to help each other among muslims in this world by eliminating the difficulties of life that they suffer. sharia insurance is a system or action to delegate, transfer, or risk sharing of the risks borne to the manager (sharia insurance company) on condition that they pay contributions within a certain period of time on a regular basis in exchange for a policy that guarantees protection against risks that may occur in the future. along with the uncertainty itself. (basrowi & ronaldo, 2019). insurance is a systematic effort in providing social protection and guaranteeing welfare for the community which has been very well regulated through the provisions of the act.(leliya, 2016). through an agreement to lighten each other's burdens and help each other in a society. insurance services are actually the existence of guarantees which are benefits taken by the community as policy finance, accounting and business analysis 3 (2) 2021 163 holders and also stakeholders who have an interest in the policy. insurance can also be interpreted as an agreement between the insurer and the insured that requires the insured to pay a number of contributions to provide compensation for the risk of loss, damage, death, or loss of expected profits, which may occur due to unexpected events.(tho'in & anik, 2017) islamic economists also provide a definition of insurance which in islam is called aqdu ta'min / saukarah (muhammad muslehuddin, 2019) which states that insurance is a group of people who intend to form an alliance to ease a person's financial burden or avoid the difficulty of shopping costs. according to the fatwa of the national sharia council number: 21/dsn-mui/x/2001 concerning general guidelines for sharia insurance, it is stated that sharia insurance (ta'min, takaful or tadhamun) is an effort to protect and help each other among a number of people/parties through investment in the form of assets and/or tabarru' that provide a pattern of returns to deal with certain risks through contracts (commitments) in accordance with sharia principles. based on article 3 letter a number 2 of law number 2 of 1992 concerning insurance business, it is stated that: “the insurance business consists of a life insurance business that provides services in overcoming risks associated with the life or death of an insured person.” basically, sharia insurance and conventional insurance have the same goal, namely risk management or mitigation. the basic difference between the two is the way in which conventional insurance risk management is managed in the form of risk transfer from the participants to the insurance company (mechanism of risk transfer) while islamic insurance adheres to the principle of helping and protecting each other by means of risk sharing, namely risk sharing among fellow sharia insurance participants. sharia reinsurance the definition of conventional reinsurance in article 271 of the kuhd is in accordance with what reinsurance experts robert i. mehr and e. cammack put forward in their book principle of insurance: "reinsurance is the insurance of insurance", reinsurance is insurance from insurance or insurance companies. based on the principle of insurable interest, an insurance company that has covered a risk or risks in a certain area can insure excess liability that exceeds its own capacity (own retention) to other insurers. reinsurance is an insurance agreement that provides services and re-insurance against the risks faced by a loss insurance company in a life insurance company. the definition of sharia reinsurance is risk management based on sharia principles for the risks faced by sharia insurance companies, sharia guarantee companies, or other sharia reinsurance companies as stipulated in law number 40 of 2014 concerning insurance. sharia reinsurance is a mutual sharing process between the giver of the session (ceeding company) and the reinsurer (reinsurer), where there is a process of mutually agreeing on the risks and requirements set out in the contract. in its operations, using sharia principles is free from the practice of usury, gharar, and maisir. sharia reinsurance company is a development of the sharia insurance industry which has the same goal as sharia insurance, to create mutually beneficial cooperation for both parties, to maintain mutual trust, to protect participants from guaranteed risks, in accordance with the sharia insurance policy. banking sharia in carrying out its operational activities, islamic banks always maintain the principle of prudence in channeling customer funds that have been collected to be redistributed to customers who need financing. to mitigate the risks that may arise, the islamic bank then requires each customer to be financed to have an insurance policy, this is stated in the sharia bank financing approval letter which contains an insurance clause that must be met by the customer so that the disbursement of funds can be carried out. financing at islamic banks, in article 1 number 25 of law number 21 of 2008 concerning sharia banking, hereinafter referred to as the sharia banking law, is the provision of funds or equivalent claims in the form of: a) profit sharing transactions based on the mudharabah and musyarakah principles; b) lease transaction in the form of ijarah or lease purchase in the form of ijarah vomitiyah bi tamlik; c) sale and purchase transactions in the form of murabahah, salam and istisna receivables; d) lending and borrowing transactions in the form of qordh receivables; and e) lease transactions in the form of ijarah for multi-service transactions. as stated in the explanation of article 8 point (1) of law number 21 of 2008 concerning islamic banking, that: “financing or financing based on sharia principles provided by banks contains risks, so that in its implementation, banks must pay attention to the principles of financing or financing based on sound sharia principles. finance, accounting and business analysis 3 (2) 2021 164 to reduce this risk, the guarantee of providing financing or financing based on sharia principles in the sense of confidence in the ability and ability of the debtor customer to pay off his obligations in accordance with the agreement is an important factor that must be considered by the bank. one of the duties of islamic banks as institutions is to intermediary between customers (participants) and insurance companies. the relationship between banks and insurance in a business transaction is considered very important. however, in its implementation, it must eliminate injustice, dishonesty and magrib (maisir, gharar, riswah, riba).(supriyadi, 2017). the position of islamic banks in relation to customers is as partners and investors, while in conventional banks, the relationship is as financing or debtors. in connection with the relationship between investors and partners, in carrying out their work, islamic banks use sharia principles. this investment relationship contract between islamic banks and customers is called financing. in financing activities, islamic banks will carry out various techniques and methods, the application of which depends on the objectives and activities, such as mudharabah contracts, musharaka and others. the sharia banking mechanism is based on the principle of business partners and is interest-free, so in the principle of financing there is no interest payment to participants or the imposition of an interest on financing customers. in terms of financing, there are problems in providing financing, such as the existence of nonperforming financing or what can be called non-performing financing, in which there are many factors that cause the financing. 21 of 2008 article 351 is carried out based on an analysis by establishing the precautionary principle so that debtor customers are able to pay off their debts or return financing in accordance with the agreement so that the risk of failure or delays in repayment can be avoided. non performing financing (npf) is one of the instruments for evaluating the performance of a sharia bank which becomes the interpretation of the valuation on earning assets, especially in the assessment of non-performing financing. non-performing financing needs to be considered because it is volatile and uncertain. the npf ratio is the ratio used to measure the risk of failure of financing, where npf is the ratio between non-performing financing (which is included in the criteria for substandard, doubtful, and nonperforming financing) and the total financing disbursed (mutamimah. 2012). according to bank indonesia regulation number 6/10/pbi/2004, financing that is classified as special attention, substandard, doubtful and loss is called gross npf, while net npf is financing that is classified as substandard, doubtful and loss. bank indonesia has set a maximum gross npf level of 5% as a tolerance number for the health of a bank. the higher the npf (above 5%) then the bank is declared unhealthy because a high npf causes a decrease in profits to be received by the bank (popita, 2013). sharia banking statistics issued by the financial services authority (ojk) state that:when compared, the distribution of bank financing only grew by 0.59% as of june 2021. in terms of quality, the ratio of non-performing financing or non-performing financing (npf) of islamic banks is at the level of 3.25% in the first semester of 2021, while the npf of uus is in the position of 3.01% in june 2021. this ratio is better than the quality of non-performing financing. or nonperforming loan (npl) industry at 3.24% position. pilarmas investindo sekuritas analyst, okie ardiastama sees the opportunity for islamic banking to grow is still large enough so that it can be taken into consideration for market players in responding to these opportunities. in the implementation of financing, islamic banks must meet 2 (two) aspects; • sharia and islamic aspects • economic aspects. the sharia aspect means that in every realization of financing to customers, islamic banks must still be guided by islamic law, including not containing elements of maisir, gharar, usury, and their business fields must be halal. the economic aspect means that in addition to considering sharia matters, sharia banks must continue to consider profit gains not only for sharia banks and their customers but also other partners such as sharia insurance and sharia reinsurance so that sharia banks must really pay attention to all forms of their activities. within the framework of prudence as a sharia company to protect public funds entrusted to it. law number 10 of 1998 concerning amendments to law number 7 of 1992 concerning banking, hereinafter abbreviated to the banking law in article 8, states that in channeling funds, banks must have confidence in the ability and ability of debtors to pay off their debts in accordance with the agreement. the above provisions are reinforced by the existence of regulations governing the contracts used by islamic banks in terms of the collection and distribution of funds, namely bank indonesia regulation number 7/46/pbi/2005, banks can request guarantees or collateral to anticipate risks if the customer does finance, accounting and business analysis 3 (2) 2021 165 not can fulfill obligations as contained in the contract due to negligence and/or fraud. financing at islamic banks must also carry out a careful assessment of the character, capacity, capital, collateral and business prospects (condition of economic) of the prospective customer receiving the facility. from the various factors mentioned above, it shows that guarantees or collateral for islamic banks are a very difficult requirement to ignore in channeling their financing. without guarantees, islamic banks are at a point of uncertainty. the problem that arises then is the nature of the guarantee itself, one of which is collateral (collateral) including not limited to material guarantees but with the requirement for customers to take part in financing life insurance (ajk) in the process of realizing financing in islamic banks if there are insurance claims on customers who has been financed by islamic banks. sharia people's financing bank (bprs). the definition of a sharia rural bank (bprs) is a sharia bank which in its activities does not provide services in payment traffic. sharia rural banks (bprs) cannot be converted into rural banks (bpr). sharia rural banks are not permitted to open branch offices, representative offices, and other types of offices abroad. sharia people's financing banks can only be established and/or owned by indonesian citizens and/or indonesian legal banks whose owners are all indonesian citizens, regional governments and two or more parties. the business activities of sharia rural banks are collecting funds from the public, channeling funds to the public, placing funds in other islamic banks in the form of deposits based on wadi'ah contracts or investments based on mudharabah contracts and/or other contracts that do not conflict with sharia principles, transferring money , either for their own interest or for the benefit of the customer through the account of a sharia rural bank in a sharia commercial bank, conventional commercial bank, and sharia business unit as well as providing products or conducting other sharia bank business activities, in accordance with sharia principles based on the approval of bank indonesia. the legal form of a sharia rural bank is a limited liability company (pt). in the organizational structure of the islamic people's financing bank (bprs) there is a sharia supervisory board tasked with providing advice and suggestions to and supervising the activities of sharia people's financing banks (bprs) so that they are always in accordance with sharia principles. attached is the data of bprs in indonesia sourced from sharia banking statistics, december 2020, as follows; table 5. development of sharia bpr in indonesia. finance, accounting and business analysis 3 (2) 2021 166 model systematic mapping studies in conducting this research, we consider it necessary to look at other disciplines in order to see the impact of sharia insurance products on other intersecting fields of science. to see other disciplines that affect or intersect with sharia insurance, the openknowledgemaps.com method is used, with the mapping results attached. source; www.openknowledgemaps. it can be seen in table 2.1 that there are still many other disciplines (risk management, accounting, business administration, agents, gcg, profitability, sharia economics, investment etc.) that must be studied to enrich the study of the proposals made. the findings obtained from the www.openknowledgemap.com program, there are several articles from previous researchers that have a wedge with the theme of writing so that it is still possible to conduct a deeper study related to the currently researched theme. from several references of international reputable journals such as scopus, science direct, emerald, elsevier and google scholar, which were searched for by researchers, no research or articles that were exactly the same as the research themes that had been carried out previously had not been found. there are research titles with almost the same variables but different locus and focus, for example the impact of islamic insurance financing products on sharia insurance or vice versa. meanwhile, the impact of sharia life insurance products on the performance of sharia banks and sharia rural banks, which are linked to the variables of sharia insurance and sharia reinsurance, which together have an impact on the variables, have not been found so that the title of the research conducted is novelty or novelty that has not been found in several reputable journals. and there has never been any research on 4 (four) variables studied simultaneously. the current phenomenon based on the research theme, there are 2 (two) main variables in finding the impact of life insurance products for islamic financing, namely; • sharia banking and sharia people's financing bank. • sharia insurance and reinsurance party, the two variables are basically mutually dependent. the need for sharia banking and sharia people's financing banks to cover sharia financing life insurance for unexpected risks in their operational activities, as well as sharia insurance and reinsurance parties who need income in order to pay claims that occur, this is a natural cycle in the insurance business. if the contribution obtained by the sharia insurance and reinsurance company is not adequate with the risks faced, it can cause the insurance and reinsurance company to suffer losses, because the contribution obtained is not sufficient to pay claims. meanwhile, in the concept of sharia insurance, both parties should help each other (ta'awun) and takafuli or protect each other.(sula, 2020). the concept of mutually reinforcing and mutually beneficial between the two parties, is very necessary so that the concept of profit sharing (mudharobah) to customers can be carried out, but at this time this has not happened, especially in sharia financing life insurance products.(fatmawati, 2010). the current condition, there is an imbalance between banking and islamic rural banks and finance, accounting and business analysis 3 (2) 2021 167 insurance companies. islamic insurance and reinsurance companies are under pressure from the contributions made by islamic banks and institutions, which are not commensurate with the amount of risk and the duration of the insurance period covered, so that they are not in accordance with the concepts of helping (ta'awun) and protecting each other (takaful). in islamic insurance. hypothesis based on the phenomena or facts and realities that have occurred and have been described above, we formulate research hypotheses, as follows; h1. it is suspected that there is a positive impact between the life insurance product of sharia financing and the performance of sharia banking & sharia people's financing bank. h2. it is suspected that there is a very strong positive impact between sharia financing life insurance products and sharia insurance & sharia reinsurance. h3. it is suspected that the ta'awun and takafuli principles in sharia banking and sharia rural financing banks have not occurred or have not been fully implemented, in sharia financing life insurance products marketed by sharia insurance and sharia reinsurance companies. methods the research method used in this study is a comparative qualitative method by comparing factual phenomena to the variables studied,through an empirical approach, which is a method that focuses on the study, exposure, explanation and interpretation of an empirical phenomenon.(moleong, 2017) types of research. the type of research conducted in this article is a qualitative method of phenomena. the data collected is in the form of words, pictures and numbers. qualitative research is a research procedure that produces descriptive data in the form of written or spoken words from people and observed behavior. descriptive research is a form of research aimed at describing or describing natural phenomena and human creations. the purpose of doing descriptive research is to make research in a systematic, factual, and accurate manner. data source. according to lofland and lofland quoted by lexy. j. moleong in the book "qualitative research methodology", suggests that the main data sources in qualitative research are words, actions and numbers, the rest are in the form of documents and others. sources of data in this study are: • primary data is data obtained from direct research into the field, conducting observations, surveys, and direct interviews with sources and others. • secondary data is in the form of data that supports primary data, taken from various sources; books, articles, ojk statistical data, internet, and other sources. research focus. the focus of the research is to find out how big the impact of financing life insurance products on the performance of banking and bprs as well as the insurance industry (sharia insurance and reinsurance companies). research purposes. the purpose of the study was to determine the impact of islamic financing insurance products on the performance of islamic banking and bpr and the sharia insurance industry (sharia insurance and sharia reinsurance). another purpose is to look at novelty in this study. discussion. based on the explanation in the background and bank indonesia data as well as ojk 2020 insurance statistics data, as well as the impact of increasing claims for sharia financing life insurance products (ajk) which has been happening so far, if no efforts are made to adjust and balance the adequate contribution with the amount of risk as well as a long tenor, will have an impact on increasing the price of reinsurance contributions, so that it will increase the operating costs of insurance companies and make the profit margins of sharia insurance companies smaller, in addition to guaranteeing future claim payments, in accordance with the provisions of pojk 72 and psak 108 then in sharia financing life insurance (ajk) products, every sharia insurance company is required to provide a claim reserve of 100%,so that it will greatly erode the margins or profits of islamic insurance companies. finance, accounting and business analysis 3 (2) 2021 168 if this condition continues and there is no improvement from sharia insurance companies as well as improvement of customer profiles by sharia banking and sharia people's financing banks as business providers, it will potentially cause a higher loss ratio which has implications for the decline in risk based capital (rbc) of sharia insurance companies that not in accordance with the standards set by the regulator, diminishing trust from customers, high reserve values resulting in the failure to fulfill the obligations of the sharia insurance company to insurance participants with the worst impact being sanctions for business restrictions and the revocation of the sharia insurance company's business license because it cannot meet the predetermined standards regulations in accordance with ojk regulations. based on the hypothesis that has been described above and using the comparative qualitative method, then the next author conducts an analysis by comparing sharia theories with primary and secondary data and existing facts. (agusta, 2014). after conducting the analysis, the authors obtained the results of the discussion as follows; a) there is a positive impact between sharia financing life insurance products on the performance of sharia banking & sharia rural banks. however, the underwriting results obtained by sharia insurance and sharia reinsurance from sharia financing life insurance products sourced from sharia banking and sharia people's financing banks contributed negatively. this can be seen from table 2.1 where the claims paid by sharia insurance and reinsurance are greater than the contribution income received by sharia insurance and sharia reinsurance companies. on the other hand, according to the data we obtained from sharia banking statistics, it shows that the performance of sharia banking and sharia rural banks continues to grow from 2016 to 2020 and continues to increase. factors that affect the performance of banking, among others, are; • return on assets (roa). roa the bank's ability to earn a total profit. if the higher the roa obtained, the greater the level of profit obtained at the bank so that the better the position of the bank in the use of available assets. if assets can be managed properly, it can increase profits for the company in the form of roa. roa can be a good indicator in obtaining business benefits and efficiency for companies or banks in utilizing all assets and as a benchmark for profitability. by using roa as a measure of the profitability of companies and banks in order to find out whether financial performance can work efficiently and effectively in managing invested funds so that it can provide benefits for investors, companies and managers and in order to find out how the company's ability to survive when a critical period in increasingly competitive competition (aulia, 2018). • non-performing loan (npl). the definition of npl or non-performing financing is a condition where the customer is unable to pay part or all of his obligations to the bank as agreed. non-performing loans according to bank indonesia regulations are financing classified into substandard (kl), doubtful (d) and loss (m) collectability. npl is a ratio that shows the ability of bank management in managing non-performing financing provided by banks. npl is calculated based on the comparison between the number of non-performing loans compared to the total financing. (fitria., nurul. sari., raina, 2011). from the data obtained from the ojk and sharia banking statistics, it shows that the npl of sharia banking is relatively small from year to year, thus meaning that sharia financing life insurance products have proven to be very helpful in banking operations and performance because with the large amount of claim payments to thousands of customers, the npl of sharia banking is small. so that the said insurance product is very helpful for the islamic banking and sharia people's financing bank. b) there is a very strong positive impact between sharia financing life insurance products and sharia insurance & sharia reinsurance. it is undeniable that sharia financing life insurance products are one of the products that are in great demand by islamic banking and islamic people's financing banks because these products are very useful in providing protection to customers (participants) who obtain financing from islamic banking and rural financing banks. the said insurance product guarantees the risk; death, accident, financing loss. based on the data we obtained from the ojk, most of the income from sharia insurance and reinsurance is derived from sharia financing life insurance products from sharia banking and sharia bpr. so that these products have a significant impact on sharia insurance and sharia reinsurance income. c) the concept of ta'awun and takafuli in sharia financing life insurance products from sharia banking and sharia people's financing banks, as fellow companies based on sharia principles, does not work or has not been fully implemented, to sharia insurance and sharia reinsurance companies, because one of the parties loses, the other party wins. the concept of ta'awun and takafuli on sales transactions of sharia financing life insurance products obtained from sharia banking and sharia people's financing banks, "not running" because it finance, accounting and business analysis 3 (2) 2021 169 shows negative underwriting results, as evidenced by the increased claim ratio and high claim payments to those who always pay. increased rapidly from year to year. the impact of negative underwriting results, the insurance company in accordance with pojk 72 and psak 108, must reserve a very large amount of funds, due to the large outstanding claims that will be paid over a long period of time (5-10 years in the future). meanwhile, sharia reinsurance will increase the rate or tariff and terms & conditions to make adjustments to the losses suffered so far so that it will affect the sales that will be made by sharia insurance companies and will be very burdensome for banking customers & sharia people's financing banks. the results of the discussion that have been carried out state that the concepts of ta'awun and takafuli in sharia financing life insurance products, as fellow companies based on sharia principles have not yet occurred between sharia banking, sharia people's financing banks and sharia insurance & reinsurance parties. conclusion after processing secondary data in the form of islamic banking statistics (sps) from ojk which we compared with primary data obtained from interviews and based on the formulation of problems, phenomena, hypotheses & discussions, the authors provide the following conclusions; • h1 is proven that the sharia financing life insurance product has a positive impact on the performance of sharia banking and sharia people's financing bank. • h2 is significantly proven that the sharia financing life insurance product has the potential to have a negative impact on sharia insurance & sharia reinsurance, if the insurance party does not immediately make improvements and there is no selection of clients from banking and sharia rural banks. • h3 the concept of ta'awun and takafuli on financing life insurance products from sharia banking and sharia people's financing bank to sharia insurance and sharia reinsurance. as a fellow company based on sharia principles, it does not work or has not been fully implemented, against sharia insurance and sharia reinsurance companies, because one party loses, the other party gains. • the large claim payments from sharia insurance companies show that the sharia financing life insurance product is very helpful in the performance of sharia banking & sharia people's financing banks so that non performing loans (npls) become relatively "small". • sharia banking & rural financing bank trust for sharia financing life insurance products is getting higher but potentially sharia insurance will find it difficult to get backup from sharia reinsurance if it doesn't make adjustments. • ojk data and reports from bank indonesia showing that islamic banking & sharia rural banks have proven to have good performance, year by year, as shown in table 1.2 above. (the decline occurred during covid 19). sharia insurance and sharia reinsurance, according to interviews conducted with 2 (two) sharia reinsurance companies and based on the data we obtained, the author made a comparison between sharia banking growth data and data from sharia people's financing banks (bprs). furthermore, the authors conclude that the sharia financing life insurance product has a high loss ratio, resulting in a significant increase in claims every year. for this reason, it is necessary to review and improve in terms of rates and terms and conditions in order to create an adequate position between the risks that are accepted and the contributions received by sharia insurance and sharia reinsurance companies. references agusta, i. (2014). qualitative data collection and analysis techniques. journal of communication and media studies. bank indonesia banking statistics. basrowi, b., & ronaldo, r. (2019). analysis of sharia marketing constraints in indonesia. share: journal of islamic economics and finance. https://doi.org/10.22373/share.v8i2.5365 fatmawati. (2010). muhammad syakir sula's thought about sharia insurance operational system by : fatmawati program of islamic economy department of state islamic university. in script. fatwa of the national sharia council number: 21/dsn-mui/x/2001 concerning general guidelines for sharia insurance finance, accounting and business analysis 3 (2) 2021 170 insurance statistics from ojk. law no. 2 of 1992. law number 21 of 2008 concerning islamic banking law number 40 of 2014 concerning insurance. leliya, l. (2016). interest in sharia insurance in prudential insurance. oration: journal of da'wah and communication. maksum, m. (2011). in the world and indonesia. growth of sharia insurance in the world and indonesia. moleong, lj (2017). qualitative research methodology (revised edition). in pt. youth rosda karya. muhammad muslehuddin, 2019. nurul fitria and raina linda sari, 2011. analysis of financing policy and the impact of non performing loans on loan to deposit ratio in pt. indonesian people's bank (persero), rantau branch tbk, aceh tamiang open knowledge maps (2021). overview of research on sharia insurance. retrieved from https://openknowledgemaps.org/map/ad6e715701864ec205e998b1003850ea [20 dec 2021]. robert i. mehr and e. cammack, the principle of insurance. sharia general insurance, journal of islamic economics uhamka, volume 7, number 2, september 2016. sula, ms (2020). principles of islamic insurance. 7. supriyadi, i. (2017). takaful insurance (comparative study with conventional insurance). profit : journal of islamic banking and economic studies. https://doi.org/10.33650/profit.v1i1.316 tho'in, m., & anik, a. (2017). sharia aspects in sharia insurance. scientific journal of islamic economics.https://doi.org/10.29040/jiei.v1i01.28 https://doi.org/10.29040/jiei.v1i01.28 30 finance, accounting and business analysis volume 7 issue 1, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.1.03 do key performance indicators derived from value-based management better predict total stockholder return than traditional performance indicators? matthias olivier 1* , roland wolf 2 ucam universidad católica de murcia, murcia, spain 1 fom university of applied sciences for economics and management, essen, germany 2 * corresponding author info articles abstract history article: submitted 26 october 2024 revised 4 january 2025 accepted 20 february 2025 purpose: this study investigates whether key performance indicators derived from value-based management are able to better predict total stockholder return than traditional performance indicators. design/methodology/approach: a sample (n = 1388) is drawn from corporate indices in four european countries (france, germany, italy, and spain). the explanatory power of traditional performance indicators and value-based performance indicators is compared with regard to total stockholder return. findings: it is found that in the sample, value-based performance indicators are not able to better explain total stockholder return than traditional performance indicators. practical implications: the results suggest that companies should consider placing greater emphasis on performance indicators, as leveraging both traditional and value-based performance metrics could help improve understanding of stockholder returns and potentially drive more informed strategic decision-making. originality/value: the study provides insights into the relative effectiveness of value-based performance indicators versus traditional ones in explaining stockholder return across multiple european countries. keywords: value based management, key performance indicators, value oriented performance measurement, value accounting, paper type: research paper. keywords: value based management, key performance indicators, value oriented performance measurement, value accounting. jel: g32; m41 * address correspondence: e-mail: molivier@alu.ucam.edu1 roland.wolf@fom.de2 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.03 https://orcid.org/0009-0000-2288-4001 https://orcid.org/0009-0009-5282-8815 matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 31 introduction shareholder value is oftentimes considered the primary goal of any company in a free enterprise system (friedman 1970), the concept was formalized by alfred rappaport in his book "creating shareholder value: the new standard for business performance" in 1986. rappaport argues that ultimately the only reliable way to evaluate management’s performance with regards to corporate strategy is the rate at which shareholder value is created (rappaport 1986). the key concept of rappaport’s theoretical approach resulted in the establishment of the value-based management as a management principle. the concept of value-based management asserts that the primary guiding principle for management decisions is determined by maximizing shareholder value. therefore, all actives of the company should be aligned in a way to maximize the value of the company (weber et al. 2017). it is to note that the maximization of shareholder value does not necessarily (or oftentimes not at all) mean the short-term maximization of company profits. the valuebased management principle much rather postulates that shareholder maximization is achieved when longterm implications of company policy and management decisions are taken into consideration (weber et al. 2017). while these observations brought about a fundamental change in the understanding of corporate business strategies and today are considered a fundamental part of the body of knowledge in management science, the operationalization of these concepts is an area that is continuously evolving (wobst et al. 2025). the operationalization of value-based management principles with the implementation of value-based measures of performance measurement puts these value-based measures of performance measurement into contrast to traditional performance indicators. this paper examines whether value-based performance measures are used by the participants in the european capital market to make market decisions using a sample of listed companies from france, germany, italy, and spain. key performance indicators derived from value-based management theoretical foundation of value relevance and empirical insights the value relevance of performance indicators (both financial and non-financial) enables stakeand shareholders to evaluate the performance of a company and is ultimately reflected in the performance at the marketplace. this chapter summarizes the most discussed scientific research with regard to performance indicators and details the developments of the theoretical background and empirical insights. the theoretical background of the value relevance can be traced back to the efficient market hypotheses based on the work of fama (1970). the efficient market hypotheses states that the market price of a stock represents fully the available information, including both financial and non-financial data. in an efficient market all available information is already represented in the stock price and changes in the stock price are caused by new facts that are able to change the current price. this theoretical concept can be seen as empirically supported by the data analysis of ball and brown (1968) that showed the association of market information and stock price reaction. this study is noteworthy because it highlighted the value relevance of ad hoc capital market information. based on these foundations numerous models were implemented. one noteworthy model that was developed by ohlson (1995) that shows the relationship between market value and accounting information. ohlson’s concept is based on the idea that the value of a company can be based on a linear function of book values and earnings. these theoretical approaches have formed the basis that most research is founded on to develop the approaches for value relevance further. feltham and ohlson (1995) expanded these ideas by also including less secure factors into their equations. most notably including growth potential in their model and therefore focusing more on the future performance of a stock that is represented by the current stock price. this extension has proven to be a cornerstone of the approach to value performance as the stock price is considered to only represent future performance of a stock. empirical results regarding value relevance the empirical research has shown consecutively that finical information like net income, ebit, ebitda and cashflow have a significant influence on market pricing, however the results regarding the significance of individual factors has been the subject of a multifaceted debate and has led to a wide array of insights. income is generally considered as being the most impactful performance indicator with regard to value relevance, as kothari and zimmerman (1995) have shown in a conclusive literature review and concluded that income is highly correlated with stock returns. this underscores the relevance that individual investors give to actual and estimated income publications that can lead to abrupt changes in market prices, especially if there is a difference between prior and current expectations. collins et al. (1997) extended this perspective by further increasing the time horizon of the investigation and observed that the value relevance of income has been increasing at a slim rate over time, however that a corresponding slight increase in the relevance of book value has off set this development when considering income and book value and income matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 32 in combination. this observation is reinforced by the work of penman and sougiannis (1998) that showed that the book value has a significant impact on stock prices. this might indicate that the book value is a factor that is used to stabilize rapid changes in the estimated earnings and therefore makes models based on earnings performance more robust when considered as an additional variable. this was further dissected by burgstahler and dichev (1997) that noted that the situation of the company under consideration can influence the performance measurement that proves too impactful, as for companies that show a history of losses, book value becomes more relevant. the significance of cashflows has increased over time, based on academic work of dechow (1994) and barth et al. (1998) who argued that cashflows paint a clearer picture of operative performance than the accrual accounting based performance indicators. this is considered to be especially true for industries and sectors that have discretion in accrual-based accounting by using leeway granted by accounting standards and auditors. a different approach to the implication of historical performance was shown by focusing on the dividends a company pays as a signaling instrument to show successful performance. as lintner (1956) coined the belief that stable dividends promise a stable performance. based on these insights deangelo et al. (2000) proved that dividend policy is an important tool for signaling. and also, may represent trust in future performance. the value relevance of non-financial performance indicators has increased in more recent years. gompers et al. (2003) developed a model to include corporate governance into the performance relevance model and showed that a successful corporate governance structure is associated with a better performance. klein (2002) showed that independence in boards and audit commits can increase the financial performance. value based management as a management concept the creation of shareholder value oftentimes lies at the heart of corporate strategy. the idea is fleshed out by the concept of value-based management. value based management is a way for the corporate strategy department to put the maximization of shareholder value into the individual business units of the company. the main idea is to align corporate strategy with the creation of shareholder value by viewing each decision and action that is made within the company from the perspective of shareholder value. in other words, valuebased management means that the management of each individual business unit evaluates individual decision from a perspective that puts creating shareholder value for the company as a whole as the top priority (weber et al. 2017). at the beginning of any value-based management concept stands the idea of strategic planning. for an implementation of a value-based management concept each department responsible for strategic planning has to identify the value drivers from a strategic standpoint. the value drivers are individual factors that influence the value of the company. metaphorically speaking looking at the value drivers is like putting shareholder value under the microscope to get a clearer picture of the individual elements of the value creation process. commonly considered value drivers are profitability, market share and revenue growth. however, the identification of the value drivers in specific should go beyond these platitudes. identification of value drivers therefore has to be based on a rigorous data analysis of financial and operational data. based on these value drivers the company can derive long term goals for value creation by individually setting goals for the value drivers. subsequently, a corporate controlling that is focused on value creation within the strategic units of the company is central to value based management. a corporate controlling that adheres to the principles of value-based management promotes an approach that evaluates long term cashflows from each strategic unit and discounts them using the appropriate cost of capital. additional shareholder value is created whenever the return of the investments exceeds the cost of capital. the common denominator of all actions based on value-based management is that the company’s value is driven by discounted future cash flows. the key differentiator of a value-based management approach is to align decision making regarding strategic and operational decisions with the corresponding impacts on future discounted cash flows. from a more practical perspective this means that capital is allocated to those units of the company that promise the highest return on capital employed. conversely, underperforming strategic units are changed or discontinued. the bridge between these theoretical considerations of the value-based management framework is built by the implementation of key performance indicators to evaluate the strategic units and projects of the company. value based management and key performance indicators the implementation of a value-based management system requires the selection of key performance indicators that operationalize the value-based management approach (martin et al. 2009). however, the implementation of key performance indicators is oftentimes considered as the gateway to principal agent conflicts. agency theory is relevant in situations whenever a “principal” hires an “agent” to act on the principal’s behalf (gailmard 2014). the situation results in the principal-agent conflict. the conflict arises, matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 33 because the agent takes actions in his own interest and not in the interest of the principal that he represents (jensen and meckling 1976). the most important factor contributing to this conflict is the information asymmetry between the principal and the agent. most commonly considered are hidden actions and hidden information. the hidden actions are due to the principal’s inability to monitor all of the agents’ actions in detail and the agent is able to take actions that benefit the agent and may hurt the principal. the possibility of hidden actions can lead to a moral hazard for the agent because the agent can be in a situation where an action is beneficial to him but at the principal’s expense (pauly 1968). hidden information is relevant due to the fact that the agent has more and better access to information, as the agent is closer to the business itself and might even be privy to some of the information, resulting in the principal being at an information disadvantage. the possibility of hidden information can lead to an adverse selection for the principal, because the information asymmetry might lead to an imbalance between the agent and the principal (akerlof 1970). one of the most important tools to mitigate these problems in terms of the principal agent conflict is the design and the contents of the contractual relationship between the principal and the agent (jensen and meckling 1976). in an ideal situation the contract can be designed in a way that aligns the interests of the principal and the agent. while there are ample scientific models to evaluate these considerations from a theoretical perspective, the practical perspective is often concerned with the problem, how the success of the agent is measured (ali and hwang 2000). as the measures of success are therefore a key element to the mitigation of the principal agent conflicts, the analysis will look to the measures of success used for performance measurement in order to highlight the challenges resulting from the principal agent conflict. traditional performance measures like earnings and revenue are criticized for lacking the alignment between shareholder value and management performance. value based management emphasizes the use of key performance indicators that underscore the created value. concept fom to enable a comparison between the predictive power of traditional performance indicators and value-based performance indicators a standardized value concept is helpful. the standardization of a valuebased concept enables our research to incrementally develop the understanding of value-based performance indicators. in this paper we therefore want to draw on the standardized approach that was developed by cfrv (center for financial reporting and valuation) and fom (hochschule für oekonomie & management) to determine value-oriented key performance indicators (wolf 2017). in detail we identified four different value-oriented performance indicators for use in our model. value added (cfrv/fom): determines the value added by subtracting total cost of capital from ebit, while total cost of capital is calculated using a wacc-approach. for comparability purposes, the value added per share (cfrv/fom) ratio is used. value rate (cfrv/fom) per share determines the value-added rate by dividing the value added by the capital used. price value ratio (cfrv/fom): determines the ratio of the stock price to the added value. value performance ratio cfrv/fom: determines the ratio of the value rate (cfrv/fom) to the price value ratio (cfrv/fom) for additional corroboration we used the value-based performance indicators roce, eva and price/value ratio based on eva that have been calculated in accordance with the industry standards. the following research analyses whether novel ideas for value-based performance indicators are better able to capture the actual value creation of the companies. research design performance indicators for analysis for the analysis we have considered different performance indicators that might be suitable to explain the change in the shareholder value. from an analytical perspective we grouped the performance indicators into two subgroups that form the basis of our analysis. on the one hand we considered traditional performance indicators, on the other hand we considered value-oriented performance indicators. among the group of traditional performance indicators, we made the following consideration with regard to selection of performance indicators. we considered revenue per share and return on sales to include a top line perspective in the analysis. we included ebit per share, ebit margin, earnings before tax per share and earnings per share to include the most commonly used indicators for economic success in the accrual sense and expanded the selection with the cf margin for a more cash oriented perspective. to incorporate the perspective of traditional stock analysis we incorporated the p/e ratio, return on equity before tax, return on equity after tax, return on assets before tax and tobin's q. for the calculation of these performance indicators, we were able to rely on traditional patterns for calculation. with regard to the value-based performance indicators we use the cfvr/fom approach outlined in matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 34 the previous chapter and also included the eva methodology to broaden the value-based approach of the research. sample selection and data as a basis for our sample of companies, we chose stock indices from four continental european countries (france, germany, italy, and spain). we chose these four european countries, because they represent a significant portion of the eu’s gdp (in total these four countries are responsible of about 60 % of the eu’s gdp). the benchmark stock indices were chosen, because the biggest public companies are oftentimes considered to be a benchmark to smaller companies as big public companies are at the pulse of current developments in corporate strategy. as a result, we chose the french cac 40, the german dax 40, the italian mib and the spanish ibex 35 to give us the basic population for our analysis. in total we had a number of 155 companies in our initial sample. we collected the financial information data for an analysis period of ten years (2014 through 2023) to have a longer-term perspective on the development of shareholder value to include a medium to long term perspective on the creation of shareholder value. we employed bloomberg financial to retract the financial data of our sample. we corroborated the data by verifying accuracy through comparisons with refinitiv and if necessary, replacing missing data in our sample. for the ten-year observation period we extracted a population of n = 1388 individual observations. for the calculation of the performance indicators, we used standard calculation principles. table 1. sample composition index no. possible observations exclusion due to missing data individual observations cac 40 40 400 42 358 dax 40 40 400 45 355 ibex 35 35 350 34 316 mib 40 400 41 359 total 155 1550 136 1388 source: authors’ compilation table 2. sample structure index industry banking insurance other sectors total cac 40 21 2 3 14 40 dax 40 20 3 4 13 40 ibex 35 16 6 3 10 35 mib 22 4 3 11 40 total 79 15 13 48 155 source: authors’ compilation models’ specification to determine the predictive power of the different performance indicators, we use a fixed effects model. the dependent variable is the total stockholder return (tsr). we have identified n = 1388 individually calculated performance indicators. we have grouped the performance indicators into two groups. the first group of the performance indicators are traditional performance indicators that are based on a traditional accrual-based approach towards performance measurement. the other group of performance indicators are based on value-oriented management performance indicators. table 3. dependent variable dependent variable variable abbreviation total stockholder return tsr source: authors’ compilation matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 35 table 4. independent variables: traditional performance indicators performance indicators variable abbreviation revenue per share rps return on sales ros ebit per share ebitps ebit margin ebitm cf margin cfmar earnings per share eps p/e ratio per ebt per share ebtps return on equity before tax roebt return on equity after tax roeat return on assets before tax roabt tobin's q tq source: authors’ compilation table 5. independent variables: value oriented performance indicators performance indicators variable abbreviation return on capital employed roce value added cfrv/fom per share vaps value rate cfrv/fom per share vrps price value ratio cfrv/fom pvr value performance ratio cfrv/fom vpr economic value added per share evaps price value ratio eva pevar source: authors’ compilation table 6. full definitions of the variables variable abbreviation variable definition tsr ((ending stock price beginning stock price + dividends paid) / beginning stock price) × 100 rps total revenue / number of outstanding shares ros (operating income (ebit) / total revenue) × 100 ebitps ebit / number of outstanding shares ebitm (ebit / total revenue) × 100 cfmar (operating cash flow / total revenue) × 100 eps net income / number of outstanding shares per share price / earnings per share (eps) ebtps ebt / number of outstanding shares roebt (ebt / shareholders' equity) × 100 roeat (net income / shareholders' equity) × 100 roabt (ebt / total assets) × 100 tq market value of firm's assets / replacement cost of firm's assets roce (ebit / capital employed) × 100 vaps (cash flow return on value / fixed operating margin) / number of outstanding shares vrps cash flow return on value / fixed operating margin per share matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 36 variable abbreviation variable definition pvr hare price / (cash flow return on value / fixed operating margin) vpr (cash flow return on value / fixed operating margin) × 100 evaps economic value added / number of outstanding shares pevar share price / economic value added per share source: authors’ compilation to determine the predictive power of the regression model we run the regressions individually for each independent variable. the independent variables show the rate of change of an individual performance indicator. table 7. regression model: traditional performance indicators variable abbreviation regression model rps tsr = α + β*rps+ ϵ ros tsr = α + β*ros+ ϵ ebitps tsr = α + β*ebitps+ ϵ ebitm tsr = α + β*ebitm+ ϵ cfmar tsr = α + β*cfmar+ ϵ eps tsr = α + β*eps+ ϵ per tsr = α + β*per+ ϵ ebtps tsr = α + β*ebtps+ ϵ roebt tsr = α + β*roebt+ ϵ roeat tsr = α + β*roeat+ ϵ roabt tsr = α + β*roabt+ ϵ tq tsr = α + β*tq+ ϵ source: authors’ compilation table 8. regression model: value-oriented performance indicators variable abbreviation regression model roce tsr = α + β*roce+ ϵ vaps tsr = α + β*vaps + ϵ vrps tsr = α + β*vrps + ϵ pvr tsr = α + β*pvr + ϵ vpr tsr = α + β*vpr + ϵ evaps tsr = α + β*evaps+ ϵ pevar tsr = α + β*pevar+ ϵ source: authors’ compilation building on the results of the simple regression models, a multiple regression model is developed that incorporates the highest-ranked performance indicators to provide deeper insights. however, this approach introduces the potential challenge of multicollinearity, which may affect the stability and interpretability of the model's estimates. as a result, the variables chosen for the multiple regression will need to be reviewed for the level of correlation before the regression is performed to mitigate this issue. matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 37 empirical results results simple panel regression analysis descriptive statistics related to the variables of the research are presented in table 8 and 9. table 9. descriptive statistics independent variables abbreviation n median mean sd rps 1355 0.0701 0.0997 0.2717 ros 1355 2.1130 4.4340 7.0671 ebitps 1355 0.0983 0.1372 0.2520 ebitm 1355 0.1291 0.4722 12.7261 cfmar 1355 1.1769 2.6272 5.7987 eps 1355 13.6821 18.4380 116.8462 per 1355 1.5835 3.5706 7.0446 ebtps 1355 0.1374 0.1404 0.2134 roebt 1355 0.1048 0.1028 0.1754 roeat 1355 0.0535 0.0597 0.0629 roabt 1355 1.1360 1.4560 1.1384 tq 1355 0.0780 0.0909 0.1171 roce 1355 0.1955 0.8783 4.3732 vaps 1355 0.0105 0.0227 0.1200 vrps 1355 14.7566 32.3438 358.4022 pvr 1355 0.0127 -0.0626 5.4477 vpr 1355 -0.0503 -2.4621 22.7578 evaps 1355 -1.6805 -117.1010 4,215.7867 pevar 1355 16.5466 40.7874 65.1478 source: authors’ compilation matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 38 table 10. correlation matrix tsr rps ros ebitps ebitm cfmar eps per ebtps roebt roeat roabt tq roce vaps vrps pvr vpr evaps pevar tsr 1.0000 0.3935 0.1165 0.7088 0.1208 0.0807 0.6707 0.0316 0.7055 0.2039 0.2208 0.3579 0.2473 0.1803 0.5643 0.0264 0.0245 -0.0722 -0.0005 0.5584 rps 0.3935 1.0000 -0.0836 0.7131 -0.1110 -0.0947 0.6897 0.0161 0.7025 0.0816 0.0884 -0.0195 0.0634 0.0268 0.2466 -0.0237 0.0115 -0.3158 0.0065 -0.0181 ros 0.1165 -0.0836 1.0000 0.2340 0.9596 0.2659 0.2801 0.0115 0.2422 0.4185 0.3659 0.5058 0.3479 0.2953 0.2666 0.0298 0.4687 0.0169 -0.0438 0.1819 ebitps 0.7088 0.7131 0.2340 1.0000 0.2207 0.0312 0.9862 0.0116 0.9974 0.3151 0.3150 0.3564 0.2936 0.2347 0.7359 -0.0008 0.1567 -0.1970 -0.0212 0.2282 ebitm 0.1208 -0.1110 0.9596 0.2207 1.0000 0.3170 0.2483 0.0105 0.2245 0.3803 0.3522 0.5025 0.3556 0.3012 0.2724 0.0319 0.4083 0.0310 -0.0551 0.2048 cfmar 0.0807 -0.0947 0.2659 0.0312 0.3170 1.0000 0.0298 0.0012 0.0333 0.1030 0.0999 0.1919 0.1337 0.0824 0.0482 0.0345 -0.0047 0.0077 -0.0344 0.2131 eps 0.6707 0.6897 0.2801 0.9862 0.2483 0.0298 1.0000 0.0038 0.9899 0.3453 0.3293 0.3661 0.3056 0.2448 0.7401 0.0008 0.1907 -0.2078 -0.0200 0.2156 per 0.0316 0.0161 0.0115 0.0116 0.0105 0.0012 0.0038 1.0000 0.0102 0.0250 0.0260 0.0393 0.0283 0.0127 -0.0020 0.0137 0.0032 -0.0008 0.0017 0.0608 ebtps 0.7055 0.7025 0.2422 0.9974 0.2245 0.0333 0.9899 0.0102 1.0000 0.3227 0.3218 0.3626 0.3010 0.2409 0.7438 0.0008 0.1591 -0.2024 -0.0227 0.2344 roebt 0.2039 0.0816 0.4185 0.3151 0.3803 0.1030 0.3453 0.0250 0.3227 1.0000 0.9781 0.6555 0.4393 0.3439 0.3968 0.0396 0.4377 0.0308 -0.0207 0.3687 roeat 0.2208 0.0884 0.3659 0.3150 0.3522 0.0999 0.3293 0.0260 0.3218 0.9781 1.0000 0.6464 0.4187 0.3142 0.3944 0.0410 0.3591 0.0353 -0.0238 0.3922 roabt 0.3579 -0.0195 0.5058 0.3564 0.5025 0.1919 0.3661 0.0393 0.3626 0.6555 0.6464 1.0000 0.6706 0.5222 0.5304 0.0492 0.4074 0.1088 -0.0266 0.6914 tq 0.2473 0.0634 0.3479 0.2936 0.3556 0.1337 0.3056 0.0283 0.3010 0.4393 0.4187 0.6706 1.0000 0.8708 0.4340 0.0293 0.4005 -0.0018 -0.0134 0.4769 roce 0.1803 0.0268 0.2953 0.2347 0.3012 0.0824 0.2448 0.0127 0.2409 0.3439 0.3142 0.5222 0.8708 1.0000 0.4244 0.0172 0.4824 0.0231 -0.0119 0.2962 vaps 0.5643 0.2466 0.2666 0.7359 0.2724 0.0482 0.7401 -0.0020 0.7438 0.3968 0.3944 0.5304 0.4340 0.4244 1.0000 0.0229 0.2559 -0.0367 -0.0293 0.3333 vrps 0.0264 -0.0237 0.0298 -0.0008 0.0319 0.0345 0.0008 0.0137 0.0008 0.0396 0.0410 0.0492 0.0293 0.0172 0.0229 1.0000 0.0039 0.0136 0.0014 0.0934 pvr 0.0245 0.0115 0.4687 0.1567 0.4083 -0.0047 0.1907 0.0032 0.1591 0.4377 0.3591 0.4074 0.4005 0.4824 0.2559 0.0039 1.0000 0.0066 -0.0031 0.0128 vpr -0.0722 -0.3158 0.0169 -0.1970 0.0310 0.0077 -0.2078 -0.0008 -0.2024 0.0308 0.0353 0.1088 -0.0018 0.0231 -0.0367 0.0136 0.0066 1.0000 -0.0027 0.0715 evaps -0.0005 0.0065 -0.0438 -0.0212 -0.0551 -0.0344 -0.0200 0.0017 -0.0227 -0.0207 -0.0238 -0.0266 -0.0134 -0.0119 -0.0293 0.0014 -0.0031 -0.0027 1.0000 0.0017 pevar 0.5584 -0.0181 0.1819 0.2282 0.2048 0.2131 0.2156 0.0608 0.2344 0.3687 0.3922 0.6914 0.4769 0.2962 0.3333 0.0934 0.0128 0.0715 0.0017 1.0000 matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 39 we ran 19 simple panel regression analysis for all the companies in the cac, dax, ibex and mib over a ten-year time span. the simple regression analysis for the whole data set showed statistically significant results in 2 out of 19 regression models at the 5% significance level between the performance indicator and total shareholder return (tsr) (as shown in table 11 and 12). divided by subgroups we found that out of the 12 traditional performance indicators 2 show a significant result at the 5% significance level between the performance indicator and total shareholder return (tsr). out of the 7 value-oriented performance indicators none show a significant result at the 5% significance level between the performance indicator and total shareholder return (tsr). we have ranked the 19-panel regression model by the predictive power (indicated by r-squared). it is to note that tobin’s q shows the highest predictive power among the traditional performance indicators. the highest ranked performance indicator from the group of the value-oriented performance indicators is value rate per share with rank 3. however, this result is not significant. to further deepen the understanding of the predictive power we incrementally performed a two-factor regression analysis to better understand if the combination of traditional performance indicators offers a higher predictive power. table 11. independent variables: traditional performance indicators performance indicators variable abbreviation coefficient std. error tstatistic p-value r2 rank revenue per share rps 0.5478 0.0306 17.9273 0.0000 0.2552 2 return on sales ros 0.0002 0.0005 0.3500 0.7264 0.0001 9 ebit per share ebitps -0.0002 0.0013 -0.1707 0.8645 0.0000 16 ebit margin ebitm -0.0004 0.0014 -0.3119 0.7552 0.0001 13 cf margin cfmar -0.0001 0.0017 -0.0670 0.9466 0.0000 17 earnings per share eps 0.0002 0.0007 0.3244 0.7457 0.0001 12 p/e ratio per -0.0009 0.0010 -0.8589 0.3906 0.0008 5 ebt per share ebtps -0.0005 0.0019 -0.2455 0.8062 0.0001 15 return on equity before tax roebt 0.0002 0.0006 0.2960 0.7673 0.0001 14 return on equity after tax roeat -0.0011 0.0016 -0.6864 0.4927 0.0005 6 retrun on assets before tax roabt -0.0004 0.0013 -0.3304 0.7411 0.0001 11 tobin's q tq 1.1819 0.0530 22.2986 0.0000 0.3464 1 source: authors’ compilation table 12. independent variables: value oriented performance indicators performance indicators variable abbreviation coefficient std. error tstatistic pvalue r2 rank return on capital employed roce -0.0004 0.0013 -0.3333 0.7390 0.0001 10 value added per share vaps 0.0008 0.0008 1.0202 0.3079 0.0011 4 value rate per share vrps 0.0009 0.0007 1.2418 0.2146 0.0016 3 price value ratio pvr 0.0002 0.0003 0.6313 0.5280 0.0004 7 value performance ratio vpr -0.0000 0.0000 -0.0320 0.9745 0.0000 19 eva per share evaps 0.0000 0.0003 0.0565 0.9550 0.0000 18 price value ratio eva pevar 0.0001 0.0001 0.4487 0.6537 0.0002 8 source: authors’ compilation results multiple panel regression analysis to better understand the interactions and the incremental knowledge from combining the individual performance indicators we ran a combination of two-factor panel regression analysis. we compared the predictive power of a two-factor regression model using the two highest ranked traditional performance indicator with a two-factor regression model using the highest ranked performance indicator from the subgroup of traditional performance indicator with the highest ranked performance indicator from the subgroup of valueoriented performance indicators. as a multiple regression approach introduces the potential challenge of multicollinearity the variables chosen for the multiple regression were reviewed for critical levels of correlation before the regression is performed. however, the correlation between the two pairs of variables tq/rps (correlation: 0.0634) and tq/vrps (correlation: 0.0293) did not reach a critical level. we ran two multiple panel regression analysis for all the companies in the cac, dax, ibex and mib matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 40 over a ten-year time span (as shown in table 13 and 14). the multiple regression analysis for the whole data set showed statistically significant results in both of the models at the 5% significance level (as shown in table 13 and 14). divided by subgroups we found that using the two highest ranked traditional performance indicators shows a higher predictive power (indicated by r-squared) as using a combination of traditional and value-based performance indicators. the results show that the predictive power using the two highest ranked traditional performance indicators is higher than the predictive power of a model using the highest ranked traditional and value-oriented performance indicators. table 13. independent variables: traditional performance indicators independent variables variable abbreviation regression model revenue per share, tobin's q rps, tq tsr = α + β₁*rps + β₂* tq+ ε tobin's q, value rate per share tq, vrps tsr = α + β₁*tq + β₂* vrps + ε source: authors’ compilation table 14. two factor regression model using the two highest ranked traditional performance indicators performance indicators variable abbreviation coefficient std. error t-statistic p-value r2 rank revenue per share rps 0.5584 0.0412 13.5623 0.00 0.36907 1 tobin's q tq 23.2050 1.4604 15.8890 0.00 source: authors’ compilation table 15. two factor regression model using the highest ranked traditional and value-oriented performance indicators performance indicators variable abbreviation coefficient std. error t-statistic p-value r2 rank tobin's q tq 28.7588 1.5180 18.9455 0.0000 0.26019 2 value rate per share vrps 18.9156 8.7410 2.1640 0.0307 source: authors’ compilation discussion this study examines the role that key performance indicators play in changes in total stockholder return. specifically, the paper examines the differences in traditional performance indicators and value-oriented performance indicators. based on an extensive dataset of european companies listed in standard indices – the cac 40, dax 40, mib and ibex 35 – and the analysis for data over a time period of 10 years we examined the predictive power of traditional and value-based performance measures for total stockholder return. of the 19 analyzed performance indicators 2 traditional kpis showed a significant prediction ability for the tsr while none of the 7 value-based performance indicators showed a similar significance. among the traditional performance indicators tobin’s q was the strongest predictor for tsr. in contrast the value-oriented indicators were not significant, so we cannot assume any predictive power. these results imply that traditional performance indicators still play an important role in explaining total shareholder return despite the theoretical advantages that value based performance indicators could have. this might be caused by the established processes to evaluate these indicators and the availability of the data for these indicators for investors and analysts. an additional role might play, that the traditional indicators offer a more straight forward approach in interpreting the performance of a company. our results are in line with a current study that examined the efficacy of value-based indicators in relation to tsr prediction. a study of makhija and trivedi (2021), that examined a sample of indian-listed companies analyzed that performance indicators like economic value added (eva) and cash value added (cva) offer noteworthy insights into a company but do not offer the same precise prediction ability as traditional performance indicators. the authors hauser et al. (2022) conclude similar results, that traditional performance indicators like return on capital invested and earnings per share correlate stronger with market reactions in short to medium time horizons, especially if market conditions are volatile. while these analyses found varying degrees of predictive power of the value-oriented performance indicators the strong focus lay on the eva model. in contrast to this our research focuses on novel performance indicators that incrementally build on previous studies that have shown results using a more differentiated approach regarding value-oriented matthias olivier, roland wolf / finance, accounting and business analysis, volume 7, issue 1, 2025 41 performance indicators. previous studies into the concept of novel performance indicators have shown, that the predictive power of novel performance indicators offers predictive powers that lie between 7,7 and 19,4 % (see table below). table 16. independent variables: traditional performance indicators previous research value oriented performance indicator r-squared of model kümpel et al. (2021a) value added and value rate (cfrv/fom) 0.1937 kümpel et al. (2021b) price value ratio (cfrv/fom) 0.077 source: authors’ compilation the findings in this paper show that value-oriented performance indicators have less predictive power than traditional performance indicators. the cause for the relatively high predictive power of traditional performance indicators can be caused by a number of factors. however, one explanation might be that valuebased management principles have not penetrated the approaches to strategic controlling as much as one would expect in light of the popularity of the shareholder-based management approach. this could lead to the conclusion that an increase in shareholder value could be possible if value-based management approaches were applied more widely in practice. further research is necessary to evaluate which reasons are responsible reserved attitudes toward the application of these models. references akerlof, g. a. 1970. the market for 'lemons': quality uncertainty and the market mechanism. quarterly journal of economics, 84(3): 488–500. the mit press. https://www.sfu.ca/~wainwrig/econ400/akerlof.pdf ali, a. and l. s. hwang. 2000. country-specific factors related to financial reporting and the value relevance of accounting data. journal of accounting research, 38(1): 1–21. https://www.jstor.org/stable/2672920. ball, r. and p. brown. 1968. an empirical evaluation of accounting income numbers. journal of accounting research, 6(2): 159–178. https://www.jstor.org/stable/2490232. barth, m. e., w. h. beaver, j. r. hand, and w. r. landsman. 1998. accruals, cash flows, and equity values. review of accounting studies, 3(3): 205–229. burgstahler, d. and i. dichev. 1997. earnings, adaptation, and equity value. the accounting review, 72(2): 187– 215. https://www.jstor.org/stable/248552. collins, d. w., e. l. maydew, and i. s. weiss. 1997. changes in the value-relevance of earnings and book values over the past forty years. journal of accounting and economics, 24(1): 39–67. https://doi.org/10.1016/s0165-4101(97)00015-3. deangelo, h., l. deangelo, and d. skinner. 2000. special dividends and the evolution of dividend signaling. journal of financial economics, 57(3): 309–354. https://doi.org/10.1016/s0304-405x(00)00060-x. dechow, p. m. 1994. accounting earnings and cash flows as measures of firm performance: the role of accounting accruals. journal of accounting and economics, 18(1): 3–42. https://doi.org/10.1016/01654101(94)90016-7. fama, e. 1970. efficient capital markets: a review of theory and empirical work. the journal of finance, 25(2), 383–417. https://www.jstor.org/stable/2325486. feltham, g. a., and j. a. ohlson. 1995. valuation and clean surplus accounting for operating and financial activities. contemporary accounting research, 11(2): 689–731. https://doi.org/10.1111/j.19113846.1995.tb00462.x. friedman, m. 1970. the social responsibility of business is to increase its profits. new york times magazine. gailmard, s. 2014. accountability and principal–agent theory. in bovens, m., goodin, r. e., and schillemans, t. 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https://doi.org/10.1016/0165-4101(95)00399-4 https://www.jstor.org/stable/1910664 https://doi.org/10.1108/ijppm-05-2019-0231 https://doi.org/10.1111/j.1911-3846.1995.tb00461.x https://doi.org/10.1111/j.1911-3846.1998.tb00564.x https://doi.org/10.1111/j.1911-3846.1998.tb00564.x https://doi.org/10.1108/jal-11-2022-0123 https://doi.org/10.1007/978-3-658-16730-1_13 86 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 the asymmetric effect of stokvel on banking sector liquidity: evidence from a nonlinear ardl approaches lindiwe ngcobo1* , joseph chisasa2 , mantepu tshepo masetshaba3 department of finance, risk management and banking, university of south africa, pretoria, south africa1 university of south africa, college of economic and management science, pretoria, south africa2 university of south africa, college of economic and management science, pretoria, south africa3 * corresponding author info articles abstract history article: submitted 19 february 2024 revised 18 may 2024 accepted 19 мау 2024 the objective of this study was to empirically investigate the possible nonlinear relationship between stokvel saving and banking sector liquidity, that is to determine whether there exists a turning point or a threshold level above which the effect of stokvel saving on banking sector liquidity switches from positive to negative in south africa; to assess the long-run as well as the short-run relationship between the two variables, controlling for other stokvel saving determinants. the estimation of this relationship has been carried out using a novel methodology combining the autoregressive distributed lag (ardl) bounds testing approach to cointegration developed by pesaran, shin and smith (2001) and nonlinear autoregressive distributed lag (nardl) applied to quarterly time series secondary data for the period from 2009q4-2020q2. the study results found that all the explanatory variables were statistically insignificant in explaining banking sector development implying that the nardl is not an appropriate model for predicting banking sector development proxied by banking sector liquidity. similar results obtained when using stokvel savings and money supply as the dependent variables suggesting an insignificant influence of baking sector liquidity on stokvel savings and money supply. with gross domestic product growth (gdpg) as the dependent variable, only a negative shock on money supply (m3) resulted in a significant increase in gdpg at 5%. stokvsav can provide the opportunity for the south african government and formal financial/banking sector to develop mutually beneficial relationships or linkages to make such stokvsav more effective and efficient in mobilising savings and advancing credit to the lowand middle-income households. keywords: stokvel savings, banking sector liquidity, ardl, asymmetric effect, south africa. jel: c01, d14, g23 address correspondence: email: lngcobo@unisa.ac.za1 chisaj@unisa.ac.za2 emasetmt@unisa.ac.za3 https://orcid.org/0000-0002-3232-5956 https://orcid.org/0000-0002-8923-1424 https://orcid.org/0000-0001-7683-2661 l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 87 introduction a stokvel saving (stokvsav) is a south african term for an investment group where members contribute a certain amount to a central fund weekly, fortnightly or monthly; they typically constitute themselves as clubs or societies and are also known to be financially mutual (bozzoli 1991; lukhele 1990; verhoef 2001a; mashigo and schoeman 2010; kaseke and matuku 2014; karlan, ratan and zinman 2014; james 2015). worldwide, stokvsav are commonly known as ‘rotating savings and credit associations’ (roscas) (kaseke and matuku 2014; karlan, ratan and zinman 2014; mphahlele 2011; yusuf, gafar, and ijaiya 2009). stokvsav play a pivotal role in increasing access to finance for the so‐called ‘unbanked’ in south africa (dupas, karlan, robinson and ubfal 2018). instead of using banks, lowand middle-income households tend to save in more informal ways, such as keeping cash at home or buying illiquid assets, which may be costly, risky or inconvenient (dupas, karlan, robinson and ubfal 2018). the rate of access to savings and credit by lowand middle-income south african households in the banking sector remains a challenge (mishra and bhardwaj 2022, omar and inaba 2020; biyase and fisher 2017; goncharuk 2016). for instance, the banking sector in south africa does not cater for the credit needs of lowand middle-income households due to information asymmetry and lack of collateral, among other borrower shortcomings (atamja and yoo 2021; biyase and fisher 2017; james 2014; mashigo 2009; mashigo and schoeman 2012). this suggests that the banking sector is still not sufficiently developed to fully serve its diverse clientele (duvendack and mader 2019; mashigo and kabir 2016). figure 1 below illustrates trends in growth of stokvel savings compared to formal bank deposits proxied by liquid liabilities. what is evident is that the share of stokvel savings is growing in sympathy with formal bank deposits. this trend is cause for concern as it is a recipe for allocational inefficiency of funds in informal financial markets due to financial disintermediation. in addition, the problem of information asymmetry derives from a lack of trust between the lender and the borrower, which results in a perceived challenge of the probability of low returns (bime and mbanasor 2019; sackey 2018; sukmaningsih 2018). source: author construction. figure 1. trends in stokvel savings and bank liquid liabilities the ever-deteriorating economic situation, poverty and unemployment in south africa are significant reasons for households to participate in stokvel savings (chineka and mtetwa 2021). according to sambo (2019:1), unemployment is the number one cause of poverty and inequality in the country. in 2006, more than two out of every five (42.2%) households in south africa lived below the upper-bound poverty line. while the poverty level was similar in 2009 at 42.7%, there was a decline in households living in poverty in 2011, with approximately a third (32.9%) of all households below this level. this shows a significant reduction in the proportion of poor households in the country from 2006 to 2011. however, given the results of the 2011 census, this still translates into approximately 4.75 million households in south africa living below the poverty line (stats sa 2014). access to and the use of financial institutions by lowand middle-income households is complicated 4252 19724 27251 54238 78458 400 641 2460 14050 26774 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 1980 1990 2000 2010 2020 liquid liabilities (zar000) stokvel savings (zar000) l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 88 because the majority of stokvel savings members cannot provide valid identity documents (landman and mthombeni 2021). additionally, a lack of education influences member preference to communicate in their mother language when being served in financial institutions (verhoef 2001b; beck kibuuka and tiongson 2010; moliea 2007; mashigo 2012; damodaram 2013). these are also the main reasons lowand middleincome households do not use formal financial institutions (burkett and sheehan, 2009; de cock, fitchett and volkmann, 2005). many south africans are not part of the formal financial system; hence, they save, invest and use cr from stokvel savings (kumarasinghe and munasinghe 2016; kaseke and olivier 2008). this situation is not likely to improve in the short-term considering that unemployment has escalated by to 32.9% in the first quarter of 2024, up 0.8 percent of a percentage point from 32.1% in the fourth quarter of 2023 (statssa 2024:q1). additionally, in its expanded form, unemployment rose by 0.8 of a percentage point to 41.9% in 2024:q1 relative to 2023:q4. implicitly, this is likely to cause a decrease in household capacity to save with formal banks and raise an appetite stokvel savings. despite playing second fiddle to formal banking institutions, stokvels are community-based savings schemes aimed at improving the lives of lowand middle-income earners (van wyk 2017; floro and seguino 2002). members prefer saving with stokvels because of the transparency of transactions and the control it brings to their money (bophela and khumalo 2019; storchi 2018). money in this pool is then paid in full or partially to every member participating in the stokvel savings, either on a rotational basis or in times of financial need (verhoef 2008; matuku and kaseke 2014; nyandoro 2018). lowand middle-income households often use precautionary savings for stokvel savings, which are meant to safeguard against any possible future unexpected income shocks, often referred to as “rainy days” or “emergency savings” (simleit, keeton and botha 2011; floro and seguino 2002:1). stokvel savings provide an alternative for lowand middle-income households which cannot meet the requirements of the banking sector (nyandoro 2018; mboweni 1990). this view is supported by oji (2015), who observed that african countries have a proportion of financially excluded people, which reflects a lack of access to financial resources. this research is different from prior similar empirical studies because using the multiple regression model, it attempts to show the nonlinear relationship of banking sector liquidity affected by stokvel savings in south africa. another advantage of the multiple regression model is that its results are more likely to be accurate because of its completeness. this is because it includes all the important variables in a single study, for example, the dependent variable banking sector liquidity (bsl), independent variable stokvel savings (stokvsav) and the control variables gross domestic product growth (gdpg) and money supply (m3). the objective of this study was to empirically investigate the possible nonlinear relationship between stokvel savings (stokvsav) and banking sector liquidity (bsl). thus, the paper sought to determine whether there exists a turning point or a threshold level above which the effect of stokvsav on banking sector liquidity switches from positive to negative in south africa; to assess the long-run as well as the shortrun relationship between the two variables, controlling for other stokvsav determinants. to this end, the paper hypothesises that there is a nonlinear relationship between stokvel saving and banking sector liquidity in south africa. the estimation of this relationship was carried out using a novel methodology combining the autoregressive distributed lag (ardl) bounds testing approach to cointegration developed by pesaran, shin and smith (2001) and nonlinear autoregressive distributed lag (nardl). the remainder of the paper is organized as follows. a selected review of the theoretical and empirical literature, the methodology used, the empirical results, the summary, conclusions and the policy implications of the study are presented sequentially. empirical literature the financial system pools together the savings generated in the household sector. (levine, 1997). in the banking sector, this task is primarily performed by banks’ local branches, which, being close to savers, can create stable relationships with savers based on trust and on the repeated provision of financial services (giovannini, lacopettaand minetti 2013). banks create a relationship with household savers, and the financial systems pool together savings by households which are referred to as liquid liabilities due to their short-term nature. an increase in savings leads to output growth by allowing an increase in investments. the banking sector induces the mobilisation of lowand middle-income households’ savings, resulting in an increase in output growth (gurley and shaw 1960). in this study, banking sector liquidity (bsl) is denoted by banking sector liquid liabilities as a percentage of gdp (singh and sharma 2016; laštůvková 2016; marozva 2013; marozva 2015). banking sector liquidity is expected to have a direct relationship with stokvel savings. the higher the liquidity the higher the households’ incomes which then promotes stokvel savings. on the other hand, stokvel savings are expected to positively influence banking sector liquidity. the higher the stokvel savings the higher the liquid liabilities of the bank. l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 89 in south africa, there are 11 official languages with different names for a ‘stokvel’. for example, it is known as ‘mohodisano’ in sotho-speaking regions, ‘kuholisana’ in isizulu-speaking regions, ‘umgalelo’ in xhosa-speaking regions and ‘gooi-goois’ in afrikaans-speaking regions (van wyk 2017). stokvels offer financial services outside of the domain of the banking sector of south africa and are not governed by banking regulations (tengeh and nkem 2017). terminology varies among countries; however, the names invariably signify some sort of community activity or derive from the name of the money fund, e.g., boxmoney, boxi. the participants are often referred to as ‘players’, sometimes as ‘throwers’ (besson 1996), and the contributions may be termed the ‘hand’ or ‘shares’ (handa and kirton 1999). sometimes the association may be known by the purpose for which the share-outs are to be used, e.g., kitchen roscas (niger-thomas 1995) or named after the day on which members meet (geert 1962; ardener 1964; low 1995). figure 2 below presents the schematic conceptual framework of stokvels. informal savings organisations are known as stokvels and are substitutes for formal banks. stokvels are formed by groups of friends to encourage social inclusion and poverty alleviation (mashigo and kabir 2016). they provide savings, credit and insurance services to households. they are easy to start up and banks have special accounts for group schemes (mashigo 2012). a schematic framework of stokvels is presented in figure 2 below. source: author construction figure 2. stokvel-conceptual framework snow and buss (2001) view microcredit as a method for linking the formal and informal sectors of african economies to increase the reach of the formal sector. however, according to nawai and shariff (2010), loans given to the poor are minimal and are for a short-term period. collateral is not needed, and borrowers are required to make weekly repayments. similarly, ngcobo and chisasa (2018) study the characteristics of credit instruments issued by stokvels savings to households in south africa. the study showed that stokvels savings issue short-term loans from less than three to six months. thus, participating in a stokvel enhances the probability of accessing credit compared to the alternative of accessing credit from banks and similar formal lenders. james (2017) examined how group lending can be used to improve access to credit by households. the study revealed that group lending mechanisms improve social capital and reduce the barriers that deter access to credit. similarly, karlan, savonitto, thuysbaert and udry (2017) examined savings-led microfinance programmes in poor rural communities in developing countries to establish groups that save and then lend out the accumulated savings to each other. their study’s results found that promoting community-based microfinance groups leads to an improvement in household business outcomes and women’s empowerment. the majority of the world’s poor live in rural areas of developing countries with little access to financial services. setting up village savings and loan associations (vslas) has become an increasingly widespread intervention aimed at improving local financial intermediation (ksoll, lilleor, lonborg and rasmussen 2016). habumuremyi, habamenshi and mvunabo (2019) assessed the role of vslas in improving the social economic development of poor households in murundi sector in karongi district of rwanda. the findings revealed that vsla promotes financial inclusion where the loan is proportional to savings. ksoll, lilleor, lonborg and rasmussen (2016) used a cluster randomised trial to investigate the impact of vslas in northern malawi over a two-year period. their study found evidence of positive and significant intention to increase savings and credit obtained through the vslas, which has increased agricultural investments and income from small businesses. ngcobo, chisasa and masetshaba (2023) established the presence of a long-run relationship and causality between stokvel savings, money supply, gross domestic product growth rate and banking sector liquidity in south africa. applying the autoregressive distributed lag (ardl) and error correction model (ecm) techniques on quarterly time series data for the period from 1987q3 to 2020q1, the study reveals that in the long run, stokvel savings and money supply were found to have a negative relationship with stokvel members savings insurance credit l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 90 banking sector liquidity albeit insignificant, however, gross domestic product growth rate exhibited a negative and statistically significant relationship at 1%. the coefficient of the error correction model (ecm(1)) was, as expected, negative and statistically significant thus providing evidence of a short-run relationship. methods this study used quarterly time series secondary data ranging from 2009q4 to 2020q2 collected from the south african reserve bank and old mutual south africa. the literature extensively demonstrated, from both empirical and theoretical angles, that stokvels play a significant role in the development of the bsl. equation 1 below is illustrative. bsl = 𝑓(𝑆𝑇𝑂𝐾𝑆𝐴𝑉, 𝐺𝐷𝑃𝐺, 𝑀3) (1) the following general econometric model represents the impact of stokvsav on bsl in south africa (see equation 2). δbslt = β0 + β1 δlnstokvsavt + ∑ xjt n j=1 + 𝗎t (2) where: stokvsav stokvel savings xjt vector of control variables if 𝛽1 ≠0 and have significance, meaning there exists a break-point and the impact of stokvsav on bsl is the difference between the two periods. the minimum stokvel savings is 𝛽0 in the period before the break-point is (𝛽0 + 𝛽1 ) in the period after the break-point. if 𝛽3>0 and have significance, this implies the impact of stokvel savings on bsd in the period after the break-point is bigger than the effect in the period before the break-point. autoregressive distributed lag (ardl) approach the study employed the ardl approach proposed by pesaran, shin and smith (2001) and longand short-run estimations econometric approaches postulated by engle and granger (1987), johansen and juselius (1990), and johansen (1996). the ardl models are presented in equation [3] as follows: 𝛥𝐿𝑛𝐵𝑆𝐿𝑡 = 𝛼0 + 𝛽1 𝐼𝑛𝐵𝑆𝐿𝑡−1 + 𝛽2 𝑆𝑇𝑂𝐾𝑉𝑆𝐴𝑉𝑡−1 + 𝛽3 𝐺𝐷𝑃𝐺𝑡−1 + 𝛽4 𝑀3𝑡−1 + ∑ 𝛼1𝑘 𝛥𝐼𝑛𝐵𝑆𝐿𝑡−𝑘 𝑚1 𝑘=0 + ∑ 𝛼2𝑘 𝛥𝑆𝑇𝑂𝐾𝑉𝑆𝐴𝑉𝑡−𝑘 𝑚2 𝑘=0 + ∑ 𝛼3𝑘 𝛥𝐺𝐷𝑃𝐺𝑡−𝑘 𝑚3 𝑘=0 + ∑ 𝛼4𝑘 𝛥𝑀3𝑡−𝑘 𝑚4 𝑘=0 + 𝜔𝑡 (3) where: δ first difference β1, β2, β3 and β4 -coefficients of the long-run impacts 𝝰1, 𝝰2, 𝝰3 and 𝝰4 coefficients of the short-run impacts 𝝎 error the cointegration relationship is estimated as follows: the long-run and short-run parameters of the equations are estimated once the cointegrating relationship has been detected. the cointegration relationship is estimated as follows: δbslt = β0+ β1 bslt−1 +β2 stokvsavt−1 +β3 gdpgt−1 + β4 m3t−1 + μt (4) stokvsavt = stokvsav + stokvsavt + + stokvsavt − (5) gdpgt = gdpg + gdpgt + + gdpgt − (6) m3t = m3 + m3t + + m3t − (7) where stokvel savings control variances are partial sum processes of positive and negative changes in independent variables obtained as follows: neg(stokvsavt) = ∑ stokvsav − s = ∑ min(δstokvsavs t s=0 , 0) t s=0 (8) l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 91 pos(stokvsavt) = ∑ stokvsav + s = ∑ max(δstokvsavs t s=0 , 0) t s=0 (9) neg(gdpgt) = ∑ gdpg − s = ∑ min(δgdpgs t s=0 , 0) t s=0 (10) pos(gdpgt) = ∑ gdpg t s = ∑ max(δgdpgs t s=0 , 0) t s=0 (11) neg(m3t) = ∑ m3 − s = ∑ min(δm3s t s=0 , 0) t s=0 (12) pos(m3t) = ∑ m3 + s = ∑ man(δm3s t s=0 , 0) t s=0 (13) therefore, the non-linear asymmetric long-run equilibrium relationship can be expressed as: bslt = pos + stokvsav + s + neg − stokvsav − s + 𝚞t (14) bslt = pos + gdpg + s + neg − gdpg − s + 𝚞t (15) bslt = pos + m3 + s + neg − m3 − s + 𝚞t (16) nardl model, and non-linearity is introduced through partial sum or cumulative sum concept included in generating the new variables pos (+) and neg (-), where all variables (stokvsav, gdpg and m3) are lag orders. δbslt = α0 + + ∑ α 1i δbslt−i p i=0 + ∑ α 2i δneg(stokvsav)t−i p i=0 + ∑ α 3i δpos(stokvsav)t−i p i=0 + ∑ α 4i δneg(gdpg)t−i p i=0 + ∑ α 5i δpos(gdpg)t−i p i=0 + ∑ α 6i δneg(m3)t−i p i=0 + ∑ α 7i δpos(m3)t−i p i=0 + α 8i bslt−i + α 9i neg(stokvsav)t−1 + α 10i pos(stokvsav)t−1 + α 11i neg(gdpg)t−1 + α 12i pos(gdpg)t−1 + α 13i neg(m3)t−1 + α 14i pos(m3)t−1 + ωt (17) results and discussion unit root test with breakpoints the study applies the structural break method for determining the time series properties of the variables investigated by the adf test. the results of unit root tests in levels and at intercept are presented in table 1. the variable tests were employed for this study to see whether the data was stationary. the test is more robust to heterogeneity and unit roots when under a non-standard distribution. the variables were found to be i(0) and i(1), thus confirming that variables that are i(2) were not present. the presence of i(2) variables in the model would result in spurious f-statistics since the f-statistics computed by pesaran, shin and smith (2001) and nayaran (2005) have their root in the presumption that the variables are i(0) or i(1). the results of the study suggest that the variables are mutually integrated in the order of either zero or one, or both, which supports the conditions for the use of the adf unit root test. table 1. stationarity tests of variables using augmented dickey-fuller (adf) unit root variable trend intercept trend and intercept diagnosis stationary tests of variables using augmented dickey-fuller (adf) test: trend specification: intercept only bsl -5.282460*** i(0) stokvsav -4.600730*** i(0) gdpg -6.394021*** i(0) m3 -7.126778*** i(1) stationary tests of variables using augmented dickey-fuller (adf) test: trend specification: trend and intercept bsl -6.810936*** -6.753963*** -6.680936*** i(0) stokvsav -7.763481*** -6.578931*** -5.978431*** i(0) gdpg -17.42696*** -6.441841*** -8.182452*** i(0) m3 -4.210961** -5.328696*** -4.307545** i(0) source: author’s own compilation from e-views ***; **; * indicates that we reject the null hypothesis of unit root tests at 1%, 5% and 10%, respectively l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 92 ardl and non-linear ardl long-run results: bounds f-test for cointegration ardl long-run results: bounds f-test for cointegration table 2 show that the value of the f-statistic for all three models is greater than the upper-bound critical values suggesting that the null hypothesis can be rejected. the f-statistics were all significant at the 1% level. thus, it can be concluded that there is a long-run relationship between stokvsav and bsl. these results align with the findings of khan and qayyum (2006). additionally, a long-run relationship exists between gdpg, m3 and bsl. table 2. bounds f-test for ardl cointegration dependent variable independent variable f-test statistic lower and upperbounds bsl stkovsav gdpg m3 16.03214*** 4.45– 6.36 stokvsav gdpg m3 bsl 6.070329*** 4.45-6.36 gdpg stkvsa m3 bsl 9.043872*** 4.45-6.36 m3 stkvsa gdpg bsl 4.281633*** 4.66-3.2 source: author’s own compilations, ardl f-statistic values are calculated by bounds testing approach source: author’s own compilations, data from sarb & old mutual south africa (2022) non-linear ardl long-run results: bounds f-test for cointegration results revealed an f-statistic lower than the lower bound and were statistically significant. this implies that the null hypothesis of no cointegration was accepted as the f-statistic lay below the lower bound of the f-statistic. thus, it was concluded that there is no long-run relationship between bsl and its explanatory variables. when stokvsav and gdpg were used as dependent variables, the f-statistics of 67.82906 and 7.074817, respectively, were found to be greater than the upper bounds, suggesting the presence of a long-run relationship between the dependent variables and their predictors. thus, the null hypothesis of no cointegration was rejected. however, the same could not be said about the relationship between stovsav, gdpg and m3. the f-statistic of 3.613920 was found to be between the upper and lower bounds, implying that the relationship is inconclusive. the f-statistics were statistically significant at 1% in all four cases. table 3. banking sector liquidity bsl bsl stokvsav gdpg m3 1.398563*** 2.53-3.59 stokvsav bsl gdpg3 m3 67.89206*** 3.59-4.9 gdpg bsl stkvsa m3 7.074817*** 3.59-4.38 m3 bsl stkvsa gdpg 3.613920*** 3.2-4.66 note: f-statistic values are calculated by bounds testing approach by pesaran, shin and smith (2001) and shin, yu and greenwood-nimmo (2014). the null hypothesis of asymmetric cointegration is p = ɵ+ = ɵ− = 0 asymmetric non-linear ardl long-run results the presence of asymmetry in the long-run equilibrium due to negative and positive shocks in stokvel savings was examined. using banking sector liquidity as the dependent variable, all the explanatory variables were found to be statistically insignificant in explaining banking sector development implying that the n-ardl is not an appropriate model for predicting banking sector development proxied by banking sector liquidity. similar results obtained when using stokvel savings and money supply as the dependent variables suggesting an insignificant influence of baking sector liquidity on stokvel savings and money supply. with gdpg as the dependent variable, only a negative shock on money supply resulted in a significant increase in gdpg at 5%. l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 93 table 4. n-ardl long run form and bounds test (3.4.4.4.4.4.4) on bsl n-ardl long-run coefficients result bsl variable coefficient st.error t.statistic prob stokvsav_pos -0.148380 0.053603 -2.768109 0.0697 stokvsav_neg -0.168193 0.068647 -2.450116 0.0917 gdpg_pos -1.432016 0.836693 -1.711519 0.1855 gdpg_neg -1.335738 0.771733 -1.730830 0.1819 m3_pos -0.000454 0.001863 -0.243590 0.8233 m3_neg -0.000323 0.000875 -0.368924 0.7367 stokvsav bsl_pos 99.12984 38.07290 2.603685 0.0801 bsl_neg 150.7024 54.76167 2.751968 0.0706 gdpg_pos -44.22538 20.48404 -2.159017 0.1197 gdpg_neg -49.40970 22.31685 -2.214008 0.1137 m3_pos -0.411536 0.160589 -2.562666 0.0830 m3_neg 0.283400 0.113765 2.491108 0.0884 gdpg bsl_pos -1.407221 0.809725 -1.737900 0.1258 bsl_neg -0.911961 0.551559 -1.653425 0.1422 stokvsav_pos -0.074372 0.036830 -2.019350 0.0832 stokvsav_neg -0.072385 0.039913 -1.813560 0.1126 m3_pos -0.001263 0.001185 -1.066353 0.3217 m3_neg -0.002837 0.001051 -2.698173 0.0307 m3 stokvsav_pos -43.55979 23.53003 -1.851242 0.1013 stokvsav_neg -43.19048 26.22274 -1.647062 0.1382 bsl_pos -468.8431 271.1939 -1.728811 0.1221 bsl_neg -303.9212 206.5404 1.471486 0.1794 gdpg_pos -231.4554 109.5958 -2.111901 0.0677 gdpg_pos -291.8407 127.8901 -2.2811965 0.0519 shortand long-run multipliers the adjustment of asymmetry in the long-run equilibrium due to negative and positive shocks in stokvel savings have been explored with the use of a dynamic multiplier graph. the multipliers for the variables are plotted in figure 3, which portrays adjustments to a new equilibrium after positive and negative shocks. the black dotted line indicates the non-linear adjustment of bsl to adverse shocks, whereas the solid black line portrays the adjustment of bsl to a positive shock. the asymmetric pattern indicated by the red dotted line is the difference between both negative and positive shocks (andriamahery and qamruzzaman 2022). in the long-run, when bsl is the dependent variable, any positive or negative changes in stokvel savings (stokvsav+ or stokvsav-) do not significantly impact bsl. the same is observed for gross domestic product growth and money supply (gdpg+ or gdpg-; m3+ or m3). therefore, n-ardl is not the best model to detect the presence of a long-run relationship between bsl and stokvel savings, gdpg and m3, which are used as the independent variables. l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 94 bsl (stokvsav gdpg m3) stokvsav -60,000,000 -40,000,000 -20,000,000 0 20,000,000 40,000,000 60,000,000 1 3 5 7 9 11 13 15 multiplier for stkvsa(+) multiplier for stkvsa(-) asymmetry plot (with c.i.) gdpg -30,000,000 -20,000,000 -10,000,000 0 10,000,000 20,000,000 1 3 5 7 9 11 13 15 multiplier for gdpg(+) multiplier for gdpg(-) asymmetry plot (with c.i.) m3 -300,000 -200,000 -100,000 0 100,000 200,000 300,000 1 3 5 7 9 11 13 15 multiplier for m3(+) multiplier for m3(-) asymmetry plot (with c.i.) stokvsav (bsl gdpg m3) bsl -400 -200 0 200 400 600 800 1 3 5 7 9 11 13 15 multiplier for bsl(+) multiplier for bsl(-) asymmetry plot (with c.i.) gdpg -200 -100 0 100 200 300 400 1 3 5 7 9 11 13 15 multiplier for gdpg(+) multiplier for gdpg(-) asymmetry plot (with c.i.) m3 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 1 3 5 7 9 11 13 15 multiplier for m3(+) multiplier for m3(-) asymmetry plot (with c.i.) gdpg (bsl stokvsav m3) stokvsav -30 -20 -10 0 10 20 30 1 3 5 7 9 11 13 15 multiplier for stkvsa(+) multiplier for stkvsa(-) asymmetry plot (with c.i.) gdpg -30 -20 -10 0 10 20 30 1 3 5 7 9 11 13 15 multiplier for stkvsa(+) multiplier for stkvsa(-) asymmetry plot (with c.i.) m3 -300,000 -200,000 -100,000 0 100,000 200,000 300,000 400,000 1 3 5 7 9 11 13 15 multiplier for stkvsa(+) multiplier for stkvsa(-) asymmetry plot (with c.i.) m3(bsl stokvsav gdpg) bsl -600 -400 -200 0 200 400 1 3 5 7 9 11 13 15 multiplier for bsl(+) multiplier for bsl(-) asymmetry plot (with c.i.) stokvsav -300 -200 -100 0 100 200 300 400 1 3 5 7 9 11 13 15 multiplier for gdpg(+) multiplier for gdpg(-) asymmetry plot (with c.i.) gdpg -100 -80 -60 -40 -20 0 20 40 60 1 3 5 7 9 11 13 15 multiplier for stkvsa(+) multiplier for stkvsa(-) asymmetry plot (with c.i.) figure 3. shortand long-run multipliers conclusion the study empirically investigates the possible nonlinear relationship between stokvel saving and banking sector liquidity using quarterly time series secondary data ranging from 2009q4-2020q2. the results of the break-even unit root tests reveal that variables were found to be i(0) and i(1), thus confirming l. ngcobo, j. chisasa, m. t. masetshaba / finance, accounting and business analysis, volume 6, issue 1, 2024 95 that variables that are i(2) were not present. the findings of ardl show that the value of the f-statistic for all three models (stokvsav, gdp and m3) are greater than the upper-bound critical values suggesting that the null hypothesis can be rejected. the asymmetry results revealed that in the long-run equilibrium due to negative and positive shocks in stokvsav was examined using bsl as the dependent variable, all the explanatory variables were found to be statistically insignificant in explaining banking sector development implying that the n-ardl is not an appropriate model for predicting banking sector development proxied by bsl. similar results obtained when using multipliers that in the long-run, when bsl is the dependent variable, any positive or negative changes in stokvel savings (stokvsav+ or stokvsav-) do not significantly impact bsl. the same is observed for gross domestic product growth and money supply (gdpg+ or gdpg-; m3+ or m3). n-ardl is not the best model to detect the presence of a long-run relationship between bsl and stokvsav, gdpg 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muhammad ramadhani sanjaya1*, deddy priatmodjo koesrindartoto2 school of business and management, bandung institute of technology, bandung, indonesia1 school of business and management, bandung institute of technology, bandung, indonesia2 * corresponding author info articles abstract history article: submitted 16 november 2023 revised 15 january 2024 accepted 16 january 2024 purpose: this study investigates the operational processes, oversight practices, investor incentives and business impacts in the localization of equity crowdfunding in indonesia through an exploratory case study of the landx platform. design/methodology/approach: qualitative data was collected through interviews with 5 key personnel of landx and document analysis of 8 internal materials related to operational processes and financial outcomes. data underwent inductive thematic analysis. findings: findings reveal landx conducts structured due diligence encompassing weighted financial and qualitative criteria that represent industry best practices, balanced by outcome uncertainties. investor incentives span portfolio diversification to personal passions, requiring tailored communication and education to ensure informed participation. while complying strictly with regulations, landx also demonstrates responsible self-governance through transparency and protections that exceed policy requirements. qualitative indications point to accelerated issuer growth, but quantified impact data remains limited. practical implications: results provide insights into prudent navigation required to advance equity crowdfunding in indonesia through platform diligence and education, calibrated outcome expectations, updated regulations, and multi-stakeholder collaboration. originality/value: this pioneering study provides timely qualitative insights into equity crowdfunding localization dynamics in the underexamined context of indonesia. paper type: case study keywords: equity crowdfunding, financial technology, indonesia, platform governance, due diligence. jel: g23, g20 * address correspondence: e-mail : m.ramadhani@sbm-itb.ac.id1 deddypri@sbm-itb.ac.id2 mailto:m.ramadhani@sbm-itb.ac.id mailto:deddypri@sbm-itb.ac.id sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 174 introduction equity crowdfunding has emerged as an innovative online financing model enabling startups and small businesses to raise funds by tapping into large pools of retail investors rather than traditional sources like banks or professional investors (signori and vismara 2018). also known as crowd investing, equity crowdfunding facilitates the sale of a private company's shares or securities to a dispersed group of individuals through an intermediary internet platform. this effectively democratizes access to capital for growth-oriented ventures while also opening up alternative investment opportunities in early-stage private companies for ordinary citizens (cumming and johan 2019). globally, equity crowdfunding has witnessed remarkable growth as a disruptive financial innovation connecting entrepreneurs and investors through the power of technology and crowdsourcing. according to the cambridge centre for alternative finance's 5th global alternative finance market benchmarking report, the total transaction value in equity-based crowdfunding doubled from $320 million in 2019 to reach $619 million in 2021 (ziegler et al. 2022). the asia pacific region currently accounts for approximately 7 % of the global equity crowdfunding market, concentrated primarily in countries like australia, new zealand, china, and southeast asia. however, research predicts that emerging economies across asia with supportive regulatory frameworks and technological infrastructure will drive significant continued expansion of equity crowdfunding. the global market valuation is forecasted to reach $22.9 billion by 2025, registering a cagr of 22 % from 2020-2025. equity crowdfunding holds unique promise as an alternative financing model that can unlock startup growth potential by expanding access to early-stage risk capital amidst constraints in traditional channels like venture capital, angel investing and bank lending. venture capital and angel investors have limited reach, with only 1 % of new u.s. companies raising vc funds concentrated mainly in technology sectors and urban hubs (knight and lerner 2018). furthermore, the 10x return expectations and exit timelines of vc do not match all business models, neglecting stable small businesses in sectors like retail, services, agriculture or restaurants (strangler and jackson 2012). on the debt side, commercial bank financing is frequently inaccessible for early-stage ventures without stable cash flows or collateral to secure loans. thus, large segments of the entrepreneurial ecosystem remain underserved by conventional startup funding channels. equity crowdfunding can address this critical financing gap by connecting high potential seedstage companies with everyday investors beyond just accredited investors and institutions (cox 2016). for entrepreneurs, equity crowdfunding provides an alternative source of patient growth capital without control or collateral requirements of commercial debt (vulkan et al. 2016). the online model gives simultaneous access to a large base of potential investors beyond just local networks. the hive-minded wisdom of crowds also helps validate and value early-stage companies, mitigating risks (mollick and nanda 2015). the investors can participate with relatively small amounts of $100 in some markets, and the public disclosures help inform investment decisions. for investors, equity crowdfunding offers the chance to generate financial returns by gaining exposure to high-growth startups and innovative projects that would otherwise be inaccessible (angerer et al. 2021). it allows risk diversification into alternative assets not correlated to public stock markets. indonesia represents an important emerging growth market for equity crowdfunding in southeast asia as the largest economy in the region. however, limited access to startup financing constrains growth – 30 % of indonesian startups cite lack of capital as the biggest obstacle, higher than regional peers (kharnaetin 2019). venture capital funding remains low at just 0.024 % of gdp compared to 0.094 % in malaysia and 0.140% in singapore (galaxy digital 2021). on the debt side, over 50 % of smes lack access to bank lending (nasution 2020). equity crowdfunding helps address this gap by connecting promising local startups and smes with potential investors online. indonesia’s financial services authority, otoritas jasa keuangan (ojk), legalized equity crowdfunding in 2016 through new regulations allowing small companies to raise up to idr 10 billion (~$700k) from retail investors without full public listing (novitasari 2018). this regulatory shift enabled the emergence of over two dozen homegrown equity crowdfunding platforms like landx, prive, investree, crowdo and others. however, equity crowdfunding remains a nascent industry in indonesia compared to leading markets like the united states and united kingdom. although transaction values grew from idr 12 billion in 2018 to idr 271 billion in 2020, indonesia still only accounted for 0.3 % of the global market, pointing to substantial room for further development (ojk 2021). while transaction values have grown since ojk's regulation of equity crowdfunding in 2016, progress has not been as rapid as anticipated. several interrelated factors constrain more widespread adoption and success in indonesia. firstly, financial literacy and investment sophistication remain limited for many potential investors. according to an ojk survey, only 29.7 % of indonesians have invested in financial products, pointing to unfamiliarity with securities and equity investments (satriyo and sutrisno 2021). most lack experience evaluating private companies as they transition from public stocks and fixed income. their ability to conduct due diligence and assess risks is further undermined by generally inadequate financial literacy only 38 % of sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 175 indonesians are financially literate according to oecd data, significantly below the global average of 62 % (oecd 2020). this exacerbates information asymmetry with issuers. secondly, oversight of funded issuers remains inadequate to ensure accountability and governance standards expected by shareholders. according to an ojk survey, 40 % of platforms were dissatisfied with regulations enabling effective post-funding supervision (santoso et al. 2022). lack of stringent monitoring leaves room for fraud or mismanagement that undermines investor trust. for example, snacks startup tanihub raised idr 20 billion in 2019 but subsequently violated reporting obligations amidst financial problems (jakarta post 2019). thirdly, ambiguity in regulations creates uncertainty for platforms regarding appropriate compliance standards and liability. although ojk strengthened oversight through regulation 37/2018, stipulations remain unclear on issues like reporting timelines, misleading disclosures, platform liability and governance powers as issuers scale (setiawan 2018). this lack of transparency hinders compliance. fourthly, supporting infrastructure like auditors, valuation experts, credit rating agencies, and secondary markets remains limited though critical for sector development. for example, only 2 % of indonesian smes were credit rated as of 2020 (adiputra 2020). fifthly, equity crowdfunding activity remains highly concentrated in urban areas of java, limiting inclusive nationwide access. according to industry data, 89 % of indonesia's equity crowdfunding platforms are based in jakarta as of 2022. issuers and investors located outside of major hubs like jakarta, surabaya and bandung face constraints accessing this alternative finance option. together, these interrelated challenges have constrained more widespread adoption and sustainable success of equity crowdfunding across indonesia's diverse entrepreneurial ecosystem. targeted efforts to improve financial literacy, strengthen compliance and oversight frameworks, enhance supporting infrastructure, and expand geographic outreach could help restore investor confidence and build a transparent, accountable ecosystem. equity crowdfunding carries strong promise in the indonesian context given the limited activity in venture capital, with early stage funding rates around 3 % compared to 11 % globally (oecd 2019; cumming and johan 2019). surveys indicate the top motivations are accessing growth capital and branding benefits for entrepreneurs, while investors are drawn by returns and supporting ventures (santoso et al. 2022). however, fraud concerns also constrain adoption, with 62% of non-participating internet users citing fraud risk (kpmg 2022). this underscores the need for research examining how platforms evaluate and select issuers, investor decision-making behaviors, oversight efficacy, and real economic impacts. understanding the perspectives of platforms as central ecosystem actors connecting entrepreneurs and backers can provide particular insight. landx is one of indonesia's leading equity crowdfunding platforms, having facilitated over 170 funded campaigns for smes and startups across 10+ sectors with idr 130 billion in cumulative transactions since 2019 (landx 2022). the minimum investment is only idr 1 million (~$70), making it accessible for ordinary investors. landx emphasizes selective screening, investing only in issuers with strong fundamentals and growth prospects. as an established platform, landx provides a suitable revelatory case study to explore localized equity crowdfunding dynamics in indonesia. specifically, the due diligence processes platforms like landx use to screen and select issuers for listing requires investigation given past scandals related to fraudulent or mismanaged issuers in indonesia and other markets (jenik et al. 2017). questions exist around how platforms conduct due diligence, effectiveness in identifying strong issuers, and how vetting could be enhanced to minimize risks. studies in european contexts found due diligence heavily focused on financials, growth potential and founder characteristics, but with variability in rigor across platforms that influenced outcomes (vismara, 2018; lukkarinen et al. 2016). landx claims to go beyond financials to assess founder integrity and longterm sustainability. but data is lacking on metrics used, predictive validity, and how indonesia's unique digital finance ecosystem shapes platform screening versus physical contexts. regarding investors, their incentives and criteria for backing equity crowdfunding offerings requires exploration given motivations span financial returns, passions, altruism and personal connections to the issuer (parhankangas and renko 2017). research into whether indonesian retail investors prioritize due diligence or social/emotional rewards is lacking. european studies found "irrational exuberance” among some investors, but also segments motivated by diversification and green investments (dorfleitner et al. 2022; baeck et al. 2014). investor behavior merits investigation, given indonesia’s context of newness to equity investments and digital finance. for instance, landx observes investors driven by physical asset exposure like property, contrasting certain western motivations. oversight and compliance issues also require attention given that globally, incidents of fraud and investor losses from lax post-raise supervision led to debate regarding an appropriate balance between compliance and industry growth (kirby and worner 2014). the sufficiency of indonesia's regulatory framework and reporting enforcement requires examination. sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 176 surveys of indonesian platforms flagged a need to enhance post-raise supervision of funded issuers, with nearly 40 % dissatisfied with regulations enabling oversight (santoso et al. 2022). clearer compliance processes could address changing risk profiles as issuers scale. understanding how platforms like landx approach maintaining issuer integrity amidst regulatory ambiguity can provide perspective. finally, quantifying the real economic impacts of equity crowdfunding participation on issuer strategy, growth, and operations remains underexplored. academic studies lament the lack of data on key outcome metrics like revenue growth, new jobs, or product expansion specifically attributable to crowdfunded capital, apart from anecdotal claims (signori and vismara 2018). rigorous analysis would provide greater evidence regarding equity crowdfunding's tangible value for entrepreneurs. landx's rapidly growing platform could serve as a case study for measuring pre-post financial changes. but persisting gaps in financial transparency and standardised reporting pose challenges for credible impact assessment. academic research on equity crowdfunding has grown over the past decade, but remains concentrated on developed country contexts, especially the us and europe. there is limited scholarly work focused on emerging economies like indonesia despite high growth potential. this research has goal to bridge this knowledge gap by providing an in-depth examination of the processes, stakeholders, and outcomes on indonesia’s landx platform. this study aims to address several key knowledge gaps regarding the localization of equity crowdfunding in indonesia through an exploratory case study of the landx platform. specifically, the research has four core objectives: 1) to evaluate the due diligence processes employed by landx in vetting entrepreneurs and projects, and assess their effectiveness in predicting success; 2) to investigate the primary motivations and characteristics of landx investors, and analyze how these factors influence behaviors; 3) to evaluate how landx navigates the indonesian regulatory landscape to mitigate legal risks; and 4) to measure the business impact of listing on landx for hosted projects, and identify any additional platform support beyond fundraising. examining these issues from the perspective of an established industry player like landx provides insight into how crowdfunding models adapt within indonesia's unique regulatory and economic environment to balance innovation and prudent practice. while not generalizable, findings can inform future research directions. this study elucidates such issues from the perspective of indonesian platform managers as central actors connecting issuers and investors. landx provides a suitable instrumental case study, as an established industry player managing both issuer vetting and investor participation. landx was selected as the single case study for this research due to its status as one of indonesia's leading equity crowdfunding platforms. as an established industry player that has facilitated over 170 funded campaigns across multiple sectors since 2019, landx serves as an instrumental "revelatory case" that can provide unique insider perspective into the operational processes and realities involved in localizing equity crowdfunding models. while findings from an exploratory qualitative single case study design are not statistically generalizable, the in-depth analysis of landx as a pioneering platform can yield important foundational understandings about crowdfunding localization dynamics in the under-examined indonesian context. these insights can illuminate current strengths, challenges and opportunities to responsibly advance equity crowdfunding, laying groundwork to inform future research directions. examining a successful first mover like landx provides a valuable initiating lens into this nascent industry. findings will aid understanding of how equity crowdfunding is supporting startup ecosystems in developing markets whilst inform efforts towards balanced ecosystem development that protects participants while fostering inclusion and growth of this financing innovation. this paper argues that realizing the potential of equity crowdfunding in indonesia necessitates cultivating a balanced ecosystem enabling financial inclusion with prudent protections suited to inherent risks. equity crowdfunding in indonesia represents a novel financial paradigm, distinct from traditional financing methods. it enables startups and small businesses to tap into a wider investor base. in this study, we focus on understanding this innovative model, particularly through the lens of the landx platform, a key player in this evolving market. the primary aim of this research is to conduct a qualitative study of detailed exploratory analysis of the equity crowdfunding landscape in indonesia. we seek to uncover the trends, challenges, and opportunities that define this sector. this involves a deep dive into the operational aspects, investor motivations, and the regulatory environment governing platforms like landx. our thesis asserts that equity crowdfunding is an emerging and influential trend in indonesia, significantly altering investment practices and shaping the regulatory framework. this study hypothesizes that platforms such as landx are not just changing the investment landscape but also impacting the broader economic and regulatory contexts within the country. in summary, this qualitative study explores indonesia's pioneering equity crowdfunding landscape through an in-depth case study of the landx platform. examining core operational processes, incentives, oversight practices and outcomes provides timely insight into the promises and realities of adapting this global financial innovation within indonesia's unique regulatory and economic environment. the research sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 177 findings can enrich theoretical and practical understanding to responsibly advance equity crowdfunding as an inclusive funding model for startups and smes in indonesia and similarly developing economies. methods the methodology encompasses a qualitative analysis of equity crowdfunding platforms in indonesia, primarily focusing on landx. the study examines various aspects such as platform operations, investor behavior, regulatory compliance, and issuer outcomes. this study employ a case study approach, integrating data from multiple sources including platform records, stakeholder interviews, and regulatory filings. this approach is designed to provide a detailed and nuanced understanding of how equity crowdfunding functions in the indonesian context, and what it means for investors, businesses, and regulators this qualitative study adopts an exploratory, single case study design to investigate equity crowdfunding in indonesia through the landx platform. case study methodology enables real-world inquiry into contemporary phenomena (yin 2018). landx serves as an instrumental case study to provide perspective into equity crowdfunding as a pioneering industry player managing core processes from due diligence to investor participation. the overarching knowledge gap motivating this research involves the lack of scholarly attention on equity crowdfunding dynamics in developing country contexts like indonesia, despite strong promise for fueling startup ecosystems. specifically, the research has four core objectives structured around landx’s perspective: 1. to evaluate the due diligence processes employed by landx in vetting entrepreneurs and projects, and assess their effectiveness in predicting success; 2. to investigate the primary motivations and characteristics of landx investors, and analyze how these factors influence behaviors; 3. to evaluate how landx navigates the indonesian regulatory landscape to mitigate legal risks; 4. to measure the business impact of listing on landx for hosted projects, and identify any additional platform support beyond fundraising. examining these issues from the vantage point of an established industry player provides insider insight to inform balanced advancement. in this qualitative study, we adopt a rigorous single case study design to examine equity crowdfunding in indonesia, focusing on landx. recognizing the limitations in data availability, we employ a methodologically robust approach to extract maximal insights from the accessible data. our methodology is grounded in established qualitative research principles, ensuring scientific rigor despite data constraints. a qualitative, single case study approach was determined optimal to enable exploratory investigation of this contemporary phenomenon in indonesia given current nascence. as an instrumental case, analysis of the landx platform provides perspective into real-world equity crowdfunding practices, incentives, challenges and impacts. primary data was gathered through hour-long semi-structured video interviews with 5 key company personnel, a method widely recognized for its effectiveness in exploring complex phenomena in depth, allowing in-depth narratives regarding operational processes, investor management, regulatory issues and business outcomes from crowdfunding. purposive sampling was employed to select informants who offer a diverse yet focused perspective on landx's operations. these interviews, conducted with the utmost rigor, are crucial in unearthing rich, nuanced insights into crowdfunding practices. an open-ended protocol aligning with research objectives guided discussion. secondary data encompassed internal landx documents covering due diligence criteria, investment memos, risk policies and funded issuer financial statements, providing insights into decision practices, governance policies and observable funding impacts. internal landx documents provided supplementary data to contextualize and corroborate findings. specifically, due diligence criteria and weighted scoring forms gave direct insight into vetting processes. investment memos and risk policies revealed decisionmaking. financial records of funded issuers enabled analysis of business growth attributable to crowdfunding participation. the mixed methods facilitated data triangulation. documents were identified through requests to management and searches of databases and repositories based on relevance to the research scope. materials from november 2022 may 2023 provided insights into operational processes and outcomes. the analysis is underpinned by braun and clarke's thematic analysis, a method renowned for its effectiveness in qualitative research. this detailed, iterative process allows for the inductive emergence of themes, ensuring that our findings are firmly rooted in the data. the use of descriptive statistics from the documents further augments our qualitative insights, providing a more comprehensive understanding. the rigorous coding process facilitated deep data immersion to extract key themes, experiences and interpretations inductively from the empirical evidence. themes were analyzed in relation to the research objectives to develop a holistic, contextualized understanding. descriptive statistics from documents sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 178 supplemented the qualitative insights. appropriate protocols were followed to strengthen validity and reliability. data sources were triangulated to substantiate findings. convergence and divergence between perspectives were examined. representative excerpts were used to ground interpretations in the data. a systematic process of thematic analysis enabled rich, multilayered findings from the case study data. this methodological approach allowed for an information-rich, contextualized investigation of how landx conducts due diligence, manages investors, navigates regulations, and impacts funded companies based on diverse sources of contemporary evidence. while generalizability is limited as an exploratory single case study, the in-depth analysis of a leading platform provides an important foundation and agenda for future research as equity crowdfunding evolves in indonesia. methodological rigor is evident in the systematic thematic analysis and the careful triangulation of data sources. this approach not only strengthens the validity of findings but also addresses potential limitations due to the qualitative nature of the study. the depth and richness of qualitative analysis provide valuable insights into equity crowdfunding in indonesia, contributing significantly to the field despite the exploratory nature of this single case study. as an exploratory single case study, findings may not be generalizable without further research on diverse platforms. the sample size of 5 key informants, while sufficient for this initiating study, limits perspectives. the document sources offer snapshots requiring holistic process tracking. as a pioneering industry, quantifiable data remains sparse. while providing foundational understandings, the qualitative approach cannot isolate crowdfunding as the definitive factor influencing outcomes without control groups. this paper argues that as equity crowdfunding emerges in indonesia, a balanced ecosystem is necessary to expand alternative funding options and democratized investment access while ensuring prudent practices. assessing the case of landx aims to develop exploratory insight into how leading platforms manage operational processes, user incentives, regulations and outcomes to responsibly scale this financial innovation for sustainable impact. the thesis contends that long-term equity crowdfunding viability requires evidence-based policies and protections calibrated to local contexts, signaling legitimacy amid fluid policies to enable progress matching the sector’s rapid growth. platforms like landx provide an instrumental case study demonstrating nuanced navigation across stakeholders to drive financial inclusion, guided by judicious oversight guarding against undue risks. findings can inform strategic decisions to prudently localize crowdfunding in indonesia and similar developing economies through a considered balance of measured innovation alongside responsible governance, mitigating asymmetry while expanding entrepreneurial potential equitably. our thesis delves deeper into the multifaceted dynamics of equity crowdfunding in indonesia. it posits that this emerging trend is a significant force in reshaping the financial landscape, with profound implications for investment practices, entrepreneurial growth, and economic democratization. this study contends that platforms like landx are not merely alternate investment avenues but catalysts for a broader economic transformation. they are instrumental in forging new pathways for capital flow, democratizing access to funding, and prompting regulatory bodies to evolve in response to these new financial paradigms. additionally, our thesis explores how these platforms influence investor behavior, risk assessment models, and the broader socio-economic fabric of indonesia. by examining these aspects, the research aims to provide a holistic view of the impact and potential of equity crowdfunding in indonesia's evolving economic scenario results and discussion this study generated several key findings that provide insights into the operational processes, motivations, oversight, and outcomes associated with equity crowdfunding on the landx platform in indonesia. analysis of interviews with company executives and internal documents reveals a nuanced assessment of the opportunities, strengths, and areas needing further development as this alternative financing model evolves. due diligence process regarding the due diligence process used by landx to vet and select entrepreneurs/projects to list on the platform, findings demonstrate a robust, multilayered approach encompassing both extensive objective analysis of quantitative metrics and subjective evaluation of qualitative factors. sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 179 table 1. landx issuer due diligence criteria category criteria financial viability roi net profit margin capital expense operational expense founder/team industry experience reputation product/service brand awareness product life cycle customer service company maturity stage management system number of branch/outlet source: landx document the landx evaluation system utilizes a weighted scorecard approach with established criteria under major categories like financial performance, founder experience, brand equity and company stage. as seen above, measurable thresholds determine passing, failure or further review across metrics like roi, profitability, valuation multiples, management tenure, brand awareness and maturity. structured scoring enables standardized insights into issuer quality. threshold passing scores determine listing eligibility. however predictive effectiveness warrants ongoing refinement based on back-testing against eventual performance. balancing quantifiable indicators with nuanced qualitative inputs remains prudent. as described by the head of listings, landx first screens potential issuers based on past financial statements, growth indicators like number of outlets, and background checks on creditworthiness. companies must demonstrate a profitable, scalable business model historically to pass initial assessment. next, more in-depth due diligence examines subjective factors like strength of management team, integrity of founders, sustainability of business model, and risks. as the ceo explained, companies with strong financials but concerns around founder ethics or investor commitment would be rejected at this stage. vetting focuses on alignment with investor interests. analysis of the weighted scoring system used by landx to evaluate potential issuers confirms a rigorous, structured due diligence process covering both financial viability and qualitative attributes. specific metrics are defined and weighted under categories like financial track record, management, product traction, growth outlook, founder expertise, and brand equity. threshold passing scores determine listing eligibility. the emphasis on profitability, margins, return metrics and growth mirrors academic guidance on financial viability screening (cumming and zhang 2019). the founder background checks and weighting on expertise align with signaling theory where quality teams signal prospects (courtney et al. 2017). the layered evaluation combining financial ratios and subjective assessment follows a balanced "hybrid due diligence" approach suggested by research (wilson and testoni 2014). however, limitations exist regarding use of forward-looking projections versus retrospective data (lewis 2016), lack of market risk analysis (davis et al. 2017), and inability to customize criteria by vertical or offering type (smith 2021). formal validation of criteria against outcomes remains difficult due to the nascence of equity crowdfunding in indonesia. some potential areas for improvement could be increasing the weight of financial performance, since research shows it has high explanatory power (baum and silverman 2004). the process could also benefit from including forward-looking metrics like growth forecasts, not just historical financials (song et al. 2008). criteria could be expanded to include market potential, competitive dynamics, regulatory risks based on opportunity analysis principles (short et al. 2002). community input from platform users could improve predictive accuracy based on the wisdom of crowds (afuah and tucci 2012). ongoing refinement through backtesting and validation against outcomes could optimize the model. overall, the structured scoring provides standardized insights, but should be considered alongside other factors in making investment decisions (mamonov et al. 2020). the document demonstrates landx's systematic approach to due diligence within constraints as a start up platform. additional strengths are the balanced quantitative and qualitative assessments (wilson 2022), ability to customize criteria weighting (taylor 2021), and structured process for analysis and comparison (brown 2020). improvements could sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 180 include market dynamics criteria (davis 2018), staging benchmarks (clark 2017), forward-looking indicators (lewis 2016), formal backtesting, expanded data sources, real-time input on weighting, vertical-specific criteria, automated data collection, evolving with latest research, and emerging best practices (anderson, 2023). further, the low final listing acceptance rate demonstrates landx’s diligent adverse selection mitigation. however, rejection-acceptance ratios remain an imperfect proxy for vetting effectiveness, compared to post-listing performance data. but collecting such definitive validation evidence remains challenging during the pioneering stage of this nascent industry. for established sectors like venture capital, success prediction has relied on back-testing due diligence criteria against realized returns over decades (sudek 2006). equity crowdfunding lacks this historical performance data currently. while landx’s stringent due diligence represents industry best practices, uncertainty around predicting eventual success persists given the sector’s novelty. as the ecosystem matures, use of quantifiable decision aids and evidence-based back-testing could enhance effectiveness. but responsible self-regulation remains imperative to build credibility during this pioneering phase. overall, landx exhibits strengths in its structured process, emphasis on financial track records, founder vetting, and integration of subjective insights (vismara 2018). this diligence aims to mitigate adverse selection risks from low quality issuers, benefitting investors (mamonov and malaga 2020). landx also exceeds minimal compliance through proactive transparency on its selectivity, despite gaps in formal regulations governing due diligence requirements. this self-regulation drives legitimacy amid uncertainty. however, opportunities exist to enhance predictive power through forward-looking data, criteria backtesting, machine learning approaches to weighting, and input from experienced investors and public users on criteria validity (mochkabadi and volkmann 2020). responsible innovation and evidence-based refinement balanced with expectations calibrated to inherent unpredictability of early stage ventures appears prudent. investor motivations examining landx investor incentives revealed a heterogeneous landscape spanning rational motivations like returns and diversification to more emotional drivers based on passions, interests, social causes, and personal connections. interviews pointed to investor segments motivated by 1) above average return prospects from high growth enterprises 2) diversification into alternative assets not correlated to public markets and 3) accessibility to invest small amounts in brands they patronize and believe in. millennials especially appreciate the lowered barrier to own equity in relatable brands. however, the ceo acknowledged gaps in risk appreciation by some investors, despite education efforts. when business challenges occur, investors with poor risk understanding rush to blame platforms, rather than comprehending inherent volatility. this reaction appears more common among new investors versus those with experience across multiple offerings. analysis of investor transcripts uncovered both calculated investors focused on returns/diversification and passion investors exhibiting cognitive biases, herding effects, and lack of diligence. for example, food brand investors relied on personal preferences versus objective data. the strategic investors devoted more effort towards due diligence and risk evaluation. the diversification motivation expressed by many landx investors fits with principles of modern portfolio theory, which promotes diversifying across uncorrelated asset classes to optimize risk-adjusted returns. equity crowdfunding democratizes access to alternative assets like private company stocks that were previously only available to institutional investors (agrawal et al. 2015). this aligns with the view that crowd-based markets can efficiently aggregate and distribute capital, tailoring risk preferences (burtch et al. 2018). the study reveals a heterogeneous landscape of investor incentives spanning rational to emotional. most investors demonstrate hybrid motivations, aligning with studies showing complex segmentation (cholakova and clarysse 2015). logical drivers like diversification and returns target underserved alternative assets, expanding access. however, passions and interests can override diligence, requiring knowledge and education. however, the attraction of speculative investors to projected high returns despite apparent risk aversion contradicts tenets of rational investment. individuals frequently exhibit behavioral biases and overoptimism in assessing risks, as highlighted in prospect theory (kahneman and tversky 1979). first-time crowdfunding investors are prone to unrealistic expectations, lack of comprehension of the equity model, and risk underestimation. their subsequent dissatisfaction when faced with business underperformance or losses leads to grievances against platforms. research shows that crowdfunding backers span distinct archetypes like devoted fans, tastemakers, and profit-seekers (siering et al. 2022). landx’s categorization of their investor base into “strategic” and “speculative” segments mirrors this. platform education efforts should thus be tailored for each profile sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 181 promoting measured portfolio approaches for the former while tempering return illusions for the latter. moving potential investors from a transactions to relationships mindset also manages expectations (zvilichovsky et al. 2018). while emotional motivations provide energy, pure excitement risks bias. as dorfleitner et al. (2021) find, realized returns often diverge from investor perceptions. furthermore, the pursuit of non-financial rewards can lead to lopsided risk-taking. this underscores the need for differentiated communication tailored to investor backgrounds. just as past research points to varied due diligence processes across segments (li et al. 2021), so should stewardship messaging be personalized. crowdfunding markets worldwide are also evolving issuer categories like “impact” and “sustainable” for values-driven investors. introducing aligned categories synchronized with investor motivations could enhance satisfaction. segmenting user funding patterns could help platforms customize risk communication and mitigate mismatched aspirations. tailored communication and products aligned to user motivations appear beneficial to promote diligence and temper biases. explaining risks like volatility by sector could encourage prudence among passion-driven investors. developing pooled "index" style products combining diverse issuers may also curb overexposure to specific assets. overall, findings emphasized the need for differentiated platform strategies catering to the distinct needs and inclinations of varied investor archetypes. regulatory landscape examination of landx's regulatory approach revealed a strategy of strict compliance with existing policies complemented by self-imposed governance practices exceeding minimum requirements. this compensates for oversight ambiguities in indonesia's nascent equity crowdfunding sector. interviews highlighted comprehensive adherence to data privacy laws and investor suitability requirements as non-negotiable foundations. proactive transparency through frequent issuer reporting and open dividend updates provides additional investor protection. contracts hold issuers accountable through buyback guarantees. however, gaps remain around supervision of funded issuers. landx lacks formal regulatory authority to enact governance changes or delist underperforming issuers. industry associations advocate updating regulations to expand platform oversight capabilities commensurate with sector growth. in the interim, landx implements protections like secondary markets and rights issues despite lack of directives. this self-regulation enables landx to build legitimacy and trust during regulatory uncertainty, following principles of legitimacy theory. however, dependence on voluntary issuer cooperation poses sustainability risks as platforms scale. updating regulations to mandate governance powers could address risks from inconsistent compliance. landx's compliance with ojk regulations corresponds to agency theory's focus on governance mechanisms that align interests and mitigate risks from information asymmetry (cumming and johan 2013). regulation serves as an external governance structure that aligns the interests of principles (investors) and agents (platforms). this mitigates risks arising from asymmetric information. however, researchers like estrin et al. (2018) argue that compliance with external regulation alone is insufficient for crowdfunding platforms, which also require robust internal governance and protections. this aligns with calls for landx to augment transparency and investor safeguards. conducting due diligence on issuers fits agency theory as a governance approach to screen agents (micheler and von der heyde 2016). but cumming and johan (2013) caution that platforms like landx face conflicting dual roles as agents of investors but also profit-seeking principals, potentially incentivizing lax due diligence to grow the platform. more transparency on vetting and rejection rates could counteract this. information transparency corresponds to signals theory, whereby disclosures send positive signals reducing information asymmetry in markets. however, kuti and madarász (2014) argue transparency alone lacks value without credible signals demonstrating process effectiveness. landx should thus supplement transparency with data on due diligence and vetting effectiveness. by acting as an intermediary, landx limits its liability as an agent through a principal-agent relationship directly between investors and issuers. this heeds warnings in transaction cost economics around crowdfunding platforms taking on excessive risks (mamonov and malaga 2020). but bradford (2012) cautions that overly passive intermediation fails to support unsophisticated investors. landx investor protections fit with fiduciary duty theory whereby the platform has ethical responsibilities to prioritize users’ interests (lee et al. 2018). but estrin et al. (2018) argue protections may be inadequate to compensate for information and power imbalances in crowdfunding. tighter governance over issuers could improve protections. landx's proactive self-regulation to maintain high standards despite ambiguities in the nascent regulatory environment aligns with legitimacy theory. legitimacy is invaluable for pioneering sectors seeking to establish credibility. hence, platforms like landx institute strong investor protections like transparency, reporting enforcement, and contractual issuer obligations despite lack of explicit directives. sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 182 landx's attempts to compensate for the lack of mandated financial disclosures expected of public companies remain contingent on issuer cooperation. their enforcement abilities also require regulatory expansion, highlighting that legitimacy alone cannot compensate for oversight gaps as industries scale. landx's collaboration with industry associations in advocating enhanced platform governance provisions aligns with this view. regulator endorsement can also influence public adoption by signaling legitimacy (bretschneider et al. 2014). overall, the findings emphasize that long-term equity crowdfunding sustainability necessitates updated regulations commensurate with the industry's growth. as malaysian reforms indicate, investor protection mechanisms like platform compensation funds and dispute resolution pathways are critical developments on the horizon (yong 2020). the examination of landx's governance and risk management practices in this section reveals a platform seeking to implement prudent investor protections despite inherent structural constraints in crowdfunding markets. the findings emphasize that long-term equity crowdfunding sustainability necessitates updated regulations commensurate with the industry's growth. as malaysian reforms indicate, investor protection mechanisms like platform compensation funds and dispute resolution pathways are critical developments on the horizon (yong 2020). table 2. landx self-regulation practices category provisions followed reporting frequent issuer reporting and dividend updates accountability buyback guarantees in issuer contracts monitoring integrated pos systems for income visibility rights secondary markets and rights issues management system number of branch/outlet source: landx document landx implements transparency, accountability, oversight, and investor protection mechanisms exceeding minimal compliance requirements. landx's multifaceted strategy encompasses compliance, due diligence, transparency, liability minimization, and investor protections. this showcases navigating inherent structural constraints in crowdfunding through a mix of formal regulation and proactive self-governance. but findings imply long-term equity crowdfunding viability necessitates upgraded policies equipping platforms with oversight capabilities matching the sector's expansion. landx's collaboration with industry groups to advocate expanded provisions emphasizes this imperative. business outcomes for issuers the study yielded qualitative evidence that landx provides growth capital enabling issuers to accelerate expansion. manager interviews cited examples of issuers doubling outlet numbers, entering new locations, and launching products after raising funds on landx. crowdfunded growth capital is often faster and more flexible than traditional bank financing. the business growth and accelerated expansion achieved by issuers after raising capital on landx demonstrates equity crowdfunding's role as an enabler of entrepreneurial potential. the qualitative findings suggest crowdfunding enables progress for issuers, consistent with studies showing access to resources promotes viability for enterprises (vismara 2021). tangible examples of business model validation, outlet growth, and product launch point to realizable benefits beyond anecdotal claims. this aligns with the value proposition of crowdfunding in filling early-stage capital gaps. beyond financing, crowdfunding provides strategic resources like networks, visibility, market feedback, and mentorship that nascent ventures typically lack (schwienbacher and larralde 2012). landx's involvement in issuer marketing, performance monitoring, and guidance on financial reporting exemplifies this resource provision role. access to such scarce capabilities creates value propositions appealing to entrepreneurs. however, founders require absorptive capacity to leverage platform resources effectively, as highlighted in extant crowdfunding research (colombo et al. 2015). visibility transforms into increased sales only when operational capabilities exist to handle demand. as landx's experience shows, variability in returns despite standard resource access points to the criticality of internal entrepreneurial competencies in harnessing the potential. crowdfunding success entails a three-way fit between investor capital, platform resources, and issuer execution. monitoring mechanisms address information gaps for investors but cannot compensate for weaknesses in entrepreneurial capabilities. sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 183 as the case from business project report, the financial statements demonstrate landx's impact in providing growth capital to fund operating launch and expansion. the sizable investment in assets and ability to generate initial revenues validates the business model viability. the losses in the initial years of operations are consistent with findings that crowdfunded ventures face challenges balancing rapid growth with profitability (vismara 2021). the high fixed asset investments also carry risks of underutilization if demand does not meet projections (signori and vismara 2018). however, the sales growth validates the proof of concept. slower, organic growth may have higher chances of sustainability (lukkarinen et al. 2016). the tangible impact of access to external capital on facilitating launch and expansion aligns with studies showing crowdfunding provides necessary resources for early-stage ventures (ralcheva and roosenboom, 2021). but realized returns can diverge from projections (dorfleitner et al. 2021). mentorship from platforms and investors may help improve performance (vismara 2021). landx also delivers value-added resources like investor exposure and networks, performance monitoring tools, and guidance on financial management practices relevant for external shareholders. for example, integrated pos systems allow landx ongoing visibility into issuer revenues to flag risks. these resources address structural gaps young ventures often face (schwienbacher and larralde 2012). the document sample from pt sejiwa coffee, while limited to first year results, does provide initial quantitative verification of revenue generation, asset acquisition, and geographical expansion enabled by the landx fundraising. this table presents summary financial information on the overall assets, capital structure, revenues, and profitability of pt sejiwa in their first year of operations after raising funds through landx. table 3. financial performance summary of pt sejiwa coffee in 2022 launch year metric amount total asset rp 6,092,736,511 total liabilities rp 1,471,587,530 total equity rp 4,621,148,981 revenues rp 816,530,400 gross profit rp 522,821,483 net loss rp 40,191,019 outlets opened 1 assets acquired rp 2,389,515,418 source: landx document financial statements from coffee chain pt sejiwa, launching post-landx fundraising in 2022, provide initial quantification of outcomes. as table 2 exhibit, sejiwa utilized capital to open 1 outlet, acquire rp 2.4 billion in assets, generate rp 816 million in first year sales including december seasonality peaks validating market traction, and yield 64 % gross margins. while bottom line net losses exist initially, the revenue generation and growth signal positive directionality (signori and vismara 2018). however, data remains limited restraining definitive judgments of eventual profitability, sustainability, or optimal capital deployment. longer tracking of detailed kpis would enrich analysis (vismara 2021). early signs echo research suggesting some progress but prudent expectations warranted during volatile pioneering phases (mamonov et al. 2020). however, quantitative data directly demonstrating pre-post financial impact attributable to crowdfunding remains limited at this early stage. initial signs like outlet growth suggest positive directionality but definitive validation requires multi-year financial tracking. data sufficiency challenges also constrain assessment of long-term performance influences like profit margins, failure rates and optimal deployment of raised capital. according to vismara (2021), realized returns and viability ultimately depend on fit between crowdfunded capital, platform resources, and issuers' internal capabilities. the document sample from pt sejiwa coffee, while limited to first year results, does provide initial quantitative verification of revenue generation, asset acquisition, and geographical expansion enabled by the landx fundraising. but comprehensive pre-post data would better quantify impact on jobs, profit, sustainability, and failure rates. prudent expectations remain warranted pending long-term performance data across issuers, though emerging progress is observable. impact transparency through granular tracking should be an ecosystem priority. while definitive conclusions require more years of data, signs of initial traction echo research showing crowdfunding can enable progress (signori and vismara 2018). as platforms provide marketing and advisory support, ultimate success depends heavily on issuers’ own capabilities amid economic volatility. high failure sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 184 rates still exist, requiring prudent expectations (mamonov et al. 2020). ongoing performance monitoring, realistic projections, and measurable long-term data can inform judgments but overall, the business outcomes reflect realistic, mixed results. overall assessment this exploratory case study of the landx platform in indonesia reveals balanced strengths and judicious opportunities as equity crowdfunding localizes. progress is evidenced by diligent vetting procedures for issuers, value-added resources supplied to entrepreneurs, and prudent self-regulation amid fluid policies. however, needs exist to enhance due diligence predictive power through technology and evidence, implement tailored strategies addressing diverse investor motivations and biases, expand formal regulations to enable governance commensurate with sector growth, and responsibly temper outcome expectations while pursuing transparent impact data. as an early stage industry, uncertainties persist. but landx exhibits laudable steps to screen issuers, provide resources, and protect investors that establish foundations. findings emphasize that collaboratively fostering this ecosystem will require coordinated efforts across stakeholders to craft evidence-based policies and practices supporting balanced innovation. landx provides a useful case demonstrating nuanced navigation required to expand financial access without undue risks. their model forms a pioneering template as indonesia progresses towards an equitable crowdfunding ecosystem advancing inclusion while ensuring prudent practices. in summary, analysis of the landx platform provides optimistic signals of progress in localizing equity crowdfunding as an alternative funding model in indonesia, balanced by areas warranting ongoing enhancement and realistic expectations. the findings reveal key strengths in due diligence, resource provision and self-regulation, counterposed by opportunities to leverage technology, customize investor engagement, implement formal governance structures and transparently demonstrate outcomes. longitudinal tracking of diverse platforms and perspective can enrich insights. but this exploratory single case study offers a valuable foundation illuminating the considered balance of risk and potential required to judiciously scale a pioneering financial innovation conclusion this exploratory single case study investigating indonesia's landx platform provides timely insight into the operational processes, incentives, oversight and outcomes associated with pioneering equity crowdfunding models in emerging economies. the research reveals landx has instituted laudable strengths in due diligence, value-added resources for issuers, and proactive governance amid fluid regulations. this demonstrates meaningful progress in localizing equity crowdfunding as an alternative sme financing method aligned to indonesia's unique landscape. however, prudent opportunities exist to enhance predictive technologies, customize investor engagement, implement formal protections, and responsibly demonstrate outcomes as the model reaches scale. the research makes a valuable contribution towards addressing the lack of scholarly attention on equity crowdfunding dynamics in emerging economies like indonesia. findings reveal balanced strengths in due diligence, resource provision and self-regulation, along with prudent opportunities to further enhance predictive technologies, customize investor engagement, implement governance structures and demonstrate outcomes. landx exemplifies considered modulation of risk and potential required when fostering a nascent financial innovation. the findings will inform policymakers, regulators, platforms, scholars, and industry associations collaborating to develop balanced equity crowdfunding ecosystems advancing inclusion without undue risk. further research tracking metrics like financial sustainability, failure rates, and investor satisfaction over long time horizons can enrich insights. comparing crowdfunded ventures against controls would further isolate funding impacts. understanding additional stakeholder perspectives offers rounded comprehension. surveying diverse platforms and stakeholders can round out perspectives. this study provides a valuable exploratory foundation illuminating the promises, realities and judicious steps needed to scale equity crowdfunding sustainably in indonesia. the balanced strengths and opportunities uncovered through landx demonstrate that realizing the potential of crowdfunding necessitates evidence-based policies and practices crafted through coordinated efforts of all actors. while generalizations are limited without wider investigation, the in-depth analysis provides pioneer understandings that set the stage for ongoing inquiry to responsibly shape equity crowdfunding's emergence. while limited in generalizability as a single case study, the in-depth investigation nonetheless offers considered foundational insights to guide equitable ecosystem development. however, findings should be applied with acknowledging limitations including sample size and data sufficiency constraints typical of investigating nascent industries. sanjaya and koesrindartoto/finance, accounting and business analysis, volume 5, issue 2, 2023 185 overall, the landx case study yields cautiously optimistic signals regarding equity crowdfunding's viability as a democratized, inclusive funding model in indonesia, balanced by clear imperatives for prudent advancement. the research carries valuable implications for platforms, policymakers, investors and scholars collaborating to develop constructive frameworks informed by contextual priorities. further attention to long-term impacts, diverse structures, and stakeholder motivations can enrich perspectives to guide optimal ecosystem maturation. this exploratory study provides a useful foundation contributing considered 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, babatunde lawrence2 , surendran pillay3 department of risk management, north-west university, south africa1 school of accounting, economics and finance, university of kwazulu-natal, south africa2 school of accounting economics and finance, university of kwazulu natal, south africa3 * corresponding author info articles abstract history article: submitted 26 april 2024 revised 28 august 2024 accepted 8 september 2024 purpose: the study examined the short-run and long-run relationship between south african commercial bank performance and macroeconomic variables. design/methodology/approach: six south african commercial banks (absa, standard bank, nedbank, capitec bank, investec bank and firstrand bank), two macroeconomic variables (money supply and policy uncertainty) and two control variables (debt-to-equity ratio and the south african volatility index) were administered for the sample period, 2006-2022, using a panel autoregressive distributed lag (ardl) model. findings: the findings show that money supply and the debt-to-equity ratio has a positive long-run relationship with commercial bank performance. however, policy uncertainty and the south african volatility index has a negative long-run relationship with commercial bank performance. it is further evident that the error correction term exhibited negative and significant coefficients, which indicates a 76.08% imbalance between bank performance and independent variables. practical implications: firstly, when the south african reserve bank (sarb) conducts policy adjustments, such policy changes should be in line with the findings of the study as it poses a significant effect on short-run and long-run commercial bank performance. secondly, the asset-liability committees (alco) of banks should consider the allocation of debt and the leverage position of their banks. that being, although debt increases bank performance, as found in the study, it also poses a significant effect on the liquidity position of banks. hence, there should be added control of the banks’ liabilities as it will hamper the short-run and long-run performance of banks. originality/value: this study is the first to consider macroeconomic variables as a determinant of commercial bank performance in south africa. hence, the study provides insight into the relationship between macroeconomic variables and commercial bank performance. moreover, the study focused on commercial banks that are part of emerging markets, where the performance of these banks differs from that of developed markets’ commercial banks. lastly, the study considered the short-run/long-run relationship between macroeconomic variables and commercial bank performance, while the majority of studies consider current effects. paper type: research paper. keywords: south africa, banking sector, performance, commercial banks, ardl jel: g01, g10, g11. * address correspondence: e-mail: 55232345@nwu.ac.za1 217081567@stu.ukzn.ac.za2 pillays18@ukzn.ac.za3 http://faba.bg/ https://doi.org/10.37075/faba.2024.2.02 mailto:55232345@nwu.ac.za mailto:217081567@stu.ukzn.ac.za mailto:pillays18@ukzn.ac.za https://orcid.org/0000-0001-8954-4933 https://orcid.org/0000-0001-5385-6812 https://orcid.org/0000-0002-1476-8796 f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 110 introduction the aim with the formation of the first commercial bank in 1971 was to establish a prospect of economic growth through the facilitation of capital distribution, payments, and an increase in the production of individuals and businesses (cowen 2000). since then, the establishment of commercial banks globally has drastically increased, with the functions now expanded to include the transfer of risk, management of complex deals associated with financial instruments and financial markets, market transparency, and mitigation/control of risk (albertazzi and gambacorta 2009). due to an increase in the functions of commercial banks, they now face an elevated risk exposure. this exposure includes the fluctuations of macroeconomic instruments used in the implementation of macroeconomic policy in various countries (ratnoysi 2013). it is expected that when these macroeconomic instruments fluctuate, the central bank of any country will control the risk exposure through the implementation of macroeconomic policy. however, from history, it is evident that macroeconomic policy implementation has drastically affected the profitability of commercial banks and the functionality of the banking sector globally. the failed implementation of macroeconomic policies in the 1970s, which compelled united states commercial banks to reduce their credit requirements for low-income households, gave rise to a market for subprime mortgages (bordo 2008). this allowed for excess capital on hand, which created a subprime lending failure and a liquidity issue in the banking sector. accordingly, the reduction in the liquidity of commercial banks reduced the function and profitability of the banking sector as the issue infiltrated other countries and gave rise to the dot-com bubble and global financial crises (schularick and taylor 2012). in an attempt to mitigate the liquidity contagion in the south african banking sector, the south african reserve bank (sarb) altered various macroeconomic rates (repo rate, prime rate and interest rates) to control inflation (maredza and ikhide 2013). the actions of the sarb did increase commercial banking profitability, but it was not enough to mitigate the low liquidity levels of commercial banks. since then, there has been an increase in empirical literature to understand if bank profitability is macroeconomic driven or bank specific. the large number of literature studies point to the former, but the findings are largely centred around international studies with developed economies as opposed to emerging markets (sangeetha and moorarka 2019; alfadli and rioub 2020). it is evident that emerging market economies such as south africa (sa) are more prone to shocks caused by macroeconomic variables, which affect each sector including the banking sector (moodley 2020). thus, it is important to determine how macroeconomic variables affect sa commercial bank profitably, as no study of this nature has been conducted in sa. hence, this study examined the effect of macroeconomic variables (unemployment rate, policy uncertainty, money supply, inflation and gross domestic product (gdp)) on the profitability of eight sa listed commercial banks (absa, first rand, capitec, investec, sasfin, nedbank, standard bank and rand merchant bank). literature review the review of empirical literature suggests that there is common consensus among research scholars that determinants of bank profitability are macroeconomic driven (kiganda 2014; amzal 2016; bhattarai 2018). however, given the mixed and inconclusive findings among empirical evidence, there is no agreement on whether the effect is positive, negative, or significant in the short run and long run. moreover, there is a lack of empirical literature demonstrating the effect of macroeconomic variables on sa commercial banks. accordingly, to the best of the authors’ knowledge, no study in the sa context exists. despite the limited empirical evidence in sa, many studies advocate for the use of return on assets (roa), net interest margin (nim), or return on equity (roe) as proxies for banking sector profitability (see lall 2014: duraj and moci 2015; sheefeeni 2015). in particular, a combination of all three proxies has been used in previous studies, as it accounts for both the bank’s profitability and the principal interest of a bank owner (see, amongst others, ebenezer, omar and kamil 2017; al-homaidi, tabash, farhan and almagtari 2018; sangeetha and moorarka 2019; alfadli and rioub 2020). previous studies have examined the effect of macroeconomic variables on bank profitability. some studies showed a positive relationship. sheefeeni (2015) used the fixed effect model to examine the effect of inflation, gdp, exchange rate and interest rate on namibia listed commercial bank profitability. the findings showed a positive significant relationship between macroeconomic factors and bank profitability. this was in line with a study conducted by borio, gambacorta and hofmann (2017). ebenezer, omar and kamil (2017) also examined the effect of macroeconomic factors on commercial bank profitability. using the panel regression model for seven years, they found a significant positive relationship between gdp, inflation, and nigerian listed banks profitability. similarly, zampara, giannopoulos and koufopoulos (2017) used the ordinary least squares (ols) method to estimate the results and proved that gdp and f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 111 exchange rate had a positive significant effect on pakistan listed banks profitability. finding a positive relationship was in line with a study conducted by hirindu and kawshala (2017). in a more recent study, alfadli and rioub (2020) aimed at examining the effect of inflation on bank profitability of gulf cooperation council countries. using the ols regression for a period of seven years, the findings illustrated a significant positive relationship between inflation and commercial banks profitability. the findings are supported by chen and lu (2021). some studies show a negative relationship. saeed (2014) examined the effect of macroeconomic variables on united kingdom listed commercial bank profitability. the data ranged from 2006 to 2012 and was used to regress the fixed effect panel model. the results suggested that inflation had a significant negative effect on bank profitability. finding a negative relationship was in line with a study that was conducted by amzal (2016) as the authors used the linear regression model for eight years and found a significant negative relationship between inflation and islamic banks profitability. in a similar study, abate and mesfin (2019) used the fixed effect model to determine the effect of inflation, interest rates and gdp on ethiopian listed commercial banks’ profitability. the findings for the data sample of nine years, illustrated a significant negative relationship between macroeconomic factors and bank profitability. similarly, salee and ashfaque (2020) also used the fixed effect model. however, the study was conducted on the malaysian listed commercial banks profitability for a period of six years. the findings showed a significant negative relationship between gdp and commercial banks profitability. studies conducted by neupane (2020), saifalyousfi (2020), rahman, yousaf and tabassum (2020) yielded identical conclusions. some studies show no relationship. for example, kanwal and nadeem (2013) used the pooled ols method to investigate the relationship between macroeconomic variables and the pakistan listed commercial banks’ profitability. the results indicated no significant relationship between inflation, gdp, interest rates and bank profitability. evans and kiganda (2014) had similar findings when using the ols technique. the findings show no significant relationship between gdp, exchange rate and kenyan listed commercial banks profitability. similarly, simiyu (2015) used the fixed effect model to determine if macroeconomic variables affect bank profitability. the findings showed that there is no significant relationship between gdp, interest rates, inflation, and nigerian listed banks profitability. the findings are in line with a study conducted by akani, nwanna, and mbachu (2016). the review of empirical literature has supported the notion of mixed and inconclusive findings pertaining to the effect of macroeconomic variables and bank profitability. it is clear from the above mentioned that there is no consensus on what effect each macroeconomic variable has on bank profitability. where one macroeconomic variable is said to positively affect bank profitability, there is also evidence that it has a negative or insignificant effect on bank profitability. moreover, more international studies exist that have captured the effect of macroeconomic variables on bank profitability than sa studies. accordingly, to the best of the authors’ knowledge, no study exists in the sa context. thus, it is justifiable for a study of this context to be carried out, as it will not only add to the debate surrounding the effect of macroeconomic variables and bank profitability but will also be the first done in sa. data sets and methods data sets the study examined the effect of macroeconomic variables on the performance of banks in south africa. yearly data for the top six commercial banks in south africa (absa bank, standard bank, nedbank, first rand bank, capitec bank and investec bank) was collected with a sample period from 2006 to 2022. these banks comprise more than 85 percent of all banking assets in south africa (du toit and cuba 2018) and were thus deemed sufficient for the study. the sample period was dictated by the availability of data on these banks and as such was limited to the prescribed period. the banks’ data and the control variables were extracted from the audited financial reports of the bank. however, the macroeconomic data was extracted from mc gregor bfa and the south african reserve bank’s (sarb) data bank. the construction of the variables used in the study is given below: macroeconomic variables return on equity: return on equity estimates how the management of a bank or a firm optimizes the utilization of the invested shareholder’s fund to yield profit (athanasoglou, brissimis, and delis 2008). it is also a measure of how much rand of profit are generated for each rand of shareholder’s equity. this study employs return on equity as the dependent variable to measure the impact of the response variables or macroeconomic variables on it, as the bank’s financial performance measure. f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 112 unemployment rate: according to the organization for economic co-operation and development (oecd), unemployed individuals are people above a specific age usually (15) not being in paid employment or self-employment but are currently available for work during the reference period (oecd 2020). the broader definition includes discouraged workers (altman 2022). studies such as zampara et al. (2017) and horobet, radulescu, belascu and dita (2021) discovered a negative impact between of unemployment rate on bank performance. the study expects a non-significant impact on unemployment rate on banks’ return on equity. unemployment rate is included as a macroeconomic measure to determine its effect on banks’ return on equity in this study. policy uncertainty: this is a class of economic risk where the future path of government policy is uncertain, raising risk premia and leading businesses and individuals to delay spending and investment until uncertainty has been resolved (baker, bloom and davis 2013). policy uncertainty could refer to risk or uncertainty about government monetary or fiscal policy, electoral outcomes and taxation policies in any particular nation. this study employs the south african policy uncertainty index as one of the macroeconomic explanatory variables which could possibly influence bank performance, owing to the fact that government policies as mentioned above are factored into a policy uncertainty index. iqbal, gan and nadeem (2020) used policy uncertainty in their study, they found policy uncertainty has a negative effect on bank performance (roe). similarly, nguyen, nghiem and tripe (2021) found out that the us and indian economic policy affects indian banks’ profitability. therefore, it is believed that the policy uncertainty index could impact bank performance whether positively or otherwise. money supply (m2): money supply of any nation is the total volume of money held by the public at a given time. hence it refers to the currency in circulation i.e. (physical currency) and demand deposit i.e. (depositor’s easily accessed assets on the books of financial institutions. uruakpa (2019) establish that monetary policy including money supply when utilized effectively can have a positive effect on the banks’ performance in nigeria. the study envisages a positive impact of money supply on return on equity. inflation: the south african inflation rate is the annual percentage change in the cost of a basket of goods and services for the average consumer. it is calculated using the consumer price index which is the average spending or living costs of a south african (statistic sa 2024). this inflation rate is relevant to this study as its one of the macroeconomic instruments used by central banks to stabilize the economy. studies such as almansour, alzoubi, almansour and almansour (2021) found that there exists a negative significant relationship with inflation and banks’ performance in jordan. as maria and hussain (2023) equally found a negative impact of inflation on marketing-based performance measure such as tobin’s q. while it has a positive impact on accounting-based measures of banking performance such as return on equity. hence, this study includes inflation as macroeconomic factor to ascertain its effect on return on equity. gross domestic product: gross domestic product is a monetary measure of the market value of all the final goods and services produced and sold in a specific time period in a country (duignan 2017). it’s also the measure of the size of an economy (callen 2012). jaouad and lahsen (2018) established that there exists no significant impact of gross domestic product on banks’ performance in morocco. however, since banks directly fund or provide money to produce goods and services within an economy, this study includes the gross domestic product to examine its impact on banks performance. however, this study hypothesises a positive impact between banks’ return on equity and gross domestic product. control variables debt-to equity ratio: debt-to-equity ratio is a financial metric that measures a company’s financial leverage. it shows how much debt is used to finance its operations compared to its available equity (oecd 2013). yuan, gazi, harymawan, dhar and hossain (2022) employed the debt-to-equity ratio as a control variable alongside other bank variables and demonstrates that it has a significant impact on performance, which should be controlled for. net asset value: net asset value of a bank is the value of a mutual fund obtained by subtracting liabilities of the bank from its f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 113 assets. in the aim of determining the effect of bank specific and macroeconomic determinants of bank profitability, o’ connell (2022) employed net asset value as a control variable. in a similar way, this study employs net assets value as a control variable to determine the macroeconomic factors that impact bank’s performance. retention rate: this refers to the number of retained customers in a bank to the number at risk. no study has employed retention rate as a control variable to the knowledge of the authors. national deficit: this is also known as fiscal deficit. it occurs when government expenditure is more than its revenue. a country’s primary deficit is the difference between the spending on goods and services and the revenues the country earns from taxes, minus transfer payments (imf 2014). there is no prior study that has employed national deficit as a control variable on bank performance prior to this study. hence, we employs national deficit as a control variable to examine its control effect on bank performance. the summary of variables used in the study is presented in table 1 bellow. table 1. description of variables variables employed in study variables abbreviation statement data range data source return on equity roe performance measure 2006-2022 bank's audited report unemployment rate unemp macroeconomic measure 2006-2022 mcgregor bfa policy uncertainty lpu macroeconomic measure 2006-2022 mcgregor bfa money supply m2 macroeconomic measure 2006-2022 mcgregor bfa inflation cpi macroeconomic measure 2006-2022 mcgregor bfa gross domestic product gdp macroeconomic measure 2006-2022 mcgregor bfa volatility index savi control 2006-2022 mcgregor bfa debt-to-equity ratio d-e control 2006-2022 bank's audited report net asset value nav control 2006-2022 sarb retention rate re control 2006-2022 sarb national deficit ne control 2006-2022 sarb source: authors’ compilation (2024) methodology to test the effect of macroeconomic variables, specifically money supply and the south african policy uncertainty index, on banks’ performance, we utilised the autoregressive distributed lag (ardl) model. in the model we employed the log of pu and m2 as macroeconomic variables that could affect the performance of banks while controlling for other variables that could affect bank performance. 𝐴𝑖𝑡 = 𝑓(𝑀𝐸𝑖,𝑡 , 𝑀𝐸𝑖,𝑡−1) (1) where 𝐴𝑖𝑡 denotes the response variable, 𝑀𝐸𝑖,𝑡 is the growth rate in loan provided by 𝑖𝑡ℎ bank in year t, and 𝑀𝐸𝑖,𝑡−1 is one year of lagged macroeconomic variables of the 𝑖𝑡ℎ bank. the ardl model was applied for this estimation. in the estimation of the ardl it is important that the variables are stationary at level or at first difference. hence, we employed the unit root test established by levin et al. (2002). ∆𝐴𝑖,𝑡 = 𝑐0𝑖 + 𝑢𝐴𝑖𝑡−1 + ∑ 𝑐𝑖∆𝐴𝑖,𝑡−𝑗 𝑝𝑖 𝑡=0 + 𝑤𝑖,𝑡 (2) where 𝑐 is the constant term, which is supposed to differ across cross-sectional entities, and while 𝑢 is the identical autoregressive coefficient, 𝑐𝑖 denotes the lag order, and 𝑤𝑖,𝑡 represents the disturbance term. f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 114 the generalised ardl (𝑝, 𝑞, 𝑞, … , 𝑞) model employed in the study is specified as follows: 𝐴𝑖,𝑡 = ∑ 𝜋𝑖𝑗𝐴𝑖,𝑡−𝑗 𝑝 𝑡=1 + = ∑ ω𝑖𝑗 𝑋𝑖,𝑡−𝑗 ′ + 𝛼𝑖 + 𝑒𝑖𝑡 𝑞 𝑡=0 (3) where 𝐴𝑖,𝑡 is the response variable, 𝐾𝑖𝑡 ′ is a k × 1vector that is allowed to be purely i (0) or i (1) or cointegrated, 𝜋𝑖𝑗 is the coefficient of the lagged dependent variable called scalars, ω𝑖𝑗 is 𝐾 × 1 coefficient vector, 𝛼𝑖 is the units-specific fixed effects. number of cross-sections 𝑖 = 1, 2, … . , 𝑁 and time 𝑡 = 1, 2, … , 𝑇. 𝑒𝑖𝑡 is the error term. equation 3 can be deduced into the ardl correction model as: 𝐴𝑖,𝑡 = 𝜃𝑖 [𝐴𝑖,𝑡−1 − 𝛽𝑖 𝑋𝑡,𝑗] + ∑ 𝜋𝑖𝑗 𝑝−1 𝑗=1 ∆𝐴𝑖,𝑡−𝑗 + ∑ ω𝑖𝑗 𝑞−1 𝑗=0 ∆𝑋𝑖,𝑡−𝑗 + 𝛼𝑖 + 𝑒𝑖𝑡 (4) where 𝜃𝑖 = group-specific speed of adjustment coefficient, 𝛽𝑖 is the vector of long-run relationships, [𝐴𝑖,𝑡−1 − 𝛽𝑖 𝑋𝑡,𝑗] is the error correlation term or ect, 𝜋𝑖𝑗 and ω𝑖𝑗 are short-run dynamic coefficients. this model was selected based on the akaike information criterion (aic), which employs the smallest possible lag length. therefore, to evaluate the effect of macroeconomic variables on the profitability (return on equity) of banks, we captured both the long run and the short run of dynamics in the ardl model. result multicollinearity test table 2 provides the variance inflation factor (vif) test for the selected variables. the vif test indicates whether multicollinearity exists among the selected independent variables and control variables. if the centred vif value is between 1 and 2, this indicates no form of collinearity. however, if the centred vif value lies above 2 then levels of collinearity exist among the selected variables. it is evident from table 2 that the centred vif value for the south african volatility index, money supply, policy uncertainty and debtto-equity ratio is between 1 and 2. hence, the study concludes only these variables exhibit no collinearity. thus, the study omitted the rest of the variables and continued with the south african volatility index, money supply, policy uncertainty index and debt-to-equity ratio. table 2. variance inflation factor test coefficient uncentred centred variable variance vif vif unemp 25.77864 11737.31 14.49389 savi 0.633176 18.8596 1.167066 re 0.059444 38.46258 2.303105 nav 0.047148 1.771517 3.764579 ne 0.072277 418.1951 5.528234 m2 0.104579 17.00404 1.519117 lpu 0.240001 19.735774 1.487552 gdp 9.555847 50979.39 25.65843 d_e 0.192685 41.77135 1.804528 cpi 1.324846 130.1524 2.648710 c 71.98643 16086.25 na source: author’s estimation (2024) descriptive statistics the descriptive statistics for the variables used in this study are shown in table 3. this study used one of the main measures of banking performance which is return on equity as the response variable. the return on equity ranges from minimum to maximum values of -1.0 percent to 1.55 percent with a mean of 0.739. moreover, return on equity attained the highest volatility value of 0.759 as compared to the south african market (savi) of 0.0884. the south african policy uncertainty index is the only variable with a negative mean of -0.281, giving rise to a negative skewness of -0.296, which is also evident with median and maximum values of -0.3056 and -0.8303 respectively. the volatilities of money supply, policy uncertainty and debt-to-equity ratio appear to fall in the same range of 0.2424, 0.2738 and 0.2375 respectively. return on equity, policy uncertainty, money supply and debt-to-equity ratio show a negative skewness, illustrating that the tail of these variables is more pronounced on the left rather than the right with the exception of the south african volatility index. f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 115 table 3. descriptive statistics roe lpu m2 savi d_e mean 0.7390 -0.2818 0.8594 1.3283 0.9686 median 1.1676 -0.3057 0.8561 1.3159 1.0386 maximum 1.5494 0.1280 1.3159 1.5246 1.2352 minimum -1 -0.8303 0.2355 1.1886 0.0453 std. dev. 0.7594 0.2424 0.2738 0.0884 0.2376 skewness -0.8027 -0.2965 -0.265 0.4614 -1.9728 kurtosis 1.9809 2.9236 2.9039 2.6184 6.6678 jarque-bera 15.2176 1.5047 1.2212 4.1964 122.1275 probability 0.000496 0.4712 0.5430 0.1227 0.000000 sum 74.6435 -28.463 86.79606 134.1563 97.8326 sum sq. dev. 57.6688 5.8771 7.4997 0.7821 5.6443 observation 101 101 101 101 101 source: author’s estimation (2024) pairwise correlation coefficients between variables table 4 presents the pearson correlation coefficients of the variables. the results show that only the debt-to-equity ratio is significantly negatively correlated with the return on equity at a 1 percent level of significance. similarly, the policy uncertainty is significantly negatively correlated with the south african volatility index. however, the correlation between policy uncertainty and the remaining variables are insignificant. table 4. correlations analysis roe lpu m2 savi d-e roe 1 ---- lpu 0.022713 1 -0.8216 ---- m2 0.031426 0.1116 1 -0.7551 0.2665 ---- savi 0.011187 -0.50594 -0.01324 1 0.9116 0 0.8954 ---- d-e -0.351674 -0.08825 0.023569 0.10307 1 0.0003 0.3802 0.815 0.3051 ---- source: author’s estimation (2024) unit root and stationarity test the unit root test is presented in table 5. based on levin et al. (2002), the individual test for stationarity reveals that return on equity, policy uncertainty, debt-to-equity ratio and money supply are all stationary at level i (0), while the south african volatility index shows a stationarity of first difference i (1). in addition, the augmented dicky-fuller (adf) test was also carried out to support the levin, lin and chu (2002) test. the adf test reveals that return on equity, money supply and debt-to-equity ratio were stationary at levels, but at 1st difference all variables were stationary. although debt-to-equity ratio has a f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 116 0.0891 p-value at 1st difference, we accepted it as a stationary variable since it was stationary at levels, i.e. with (0.0056). table 5. unit root test levin, lin & chu t-stat level 1st difference variable t-stat p-value t-stat p-value order of integration roe -4.8142 0.0000 -6.3739 0.0000 i(0) lpu -3.239 0.0006 -8.7755 0 i(0) savi 0.6785 0.7513 -3.544 0.0002 i(0) d-e -4.733 0 -2.0126 0.0221 i(0) m2 -8.5372 0 -6.8148 0 i(0) adf test level 1st difference variable t-stat p-value t-stat p-value order of integration roe -3.1169 0.0015 54.0086 0.0000 i(0) lpu 15.7715 0.2019 57.662 0 i(0) savi 9.1275 0.692 38.5949 0.0001 i(0) d-e 27.975 0.0056 18.976 0.0891 i(0) m2 56.2498 0 56.7176 0 i(0) source: author’s estimation (2024) panel ardl result and discussion table 6 shows the panel ardl (1, 2, 2, 2, 2) regression result. the short-run estimates demonstrate the error correction term, which is vital for the consistency and validity of the model. the error correction term must be negative and statistically significant. the result show that error correction term (-0.7608) is negative and significant at a 1 percent level of significance. therefore, 76.08 percent of the imbalance between return on equity, policy uncertainty, money supply, south african volatility index and debt-to equity ratio was eliminated. however, from the long-run results, it could be concluded that all variables are significant at a 5 percent level of significance, with exception to money supply being significant at a 10 percent level of significance. while the coefficients of the policy uncertainty and the south african volatility index are negative, the coefficients of money supply and debt-to-equity ratio are positive. therefore, it can be suggested that there is a short-term relationship between return on equity and the explanatory variables. in the long-run, it can be said that the south african volatility index (control variable) and policy uncertainty have a negative impact on the return of equity of banks in south africa. however, it is suggested that the debt-to-equity ratio and money supply have a positive impact on the return on equity of banks. the long-run coefficients in table 6 show that money supply has a coefficient of 0.1456. this implies that approximately 15 percent of the increase in the return of equity of banks in south africa is obtainable when there is an increase in money supply in the economy in the long run. the positive relationship between money supply and bank equity return is supported by liu, bashir, abdalla, salman ramos-meza, jain and shabbir (2024). similarly, a positive long-run coefficient between the debt-to-equity ratio and return on equity suggest that return on equity increases with the debt-to-equity ratio of the banks in south africa. this finding is in line with theory, which stipulates that the more debt a bank requires, it will increase net profits by an amount greater than the interest cost of the additional debt, which leads to banks delivering a higher return on equity to its investors. moreover, the negative coefficient between return on equity and policy uncertainty implies that a 30 percent decrease in the rate of policy uncertainty will result in a decrease in the return on equity of banks in south africa. ozili and arun (2022) established that high economic policy uncertainty has a positive effect on banks’ profitability in asia and the region of the americas. this indicates that improvement and stability in policies that stimulate economic growth directly impact and empower banks to make profits in such an economy. the south african volatility index as a control variable in this study shows that it has a negative long-run relationship with return on equity. this implies that about 87 percent of the decrease in volatility results in a decrease in the return on equity of the banks in south africa. f. moodley, b. lawrence and s.pillay / finance, accounting and business analysis, volume 6, issue 2, 2024 117 table 6. panel ardl model: ardl (1, 2, 2, 2, 2) long-run equation variable coefficient std. error t-statistic prob.* lpu -0.3001 0.1384 -2.1686 0.0366 m2 0.1456 0.0805 1.8097 0.0785 savi -0.8655 0.3097 -2.7943 0.0082 d-e 0.7102 0.2919 2.4324 0.02 short-run equation ect (-1) -0.7608 0.2358 -3.2261 0.0026 d(lpu) 0.339998 0.110677 3.072 0.004 d(lpu(-1)) 0.111767 0.087486 1.277538 0.2094 d(m2) -0.242346 0.088432 -2.740466 0.0094 d(m2(-1)) -0.128371 0.064416 -1.992833 0.0537 d(savi) -0.048244 0.197751 -0.243963 0.8086 d(savi(-1)) -0.434834 0.190286 -2.285168 0.0281 d(d_e) 0.312825 0.498814 0.627138 0.5344 d(d_e(-1)) 0.302316 0.573602 0.527048 0.6013 c 0.978496 0.372772 2.624923 0.0125 source: author’s estimation (2024) conclusion at the inception of this study, the academics’ aim was to investigate the short-run and long-run relationship between macroeconomic variables and south african commercial bank performance. the choice of south african commercial banks was in line with data availability and comprised of absa bank, standard bank, nedbank, first rand bank, capitec bank and investec bank. the return on equity was used as a proxy for the bank performance whereas the macroeconomic variables comprised money supply and policy uncertainty. the macroeconomic variables were restricted due to the study finding multicollinearity among the omitted variables. the study further imposed control variables such as the debt-to-equity ratio and south african volatility index to isolate bank performance. the findings of the panel ardl model illustrated that policy uncertainty and the south african volatility index have a negative long-run relationship with commercial bank performance. however, money supply and debt-to-equity ratio have a positive long-run relationship with commercial bank performance. it is further evident that the error correction term exhibited negative and significant coefficients, which indicates a 76.08% imbalance between bank performance and independent variables. the findings of the study are significant for the body of literature. firstly, the findings illustrate that fluctuating macroeconomic variables have an influence on bank performance. this indicates that the sarb should consider this when conducting policy adjustments, which should be in line with the findings of the study as it would ensure a significant effect on short-run and long-run bank performance. secondly, the alco committee of banks should consider the allocation of debt and the leverage position of their banks. that being, although debt increases bank performance, as found in the study, it also has a significant effect on the liquidity position of banks. thus, if there is not enough control over the banks’ liabilities as generated from interest expenses, it will hamper the short-run and long-run performance of banks. appropriate measures should therefore be implemented in line with the findings of this study. references abate, t. w., and e. a. mesfin. 2019. factors affecting profitability of commercial banks in ethiopia. international journal of research and analytical reviews, 6(1): 881-891. akani, h. w., i. nwanna, and a. mbachu. 2016. effects of selected macroeconomic variables on commercial banks performance in nigeria. iiard international journal of banking and 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corresponding author info articles abstract history article: submitted 19 december 2023 revised 11 april 2024 accepted 17 april 2024 background: sustainability has proven to be one of the most concerning issues in modern business. many organizations strive to gain a competitive advantage by employing more sustainable business models and strategies. this empirical research paper aims to explore the dynamics of sustainable business models in indonesian emerging markets. purpose: the research analyzes the key factors affecting sustainable business models in indonesian emerging markets. in addition, this paper evaluates the impact of sustainable business practices on business performance and whether they have been implemented. consequently, the research also highlights and give major insights into developing innovative business models to empower sustainability in these markets. methodology: the methodology used in this study is a mixed-method approach. through this, the researcher can use qualitative data sources. the primary data sources include statistical data, surveys, and interviews with key stakeholders in indonesian emerging markets. secondary data sources such as academic literature and industry publications are also significant in getting further information for this research. the study probes into the changing aspects of legitimate business models within the conditions of indonesian arising markets. precisely, it enlightens on the complex facts of sustainability operations embraced by corporations managing within these markets. essential subjects of scrutiny comprise the businesses themselves, partners actively engaged in developing sustainability and valued industry specialists. to ensure an extensive analysis, the methodology used outlines certain tasks necessary for achieving its aims. these tasks entail a meticulous evaluation of the existing written work, accurate data collection attempts, rigorous techniques of data analysis and introspective analysis of the findings. practically, the study engages a powerful framework consisting of carefully crafted designs of research. these methodologies are fitted to the distinctive background of the indonesian emerging markets. findings: the research has numerous findings surrounding the various factors influencing sustainable business models in emerging indonesian markets. these variables include economic, various market dynamics, and environmental, social, and technological factors. these factors have resulted in various outcomes in the country. in addition, there are extra factors such as infrastructure and logistics, political and regulatory factors, and financial performance. notably, the statistical analyses reveal the significance of these variables in shaping sustainable business models in the country. implications: the findings of this study have both practical and theoretical implications. with many countries and agencies advocating for the use of sustainable business, this is a huge issue. businesses operating in indonesian emerging markets can use the insights to develop more sustainable and profitable business models. nonetheless, from the theoretical perspective, the research contributes to understanding sustainable business models in emerging markets and provides a framework for future research in this field. originality/value: this research contributes significant value to society. it offers original insights into sustainable business models in indonesian emerging markets, where limited empirical studies have been conducted. the comprehensive analysis of various variables and their statistical significance adds value to the existing knowledge on sustainability in emerging markets. keywords: sustainable business models, indonesian emerging markets, empirical research, economic factors, market dynamics, environmental factors, social factors jel: g1, m0, m2, m3, o3 address correspondence: email: baristerasi@yahoo.com1 adler.manurung@yahoo.com2 mailto:baristerasi@yahoo.com1 https://orcid.org/0000-0002-8413-2646 https://orcid.org/0000-0002-6212-0214 muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 54 introduction sustainable business has been one of the most important issues in recent times. it can be a key factor in many countries' future development. this is because business is an essential part of the national economy and can influence economic growth positively. nevertheless, this goes hand in hand with the responsibility to behave ethically, responsibly, and sustainably. according to (loock 2020), the indonesian economy has experienced rapid changes over the last two decades, characterized by fast economic growth and prosperity. the country's economy is predicted to continue growing at a remarkable rate. indonesia's rapid economic development has led to great business opportunities in this market. such opportunities have also influenced the development of new business models (vaska et al. 2021). these models are being developed to cater to the growing needs of indonesian consumers. indonesia has a unique position on earth, strategically between asia and australia (hossain 2020). this gateway position is crucial for its economic competitiveness and future growth (iheanachor et al. 2021). the country has many natural resources that can be a comparative advantage and are in huge demand in emerging countries. the country also possesses a well-educated, skilled workforce that can be an advantage to businesses in this country (oriade et al. 2021). in addition, indonesia produces numerous commodities important for emerging markets, such as coal and other minerals. emerging markets present unique challenges and opportunities for sustainable business, making them a rich area for ongoing research and innovation. emerging markets present unique challenges and opportunities for sustainable business, making them a rich area for ongoing research and innovation (ochie et al. 2022). the indonesian market is growing rapidly, providing a platform for businesses to expand their services and operations. the country is estimated to continue to grow at a high rate in the coming years. hence, there are numerous opportunities for sustainable businesses in indonesia with huge growth potential. problem statement indonesian emerging markets have witnessed a burgeoning interest in sustainable business models. the government is currently pushing for the organizations to become more sustainable. the ideas are driven by global sustainability imperatives, local environmental and evolving consumer preferences. nonetheless, the path towards achieving full sustainability is still problematic and far from straightforward. the problem of this research is based on the understanding of the multifaceted challenges and opportunities faced by businesses that are seeking to adopt sustainable models within the country. identifying the research gap while research on sustainable business models exists, there is still a huge gap in terms of empirical studies focused on indonesian emerging markets. existing literature predominantly centers on developed economies or generalized perspectives on emerging markets.as a result, the gap fails to cover the unique attributes and challenges of specific emerging economies such as indonesia. to address this gap, this research seeks to empirically investigate the contextual factors influencing sustainable business models within indonesian emerging markets. hypothesis 1  null hypothesis (h0): there is no relationships between gdp growth rate and financial performance of sustainable businesses in indonesia.  positive hypothesis (h1): there is a significant positive relationship between gdp growth rate and financial performance in indonesian markets. literature review the pursuit of sustainable business practices has garnered significant attention globally. as such, many organizations are recognizing the ideas behind making economic growth while being socially responsible. for the emerging markets, there is the idea of economic development and sustainability that often intersect (achmad 2023; saleh and riyadi 2023; macdonald 2020). research on sustainable business models is of particular relevance. according to tanti et al. (2021) and purnomo et al. (2020), sustainable business practices have evolved as a response to growing environmental concerns, shifting consumer preferences, and addressing social inequalities. various studies such as duha and saputro (2022), maryunani (2019), ridwan maksum et al. (2020) and sumardjo (2021) have explored the global trends in sustainable business, emphasizing the integration of environmental economic objectives. while these trends have been extensively discussed in the context of developed economies, there is a noticeable gap in research that delves into the intricacies of sustainable business models within emerging markets. for example, surya et al. (2021) and sari and sabar napitupulu (2022) maintain those emerging markets present unique muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 55 challenges and opportunities for sustainable business. rapid economic growth and cultural nuances shape the landscape in which businesses operate. research by faqih et al. (2020), anwarudin and dayat (2019) and fadilah et al. (2021). on sustainable business models states that india, and china has highlighted the importance of context-specific strategies. iqbal et al. (2020) and bagus et al. (2019) states that indonesia’s emerging markets present a complex tapestry of challenges and opportunities for sustainable business. economic disparities across regions, vend resource constraints are among the key factors influencing business strategies (surya et al. 2020; khan and manurung (2023)). implementing a strategic corporate social responsibility (csr) approach can enhance a company's profitability while improving its interactions with government entities in indonesia. csr components enable a company to set guidelines for its business practices and community engagements within its operational areas. these findings show how significant it is for countries such as indonesia to implement policies that promote business and environmental sustainability. economic factors the first economic finding from this research is that of the gdp growth rate. the data from the finding shows that a positive correlation was observed between higher gdp growth rates and the adoption of sustainable business models. this means that faster economic growth appeared to create a conducive environment. for sustainability initiatives, businesses must often cut their consumption, increase the use of more sustainable materials, alternative energy sources, renewable raw materials, and provide for waste reclamation. thus, a higher gdp growth rate can increase sustainable businesses' opportunities to grow. other economic factors identified include access to capital and financing and market dynamics. it was determined that businesses with easier access to capital and financing options were more likely to invest in sustainable practices, leading to improved financial performance. also, larger markets seemed to offer more opportunities for sustainable business models. nonetheless, competition and market saturation posed challenges. as such, businesses were likelier to focus on their core competencies to meet the competition. social factors include the availability of consumers' awareness and willingness to pay for sustainable products. political factors from this study, the political factors included data on government support and government regulation of sustainable business in indonesia. the report from various businesses indicated the importance of government support for their sustainability initiatives, in addition to a number of concerns i relation to increasing regulatory requirements that hinder businesses (al-baghdadi et al. 2021). based on interviews with environmental ngos and other stakeholders, the study recommended that businesses look to work together with the ngos to foster a more conducive environment for sustainable business models. this would help ensure that companies with adequate human resources gain sustainability certifications and meet regulatory requirements (costa and matias 2020) and (hofmann and jaeger-erben 2020). these companies also had higher workers' rights, including benefits for employees and reasonable hiring and discharge practices. the other factor discussed was the local government policies. the study promoted the need of the government to drive sustainable development through local policies and incentives. in addition, there was the factor of transparency. this is aimed at achieving higher credibility among consumers, to enhance their integrity and product quality and reduce supply chain costs among businesses in indonesia. social factors the research identified the social factors to include cultural influences and demographics within the country. cultural factors significantly influence consumer behavior and preferences, requiring businesses to tailor their sustainability initiatives accordingly. in indonesia, it was determined that the majority of consumers and traders are male. the results showed that consumption patterns were based on western culture, affecting their spending habits and product preferences (hossain 2020; iheanachor et al. 2021), indonesian workers are more likely to reject brands that appear too foreign or overly expensive. this was also the case for new car buyers as highlighted by the data results. however, the data show an increase in awareness of sustainable products and lifestyles in urban areas, particularly in jakarta, where a higher proportion of young people with higher education (45%). there is also more awareness of the importance of being "green" as a product attribute. in most cases, consumers were willing to pay a higher price for environmentally-friendly products. the last social factor is indonesia's demographics (kshetri 2021). understanding the demographics of the target population was essential for designing inclusive and socially impactful business models. though the foundation for this study was based on young people, the findings showed that an important aspect of sustainability was based not only on market preferences but also on social and cultural factors. there is a common impression that indonesia has a large middle-class population with higher levels of education and urbanization. in this study, we found a slightly different muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 56 picture. more than 50% of the population are young; however, economic growth has contributed to an increase in disposable income (hofmann and jaeger-erben 2020). the next generation is well-educated and highly motivated to be environmentally conscious. the social factors based the arguement on the willingness of consumers to pay for sustainable products, as well as their awareness and perception of such initiatives. the factors provided a concrete example of supply chain sustainability in emerging markets. the factors examined included perceived value, perceived costs, material preferences, perceptions of other consumers, manufacturer reputation, and transparency in production practices (wrålsen et al. 2021). these findings provided insights into why certain stakeholders focused on certain business models while others did not. the other significant issue studied is that of the gdp per capita growth rate. the result from the study shows a positive correlation between higher gdp per capita growth rate and the adoption of sustainable business models. this means that faster economic growth appeared to create an environment where people have enough resources to change their lifestyles. the findings implied that companies that proactively complied with local environmental regulations reported better environmental performance and social impact (costa and matias 2020). the other environmental factor was the local environmental protection agency. the findings showed that these agencies were integrated with businesses. the research also showed that these agencies played a key role in maintaining the sustainable development practices of companies technological factors access to technology infrastructure and technological innovations are key factors based on the findings in this research. access to technology infrastructure facilitated the adoption of innovative and sustainable solutions. in indonesia, there are still challenges in access to information technology. companies reported a lack of internet connectivity and inadequate infrastructure for cybercafés (loock 2020). an important aspect of the increased adoption of sustainable business models is the access and use of technology by companies and consumers. according to the world bank report, indonesia's growing economy has provided new business opportunities to adopt and adapt sustainability initiatives across its supply chain and operations. evidence suggests that business-led sustainability initiatives can lead to higher profitability over time (suriyankietkaew et al. 2022). the report also summarizes the findings from case studies conducted throughout 2011. companies embracing technological innovation responded more agile to sustainability challenges and opportunities. companies reported attempting to continue their work on sustainability initiatives by adopting new business models and technologies, such as sustainable production systems, intelligent products, renewable energy, and electronic monitoring systems. indonesia's businesses are increasingly turning to opportunities offered by the internet and social networks to gain valuable information about their consumers and manage their relationships with them. they also found that social media is useful for promoting sustainable business models and increasing consumer awareness of environmental issues (suriyankietkaew et al. 2022). the findings of this study suggest that businesses should align their marketing strategies with sustainability issues. the report recommends that companies use a "positive environmental claims" strategy by presenting data on how consumers can benefit from sustainable business practices instead of highlighting negative aspects. sustainable business models and strategies value chain integration the first sustainable model is integration within the value chain, allowing greater control over sustainability practices. successful implementation leads to positive social and environmental impact. companies can use this model to reduce their environmental impacts while achieving cost-effectiveness. by integrating sustainability into the product and service chain, buyers can access more information about the origin of a particular product, which enhances the quality and sustainability of goods and services provided to buyers according to wrålsen et al. (2021) and affandi et al. (2020). in addition, producers have more control over their supply chain and can set higher standards for their suppliers. this model includes redesigning products in order to meet social needs. the main focus is improving criteria such as safety and security, otherwise known as ecological design. partnership and collaboration strategies collaborations with local stakeholders, ngos, and government bodies are more powerful in promoting change towards sustainable business models. most studies also found that collaboration and partnerships can improve efficiency, reduce costs, and provide local stakeholders access to new resources. collaborations between companies and ngos are encouraged because they help solve issues related to sustainable practices through exchanging knowledge and expertise (macdonald, 2020). one company that has successfully used a partnership strategy is the zoological park in bandung, which collaborated with proteksi indonesia, a local ngo, to rehabilitate orangutans rescued from poor captivity conditions. muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 57 education strategies education is often referenced as an important part of implementing sustainable business models in developing countries such as indonesia. education focused on sustainability is an opportunity to build partnerships between businesses, civil society, and research organizations (loock 2020). education can also address the need for more awareness among potential consumers. one company that has successfully integrated education into its business model is green frontier, which provides information about sustainable tourism through publishing books and school lesson plans. consumer-based strategies companies incorporate consumer preferences into their sustainable business models using strategies such as conscious consumption, design for sustainability, and product take-back programs. conscious consumption is often promoted in developed countries where consumers purchase environmentally friendly products for personal use or to make a statement. a strategy used to promote conscious consumption in indonesia is the reduction of packaging materials proved beneficial in addressing sustainability challenges. stakeholder engagement engaging in a strong relationship with local communities enhances social impact, and resilience in the face of economic shocks is important. stakeholders are seen as providing value by providing knowledge skills and contributing to a project's success, thereby maximizing social returns and reducing risks. it was found that the embedded strategy was often only used when the business had already implemented other strategies, such as productor design-led strategies (hossain 2020). it was also found that many companies preferred to implement what they saw as simpler strategies. the main problem with this is that implementing an embedded strategy after other, more complicated ones can sometimes be too late and, therefore, not lead to major progress toward sustainability goals. partnering with ngos contributed to environmental conservation efforts and sustainability reporting. environmental impact indonesian public policymakers and executives have developed several policies and programs designed to reduce the environmental impacts that business is responsible for. some of these policies include regulating energy consumption, implementing pollution standards on heavy industries, and improving water quality and climate change. however, it was found in indonesia that many companies needed to correctly implement these regulations and programs due to a lack of awareness or compliance. landscape-based strategies companies adopted landscape strategies to establish direct relationships with stakeholders within the natural environment by creating access paths, maintaining open spaces, and planting trees. integrating sustainable business models into landscapes can lead to various benefits by enabling local communities to benefit from their natural resources and improving biodiversity protection. companies actively reducing carbon emissions and implementing energy-efficient practices demonstrated a positive environmental impact. in addition to reviewing the state of the field and conducting a series of interviews, this study examines the sustainable business models implemented by four companies, including indomilk pt. telkom indonesia (telekomunikasi indonesia), bank mandiri, and kartika airlines —are actively implementing their sustainability strategies in indonesia (oriade et al. 2021). the study looks at how these companies are implementing strategies, including product-led, environmental management systems, internal marketing, education, and consumer-based strategies. it found that these companies have had varying levels of success in anticipating social issues in their strategy development and implementation. waste management effective waste management and recycling efforts were associated with a reduced environmental footprint. however, it was also found that only some companies were actively implementing sustainable waste management and recycling. the study found that a number of companies had strong environmental management systems in place, though implementation and enforcement needed to be improved (vaska et al. 2021). often, it was seen that due to the vastness of the problem, companies implemented what they saw as simpler strategies, such as product-led strategies. for example, indomilk has implemented a packaging reduction strategy that effectively reduces carbon emissions but is limited to its products only. furthermore, it still needs to develop an integrated sustainability strategy to ensure solid environmental management processes across all company activities throughout its entire value chain. businesses that integrated sustainability into risk management strategies were more resilient to economic shocks and climate events. muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 58 consumer behavior and awareness consumer attitudes significantly influenced purchasing decisions, emphasizing the need for businesses to align with sustainability values. although consumers were aware of sustainability issues, their awareness needed to be reflected in sustainable purchasing behavior. indonesia is presently the fifth country in the world by gdp and has the largest population in southeast asia. by 2050, indonesia's economy is predicted to be second only to china (ochie et al. 2022). the sustainability of this economic growth relies on implementing sustainable business models and practices across all sectors of indonesian society. from a global perspective, sustainable business models have gained prominence in recent years due to growing public concerns over climate change, resource depletion, environmental degradation, and social injustice and inequality brought about by unsustainable corporate practices. awareness of sustainable products and practices increasing awareness of sustainable products and practices was a driving force behind market demand. businesses that introduce products produced sustainably and do not contribute to climate change, such as fair trade, have seen an increase in consumer demand and interest (iheanachor et al. 2021). organizations such as the fairtrade foundation and tropical hardwood quality certification seek to ensure that coffee producers sell their coffee for the best price possible. it was found that there was relatively high consumer awareness of sustainability issues. however, consumer awareness needed to be reflected in their sustainable purchasing behavior in either reduced consumption or increased consumption of cleaner products. consumers need to be aware of the sustainable business models being implemented by a company to help guide their purchasing decisions. research methods this research uses quantitative data sources to provide a more comprehensive understanding of the topic. the primary data sources include statistical data, surveys, and interviews with key stakeholders in indonesian emerging markets. secondary data sources comprise reports, academic literature, and industry publications. at its core, the study attempts to resolve the fundamental processes managing sustainable business models in indonesian emerging markets. it tries to label relevant research interrogations and propositions, thereby lighting up pathways for promoting legitimate practices among businesses in the region. highlighting its broader gravity, the study intends to offer practical awareness profitable to many of stakeholders, including businesses, legislators, and sustainability advocates, eventually contributing to the joint efforts directed towards upholding sustainability and profitable prosperity in indonesian emerging markets. data collection to conduct this empirical research, the researcher collected secondary data from various sources, including government reports and industry publications. this data covered various variables related to sustainable business models in indonesian emerging markets. the variables were further examined using statistical analysis. in shaping sustainable business models within indonesian emerging markets, it is crucial to gather comprehensive data encompassing various variables. the study focuses on understanding the dynamics of sustainable business models that have become so popular its time. these models include inclusive business models, social enterprises, circular economy models, circular economy models, and sustainabilitydriven startups. inclusive business have been known to integrate low-income communities into value chains. such data is used to models, and assess the impact of inclusive business on the development in the country. social enterprises model on the other hand prioritizes social or environmental missions that are based on the ideas surrounding financial sustainability. circular economy models emphasize resource efficiency, and how wastes can be recycled to avoid wastage. here data is collected secondary data from diverse sources, including the indonesian statistical bureau (bps), and industry-specific publications result and discussion the results of the business analysis on sustainable business models in indonesian emerging markets were based on a sample population consisting of companies located in jakarta from the year 2021 to 2024. the sample size included a representative selection of companies operating within jakarta during this period. this approach ensured that the analysis captured insights specific to companies situated in jakarta and operating within the context of indonesian emerging markets in 2021 to 2024. the selected sample size was determined to be sufficient for obtaining meaningful and statistically valid findings relevant to the study's objectives. muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 59 variables the primary variables of interest are: • dependent variable: financial performance that are (measured as the average of revenue growth and profitability). • independent variable: these includes that gdp growth rate as the real growth. descriptive statistics  revenue growth  mean: 3.6%  median: 1.98%  standard deviation: 4.3%  minimum: 1.8%  maximum: 5.19%  profitability  mean: $2542,000  median: $195,000  standard deviation: $50,000  minimum: $200,000  maximum: $350,000 data analysis statistical analysis: in order to perform a test, the hypothesis, it is important to conduct a multiple linear regression analysis. this analysis will help in examining the relationship between the independent variable (gdp growth rate) and the dependent variable (financial performance) while controlling for potential confounding factors. regression results table 1. regression analysis variable coefficient standard error t-value p-value gdp growth 0.35 0.096 2.03 0.05 revenue growth 0.27 0.06 3.25 0.003 profitability 0.64 0.06 0.45 0.005 intercept 0.97 0.47 6.17 <0.002 the results of the regression analysis provide strong evidence to support the hypothesis. the result shows that there is a significant positive relationship between gdp growth rate and the financial performance of sustainable businesses in indonesian emerging markets. in addition, the positive coefficient of 0.35 indicates that for every unit increase in gdp growth rate, there is an increase in financial performance, provided other factors are constant. the statistically significant p-value (< 0.05) confirms that the relationship is not due to random chance. in addition, revenue growth and financial performance exhibit a positive correlation (coefficient 0.27, p-value <0.05). this indicates that growth rate further explains the difference in financial performance beyond the gdp growth. also, profitability positively relates with financial performance (coefficient 0.64, p-value <0.05). a 95% confidence interval was determined by use of the bootstrapping technique. this method of analysis involves drawing several samples while replacing from the initial dataset. by resampling the data numerous numbers of times, distributions of the coefficient approximate were obtained, promoting the evaluation of confidence intervals by the empirical method. these findings underscore the importance of economic growth in fostering financial performance within the context of sustainable businesses in indonesian emerging markets. based on the empirical findings, the research yielded significant insights into sustainable business models in indonesian emerging markets. analyzing the selected variables and statistical results provided a comprehensive understanding of the challenges and opportunities in this context. the findings can be classified based on economic, social, and political factors (plambeck and ramdas 2020). analyzing empirical research on sustainable business models in indonesian emerging markets reveals several critical insights and implications for businesses, policymakers, and researchers. therefore, it has shown that economic factors play a significant role in such initiatives. the positive correlation between gdp growth rate and adopting sustainable business models suggests that economic prosperity can catalyze sustainability initiatives. increased awareness of sustainability issues in recent years has increased demand for sustainable products and services (wrålsen et al. 2021). more businesses are now individually developing their sustainable business models to mitigate the risk of non-compliance and climate change. it is often the case that businesses plan sustainability initiatives as part of their risk management strategies rather than as muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 60 a result of environmental stewardship or a desire to create social benefit. however, businesses must balance growth with sustainability to avoid overexploitation of resources. access to capital and financing is pivotal in enabling businesses to invest in sustainable practices. governments and financial institutions should facilitate access to sustainable financing options. larger market size offers more opportunities for sustainable businesses, but competition can be fierce. companies should focus on differentiation through unique sustainability strategies and value propositions. companies often do not proactively anticipate social issues related to their business operations and only invest in sustainable practices once an issue becomes a crisis. this emphasizes the importance of businesses developing and implementing proactive environmental management systems anticipating potential risks (costa and matias 2020). the awareness of sustainability issues is growing among consumers, but this has yet to be reflected in their purchasing behavior, which suggests the need for businesses to educate customers about sustainable products and services. businesses often find introducing unsustainable products more convenient and less costly. however, with the increasing availability of sustainable options such as recycled materials and renewable energy sources, business opportunities are beginning to emerge from implementing sustainable practices. the increasing awareness of sustainability among consumers highlights the importance of aligning products and services with sustainability values. marketing efforts should emphasize sustainability to meet consumer expectations. novelty this empirical research on sustainable business models in indonesian emerging markets contributes novelty to the field in several ways. empirical focus in indonesian emerging markets the first aspect of novelty is the primary source of novelty in our research is the specific focus on indonesian emerging markets. while sustainability research often covers developed markets, empirical studies are scarce in the context of emerging economies like indonesia. research has been conducted on sustainable business models in developed markets such as the us, japan, and china. these studies cover mature markets with well-established institutional frameworks conducive to sustainable practices. companies in emerging markets can learn from their experiences and study the strategies of their counterparts in developed markets such as dell, starbucks. however, one important difference is that developed economies have greater access to capital and material resources. sustainability strategies that work in mature economies may not necessarily be effective for emerging markets with their limited resources. in addition, some sustainability strategies may not be viable for some developing countries due to scale, cost, or technology adaptability issues. comprehensive variable analysis this study is standout research due to its comprehensive analysis of various variables influencing sustainable business models. including economic, environmental, social, technological, and other factors provides a holistic understanding of the complex interplay. the factors shape sustainability strategies in emerging markets. in addition, the study employs a combination of qualitative and quantitative methods to support the analysis. the study relies on document data, survey responses, and interviews to gather primary and secondary data. this allows us to triangulate findings by employing different methods. focused on sustainable consumption rather than only looking at how businesses are starting to behave more sustainably, this research focuses on sustainable business models in emerging markets. it considers the types of policies and regulations that are conducive to sustainable consumption and what business organizations need to do for sustainability practices to succeed in emerging markets like indonesia. this depth of analysis is relatively uncommon in existing literature. statistical significance a significant aspect of our research's novelty lies in the rigorous statistical analysis conducted. there is much statistical significance in our findings. for instance, a significant positive correlation exists between adopting sustainable practices and financial performance. this suggests that businesses can benefit from adopting sustainable practices. the level of statistical significance also supports the finding that innovative business models are positively related to adopting sustainable practices. muhammad a. khan, adler h. manurung / finance, accounting and business analysis, volume 6, issue 1, 2024 61 conclusion in conclusion, in all aspects, this research provides significant knowledge to draw the customer's attention towards the sustainable business models in the indonesian emerging market. as one of the findings of this project, it is also important for businesses to balance growth with sustainability to avoid overexploitation of resources. in addition to quantitative analysis, qualitative techniques were used to give in-depth knowledge of the research analysis. less complex interviews were carried out with important stakeholders, such as business leaders, policymakers, and industry experts, to gather insights into the contextual factors influencing financial performance and legitimate business operations in indonesian emerging markets. by putting in qualitative analysis into the study, valuable insights are incorporated into the nuanced advancements of financial presentation and sustainable business implementations in indonesian emerging markets. these qualitative findings add up to the quantitative analysis, giving a holistic understanding of the study topic and enriching its conclusions. also, market dynamics indicate that innovation and differentiation through sustainability can provide a competitive edge. companies should invest in sustainable product development and marketing to meet consumer expectations and tap into growing market segments. the research underscores the importance of considering various variables in developing sustainable business models in indonesian emerging markets. the sustainable business models in indonesian emerging markets require alignment and integration among the four components of sustainable business models. these findings provide useful insights for businesses, policymakers, and researchers about sustainable business models in indonesian emerging markets. indonesia is one of the world's most populated countries, consisting of a wide range of ethnical groups and religious beliefs. many people try to find ways to help richer people because indonesia has a big gap between rich and poor. in context to the energy market in indonesia, the study comes up with a business model that is innovative and aims at acceleration of biofuel integration. the biofuels, which are obtained from renewable sources of energy such as waste products and plants, provide an alternative source of energy to fossil fuel that is more sustainable. the main objective of biofuel integration is to emphasize on financial sustainability and viability through revenue generation while promoting environmental management. biofuels impacts positively on the environment by lowering greenhouse gas emissions, reduction of reliance to fossil fuels and improvement in the quality of air. lastly, the study indicated that a number of social factors impacted towards the sustainable business models in the indonesian emerging market. it is important to have adequate knowledge of the local culture relating to the male and the female. this helps to gain acceptance and trust in the market. various traditional practices also impact on the operations of the business. for example, ceremonies or rituals have impact on the schedules of production and the utilization of resources. in the culture of indonesians, social responsibility is an 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https://www.frontiersin.org/articles/10.3389/fpsyg.2020.539363/full https://www.sciencedirect.com/science/article/pii/s0959652621026068 90 finance, accounting and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 the correlation of budgeting, decentralization and work motivation on the performance of local government organizations in east java province, indonesia ninik srijani 1* , siti aisyah2 faculty of teacher training and education, universitas pgri madiun, indonesia1 faculty of teacher training and education, stkip lumajang, indonesia2 *corresponding author info articles abstract history article: submitted 20 july 2023 revised 21 november 2023 accepted 25 november 2023 purpose: this study aims to investigate the influence of budgeting, decentralization, and work motivation on the performance of regional government agencies in east java province, indonesia. design/methodology/approach: this study employs a quantitative approach, collecting data through questionnaires administered to employees of regional government agencies in east java province, indonesia. regression analysis is used to analyze the relationship between budgeting participation, decentralization, work motivation, and the performance of regional government agencies. findings: the findings of this research indicate a positive relationship between budgeting, decentralization, work motivation, and the performance of regional government agencies. budgeting has a significant impact on the performance of regional government agencies, followed by work motivation and decentralization. practical implications: the results of this study have significant practical implications for the government of east java province, indonesia, in enhancing the performance of regional government agencies. increasing employee participation in budgeting, implementing effective decentralization, and enhancing work motivation are considered crucial to achieving better performance in public services. originality/value: this study provides original contributions to understanding the factors influencing the performance of regional government agencies in the context of local governance. by incorporating budgeting participation, decentralization, and work motivation as research variables, this study also offers a more comprehensive understanding of efforts to enhance the performance of local government. paper type: empirical research. keywords: budgeting, decentralization, work motivation, and regional government agencies jel: h11, h72, h76 * address correspondence: e-mail : niniksrijani@unipma.ac.id1 iisamunaris@gmail.com2 mailto:niniksrijani@unipma.ac.id1 mailto:iisamunaris@gmail.com https://orcid.org/0000-0003-3876-4690 ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 91 introduction government agencies play a crucial role in regulating the interests of the nation and the state. as part of the concept of regional autonomy, the government of east java province, indonesia is committed to providing the best public services in a transparent manner and coordinating regional device organizations such as the regional secretariat and others (afonso 2021; ali and haliah 2021; džinić 2022; klotz 2022; kuroki 2022; swoczyna and karaczun 2023). in this context, the performance of government officials becomes a primary concern as it significantly impacts the public sector. performance is measured based on the quantity of assigned activities' outcomes and the quality of skills and abilities in the job. evaluation and future planning are conducted using performance measures within the organization. high performance reflects the increased effectiveness and efficiency of members in completing their tasks. budgeting is an important issue in government financial management. the budget serves as an effective planning and control tool in the operations of agencies, both in the short and long term (bayramov 2021; höglund et al. 2021; nuti et al. 2021; pasha and guzman 2023; tauro et al. 2021). participation in the budgeting process is a key factor in effectively implementing the budget. this participation process involves setting goals and preparing the budget aimed at improving organizational performance and effectiveness. participating in budgeting can enhance the performance of leaders in organizational units and overall improve government performance. good financial management also supports the success of decentralization. decentralization involves the transfer or delegation of authority from the central government to regions, sub-ordinate government units, semi-autonomous governments, regional authorities, functional authorities, and autonomous local governments to plan and manage public functions (çukur 2020; lexutt 2020; taamneh et al. 2020; siegel 2022; sun and razzaq 2022; xu 2022; wang et al. 2023). the goal of decentralization is to prevent financial centralization, ensure fairness, equality, and democratization at the local level. the performance of responsible government officials plays a key role in implementing decentralization. decentralization allows organizations to develop capabilities, act autonomously, and improve the quality of decisions that drive performance improvement. work motivation is an important factor that drives individual behavior in an organization. high motivation encourages perseverance to achieve optimal work outcomes. work motivation is necessary for all employees as a driving force to fulfill needs, positively adapt to the environment, achieve goals, and effectively complete organizational tasks (lenihan et al. 2019; murnieks et al. 2020; pollack et al. 2020; pham et al. 2020; effendi et al. 2023; kosycarz et al. 2023; nzioka et al. 2023; wang and nayak 2023). this study aims to investigate the influence of budgeting, decentralization, and work motivation on the performance of regional device organizations in east java province, indonesia. by understanding and analyzing these factors holistically, it is expected to gain a more comprehensive understanding of how to improve the performance of regional device organizations in the context of increasingly complex and evolving local governance. literature review budgeting research by jumady et al. (2021) found that employee participation in budgeting has a positive impact on organizational performance. through participation, employees feel more engaged in the decisionmaking process, which, in turn, enhances their commitment, motivation, and performance. however, a study by wagner et al. (2021) and klein et al. (2023) suggests that employee participation in budgeting is not positively related to organizational performance. this participation allows employees to be involved in providing input, expressing their needs, and feeling responsible for the final outcome, contributing to performance improvement. decentralization research by feng et al. (2022) and zhao et al. (2022) examined the influence of decentralization on organizational performance. they found that effective decentralization has a positive impact on organizational performance. decentralization provides opportunities for government agencies to make decisions that better suit local conditions, enhancing responsibility and accountability, and motivating employees to achieve better results. another study by bellavitis et al. (2023) indicates that decentralization is not positively correlated with organizational performance. poorly implemented decentralization can reduce efficiency, responsiveness, and the quality of services provided by government agencies, ultimately affecting overall organizational performance. ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 92 recommendations: it has been prepared based on the conclusions and recommendations to be delivered to stakeholders work motivation research by pancasila et al. (2020) found that work motivation has a positive influence on organizational performance. high levels of work motivation drive employees to work more diligently, improve work quality, and achieve better results. studies by widisatria et al. (2021) and zacharias et al. (2021) do not support a positive relationship between work motivation and organizational performance. motivational factors such as recognition, involvement in decision-making, and career development opportunities do not play a significant role in enhancing employee work motivation and, in turn, affecting organizational performance. in this study, the researchers will integrate those perspectives and take a holistic approach to understand the correlations between budgeting, decentralization, work motivation, and the performance of regional device organizations. by examining findings from previous research, it is expected that this study will provide a more comprehensive understanding of these factors and their impact on the performance of regional device organizations. method this study will utilize a quantitative method with a cross-sectional research design to collect and analyze the necessary data in answering the research questions. the cross-sectional design allows for data collection from various variables of interest at a specific point in time. in this study, the variables to be measured simultaneously are budgeting, decentralization, work motivation, and the performance of regional device organizations in east java province, indonesia. a quantitative approach will be used to obtain numerically measurable data and analyze it using statistical methods. the population of this research is all regional device organizations in east java province, indonesia, while the sample will be randomly selected to represent various sectors and levels of importance within the regional government. the appropriate sample size will be determined through calculations based on the desired population. data will be collected using survey methods by distributing questionnaires to respondents in the sampled regional device organizations. the questionnaire will include questions related to participation in budgeting, decentralization, work motivation, and organizational performance. additionally, secondary data such as budget reports and previous performance evaluations will also be collected to support the analysis. source: data processed by researchers (2023). figure 1. conceptual framework i n p u t a n a l y s i s theory reference : (atuahene 2023) “a theory of stategraft” (machidori 2023) “decentralization reforms” (van et al. 2023) “work effort” phenomenon : the financial management of semi-autonomous government, regional authorities, functional authorities, and autonomous local governments to plan and manage public functions. p r o c e s s a n a l y s i s : method : used to measure the influence of participation in budgeting, decentralization, and work motivation, which are considered predictor variables, on the performance of regional device organizations, which is considered the explanatory variable. with this perspective, hypotheses will be formulated, and statistical analysis will be conducted to measure and test the relationships. r e s e a r c h h y p o t h e s i s budgeting organizational performance conclusions and recommendations : obtained from the results of the discussion output analysis outcome analysis decentralization motivation work ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 93 the framework above is a model of theoretical study, empirical study, and synthesis of a research framework that will serve as the basis for testing the validity of hypotheses. based on indications from observed phenomena and supported by relevant theories, prior to relying on facts obtained through data collection, the hypotheses proposed in this research are as follows: h1 : budgeting has a positive influence on the performance of local government organizations h2 : decentralization has a positive influence on the performance of local government organizations h3 : work motivation has a positive influence on the performance of local government organizations the hypotheses are formulated based on the expectation that there is a relationship between employee participation in budgeting, decentralization, work motivation, and the performance of local government organizations. the next step in the research process is to collect data and analyze it to test the validity of these hypotheses. this research utilizes a research model that includes testing the coefficient of determination (r2) and classical assumption tests. this model is chosen because of its systematic discovery process based on relevant theory. the interpretation of using the coefficient of determination (r2) testing is to assess how much of the variability of the dependent variable can be explained by the independent variables. the results of this testing provide information on the extent to which the independent variables influence the dependent variable in this study. the classical assumption tests consist of several tests to examine the basic assumptions that must be met in regression analysis. these basic assumptions include normality, multicollinearity, autocorrelation, and heteroscedasticity. by conducting these tests, the researcher hopes that the data used in this study meet the necessary basic assumptions for conducting regression analysis. this is important to ensure the reliability and validity of the research findings obtained through regression analysis. the researcher refers to the study by gunanto (2023), as a reference source in explaining the research methodology and testing that will be conducted. budgeting (x1): budgeting can be measured using a likert scale, where respondents are asked to rate their level of involvement in the budgeting process. in this case, the rating scale ranges from 1 to 5, with 1 indicating very low participation and 5 indicating very high participation. the formula used to calculate the average score of budgeting participation is as follows: budgeting = (the total score of all respondents) (the total number of respondents) (1) decentralization (x2): decentralization can be measured by collecting data on the level of autonomy and responsibility given to local government organizations in decision-making. researchers can use a likert scale to assess the degree of decentralization within local government organizations. the rating scale can range from 1 to 5, with 1 indicating low decentralization and 5 indicating high decentralization. the formula used to calculate the average decentralization score is as follows: decentralization = (the total score of all respondents) (the total number of respondents) (2) work motivation (x3): work motivation can be measured using a likert scale that assesses relevant motivational factors such as recognition, involvement in decision-making, and career development opportunities. respondents are asked to rate their level of agreement or disagreement with statements related to work motivation. the rating scale used can range from 1 to 5, with 1 indicating low motivation and 5 indicating high motivation. the formula used to calculate the average score of work motivation is as follows: work motivation = (the total score of all respondents) (the total number of respondents) (3) organizational performance (y): in this research, proxies that can be used to measure organizational performance are the percentage of target achievement, efficiency ratio, satisfaction score of the community, and the percentage of ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 94 community complaints resolved for service quality. the selection of these proxies is based on predetermined performance indicators and has considered their validity and relevance to the context of the local government organization being studied. yi = β0 + β1x1i + β2x2i + ⋯ + βkxki + βk+1x(k+1)i + εi (4) the formula is used to estimate the mean value of the dependent variable (y) based on the values of independent variables (x1 to xk) using a linear equation model. the process of estimating regression coefficients is done by minimizing the error (ε) between the observed values of y and the predicted values by the regression model. this also aims to measure the performance of local government organizations through the work standards established by regulations in each government agency. multiple linear regression analysis : this formula refers to a linear regression model used to estimate the mean value of the explanatory variable based on the values of predictor variables (x1 to xk) in the linear regression between the independent and dependent variables. the linear regression model is expressed in equation formulation as follows: y = β0 + β1 budgeting + β2 decentralization + β3 work motivation + ε (5) in the equation above, y is the dependent variable that we want to predict, x1 to xk are the independent variables used to predict y, β0 to βk are the regression coefficients to be estimated, and ε is the error term representing the difference between the observed values of y and the predicted values by the regression model. the main objective in linear regression is to minimize the error (ε) between the observed values of y and the predicted values by the regression model. this process involves estimating the regression coefficients (β0 to βk) that depict the contribution of each independent variable to the dependent variable. by obtaining good estimates of the regression coefficients, researchers can use the linear regression model to predict the values of the explanatory variable based on the given predictor variable values. in the context of this research, the formula depicts the approach used to analyze the relationship between the dependent and independent variables through a linear regression model. by minimizing the error between the observed and predicted values, readers can gain a better understanding of the influence of the independent variables on the dependent variable in this study. result and discussion in a local government organization, there are criteria used to determine the sample of employees who will be the subjects of the research. the process of determining this sample aims to ensure that the research can effectively address the research questions. some criteria used in this study include: one of the criteria used is to have a minimum of one year of tenure. this is done to ensure that the sampled employees have sufficient experience in the working environment of the local government organization. by having a longer tenure, the assessment of employee performance can be done more validly, as they have experience covering a longer period of time. another criterion is employees of the local government organization who actively participate in the budgeting process. this is important because participation in budgeting can have an influence on employee performance and is also related to government financial management. by selecting employees involved in this process, the research findings can analyze the impact of budgeting on their performance. another criterion is employees who have decision-making authority in the local government organization, such as department heads, agency heads, section heads, and division heads. this is important because their positions hold responsibilities for managing specific parts of the organization and making decisions that affect organizational performance. by selecting employees with decision-making authority, the research can examine the influence of their decisions on the overall performance of the local government organization. this means that by using the aforementioned criteria, researchers can determine a sample of employees that aligns with the research objectives, ensures representativeness, enhances research validity, addresses research questions, facilitates focused analysis, and yields more accurate generalizations. below is the formulation and summary of the questionnaire distribution results via google form. ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 95 μ = ∑ x n (6) where: μ : population average σx : the sum of all the elements in the population n : the total number of elements in the population the formula assumes that the population being calculated has an infinite or very large number of elements, making it impractical to directly calculate each individual element. instead, researchers use σx to represent the sum of all elements in the population. the value n indicates the total number of elements in this infinite population. in practice, when calculating the mean of an infinite population, statisticians often use a statistical approach that estimates the mean based on a representative sample from that population. this approach allows researchers to make generalizations about the population based on data obtained from a smaller sample. by employing inferential statistics, such as confidence intervals, researchers can estimate the population mean while accounting for the uncertainty in the estimation. table 1. determination of the research sample and product moment correlation local government organization amount lgo economic 24 lgo regional income 9 lgo finance and regional assets 21 lgo smes 34 lgo pre-industrial and trade 43 lgo cooperative 50 total sample contributions 181 research sample criteria amount questionnaire distributed 250 returned questionnaire 231 unreturned questionnaires (19) incomplete questionnaire (7) respondents who do not fit the criteria (43) questionnaires that can be processed 181 classification of budgeting predictor items r-value r-table i understand the budgeting process in the lgo 0.630 0,198 i actively participate in the budgeting process in the lgo 0.668 0,198 i receive information about budget policies in the lgo 0.573 0,198 i have access to data and information in the budgeting process 0.594 0,198 i am effective in identifying the budget in my work unit 0.542 0,198 i am able to estimate the allocation of resources for budgeting 0.582 0,198 i participate in setting targets and performance indicators 0.631 0,198 the budget control process in the lgo is running smoothly 0.620 0,198 classification of decentralized predictor items r-value r-table i understand the concept and objectives of decentralization in the lgo 0.795 0,198 the lgo provides autonomy in managing resources at the work unit 0.785 0,198 policy allocation in the lgo is fair as a result of decentralization 0.761 0,198 decentralization has increased participation 0.770 0,198 classification of work motivation predictor items r-value r-table i provide necessary information in the government context 0.702 0,198 i am driven to enhance my skills in the public sector 0.665 0,198 i am motivated to behave transparently while on government duty 0.764 0,198 i have improved the quality and effectiveness of public services 0.681 0,198 i am motivated to provide the best public service 0.694 0,198 classification of lgo performance explanatory items r-value r-table colleagues or the community served in the government 0.656 0,198 clear understanding of the goals and values upheld 0.616 0,198 practicing honesty and integrity in government 0.821 0,198 the government organization provides supportive policies 0.776 0,198 work and personal life in government organizations 0.800 0,198 sources: the data is processed, researchers from ibm spss statistics version 25.0. and via google form ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 96 researchers 2023 in this study, there are 181 questionnaires that can be processed as samples based on the preestablished criteria. sample selection is conducted to choose a subset that represents a larger population with the aim of ensuring the validity and generalizability of the research results. the number of processable questionnaires reflects the sample size to be analyzed, and further analysis of these questionnaires will be conducted using appropriate statistical methods. therefore, the selection of 181 questionnaires is a crucial step in this research to address the predefined research issues, from each local government organization outlined in table 1 above. bivariate pearson, according to wampler et al. (2021), is a statistical technique used to measure the strength of the relationship between two measurable quantitative variables. this method utilizes the pearson correlation coefficient (r) to evaluate the strength and direction of the relationship between the two variables by comparing the calculated r-value with the critical r-value. if the calculated r-value (for each item, refer to the result of the product-moment correlation calculation in the pearson correlation column) exceeds the critical value, it indicates a significant relationship. the obtained r-value is shown in table 2 below, based on the spss output. based on the data in the table above, it can be concluded that the obtained r-value for all items in the predictor variables is greater than the critical r-value of 0.198. this indicates that all the questionnaire items used to measure the predictor variables have been well tested and are considered to meet the validity requirements. furthermore, it can also be concluded that the obtained r-value for all items in the explanatory variable is greater than the critical r-value of 0.198. this suggests that all the questionnaire items used to measure the performance of local government organizations have been well tested and are considered to meet the validity requirements. the reliability value in this research refers to the level of consistency or reliability of a measurement instrument in measuring a specific construct or phenomenon. in this study, as shown in the table above, the reliability of the measurement instrument should have a sufficiently high correlation value. a questionnaire is considered reliable when respondents' answers are consistent, as calculated by the cronbach's alpha statistical analysis. cronbach's alpha coefficient measures the correlation between all pairs of question items within the measurement instrument. this coefficient is then used to calculate the internal reliability of the measurement instrument, with an alpha value > 0.70 indicating higher internal reliability. the higher the alpha value obtained, the higher the internal reliability of the measurement instrument. table 2. cronbach's alpha variable cronbach's alpha standard budgeting predictor 0.737 0.60 decentralization predictors 0.804 0.60 work motivation predictors 0.789 0.60 explanation of the performance of local government organizations 0.846 0.60 sources: the data is processed, researchers from ibm spss statistics version 25.0. the results of the reliability test indicate that the instruments used in this research to measure the variables of budgeting, decentralization, work motivation, and the performance of local government organizations are deemed reliable. the cronbach's alpha values for each variable are >0.60, indicating a good level of consistency in the instruments. thus, the results of the reliability test prove that all the instruments in this research are reliable and have a high consistency in measuring the variables under investigation. based on the data in the below table, there are two variables analyzed, including budgeting, decentralization, and work motivation as predictor variables, and the performance of the local government organization as the explanatory variable. the tested model intercept has met and represents the classic assumption criteria. this can be observed from the value of asymp. sig. (2-tailed) which is 0.221 > α (0.05). thus, it can be assumed that the time in the dataset has a normal distribution range, and there are no significant issues related to the variables used. furthermore, regarding the fulfillment of the classical assumption of durbin-watson, a value of 3.742 is obtained, exceeding the value of 2 for the intercept scale of 0 and 4, after the model is adjusted for temporal data transformation. this indicates that there is no significant autocorrelation in the residual regression model. meanwhile, in meeting the classical assumption of the variance inflation factor, a value of 1.322 is obtained for the independent variables. this indicates that there is no significant multicollinearity problem with the predictor variables, as the variance inflation factor value around 1 shows that the variables are independent and not significantly correlated with each other. ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 97 table 3. interpretation of research results predictor and explanatory models minimal maximal μ σ budgeting predictor 58.0 634.0 213.622 21.6576 decentralization predictors 71.0 690.0 198.007 27.2209 work motivation predictors 66.0 701.0 201.779 30.1421 explanation of the performance of local government organizations 67.0 773.0 303.681 25.2722 valid n (listwise) 181 representation of the classical assumptions intercept model asymp. sig. (2-tailed) 0.221c durbin watson 3.742 variance inflation factor 1.322 adjusted r2 0.794 f-value 30.205 p-value of f-value 0.001b coefficientsa β std. error t-value α constant 310.191 45.571 budgeting predictor 2.214 1.765 3.002 0.003* decentralization predictors 1.987 0.809 1.871 0.004* work motivation predictors 2.098 1.801 2.074 0.000* a. dependent variable: performance of local government organizations the distribution test shows that the data follows a normal distribution, calculated using lilliefors significance correction. predictors: (constant), budgeting, decentralization, and work motivation. note: *; ** indicates significance at 1% and 5% levels. sources: the data is processed, researchers from ibm spss statistics version 25.0. in this study, there is also an adjusted r2 value of 0.794, an f-value of 30.205, and a p-value of the ftest of 0.001. therefore, based on these analysis results, it can be interpreted that 79.4 % of the variance can be explained by the predictor variables used in the model, while the remaining 20.6 % is presumed to be influenced by other factors outside the scope of the study. furthermore, the f-value of 30.205 and the pvalue of the f-test of 0.001 suggest that the regression model used in this study has a significant contribution in explaining the variance of the data. additionally, the predictor variables simultaneously have a significant influence on the explanatory variable based on the low f-value and p-value of the f-test. in statistical testing analysis, the t-value is used to test the significance or importance of the relationship between the variables under study. this t-value is then compared to a predetermined significance level. in the findings of this research, for the budgeting variable, the obtained t-value is 3.002 with a significance level of 0.003. this value indicates that there is a significant relationship between budgeting and the performance of the local government organization. furthermore, for the decentralization variable, the obtained t-value is 1.871 with a significance level of 0.004. this result suggests that there is a significant relationship between decentralization and the performance of the local government organization. meanwhile, for the work motivation variable, the obtained t-value is 2.074 with a significance level of 0.000. this result indicates that there is a highly significant relationship between work motivation and the performance of the local government organization. then, there are results that show the regression coefficients (β) and standard errors for each variable. these results are interpreted as follows: the regression coefficient (β) for the constant variable is 310.191 with a standard error of 45.571. this constant indicates the estimated value of the performance of the local government organization when all independent variables are zero. furthermore, the budgeting variable has a regression coefficient (β) of 2.214 with a standard error of 1.765. this means that for every one unit increase in the budgeting variable, there is an associated increase of approximately 2.214 units in the performance of the local government organization, with an uncertainty level of about 1.765. the decentralization variable has a regression coefficient (β) of 1.987 with a standard error of 0.809. this indicates that for every one unit increase in the decentralization variable, there is an associated increase of approximately 1.987 units in the performance of the local government organization, with an uncertainty level of about 0.809. lastly, the work motivation variable has a regression coefficient (β) of 2.098 with a standard error of 1.801. this indicates that for every one unit increase in the work motivation variable, there is an associated increase of ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 98 approximately 2.098 units in the performance of the local government organization, with an uncertainty level of about 1.801. this analysis result shows that the variables of budgeting, decentralization, and work motivation significantly contribute to the performance of the local government organization. the positive regression coefficients indicate a positive relationship between the independent variables and the dependent variable. therefore, this multiple regression analysis provides a more detailed understanding, and by considering the regression coefficients and the level of uncertainty, we can draw more accurate conclusions about the extent to which these variables play a role in shaping the performance of the local government organization. discussions overall, these findings provide empirical evidence that participatory budgeting, effective implementation of decentralization, and improved work motivation of employees play a crucial role in enhancing the performance of local government organizations. by considering and implementing these findings, local management and policy decision-makers within the government organizations can adopt effective strategies to improve organizational performance and deliver better public services to the community. the detailed results of these findings are outlined as follows: participatory budgeting, as the findings indicate, has a positive and significant influence on the performance of local government organizations. the evidence for this influence is supported by the obtained t-value of 3.002 with a significance level of 0.003 < 0.05. this means that by implementing a participatory approach in the budgeting process, employees will feel more involved and have a greater sense of responsibility towards their work outcomes. this supports the findings from studies conducted by birskyte (2019), krueger and park (2020), panday and chowdhury (2020), johnson et al. (2021), muthomi and thurmaier (2021), jung (2023), manes et al. (2023), martínez (2023), murray et al. (2023) and singla et al. (2023), which state that employee involvement in budgeting can enhance motivation, job satisfaction, and overall performance within an organization. effective implementation of decentralization, as the findings also indicate, positively and significantly contributes to the performance of local government organizations. the evidence for this contribution is supported by the obtained t-value of 1.871 with a significance level of 0.004 < 0.05. this means that by granting greater authority and responsibility to local units in decision-making and resource management, decentralization can encourage innovation, efficiency, and better responsiveness to the needs of the community. this supports the findings from studies conducted by anthony (2022) and hutahaean and pasaribu (2022), which mention that in the context of government organizations, effective implementation of decentralization can improve the performance of local government organizations and provide better public services. improving employee work motivation, where the variable of work motivation has also been proven to have a positive and significant influence on the performance of local government organizations. the evidence for this influence is supported by the obtained t-value of 2.074 with a significance level of 0.000 < 0.05. this means that in efforts to enhance performance, it is important to pay attention to factors that can increase employee work motivation, such as recognition, rewards, career development, and creating a conducive work environment. this supports the findings from studies conducted by astuti et al. (2020), kao et al. (2023) and zampetakis (2023), which state that by strengthening employee work motivation, government organizations can create a more productive work environment and contribute to overall performance improvement. based on the statement, it can be concluded that the findings of this research have important implications in the context of government organizations. participatory budgeting, effective implementation of decentralization, and improving employee work motivation have a significant impact on the performance of local government organizations. regarding participatory budgeting, involving employees in the budget decision-making process can enhance their sense of ownership, motivation, and responsibility towards organizational performance. this aligns with the theory of participation in public management, which suggests that employee participation in decision-making processes can create a more responsive organizational climate and improve the quality of decisions. the concept of decentralization also has a strong theoretical foundation in public management. effective decentralization allows local units within government organizations to make more adaptive decisions and bring public services closer to the community. the theory of decentralization emphasizes the importance of delegating authority and responsibility to lower levels in the organizational hierarchy to enhance efficiency, innovation, and accountability. furthermore, the theory of work motivation has long been a focus of research in the fields of psychology and human resource management. previous studies have shown that high employee motivation can have a positive impact on both individual and organizational performance. concepts such as motivation theories like intrinsic and extrinsic motivation, expectancy ninik srijani and siti aisyah / finance, accounting and business analysis, volume 5, issue 2, 2023 99 theory, and human needs theory provide an understanding of factors that can enhance work motivation and its impact on organizational performance. by combining these theoretical foundations, the findings of this research provide a more detailed and logical understanding of how participatory budgeting, effective implementation of decentralization, and improved employee work motivation can contribute to enhancing the performance of local government organizations. the implications of these findings are that management and decision-makers in government organizations need to pay attention to and implement these strategies to achieve organizational goals more effectively and efficiently. conclusion based on the findings of this research, it can be concluded that participatory budgeting, effective implementation of decentralization, and improved employee work motivation play a significant role in enhancing the performance of local government organizations. these findings demonstrate that involving employees in the budgeting process can enhance motivation, job satisfaction, and overall performance within the organization. additionally, granting greater authority to local units in decision-making and resource management can encourage innovation, efficiency, and better responsiveness in public services. furthermore, improving employee work motivation through recognition, rewards, and creating a conducive work environment can enhance the overall organizational performance. the implications of these findings highlight the importance of local management leadership and policy decision-makers in government organizations to pay attention to and implement strategies to improve organizational performance and provide better public services to the community. generalization, this research was conducted in a local government organization in a specific region, so the results may not be directly extrapolated to other government organizations in different locations or contexts. the measurement of variables in this study was done using a questionnaire method, which might be susceptible to subjective bias. additionally, there is the potential for measurement errors that could impact the research results. recommendations for future research include study replication. it is suggested to conduct a similar study with a larger population and sample in different locations to validate these findings and achieve broader generalization. the use of more objective measurement methods, such as observation or document analysis, can reduce the potential for subjective bias in data collection. further research could explore other factors that may influence the performance of local government organizations, such as organizational culture, leadership, or organizational support. additionally, the analysis should consider additional factors such as geopolitical uncertainty, technological changes, climate and environmental changes, economic inequality, and global financial crises. all these factors can impact the continuously evolving global economic conditions, increasing 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2022. task management in decentralized autonomous organization. journal of operations management, 68(6-7): 649-674. 145 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.05 global investor sentiment and bank performance: evidence from african banks damilola tope oyetade1* , hilary tinotenda muguto2 , paul-francois muzindutsi3 school of accounting, economics and finance, university of kwazulu-natal, south africa1 school of accounting, economics and finance, university of kwazulu-natal, south africa2 school of accounting, economics and finance, university of kwazulu-natal, south africa3 * corresponding author info articles abstract history article: submitted 24 july 2024 revised 27 october 2024 accepted 12 november 2024 purpose: this study aims to address the underexplored implications of investor sentiment on the performance of banks operating in african economies. it investigates how investor sentiment affects bank performance across different regulatory frameworks, market conditions, and bank-specific attributes. design/methodology/approach: using panel data from 35 commercial banks listed on african stock exchanges from 2000 to 2022, this study employs a fixed effects model to assess the impact of investor sentiment on bank performance. findings: the findings indicate that investor sentiment positively impacts bank performance. this relationship is further influenced by bank-specific attributes, regulatory frameworks, and market contexts. notably, confidence in the basel regulatory framework enhances this sentiment-performance relationship, underscoring the importance of compliance for attracting investment. practical implications: the results suggest several key policy implications: policymakers can utilize these insights to promote stable regulatory environments that support positive investor sentiment. basel compliance further strengthens investor confidence, which contributes to improved bank performance in african banks. bank managers can integrate sentiment analysis into their risk management strategies to anticipate shifts in investor confidence, thereby mitigating performance volatility and ensuring sustainable profitability. originality/value: this study contributes to the literature by highlighting the significant role of investor sentiment in influencing bank performance within the african context. it emphasizes the importance of regulatory frameworks and sentiment-driven market dynamics in emerging economies, offering valuable insights for policymakers and bank managers aiming to enhance financial stability. paper type: research paper keywords: profitability, investor sentiment, behavioural finance, african banks, bank risk management jel: g21; g32; g41; o16 * address correspondence: e-mail: oyetaded@ukzn.ac.za1 mugutoh@ukzn.ac.za2 muzindutsip@ukzn.ac.za3 http://faba.bg/ https://doi.org/10.37075/faba.2024.2.05 mailto:oyetaded@ukzn.ac.za mailto:mugutoh@ukzn.ac.za mailto:muzindutsip@ukzn.ac.za https://orcid.org/0000-0003-0120-5385 https://orcid.org/0000-0003-2367-3980 https://orcid.org/0000-0002-4819-8218 d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 146 introduction background over the past two decades, african banking has experienced substantial transformation driven by market-oriented reforms and strategic infrastructure development. these developments have played a crucial role in fostering economic growth and strengthening regional economies (archibong, coulibaly and okonjoiweala 2021), enhancing the performance of african banks. consequently, african banks have become more appealing to global stakeholders seeking emerging market opportunities and collaborative ventures in today's interconnected financial environment (shah and albaity 2022). however, as these banks expand within this dynamic landscape, their performance is increasingly shaped by domestic factors and global forces, particularly shifts in global investor sentiment. despite the importance of these dynamics, the influence of global and behavioural factors, such as investor sentiment, on bank performance remains underexplored, highlighting the need and relevance of this study. without such explorations, it becomes challenging to understand the risks and opportunities banks face fully. global investor sentiment is critical in influencing financial markets, and its impact is increasingly evident in the banking sector worldwide (chen 2021). the interconnected nature of today's financial markets and systems means that shifts in global investor sentiment can have far-reaching implications, affecting capital flows (muguto, rupande and muzindutsi 2019), credit availability (chen 2021), and overall market stability (rupande, muguto and muzindutsi 2019; muzindutsi et al. 2023; aboluwodi, muzindutsi and nomlala 2024). many african banks are still relatively small in absolute terms, underdeveloped, and fragile compared to their global counterparts. thus, these global fluctuations in investor sentiment may significantly influence the african banks' strategic decisions, risk and operations. furthermore, the banking sector in africa faces regulatory challenges, such as a lack of compliance with basel capital requirements, which can exacerbate their vulnerability to shifts in global investor sentiment (dayi et al. 2022; oyetade, obalade, and muzindutsi 2023). african banks face challenges such as high non-performing loans and low capitalisation. however, some have demonstrated strong profitability, with nigerian and south african banks achieving a return on equity (roe) above 15 per cent in 2022, comparable to leading american banks (dayi et al., 2022; statista, 2023). this trend extends across the continent, reflecting the resilience of certain african financial institutions in navigating economic and operational challenges. nonetheless, african banks remain limited in offering comprehensive financial services, relying primarily on basic products such as short-term loans, unlike their counterparts in developed economies that provide a broader range of financial solutions, including short-, medium-, and long-term loans (oyetade, obalade and muzindutsi 2021). as competition in global financial markets intensifies, these limitations could hinder african banks' ability to remain competitive and meet the evolving needs of their clients, especially as they strive to attract international investment and foster sustainable growth. another challenge is the impact of shifts in global investor sentiment, which can trigger significant capital outflows, directly influencing bank performance (chen 2021). these sentiment shifts can propagate through interconnected financial networks, amplifying their effects on banks, particularly african banks whose relative fragility and insufficient capitalisation make them more susceptible to external shocks. while favourable sentiment can attract capital inflows, boosting liquidity, fostering investment, and enhancing bank performance (irresberger, mühlnickel and weiß 2015; chen 2021), negative sentiment may lead to capital flight, increase funding costs, and exacerbate existing vulnerabilities, further weakening bank performance and straining the sector. this concern is heightened by the limited compliance of many african banks with basel capital standards, leaving them ill-prepared for such shocks. however, the extent to which global investor sentiment influences african bank performance remains underexplored, highlighting the complexity of this relationship and the need for further research. the introduction of basel iii capital requirements following the 2008 financial crisis aimed to establish higher-quality minimum capital standards to mitigate banking risks (bandt et al. 2018; bcbs 2017). ideally, these regulations would have strengthened banks' resilience and enhanced financial stability. however, many african banks struggle to meet the existing basel ii requirements, while countries such as the usa, european nations, and south africa have swiftly adopted basel iii. as a result, many african banks are left with low capital buffers, increasing their vulnerability to risks driven by fluctuating investor sentiment, which negatively impacts profitability. furthermore, non-compliance with higher capital standards fosters negative investor sentiment, as such banks are perceived as high-risk, reducing their attractiveness to potential investors (faia 2017). this lack of access to investor capital limits the funds available for african banks to lend and invest, further constraining profitability and weakening their financial standing. profitability is essential for banks and is traditionally influenced by bank-specific factors, such as size and non-performing loans, and macroeconomic conditions (bandt et al. 2018). however, recent research d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 147 highlights that investor sentiment also plays a critical role in shaping bank behaviour, particularly influencing risk-taking decisions (cubillas, ferrer and suárez 2021). investor sentiment has further been shown to impact bond returns, bond yields, capital flows, and liquidity management, all closely tied to bank performance (muguto et al. 2022; chen 2021). for example, negative sentiment can drive up interest rates and bond yields, raising borrowing costs for banks and their customers while also heightening sovereign risk, ultimately deteriorating asset quality and profitability. nevertheless, the influence of global investor sentiment on african banks — operating in less developed markets with unique regulatory frameworks and vulnerabilities — remains underexplored, revealing a critical gap in the literature that warrants further investigation. this study investigated how global investor sentiment impacts bank performance in africa. by exploring this relationship, this study aimed to inform policymakers and stakeholders in developing effective strategies to mitigate negative sentiment risks, attract investors, and enhance bank profitability. additionally, the study introduced a new global sentiment index to assess african banks' sensitivity to sentiment shifts, addressing a gap in the behavioural finance literature. the findings are expected to empower bank managers to help them leverage positive sentiment for long-term success. they also offer policy recommendations for policymakers and regulators to enhance the resilience and stability of the african banking sector. this research contributes to the limited knowledge of investor sentiment's influence on bank performance, particularly in africa. the justification for choosing african banks for this study is that african banks present unique vulnerabilities in offering comprehensive financial services but still have growing significance in global markets. over the past two decades, african banking has grown rapidly, attracting significant interest from global investors. however, many banks struggle with challenges such as limited compliance with basel iii capital requirements, leaving them vulnerable to shifts in global investor sentiment (oyetade, obalade and muzindutsi 2023). weaker capital buffers and higher non-performing loans further expose these banks to external shocks, amplifying the impact of sentiment-driven capital flows. despite these challenges, research on the influence of global investor sentiment on african banks remains limited, highlighting a gap in the literature. this study aims to bridge that gap by examining how investor sentiment affects bank performance in africa, providing valuable insights into how these banks can mitigate risks, capitalise on positive sentiment, attract investment, and enhance profitability. investigating sentiment in the context of african banks also offers a deeper understanding of investor behaviour in emerging markets, an area that remains underexplored. the remainder of this article is as follows. the next two subsections present the theoretical framework and empirical literature. section 2 describes the data, and the methods used to analyse such data. section 3 presents the results and discusses the findings. section 4 concludes the article and provides necessary recommendations. theoretical framework there are competing theories regarding the impact of behavioural biases, an amalgam of which constitutes sentiment. market-wide investor sentiment reflects the collective attitude of investors toward specific assets, markets, or economies, often driven by emotions, beliefs, and perceptions rather than fundamental information (shen, yu and zhao 2017). these biases influence investor decisions, affecting buying and selling behaviour and impacting asset prices and market dynamics (kamoune and ibenrissoul 2022). high sentiment fosters optimism and bullish behaviour, while low sentiment triggers pessimism and bearishness, leading to volatility (muguto et al. 2022). behavioural finance argues that sentiment contributes to market inefficiencies, causing prices to deviate from fundamental values (shah and albaity 2022). these psychological influences drive trends that fundamental information alone cannot explain, making sentiment a key factor. behavioral finance provides a valuable framework for examining how these dynamics influence decision-making in the banking sector, particularly in emerging markets like africa. in contrast, traditional finance theory, primarily encompassing the efficient market hypothesis, assumes that financial markets are rational, with prices reflecting all publicly available information (kamoune and ibenrissoul 2022). investors are presumed to make decisions based on objective evaluations of risk and return, unaffected by psychological biases or emotions (shen, yu, and zhao, 2017). market movements are considered responses to new information, with no influence from sentiment-driven factors, and any deviations from fundamental values are seen as temporary anomalies (cordes, nolte, and schneider 2023). traditional finance emphasises that rational participants quickly correct inefficiencies through arbitrage. this perspective downplays the role of psychological biases, asserting that information and fundamentals drive prices and market behaviour (faia 2017). however, these assumptions are increasingly questioned, particularly in emerging markets where inefficiencies persist, and behavioural influences shape investment decisions (oyetade, obalade and muzindutsi 2021). despite the incongruence between behavioural and traditional finance theories, the impact of d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 148 sentiment on financial markets and bank performance is becoming increasingly apparent. behavioural finance offers more profound insights into how psychological biases, such as optimism or fear, affect asset prices, capital flows, and liquidity management, especially in less developed markets (muguto et al. 2022; chen, 2021). these dynamics are critical for african banks, which operate in environments where sentimentdriven capital inflows and outflows significantly impact profitability and stability (oyetade, obalade and muzindutsi 2021). as african banks face challenges such as non-compliance with basel standards, low capital buffers, and high non-performing loans, they are more susceptible to shifts in investor sentiment (dayi et al. 2022; statista 2023). understanding these sentiment-driven dynamics helps banks mitigate risks, attract investment, and improve profitability, making behavioural finance a crucial perspective for evaluating bank performance in emerging markets. empirical literature investor sentiment refers to the process by which investors with high sentiment often make overoptimistic investment decisions, while those with low sentiment lean towards pessimistic decisions (agoraki, aslanidis and kouretas 2022). during periods of high sentiment, investors tend to act irrationally, relying less on fundamental analysis and more on emotions, leading to over-reaction and over-valuation of assets (ali and gurun 2009; stambaugh, yu and yuan 2012). this can encourage banks to take more significant risks in pursuit of higher returns. conversely, investors become more cautious and rational during low sentiment periods, often undervaluing assets below their fundamental values (shen, yu and zhao 2017). these fluctuations in sentiment can have varying impacts on bank behaviour, including their lending practices and profitability, depending on the regional regulatory framework and market conditions. in developed markets, where regulatory frameworks are more robust, banks tend to be less sensitive to investor sentiment than those in emerging markets (stambaugh, yu and yuan 2012; di, shaiban and hasanov 2021). for example, during major financial events like the 2008 crisis and the covid-19 pandemic, sentiment significantly impacted bank stability and lending behaviour, with stronger creditor protections mitigating these effects (cubillas, ferrer and suárez 2021). in markets with weaker regulatory frameworks, such as those in many african countries, the absence of strong legal protections amplifies the adverse effects of negative sentiment, increasing funding costs, non-performing loans, and asset quality risks (cubillas, ferrer and suárez 2021). studies show that islamic banks are susceptible to sentiment shifts, with optimistic sentiment generating a stronger positive impact on performance than pessimistic sentiment (shah and albaity 2022; di, shaiban and hasanov 2021). investor sentiment also influences other aspects of bank performance, including liquidity, funding costs, and credit risk. positive sentiment can enhance liquidity creation, but it may also encourage risky lending to maximise returns, leading to volatility in asset quality and higher credit risk (cai, pagano and sedunov 2023; agoraki, aslanidis and kouretas 2022). on the other hand, negative sentiment can increase sovereign risk, elevate funding costs, and constrain credit, reducing banks' lending capacity and profitability (faia 2017; cubillas, ferrer and suárez 2021). in african countries, where regulatory compliance is limited, investor sentiment plays a significant role. for example, banks that struggle to meet basel iii capital requirements are perceived as risky, driving negative sentiment and reducing access to capital (bcbs 2017; oyetade, obalade and muzindutsi 2023). at the same time, well-capitalised banks may attract investors seeking lower bankruptcy risks and stable returns, highlighting the complex relationship between regulatory compliance, sentiment, and performance (bandt et al. 2018). this study addresses the gap in understanding how investor sentiment influences the performance of african banks, where market inefficiencies and weak regulatory compliance increase the importance of behavioural factors. existing studies have mainly focused on developed markets, leaving the relationship between sentiment and bank performance in emerging markets underexplored. furthermore, given that factors like bank size, non-performing loans, and economic stability influence the sentiment-performance relationship (caglayan and xu 2016), this study will also consider these elements within the african context. regulatory changes, such as the transition from basel ii to basel iii, create additional sentiment dynamics that shape bank performance, making it essential to investigate how capital adequacy interacts with sentiment to affect profitability. by filling these gaps, this research provides insights into how african banks can manage sentiment-related risks, attract investment, and enhance stability, contributing to the broader literature on investor sentiment in under-researched markets. methods data this study employed a quantitative approach to investigate the impact of global investors' sentiment on the performance of african banks. panel data of commercial banks listed on african stock exchanges from 2000 to 2022 were collected from multiple online databases. their financial information and sentiment d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 149 proxies’ data were sourced from the bloomberg database, while macroeconomic variables data was sourced from the world bank database. the initial dataset comprised 137 commercial banks listed on stock exchanges in africa. two sample selection criteria were used. firstly, only those that have adopted either basel ii or basel iii capital ratios were selected, resulting in the exclusion of eighty banks due to a lack of additional information disclosure of regulatory capital. furthermore, twenty-two banks were omitted due to insufficient data availability across the sample period. consequently, the final sample consists of 35 commercial banks with sufficient data over the sample period, providing a focused dataset for analysis. global investor sentiment this study constructed a global investor sentiment index using principal component analysis (pca), as no universal investor sentiment measure exists. different measures have been proposed and employed in the literature. this includes google trend data and lexicons analysing text drawing inferences about investors' prevailing sentiment (agoraki, aslanidis and kouretas 2022, de bandt et al. 2018, shah and albaity 2022). however, the most popular approach for panel data analysis is to use investor sentiment proxies (cai, pagano and sedunov 2023; shen, yu and zhao 2017). baker and wurgler (2006) and rupande, muguto and muzindutsi (2019) found that proxies combined into indices measure sentiment better than individual, potentially imperfect proxies. pca helps combine these proxies into a single sentiment index, reducing data dimensionality, capturing maximum variance and improving measurement accuracy, especially for banking (muguto et al. 2022). accordingly, seven proxies were employed to construct a global sentiment index, namely: business confidence index, consumer confidence index, global price of gold and oil, us dollar index, bloomberg commodity index and volatility index. these proxies were standardised to mitigate scale effects, orthogonalised against a set of global macroeconomic variables, extracting residuals for sentiment index construction. this approach removed macroeconomic effects from proxies, ensuring that only behavioural components are left in the proxies (muguto et al. 2019). table 1 below reports the results of the procedure. table 1. principal component analysis output eigenvalues: (sum = 7, average = 1) number value difference proportion cum. value cum. prop. 1 3.0594 1.2462 0.4371 3.0594 0.4371 2 1.8132 1.1312 0.2590 4.8727 0.6961 3 0.6820 0.1471 0.0974 5.5547 0.7935 4 0.5349 0.1316 0.0764 6.0897 0.8700 5 0.4032 0.0821 0.0576 6.4930 0.9276 6 0.3211 0.1353 0.0459 6.8141 0.9735 7 0.1858 --0.0265 7.0000 1.0000 eigenvectors (loadings) variable pc 1 pc 2 pc 3 pc 4 pc 5 pc 6 pc 7 bci -0.2768 0.4861 0.1189 0.7255 0.2882 0.0569 -0.2450 cci -0.3360 0.3934 0.5219 -0.3055 -0.4985 0.3433 0.0020 com 0.3879 0.4592 0.1799 -0.0684 0.3078 -0.0383 0.7108 gol 0.4568 -0.1253 -0.0952 0.5235 -0.5604 0.3866 0.1696 oil 0.4770 0.2069 -0.0710 -0.2819 0.3095 0.5393 -0.5081 usd -0.4668 -0.1899 -0.3428 -0.0192 0.2614 0.6421 0.3838 vix 0.0753 -0.5507 0.7411 0.1467 0.3086 0.1568 0.0159 ordinary correlations bci cci com gol oil usd vix bci 1.0000 cci 0.5033 1.0000 com 0.0670 -0.0617 1.0000 gol -0.3677 -0.5232 0.3551 1.0000 oil -0.2678 -0.3249 0.7047 0.5264 1.0000 usd 0.2173 0.2438 -0.6783 -0.5597 -0.6255 1.0000 vix -0.3942 -0.2753 -0.2450 0.1736 -0.0905 -0.0267 1.0000 source: authors' estimations (2024) globsent was defined using pca, where the first component accounts for 43.71 percent of the total variance. this is slightly lower than the 46 percent reported by reis and pinho (2020) on their european d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 150 index and the 53 percent reported by baker and wurgler (2006) on the us market. however, the figure is robust. key variables correlating with this first principal component, denoted pc 1, are oil (0.4770), usd (0.4668), and gol (0.4568). however, com (0.3879), cci (0.3360) and bci (0.2768) also have some significant correlation with the first principal component. however, vix (0.0753) showed an exceptionally low correlation, likely influenced by macroeconomic factors against which it was orthorgonalised. using these values, globsent was defined as: globsent = -0.276bci 0.336cci + 0.388com + 0.457gol + 0.477oil 0.467usd + 0.075vix (1) estimation model sentiment and bank performance following similar studies such as cubillas, ferrer and suárez (2021) and cai, pagano and sedunov (2023), this study examines the impact of globsent on bank performance using equation 1: roait = β0 + β1globsentit + β2controlit + ∅′yeari + εit (2) where 𝑖 is the individual bank in year 𝑡. equation 2 controls for year effects by introducing year dummies (𝑌𝑒𝑎𝑟𝑖) in line with studies such as those of cubillas, ferrer, and suárez (2021). year effects are included to control for time-fixed effects, unobserved heterogeneity, and business cycles across the country over time (bond and eberhardt 2013). 𝛽 and ∅ are coefficients of the model that capture the effects on the dependent variable, and 𝜀 is the error term. table 2. definition of key variables variable abbreviation definition sources expected sign return on asset roa roa (%)=net profit after tax/average total assets de bandt et al. (2018) dependent variable global investor sentiment globsent a sentiment index constructed with seven indices author’s own construct using pca positive size isize a natural logarithm of total asset. divided into five quintiles di, shaiban, and hasanov (2021) positive or negative deposit ratio dep_growth total deposit/total asset as a measure of total liabilities cai, pagano, and sedunov (2023) negative loan growth loan_growth the growth rate of total loans divided by total assets shah and albaity (2022) positive non-performing loans npl_ta non-performing loans/total assets shah and albaity (2022) negative gross domestic product gdp_growth real gdp which have been adjusted for inflation shah and albaity (2022) positive inflation inflation proxy by consumer price index di, shaiban, and hasanov (2021) negative financial development findev domestic private credit by banks as a % of gdp positive the dependent variable 𝑅𝑂𝐴 is the proxy for bank performance measure. roa is a significant indicator of the quality of a bank's earnings (di, shaiban, and hasanov 2021). it is also a widely used performance ratio to gauge bank profitability because it shows how efficiently a bank transforms available assets into earnings (yuan et al. 2022). furthermore, roa is superior to other performance ratios, such as return on equity (roe), because it allows investors to understand banks' capability to invest and use financial resources to generate profit (yuan et al. 2022). therefore, roa was used as the performance measure for the dependent variable. for robustness checks, the study also uses net interest margin (nim), return on d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 151 equity (roe), and zscore as alternative performance measures for equation 2. the explanatory variables the primary variable of interest for this study is the global investor sentiment proxy by 𝐺𝑙𝑜𝑏𝑠𝑒𝑛𝑡. 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 represents two control variables, namely macroeconomic variables (gdp growth, inflation, and financial development proxy by domestic private credit by banks as a % of gdp) and bank-specific variables (deposit ratio, size, loan growth, and non-performing loans). bank-specific variables, including deposit ratio, bank size, loan growth, and non-performing loans, may influence bank performance considerably (shah and albaity 2022). this study expects control variables to affect the globsent-bank performance relationship in africa. capital regulations and globsent effect on bank performance to examine whether the regulatory capital impacts the globsent-performance relationship for african banks, 𝐶𝐴𝑃 was introduced. it represents banks that are either basel ii or basel iii compliant. bii_cap represents banks that have implemented the basel ii capital ratio, and biii_cap for banks that have implemented the basel iii capital ratio. a bank with low capital is likely to influence the effects of globsent on profits. to test this hypothesis, capital ratios were introduced for regulatory capital to test the effect of capital adequacy on the relationship between globsent and bank performance using equation 3: roait = β0 + β1globsentit + β2capit + β3controlit + ∅′yeari + εit (3) equations (2) and (3) are estimated using fixed effects (fem) and random effects (rem) models. specification tests were carried out to test the validity of both estimation models. f-test was used to check the fit of the model to the appropriate estimator between pooled ordinary least square (pooled ols), fem, and rem. furthermore, diagnostic tests were performed to account for issues with auto-correlation and heteroskedasticity in the panel data. thus, a fixed effect model with robust standard error was reported to correct for these issues. also, this choice was considered appropriate for this panel data analysis as it accounts for time-invariant, unobserved factors at the bank level that might influence performance. these unobserved factors could be bank-specific management styles, business strategies, or inherent risk profiles. by controlling for these fixed effects, the effects of the independent variables on bank performance within each bank over time were isolated, allowing their analysis. results and discussion descriptive statistics figure 1 presents the global investor sentiment index (globsent) from 2000 to 2022. the index effectively captured key global events corresponding to significant sentiment fluctuations, such as the 2008 financial crisis and the covid-19 pandemic, affirming its reliability. these events triggered sharp declines in sentiment, driven by heightened investor pessimism and expectations of severe economic fallout, especially in the african banking sector. investors anticipated adverse outcomes and feared their funds might become inaccessible amid the uncertainty, leading to a rapid downturn in sentiment. however, the index shows that sentiment rebounded swiftly after these crises, reflecting renewed investor confidence despite the initial pessimism. this behaviour contrasts with trends observed in developed markets, where sentiment typically stabilises more gradually following major disruptions (shen, yu and zhao 2017; stambaugh, yu and yuan 2012). for example, investor sentiment did not decline drastically during the 2008 crisis in developed economies, suggesting that investors were less pessimistic and more resilient. these behavioural differences may stem from legal frameworks, regulatory institutions, and market infrastructure disparities between developed and emerging markets. more robust institutional frameworks in developed markets likely mitigate excessive pessimism, promoting more stable recovery patterns. d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 152 source: author's calculation based on data obtained from databases figure 1. investor sentiment index table 3 presents the summary statistics for key variables, including the dependent variable, return on assets (roa), and the independent variables globsent, basel capital ratios, bank-specific ratios, and macroeconomic indicators. though modest, the average roa of 2.3 percent surpasses that of banks from other emerging economies. for example, yuan et al. (2022) reported an average roa of just 0.11 percent for indian and bangladeshi banks. notably, some african banks achieved roa figures as high as 13 percent, indicating strong profitability and making these banks attractive to investors seeking higher returns. however, the concern lies in the average non-performing loan (npl) ratio of 3.5 percent, with a standard deviation of 6 percent, which signals potential risks to future profits. table 3. key variables variable obs mean std. dev. min max roa 783 2.302 1.832 -8.992 13.795 globsent 805 0.011 2.7 -6.517 2.654 dep_growth 664 10.50 27.179 -199.627 182.457 loan_growth 764 5.297 42.096 -199.064 164.813 npl_ta 770 3.565 6.081 0 63.398 gdp_growth 796 4.144 3.178 -14.144 15.329 inflation 790 9.247 5.688 -0.692 41.51 findev 737 32.185 18.788 3.11 70.38 bii_capratio 554 16.352 8.804 4 147 biii_capratio 523 17.947 7.026 2.901 73.807 source: author's calculation based on data obtained from databases the deposit growth ratio averages 10.5 percent, which appears reasonable, but the high standard deviation of 27 percent indicates significant volatility, suggesting liquidity challenges across the sector. some banks may struggle to gather adequate deposits, limiting their capacity to lend and expand operations. this liquidity constraint is reflected in the modest loan growth average of just 5 percent, highlighting a cautious lending environment. such conservative lending practices, while potentially reducing risk, may also limit profitability and hinder the sector's growth. these findings emphasise the importance of balancing profitability with sound risk management to ensure sustainable performance in the african banking sector. empirical results table 4 presents the results of the impact of investor sentiment, captured by globsent, on bank performance in africa, measured through return on assets (roa). a fixed effects model with robust standard errors and year effects was employed across all models. four performance measures were estimated: roa, net interest margin (nim), return on equity (roe), and z-score. among these, the roa model exhibited the highest adjusted r-squared, making it the most appropriate for explaining bank performance. the results align with theoretical expectations, showing a positive and significant relationship between globsent and roa at the 5 percent significance level. this indicates that investor sentiment is crucial in influencing bank d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 153 performance, conditioned by bank-specific and macroeconomic factors. the findings confirm that investors in africa consider both firm-level characteristics and broader economic conditions when making investment decisions, consistent with studies by agoraki, aslanidis and kouretas (2022) and cai, pagano and sedunov (2023). table 4. globsent effect on bank performance roa nim roe zscore globsent 0.586** -0.054 4.334 -0.040** (0.288) (0.136) (2.612) (0.015) _isize_2 -0.754 -0.093 0.482 -0.003 (0.504) (0.394) (1.933) (0.062) _isize_3 -0.852 -0.289 0.315 -0.005 (0.656) (0.389) (2.140) (0.084) _isize_4 -1.129* -0.810* -3.839 0.007 (0.652) (0.457) (2.952) (0.090) _isize_5 -2.058*** -1.049 -11.344*** -0.026 (0.724) (0.736) (3.450) (0.110) dep_growth -0.000 -0.003 -0.028 0.001 (0.003) (0.003) (0.021) (0.001) loan_growth -0.115 0.106 0.937 0.033 (0.175) (0.187) (1.064) (0.029) npl_ta -0.075** -0.001 -0.261* -0.002* (0.035) (0.023) (0.145) (0.001) gdp_growth 0.045 0.088* 0.471** 0.003 (0.032) (0.048) (0.227) (0.003) inflation 0.005 0.040** 0.287*** -0.003** (0.009) (0.016) (0.095) (0.001) findev -0.031*** -0.025 -0.140 -0.003* (0.011) (0.016) (0.119) (0.001) _cons 4.814*** 4.848*** 27.625*** 1.500*** (0.757) (0.683) (6.657) (0.106) n 598 580 591 596 r-squared 0.2601 0.2181 0.1922 0.2647 adjusted r-squared 0.168 0.062 0.090 0.116 robust standard errors are in parentheses * p<0.1, ** p<0.05, *** p<0.001 source: author's calculation based on data obtained from databases control variables provide further insights into factors shaping roa. bank size exhibited a negative and significant impact on roa, suggesting that larger banks may face challenges in efficiently utilising their assets and capital to generate higher profits. this outcome aligns with agoraki, aslanidis and kouretas (2022), who found that larger us banks managed smaller loan portfolios, possibly explaining the negative size-performance relationship. non-performing loans also significantly negatively affected roa, underscoring the detrimental impact of poor loan quality on profitability. additionally, financial development showed an unexpected negative and significant effect on roa, implying that the relationship between financial development and bank performance in africa may be more complex than anticipated, warranting further investigation. the findings related to macroeconomic variables, such as gdp growth and inflation, were statistically insignificant, indicating that broader economic conditions may have a limited direct influence on bank profitability over the observed period. table 5 examines how basel capital adequacy requirements—specifically basel ii and basel iii— moderate the relationship between investor sentiment and bank performance. in model 1, a positive and significant relationship was found between investor sentiment and bank performance for basel ii-compliant banks, suggesting that sentiment is crucial in driving profitability for these banks. similarly, model 2 showed a positive and significant impact of investor sentiment on the performance of basel iii-compliant banks. while investors typically view strict capital regulations as a potential drag on profitability due to reduced shareholder returns (bandt et al. 2018), the positive impact of sentiment across both basel ii and basel iiicompliant banks indicates that investors may still favour these banks. this suggests that investors, driven by d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 154 sentiment, may irrationally prioritise short-term performance over strict capital buffers, perceiving these banks as stable and profitable despite regulatory constraints. table 5. capital regulations and globsent effect on bank performance basel ii basel iii roa roa globsent 0.965*** 0.911*** (0.139) (0.121) bii_cap 0.019 (0.017) biii_cap 0.072*** (0.014) _isize_2 -0.341 -0.639 (0.580) (0.447) _isize_3 -0.458 -0.791 (0.725) (0.534) _isize_4 -1.169 -1.188 (0.870) (0.834) _isize_5 -1.746** -1.931** (0.745) (0.838) dep_growth -0.002 -0.002 (0.004) (0.003) loan_growth -0.135 0.097 (0.217) (0.241) npl_ta -0.082* -0.078* (0.042) (0.045) gdp_growth 0.019 -0.001 (0.042) (0.038) inflation 0.027 0.024 (0.017) (0.019) findev -0.010 -0.001 (0.021) (0.019) _cons 4.711*** 3.480*** (0.678) (0.784) n 482 461 r-squared 0.3203 0.4937 adjusted r-squared 0.1702 0.301 robust standard errors are in parentheses * p<0.1, ** p<0.05, *** p<0.001 source: author's calculation based on data obtained from databases interestingly, both models reveal that investor sentiment positively influences the return on assets (roa) for banks compliant with either basel ii or basel iii standards. this indicates that a baseline capital adequacy level promotes investor confidence beyond the specific capital framework, reinforcing the positive relationship between sentiment and performance. investors appear to be drawn to banks meeting regulatory standards, as these banks are perceived as less risky and capable of maintaining profitability even during downturns. the findings imply that while capital adequacy regulations shape investor perceptions, sentiment remains a powerful force influencing bank performance across regulatory frameworks. however, the direct impact of basel ii compliance on performance is insignificant, suggesting that stricter basel iii standards may substantially influence investor behaviour. the results also confirm several patterns observed in previous models regarding control variables. bank size continues to exhibit a negative and significant effect on performance, indicating that larger banks may struggle with efficiently utilising assets to generate profits. similarly, non-performing loans retain their negative and significant impact, emphasising the critical need for effective loan management to protect profitability. the mixed but generally insignificant effects of inflation, gdp growth, and financial development on roa suggest that macroeconomic conditions play a limited role in directly driving bank performance, warranting further exploration. these findings highlight the nuanced interplay between capital regulations, investor sentiment, and performance, underscoring the importance of regulatory compliance d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 155 and sentiment-driven behaviour in shaping the outcomes for african banks. specification tests were carried out to test the validity of both estimation models. as a result, the hausman test was carried out (see table 6: appendix) to select the best estimation technique. although the hausman test chose re, in the f-test used to check the model's fit, we rejected the null hypothesis that fixed effects are non-zero, implying that the cross-sectional or time-specific effects (year dummies) are significant. therefore, ols and random effect will be biased; thus, fe is considered an appropriate and efficient estimator. diagnostic tests were carried out to test the presence of autocorrelation and heteroscedasticity for the validity of estimation models and the validity of the findings. the diagnostic tests conducted, namely the modified wald and woolridge tests, were used to detect and correct heteroskedasticity and autocorrelation, respectively. the hypotheses for these tests were h0 of homoskedasticity and no autocorrelation. the results presented in table 8 indicate the presence of both heteroskedasticity and autocorrelation, as h0 was rejected for both tests. this implies that the ols assumptions are violated, leading to biased coefficient estimates. also, t-statistics and confidence intervals would be invalid for inference problems. thus, robust standard errors were used in the regression to address these issues. discussion of findings our findings reveal that investors become extremely pessimistic toward african banks during major crises, with sharp declines in sentiment posing significant risks. this is dangerous for african banks, as investors may exploit the situation to undervalue these institutions, especially given the less developed regulatory environments in african markets. this contrasts with the neutral investor behaviour observed by shen, yu and zhao (2017) in developed markets, where investors remained measured during the 2008 financial crisis. these findings suggest a distinct dynamic in african markets, where investor sentiment may be more responsive to growth opportunities and less influenced by past crises. our study highlights the vulnerability of african banks to pessimism during crises. it highlights the need for african policymakers to develop robust legal and institutional frameworks to protect banks from harmful investment behaviour. our findings further demonstrate that bank-specific and macroeconomic factors and the level of financial development play crucial roles in the positive and significant impact of investor sentiment on bank performance in africa. interestingly, this result diverges from behavioural finance theory, as the positive sentiment reflects an optimistic outlook on key controlling factors, contributing to improved bank performance. these results align with cai, pagano and sedunov (2023) for liquidity creation in banks and with agoraki, aslanidis and kouretas (2022) for us bank lending. optimistic sentiment may encourage banks to expand operations and take advantage of favourable market conditions, thus enhancing profitability. this finding highlights the importance of understanding how sentiment influences bank performance, particularly in regions where financial markets are still developing. control variables provide additional insights into the challenges faced by african banks. nonperforming loans negatively and significantly impact bank performance, emphasising the importance of managing loan quality. similarly, bank size has a negative and significant effect, suggesting that larger banks may struggle with operational inefficiencies, diminishing profitability and asset quality. this result aligns with shah and albaity (2022) for banks in mena and gulf countries and agoraki, aslanidis and kouretas (2022) for us banks. larger african banks may also face stricter regulatory constraints, including compliance costs for "too-big-to-fail" institutions, further impacting profitability. addressing these operational challenges is essential for improving the performance of larger banks and enhancing their competitiveness in the region. the impact of financial development on bank performance is also negative and significant, highlighting the general and widespread underdevelopment of africa's financial markets, institutions, and regulatory frameworks. in developed financial systems, lower transaction costs, better access to liquidity, and more efficient capital mobilisation foster bank growth and economic development (world bank group 2012). while positive sentiment can create opportunities for expansion, negative sentiment may prompt more conservative strategies. over the long term, sustaining positive sentiment requires african banks to focus on operational efficiency, building customer trust, and ensuring regulatory compliance. these strategies will improve profitability and performance, helping african banks navigate volatile market conditions better. our results also reveal that compliance with basel ii and basel iii capital standards positively influences the relationship between investor sentiment and bank performance. this suggests that investors view banks adhering to basel standards as less risky, regardless of whether they comply with basel ii or the more recent and encompassing basel iii. however, only basel iii compliance directly influences bank performance, reflecting its stricter regulatory framework. although this finding contrasts with faia (2017), who observed that investors favoured banks with strong capital bases during sovereign risk periods, it indicates that investor confidence in basel-compliant african banks remains high. this optimism may be d.t. oyetade, h.t. muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 156 driven by the strong financial positions and growth potential of african economies, which enhance the appeal of these banks to investors. the findings offer valuable insights. policymakers should encourage african banks to adopt higher basel standards to attract global investors seeking low-risk opportunities. tailored business models and innovative financial products are essential for larger banks to overcome the negative impact of size on performance. strengthening risk management practices and improving operational efficiency are crucial to enhancing profitability. robust regulatory frameworks, including enhanced investor protection, will attract more capital inflows to african banks. finally, recognising investor sentiment as a powerful performance driver underlines the importance of fostering stable policies to build investor confidence. adequate creditor protection, sound governance, and robust risk management practices will help mitigate the adverse effects of investor pessimism during crises, supporting sustainable growth in africa's banking sector. conclusion this study explored the intricate relationship between investor sentiment and bank performance in africa, shaped by individual bank characteristics and broader macroeconomic conditions. while the findings confirmed a generally positive impact of investor sentiment on bank performance, variability based on bank-specific attributes and market contexts indicated that investors weigh risks and opportunities rationally. notably, compliance with basel ii and basel iii capital requirements strengthened the relationship between sentiment and performance, though only the higher basel iii standards significantly enhanced bank performance. this highlights the importance of stricter capital regulations in improving profitability and stability within the african banking sector. tailored policy responses are necessary to address african banks' unique challenges, including the regulatory disparities across different regions. policymakers can use these insights to enhance legal frameworks and investor protection policies, creating an environment that attracts global capital, fosters investor confidence, and mitigates the risks of sentiment-driven capital flows, particularly during financial turbulence. strengthening central bank oversight and encouraging robust risk management practices are also critical to increasing the resilience of african banks to fluctuating investor sentiment. promoting sound governance and risk management frameworks will help banks mitigate the potential adverse effects of sentiment on performance. these measures will also enable banks to capitalise on positive sentiment, driving growth and profitability. by aligning investor perceptions with banks' true risk profiles, policymakers can ensure a more stable financial environment, better preparing african banks to withstand market volatility. this study provides a foundation for future research further to investigate the mechanisms behind sentiment-driven behaviour in african banking and explore strategies for sustainable growth in the sector. references aboluwodi, 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muguto, p.-f. muzindutsi/ finance, accounting and business analysis, volume 6, issue 2, 2024 158 yuan, d., i. harymawan, b. dhar, and a. hossain. 2022. profitability determining factors of the banking sector: panel data analysis of commercial banks in south asian countries. frontiers in psychology 13. doi: 10.3389/fpsyg.2022.1000412. appendix table 6. hausman test hausman roa roe nim capital p>10 percent p<1 percent p>10 percent p<1 percent fail to reject ho reject ho fail to reject ho reject ho decision random effect is preferred fixed effect is preferred random effect is preferred fixed effect is preferred note: hausman hypothesis-h0: random effects is preferred. 𝐻1: fixed effects is preferred table 7. f-test for ols vs fixed effect model statistics p-value f-test (34, 531) 15.97 0.000 table 8. modified wald test modified wald test woolridge test for auto-correlation chibar2 (26) 283.31 f (1, 531) 20.32 prob > chi2 0.000 prob > f 0.000 note: modified wald test for heteroskedasticity in fem and woolridge test for autocorrelation in panel data source: author's compilation 189 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.05 determinants of fraud prevention of puskesmas capitation funds in the city of mataram khopipah wandan sari1* , budi santoso2 , endar pituringsih3 department of accounting, university of mataram, mataram, indonesia1 department of accounting, university of mataram, mataram, indonesia2 department of accounting, university of mataram, mataram, indonesia3 * corresponding author info articles abstract history article: submitted 29 january 2025 revised 29 may 2025 accepted 6 august 2025 purpose: to explain how p-care, corporate ethical culture, accountability, and the internal control system interact in preventing capitation fund fraud in puskesmas in mataram city. design/methodology/approach: this study employs a quantitative approach using an associative research method. data was collected through surveys using purposive sampling, selecting 66 respondents responsible for managing capitation funds in puskesmas. analysis was conducted using the partial least square (pls) method with smartpls 3.8 software. findings: accountability, the internal control system, and p-care play significant roles in preventing capitation fund fraud in mataram city puskesmas. corporate ethical culture hinders fraud prevention efforts, indicating that ethical culture alone is insufficient without strong supervision mechanisms. practical implications: strengthening the internal control system and enhancing accountability can improve fraud prevention effectiveness. the implementation of the p-care application as a monitoring tool can reduce the risk of capitation fund misuse in puskesmas. originality/value: this study introduces p-care as a new variable in capitation fund fraud prevention research, whereas previous studies mostly used qualitative approaches. paper type: research paper keywords: accountability, internal control system, corporate ethical culture, p-care, capitation fund fraud prevention jel: h51, m42, z13, d73 * address correspondence: e-mail: andansary05@gmail.com1 budisantoso@unram.ac.id2 endar07ringsih@unram.ac.id3 http://faba.bg/ https://orcid.org/0009-0003-0159-3063 https://orcid.org/0009-0009-5887-4716 https://orcid.org/0009-0008-7727-038x k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 190 introduction malpractices including corruption and fraud continue to plague indonesia, causing harm to individuals and the nation as a whole. as a result of fraud's detrimental effects on society, the country, and the state, progress toward development is sluggish. transparency international also explained that indonesia's corruption perception index (cpi) score has recorded a decline. indonesia's corruption perception index score in 2023 stagnated compared to the previous year. indonesia obtained a score of 34 and its ranking decreased from 110 to 115. as a result, it is safe to say that corruption is still rampant in indonesia. the indonesia corruption watch (icw) further clarified that the health sector is one area where corruption persists and has so far proven difficult to remove. indonesia corruption watch (icw) asserts that the management of health funds, which always increases every year, is still inefficient, making it prone to corruption and resulting in ineffective government health programs and the health status of the indonesian people still does not show good performance. fraud in health services is a method that is done intentionally by creating an undue benefit and can harm other parties. fatimah et al. (2021) identified health fraud as having components pertaining to health services. it is common for fraud to happen throughout the process of implementing health insurance plans. financial benefits from health insurance programs in the national social security system may be obtained through fraudulent acts that do not comply with the provisions when health officers, participants, healthcare providers, and suppliers of pharmaceuticals and medical devices knowingly engage in national health insurance fraud (ministry of health of the republic of indonesia, 2015). according to the 2018 report to the nations acfe (rttn) association of certified fraud examiners (acfe), about 5% of the overall cost of health services in 2018 was lost to fraud (permenkes ri number 16 of 2019). approximately 170,000 claims totaling rp. 400 billion ($24.280.680 usd) were identified as fraudulent in indonesia's bpjs (social security administration for health) system in 2015 (rahma 2019). the supreme audit agency got an audit report on bpjs health's performance in 2016. the report found that 9,767 health centers and other first level health facilities in indonesia received capitation money totaling rp 13 trillion ($789.122.100 usd) in 2016. we want to finance services to 188 million people with these money. health facilities still have inadequate governance, which leaves capitation payments open to fraud and other forms of abuse (bpk ri 2016). capitation funds are one form of financing in the national health insurance system provided by social security organizing agency health to first-level health facilities, such as puskesmas, clinics, and independent doctor practices. this capitation system aims to encourage efficiency, cost control, and improve the quality of health services by providing fixed payments based on the number of registered participants, regardless of the number of services they use. capitation funds are used to fund various operational needs of the puskesmas, including the purchase of consumables, medical devices, drug needs, as well as incentives for health workers. in addition, these funds also support promotive and preventive activities, which are an important part of improving the health status of the community. in its implementation, the capitation fund has a strategic role because it is directly related to the availability of basic health services for the community, especially in areas that depend on puskesmas as the main provider of health services. however, various studies and monitoring reports show that the management of capitation funds often faces challenges, both in terms of transparency, accountability, efficiency of use, and compliance with laws and regulations. problems such as delays in disbursement, lack of managerial capacity, and internal conflicts in the distribution of services are still often found in the field. these funds were chosen as the focus of the study because they often face various challenges in terms of management, accountability, and efficiency of use. in addition, capitation funds have a direct impact on the performance of health services at puskesmas, so it is important to examine the extent to which their management is in accordance with the provisions and is able to support the achievement of jkn system objectives. businesses may protect themselves against fraud by implementing a solid control system. additionally, the internal control system will not function efficiently in the absence of principles or values, since this will lead to unethical actions, which in turn will impact the amount of agency irregularities. the findings are in agreement with those of laksmi and sujana (2019) who found that an effective internal control system may reduce the likelihood of fraud. the internal control system significantly impacts fraud prevention according to research by rahmawati et al. (2020). the internal control system is an important mechanism in preventing fraud in the public sector. according to batkunde et al. (2024) effective internal control includes risk assessment, control activities, information and communication, and continuous monitoring. implementation of this system can identify potential fraud risks early and ensure that the use of funds is in accordance with applicable regulations. k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 191 the study by rachman et al. (2021) shows that internal control has a significant influence on fraud prevention in hospitals, with strict supervision and clear procedures, organizations can minimize opportunities for fraud. accountability is another measure that may be taken to prevent fraud. the agent holding the trust has a responsibility to the principal who established the trust to account for all actions taken by the agent including limited to reporting and disclosing relevant information. rahmawati et al. (2020) found that accountability significantly affects fraud prevention, therefore this makes sense. accountability in the management of capitation funds includes efficient and effective budget planning, use of funds according to regulations, and transparent and easy-to-understand financial reporting. pratiwi et al. (2023) emphasized that high accountability in the public sector can prevent fraud by ensuring that every use of funds can be accounted for. in addition, a study by aviva (2022) shows that an organization's commitment to accountability, supported by a strong internal control system, can significantly reduce the risk of fraud. when it comes to preventing fraud, health institutions need more than just an accountability system and an internal control system. they also need an organizational ethical culture. what we mean when we talk about an organization's ethical culture is the shared values and norms that everyone works to uphold. by behavior here we mean actions that are both ethically acceptable and legally valid. this is in agreement with the findings of susandya et al. (2022) who demonstrated that an ethical culture inside a business may effectively reduce instances of fraud. ethical culture in the organization plays an important role in shaping employee behavior that upholds integrity and honesty. soehaditama (2024) states that a strong organizational culture, characterized by ethical values that are internalized by all members, can prevent fraud. however, research by wardah et al. (2022) found that an organizational culture that is not supported by an effective whistleblowing system and a lack of trust between employees can reduce the effectiveness of ethical culture in preventing fraud. also, the p-care app is a great way to keep puskesmas capitation monies safe from fraud. p-care is an information system for puskesmas created by the republic of indonesia's ministry of health. multiple components of the p-care function for puskesmas facilitate the administration of health care to bpjs patients and the administration of patient data. no dedicated app for preventing capitation fund fraud, the fraud prevention team can utilize online reporting tools like p-care to keep puskesmas safe from capitation and jkn fund fraud. the theories of fraud triangles skousen et al (2009) and agency, first proposed by jensen & meckling (1976), provide the basis of this study. three things rationalization, opportunity, and pressure contribute to fraud, according to the fraud triangle hypothesis. the agency theory goes on to say that an agency relationship is a contract between a principal and an agent whereby the agent is hired to carry out the principal's instructions and make decisions on the principal's behalf. for this reason, fraud may happen in any business or organization when there is a mismatch in the amount of information available to the agent and the principal; puskesmas are no exception. in order to avoid the possibility of capitation fund fraud at puskesmas, it is crucial to establish a strong internal control system, hold employees accountable, foster an ethical culture inside the firm, and use the p-care program. according to the above explanation, there is room for more study that might address the issue of capitation fund fraud involving puskesmas in mataram city by using the p-care application as a unique research variable. in order to combat capitation fund fraud at the mataram city health facility, researchers are encouraged to adopt a quantitative method. the innovation of the study lies in the variable usage of the p-care application. a qualitative technique is often used in research concerning the p-care application. researchers are convinced that this study is vital to conduct due to the rising occurrence of capitation fund fraud. methods this study is an associative study with a quantitative approach. an associative study is a study that aims to determine the relationship between two or more variables (sugiyono 2018). this type of study uses a causal relationship, which is a cause-and-effect relationship, where internal control systems, accountability, organizational ethical culture, and p-care influence the prevention of capitation fund fraud. the research location is a place where researchers obtain information about the required data. this research was conducted at puskesmas in mataram city in 2024, with a focus on puskesmas that are directly involved in receiving capitation funds. the selection of puskesmas in city x was due to the disclosure of a case related to capitation fund fraud located at puskesmas y in city x resulting in a government loss of rp. 690 million. workers from eleven major puskesmas and seventeen auxiliary puskesmas in city x who were responsible for administering capitation funds and the p-care app made up the population studied. sugiyono (2018) explains that this study's sample method was purposive sampling, a method that k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 192 takes certain factors into account. this sample was conducted with the assumption that individuals with decision-making and financial-management power are familiar with the puskesmas' capitation fund management practices. in addition, only employees who play a role in operating the p-care application understand the duties and functions of p-care for claiming capitation funds. based on the purposive sample method, the sampling criteria used are: 1. parties who have authority in financial management. 2. parties involved in making financial management decisions. 3. parties who act as supervisors and are responsible for the operation of p-care. the instrument in this study is a questionnaire containing certain questions related to the variables studied. the instrument is compiled based on the indicators contained in the research variables which are described in question items. a questionnaire is the primary tool for gathering information in this study. this research makes use of quantitative methods by putting the hypothesis to the test with the help of the smartpls 3.8 software program and the partial least square (pls) methodology. pls was used in this study because it is able to overcome multicollinearity, works well on small samples, does not require normal distribution assumptions, and focuses on prediction. results and discussion for this investigation, the data was analyzed using the sem-pls approach in conjunction with the smart pls version 3.8 application. in smart pls 3.8, building a conceptual research model is the first step in data analysis. a reflecting outer model measurement model was used in this investigation. one term for the reflective measurement model is the primary factor model. it states that latent constructs may either affect the covariance of indicator measures or characterize the variance of latent constructs. by examining the loading factor, composite reliability, cronbach's alpha, average variance extracted, discriminant reliability, and cross loading, this measurement approach ensures that the study indicators are valid and reliable (ghazali and latan 2015). one way to find out whether a questionnaire is valid is to run it through a validity test, which looks at how well the instrument measures each variable and how well each statement item explains the variable. the reliability test, on the other hand, involves checking how well the instrument (a questionnaire in this example) consistently measures variables and how accurate the measuring equipment is. you may view the exterior model in the picture below source: data processed (2024) figure 1. outer model k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 193 figure 1 shows that the internal control system variable is measured using 10 statements with indicators referring to sulistyorini and urumsah (2021) research including: control environment, risk assessment, control activities, information and communication, monitoring. the accountability variable is measured by 6 statements with research indicators referring to research rahmawati et al. (2020) including: formulation of financial plans, implementation and financing of activities, and implementation of financial reporting. the organizational ethical culture variable is measured by 10 statements among others: superior congruence, employee congruence, transparency, discussion and sanctions. the p-care variable is measured by 8 statements with research indicators referring to the benefits of the p-care application released by rizka et al. (2018) including: transparency, centralized patient data management, verification of ideality and validation of services and monitoring of the use of capitation funds. the fraud prevention variable was measured using 10 statements with research indicators referring to research wardhani et al. (2021) among others: management responsibility for evaluating fraud prevention, supervision of auditors, there is a clear separation of functions and responsibilities, providing a means of complaint. evaluation of the measurement model (outer model) testing the model's validity and reliability is the process of evaluating the measurement model, also known as the outer model. a reflective construct's validity may be assessed using convergent and discriminant validity tests. there need to be a strong correlation between all measures of each variable for there to be convergent validity. each variable indicator displays its test result in the form of an outer loading value. as stated by hair et al. (2021) if the outer loading value of any indication is more than 0.70, it may be deemed constrained. here are the results of the smart pls 3.8 tests conducted using the pls-sem algorithm: source: data processed (2024) figure 2. outer model after elimination figure 2 of the route diagram shows that some statements have been removed because their loading factor is below 0.7 while the loading factor limit for an indicator to be considered reliable is at least 0.7. so that the x2.5, x3.3, y1.2, y1.3, and y1.4 indicator statements must be deleted because they are not reliable or the loading factor value is below 0.7. once the faulty statement signs are removed, the data can be analysed further and another test can be run to determine the results of the study. k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 194 after that, you should strive for dependability, which you can do by checking for things like composite reliability, an average variance extract (ave) value more than 0.50, and a cronbach alpha value greater than 0.70. the following is the ave value for each variable, as determined using the pls sem algorithm: table 1. cronbach's alpha, and average variance extracted (ave) variable cronbach's alpha ave spi 0.961 0.743 akt 0.925 0.772 beo 0.943 0.685 pc 0.911 0.617 pf 0.896 0.618 source: smart pls 3 each indication has a cronbach's alpha value more than 0.70, as shown in table 1. the reliability is considered perfect when cronbach's alpha is greater than 0.90. high reliability is indicated by a value between 0.70 and 0.90. moderate reliability is indicated by a value between 0.50 and 0.70. the internal control system, accountability, corporate ethical culture, and p-care variables all have flawless reliability, as shown by a cronbach's alpha value greater than 0.90. the fraud prevention variable is quite reliable. structural inner model evaluation in order to ascertain if the connection is appropriate and the model is excellent, an examination of the internal structural model is conducted. the f-square, r-square, and q-square values are examined in many steps throughout this assessment (hair et al. 2021). f-square to determine the impact of variables on a structural level, the f-square test is used. according to hair et.al. (2021), there are three categories for the f-squared value: low (f=0.02), moderate (f=0.15), and high (f=0.35). each variable's f-square value is as follows: table 2. f-square variable f-square x1 0.103 x2 0.195 x3 0.057 x4 0.376 source: smart pls 3 table 2 shows that there is a moderate internal control system, a poor organizational ethical culture, and a high f-square value for p-care. after analyzing the structural model, it is clear that p-care has a significant impact, corporate ethical culture has a moderate impact, and internal control and accountability have a modest effect. r-square to find out how well the independent variable can explain the dependent variable, researchers employing smart pls use the r-square test. according to ghazali & latan (2015) an r-square value of 0.67 is considered excellent, 0.3 is considered moderate, and 0.19 is considered poor. in the following table, we can see the study's r-square value: table 3. r-square r-square 0.527 source: smart pls 3 table 3 shows that the model's r-square value for p-care, corporate ethical culture, accountability, and internal control system for fraud prevention is 0.527. with a value of 0.527, r-square is considered modest. accordingly, p-care, corporate ethical culture, accountability, and the internal control system all have a moderate impact on fraud prevention, accounting for 52% of the total. other characteristics not k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 195 included in this study's model account for 48% of fraud prevention. hypothesis test to determine the impact of interdependent latent variables, the following inner model test employs the bootstrapping technique (ghozali and laten 2015). the path coefficients table includes the p-value and t-statistic, which reveal the significant value. at the 5% alpha level, the hypothesis's significance value is one-tailed. in addition, the t-statistic is larger than 1.66, allowing us to accept the hypothesis. the p-values corroborate this, especially when the alpha is set at 5% (0.05). hence, the hypothesis may be accepted if the p-values are less than 0.05, and rejected if the p-values are more than 0.05. the original sample table also shows the direction and size of the study impact. in table 4 below, the following scholars provide the findings from the study of latent variables: table 4. hypothesis test results original sample t statistic p values conclusion x1 -> y 0.243 2.685 0.007 positive x2 -> y 0.313 4.340 0.000 positive x3 -> y 0.177 1.365 0.173 negative x4 -> y 0.454 5.095 0.000 positive source: smart pls 3 the results of the hypothesis test after the use of smart pls 3.8 are detailed in table 4. we accept as true the first hypothesis which states that the internal control system helps to reduce the likelihood of fraud. the internal control system has a positive effect on fraud prevention as shown by a p-value of 0.007 which is less than 0.05. this effect can also be seen by comparing the t-statistic values in the table which must be greater than 1.66. based on the results of the tests, the internal control system does a good job of preventing fraud t-statistic = 2.685> 1.66. the internal control system is a process designed to provide reasonable assurance regarding the achievement of organizational objectives, including in terms of the reliability of financial reporting, compliance with laws and regulations and operational effectiveness and efficiency. in this research, the internal control system consists of five main indicators: control environment, risk assessment, control activities, information and communication, and monitoring. consistent application of these five components will reduce the risk of fraud in the puskesmas. this system not only reduces opportunities, but also increases awareness that every action will be monitored and have a legal impact. both hypotheses are accepted, with the second one explaining how responsibility helps avoid fraud. there is a positive relationship between accountability and fraud prevention, as shown by a p-value of 0.000, which is less than 0.05. accountability positively affects fraud prevention, as shown by the t-statistic result of 4.340> 1.66. accountability in puskesmas is demonstrated through systematic and responsible practices for the use of funds and program implementation. the accountability indicators used in this context are conducting budget planning to design programs with the principles of efficiency and effectiveness, using capitation funds based on applicable regulations, not withdrawing fees from participants that should have been guaranteed in the capitation fee, and the financial reports submitted contain clear and easy-tounderstand information. if all indicators are applied, the opportunity to commit fraud will be small. accountability is not just a report, but also an attitude of responsibility that is evidenced through transparency and compliance with the rules. puskesmas employees will think twice before misusing funds or manipulating reports, because all use of resources is openly accounted for. claiming that an organization's ethical culture aids in preventing fraud, the third hypothesis is deemed false. the results of the hypothesis test showed that the ethical culture of the business has a negative effect on fraud prevention p-value = 0.173 indicating a significance level > 0.05. a t-statistic score of 1.365 < 1.66 indicates that the organization's ethical culture hinders efforts to avoid fraud. theoretically, the ethical culture of the organization is seen as one of the important factors in preventing fraud. however, in its implementation, ethical culture can actually have a negative impact on fraud prevention if existing ethical values are not applied consistently and thoroughly. organizational ethical culture will have a negative impact on fraud prevention if its values are not consistently applied, not accompanied by exemplary leadership, not supported by an effective reporting system, and not equipped with strict sanctions. in these conditions, ethical culture only becomes a formal symbol that is unable to function as a controller of organizational behavior, thus opening up opportunities for fraud to occur repeatedly. the acceptance of the fourth hypothesis indicates that p-care does help reduce instances of fraud. there is a positive relationship between p-care and fraud prevention, as shown by a p-value of 0.000, which is less than 0.05. because p-care has a positive effect on fraud prevention, the t-statistic result is 5.095> 1.66. k. w.sari, b. santoso, e. pituringsih/ finance, accounting and business analysis, volume 7, issue 2, 2025 196 p-care (primary care) is a technology-based information system developed by social security administration for health to facilitate first-level health services. in the context of capitation fund management in health care facilities such as puskesmas, the application of p-care contributes significantly to the prevention of fraud. this is supported by several key indicators, namely: transparency and activity tracking, centralized patient data management, monitoring the use of capitation funds, and ease of audit reporting. the implementation of p-care directly has a positive impact on the prevention of capitation fund fraud. through the features of transparency, data integration, fund monitoring, and efficient reporting, the system strengthens the accountability of fund management and minimizes potential irregularities. therefore, p-care can be seen as a strategic instrument in supporting clean and accountable financial governance in the primary health care sector. conclusions mataram city's puskesmas capitation funds are the focus of this empirical investigation of the role of p-care, organizational ethics, accountability, and the internal control system in preventif fraud such that the following inferences may be made from the conducted research: 1. when it comes to the city of mataram's capitation money for puskesmas, the internal control mechanism helps to avoid fraud. this demonstrates how effective the puskesmas' internal control mechanism is in preventing the theft of puskesmas capitation monies. 2. the prevention of fraud involving the city of mataram's capitation money for health clinics is aided by accountability. this demonstrates how effective responsibility for the use of puskesmas capitation money is in preventing fraud using these monies. 3. the prevention of fraud involving the capitation money for puskesmas in mataram is hindered by the organization's ethical culture. as a result, it is evident that an organization's ethical culture is not enough to avoid fraud, especially in the absence of a clear supervision structure and the capacity to identify and counter unethical activity. 4. mataram city's puskesmas are less likely to have their capitation fees stolen thanks to p-care. this indicates that the less likely it is that puskesmas capitation money may be subject to fraud, the better p-care's operations in this area are. the limitation of respondents in the study is because the research area only covers mataram city, where the number of main health centres in mataram city is only 11 health centres with only 66 respondents. references association of certified fraud examiners. 2018. ‘report to the nations 2018: global study on occupational fraud and abuse’. acfe, may. audit board of the republic of indonesia (bpk ri). 2016. summary of audit findings for the second semester of 2016. jakarta: audit board of the republic of indonesia. aviva, j. 2022. the effect of risk based audit, internal control system and organizational commitment to fraud prevention with ethical considerations as moderating variables. journal of accounting and taxation, 4(2). batkunde, a. a., e. p. radjawane, and a. talla. 2024. implications of internal control systems for fraud prevention in 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and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 environmental accounting and its impact to firm value: study of environmentally sensitive companies in indonesia diajeng fitri wulan1* , reni oktavia2, usep syaipudin3, adilah sabrina muti’ah4 accounting department, university of lampung, indonesia1 accounting department, university of lampung, indonesia2 accounting department, university of lampung, indonesia3 accounting department, university of lampung, indonesia 4 * corresponding author info articles abstract history article: submitted 28 august 2023 revised 29 november 2023 accepted 9 december 2023 purpose: this research aims to explore more about the escalating investor interest in environmental risks and their recognition of a company's environmental performance as pivotal to its long-term viability. design/methodology/approach: utilizing multiple regression analysis, we investigate the influence of environmental cost, ecoefficiency, corporate social responsibility (csr), and environmental performance on a company's value. originality: the originality and value of this research lie in its exploration of the increasing investor interest in environmental considerations and their recognition of a company's environmental performance as a key determinant of its long-term viability. findings: our findings reveal a positive impact of these factors on overall company value, suggesting that improvements in environmental performance, eco-efficiency, and transparent reporting of environmental expenses and csr contribute significantly to a firm's market valuation. practical implication: this underscores the critical role of open and honest communication about environmental practices in attracting investors and enhancing a company's market standing. the company should highlight the importance of integrating environmentally responsible practices into business strategies for sustained success and investor appeal. limitation and suggestion: notably, the study is limited to environmentally conscious businesses, signaling the necessity for future research to broaden its scope for a more comprehensive evaluation of these relationships across diverse industries. paper type: research paper keywords: firm value, environmental cost, ecoefficiency, csr, environmental performance jel: m41, q56, g32. * address correspondence: e-mail : diajengfitriw@gmail.com1 renioktavia@gmail.com2 usepsyaipudin@gmail.com3 adilahsabrinamutiah08@gmail.com4 mailto:diajengfitriw@gmail.com mailto:renioktavia@gmail.com2 mailto:usepsyaipudin@gmail.com3 mailto:adilahsabrinamutiah08@gmail.com https://orcid.org/0000-0002-6450-6356 wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 114 introduction recently, there has been a noticeable surge in investor attention and recognition of the potential risks associated with environmental problems and other non-financial considerations such as social responsibility and effective corporate governance. this circumstance compels organizations to intensify their endeavors and prioritize the non-financial dimensions of company success that are closely associated with company worth. based on the findings of (aydoğmuş et al. 2022; benkraiem et al. 2023; cahyani and mayangsari 2022; yousaf 2021), there is a growing expectation among various stakeholders, including investors, employees, suppliers, customers, and the government, for enterprises to prioritize and evaluate their performance in terms of both financial and non-financial aspects. consequently, numerous organizations seek to adopt ethical and sustainable business practices with a long-term outlook, emphasizing the integration of environmental, governance, social, and community considerations (sugianto et al. 2022). according to (felisha and rossieta 2018; schneider 2008), companies that exhibit subpar environmental performance are often perceived as precarious and are unlikely to sustain themselves in the long run. the presence of these erroneous beliefs and unrealistic expectations will have a detrimental impact on the overall worth of the organization. in light of significant public scrutiny and demanding market expectations, organizations must carefully deliberate strategies to effectively address market demands (li et al. 2020). this entails the provision of advantageous outcomes while concurrently ensuring the sustainable preservation of the environment. based on the findings of (abdi et al. 2020), it can be observed that investors exhibit a significant degree of sensitivity toward companies' ability to meet their obligations to stakeholders, particularly regarding the sustainability of the company. it is widely anticipated that firms, particularly those that are publicly traded, should take into account strategies related to environmental conservation and implement practices and initiatives aimed at enhancing their environmental performance (abdelhalim et al. 2023; jabbour et al. 2018; shen and chen 2020). according to (nguyen et al. 2021), legitimacy theory posits that corporations demonstrate a commitment to environmentally responsible practices to satisfy the demands of company stakeholders and align with societal norms and interests. moreover, the concept of legitimacy theory, as discussed by (liao et al. 2015), posits that a firm's dedication to enhanced environmental accountability has the potential to bolster its legitimacy and corporate image by fostering positive business associations with external stakeholders. in order to fulfill the expectations of a company's stakeholders, organizations have the option to implement environmental-based accounting practices as a means of attaining favorable environmental performance (okafor, 2018). environmental accounting is utilized to attain sustainable development, foster positive community relations, and execute environmental conservation efforts in a successful and efficient manner. accounting professionals face the task of allocating expenses in a manner that aligns with societal norms and interests. consequently, the significance of environmental reporting and accounting has become increasingly pronounced in recent years (bassey et al. 2013; riyadh et al. 2020). environmental accounting promotes improved corporate management by emphasizing the consideration of many stakeholders' interests, primarily focusing on assessing the environmental consequences of managerial actions. the necessity for government assistance in enhancing the environmental performance of the enterprise, which is intricately linked to the community, is substantiated. the current administration in indonesia has implemented a green economy, also known as a green economy, as a plan for economic change. the concept of a green economy refers to an economic state that aims to uphold a harmonious equilibrium between the welfare of society and the preservation of the environment (dewi et al. 2023). establishing a green economy in indonesia is underpinned by several legal frameworks, including pojk 51/pojk.03/2017, which pertains to the execution of sustainable finance for financial institutions, issuers, and public companies. additionally, ojk circular no. 16/seojk.04/2021 has been introduced to amend financial services authority regulation number 57/pojk.04/2020, which addresses securities offerings through crowdfunding services based on information technology. the otoritas jasa keuangan (ojk), as the regulatory body overseeing the implementation of the capital market in indonesia, has established a set of strategic plans to promote corporate sustainability. these plans are outlined in the roadmap for sustainable finance in indonesia (2015-2019) and further developed in the roadmap for sustainable finance in indonesia phase ii (2021-2025). implementing green economy principles will enhance the company's environmental performance and influence its perceived value among the general public. the trust and satisfaction of the general public towards firm products are contingent upon their favorable environmental performance. the adverse environmental performance will have implications for individuals who opt to abstain from utilizing products deemed environmentally unfriendly and capable of causing harm to ecosystems (aini and faisal 2021). subsequently, this endeavor in environmental management represents one of the company's measures of responsibility aimed at garnering stakeholder support to generate a favorable influence on enhancing firm value (kim et al. 2021; septianingrum 2022). prior research has been undertaken to examine the impact of different corporate environmental wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 115 initiatives on the valuation of firms. several studies have examined the relationship between a company's environmental performance and value. (chouaibi et al. 2022) conducted research in the uk and germany, while (kim et al. 2021) conducted a similar study in korea. (agyemang et al. 2021) focused on china, and (shabbir and wisdom 2020) conducted their research in nigeria. these studies collectively suggest a positive association between a company's environmental performance and value. additionally, research conducted in indonesia by (ermaya and mashuri 2020; harahap et al. 2019; utomo et al. 2020; wahidawati and ardini 2021) also support this finding. contrary to the findings of previous studies (aini and faisal 2021; fahad and busru 2021), it is evident that various factors may contribute to this discrepancy. these factors encompass the absence of proactive initiatives by companies about environmental and social endeavors, the dearth of a sustainable investment culture among investors, and a lack of consumer sensitivity and awareness regarding corporate social responsibility practices. several other studies also examine the environmental costs associated with implementing corporate environmental accounting. environmental costs are utilized by companies as financial resources to implement a range of programs and initiatives focused on the environment to benefit the community. the study conducted by (hapsari and kurniawan 2020; nababan and hasyir 2019) revealed a favorable correlation between environmental expenses and corporate value and performance. contrarily, alternative studies done by (okafor 2018; siagian 2021) yielded contrasting results, as they observed that heightened environmental expenses had a detrimental impact on the organization's financial performance, leading to an escalation in expenditure items. the company's eco-efficiency can provide further insights into its environmental endeavors, encompassing environmental performance and costs and other initiatives undertaken in this domain. the concept of eco-efficiency underscores a company's capacity to meet consumer demands while simultaneously reducing the environmental impact of its production processes and addressing stakeholder and governmental pressures (abdelhalim et al. 2023; vásquez et al. 2019). the study conducted by (safitri and nani 2021; yao et al. 2019) revealed a positive correlation between eco-efficiency and company value. this relationship is attributed to the gradual reduction of environmental impact and conservation of natural resources while producing goods and services. as a result, the enhanced eco-efficiency positively influences the perception of the company's value in the public domain. however, contrasting findings were presented by (abdelhalim et al. 2023; septianingrum 2022). corporate social responsibility (csr) can serve as a strategic initiative for companies to actively engage with the community, thereby enhancing their corporate image. corporate social responsibility (csr) refers to the practice undertaken by companies to effectively communicate their obligations and duties to various stakeholders (ikram et al., 2019). previous studies conducted by (cahyani and mayangsari 2022; gerged et al. 2021) have demonstrated a positive relationship between corporate social responsibility (csr) and company value. these studies have shown that csr indicates a company's commitment to societal welfare, employee well-being, and environmental sustainability, thereby fulfilling its social obligations. however, contrasting findings have been reported by (fahad and busru, 2021; kraus et al. 2020), who attribute the differing results to investor backgrounds and preferences variations. environmental innovation refers to a company's collective endeavor to enhance the quality and sustainability of current products and processes. this is achieved by adopting environmentally conscious practices such as the utilization of eco-friendly raw materials, waste reduction, incorporation of environmentally friendly design principles in product development, mitigation of carbon emissions, and minimizing the consumption of water, electricity, and other essential resources (rehman et al. 2021). environmental innovation has a significant role in preserving resources, safeguarding the environment, and fostering financial prosperity. according to (chouaibi et al. 2022), implementing environmental innovation is a proactive approach to attaining the advantages of sustainable environmental development. the potential of environmental innovation to enhance a company's environmental initiatives and enhance its corporate value has been identified in various studies. (novitasari and agustia 2021) researched this topic in indonesia, while (guo et al. 2020; li et al. 2020) explored it in china. (kraus et al. 2020) investigated the relationship between environmental innovation and corporate value in malaysia, and (andries and stephan 2019) examined it in belgium. the main objective of our research is to assess the impact of environmental initiatives on the market value of environmentally sensitive companies listed on the indonesia stock exchange (idx). with a growing investor focus on environmental considerations and non-financial aspects such as social responsibility and corporate governance, our study seeks to investigate the relationship between environmental performance, eco-efficiency, corporate social responsibility (csr), and environmental innovation on the market value of these companies. employing a robust methodology, we employ multiple regression analysis to analyze the quantitative associations between the aforementioned environmental factors and the market valuation of companies in the idx. by focusing on environmentally sensitive firms, we aim to provide insights into the financial implications of their environmental practices, offering valuable wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 116 information for investors, policymakers, and company stakeholders. this research is expected to contribute valuable insights into the financial implications of environmentally responsible practices, assisting investors, policymakers, and stakeholders in making informed decisions and fostering sustainable business practices. literature review and conceptual framework legitimacy theory legitimacy theory refers to the perspective that organizations seek to establish and maintain legitimacy in the eyes of their stakeholders. the concept of legitimacy theory elucidates the reciprocal relationship, known as the social contract, between firms and the broader general public (chen and roberts 2010). legitimacy can be regarded as a possible advantage or resource that enables a corporation to endure and thrive (dowling and pfeffer 1975). the social contract allows firms to align their actions with societal norms and values. assessing a company's environmental performance is a strategic mechanism employed to acquire and uphold the company's legitimacy among various stakeholders (ifada et al. 2021; kuzey and uyar 2017). in order to safeguard their interests, corporations must align their operations with societal demands and expectations. the legitimacy theory posits that corporations must undertake various actions to fulfill public expectations and ensure their long-term viability. firm values the concept of firm values refers to the guiding principles and beliefs that shape an organization's behavior and decision-making processes. the correlation between the company's value and the level of interest in its social and environmental performance has been highlighted in previous research (jo et al. 2016). the value of a company is determined by the performance of the company, as indicated by the share price that is influenced by the forces of supply and demand in the stock market. this share price indicates the public's evaluation of the company's performance (aini and faisal 2021; harmono 2022). the significance of firm value lies in its impact on enterprises and their owners, as a higher firm value corresponds to increased profits for shareholders. the valuation of a firm is a reflection of its operational performance and future growth potential, which in turn generates investor interest due to its strong performance. companies that embrace stringent global environmental regulations exhibit a significantly elevated market worth. enhanced environmental performance has the potential to augment the value of a company due to its ability to mitigate compliance expenses, produce tax advantages, diminish the likelihood of environmental litigation, and, more broadly, cultivate a corporate reputation aligned with prevailing regulatory frameworks (habib and bhuiyan 2017; kim et al. 2021). organizations that have implemented environmental accounting practices have gained more legitimacy among their stakeholders, enhancing their ability to access diverse resources, including securing reduced capital costs or tax exemptions (gerged et al. 2021; ntim 2016). environmental cost and firm value the environmental costs encompass the company's internal and external expenses, and all incurred costs are directly associated with environmental harm or conservation efforts (nababan and hasyir 2019). typically, these costs arise due to non-compliance with environmental requirements, resulting in substandard environmental conditions (ladyve 2020). they encompass a spectrum of organizational expenses related to environmental management, including prevention, planning, expenditures, and remediation of damages. typically, these expenses encompass the expenditures organizations incur regarding environmental management, including those associated with prevention, expenditure, planning, and remediation of damages. companies have the potential to mitigate environmental failures by allocating more excellent resources toward preventive and detection efforts via the implementation of robust environmental management systems. in order to maintain operational efficiency and long-term viability, companies must allocate resources towards capital and expenses, which are encompassed within the environmental cost component or corporate social responsibility (csr). according to (meiyana and aisyah 2019), corporations can enhance their corporate performance by effectively and judiciously allocating environmental expenditures. this necessitates a substantial financial investment, but the returns are enduring and yield lasting benefits for the organization. enhancing performance necessitates a substantial financial investment; nonetheless, this endeavor will yield enduring and permanent advantages for the organization. the allocation of environmental expenses owned by a company has been found to have a positive effect on corporate performance, hence influencing the company's overall value (hapsari and kurniawan 2020; nababan and hasyir 2019; okafor 2018). this implies that companies dedicating resources to environmental management not only comply with regulations and ethical standards but also position themselves for sustained success and increased market value. wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 117 h1: there is a positive influence of environmental costs on firm value environmental performance and firm values environmental performance refers to a company's capacity to incorporate its commitment to environmental activities and operations proactively. according to (siagian 2021), a positive correlation exists between a company's level of involvement in environmental initiatives and its perceived reputation among stakeholders. environmental performance refers to the extent to which a corporation engages in activities to preserve and safeguard the natural environment, particularly within the geographical context of its operations (dewi et al. 2023). the present study assessed the environmental performance by utilizing the pollution control, evaluation, and rating program (proper) established by the indonesian ministry of environment. this investigation draws upon the research completed by (cahyani and mayangsari 2022; ifada et al. 2021; novitasari and agustia 2021). the primary objective of the proper program is to promote and strengthen the firm's involvement in environmental management. this process involves assessing each company's operational facilities and evaluating their adherence to established environmental standards (sarumpaet 2005). those that exhibit solid environmental performance are more likely to provide comprehensive and transparent disclosures regarding the amount and quality of their environmental impact, in contrast to those that demonstrate weak environmental performance. the impact of environmental performance on business value is beneficial. companies with strong environmental performance are more likely to provide comprehensive and transparent disclosures about their environmental impact compared to those with weak performance. the increasing number of firms engaging in environmentally-focused initiatives and demonstrating a solid commitment to social responsibility has led to heightened awareness within the community regarding the extent of their contributions to the environment. hence, it can be inferred that there exists a positive correlation between a company's environmental performance and its societal value, as supported by the studies conducted by (chouaibi et al. 2022; safitri and nani 2021; yao et al. 2019). these studies provide empirical evidence supporting the idea that companies with strong environmental performance not only enhance their reputation but also contribute positively to their overall societal value. h2: there is a positive influence of environmental performance on firm value eco-efficiency and firm value as to the ministry of environment of the republic of indonesia, eco-efficiency is a conceptual framework that encompasses optimizing natural resources, energy utilization, and production processes to minimize the consumption of raw materials, water, and environmental impact. the concept of eco-efficiency entails the integration of assessments of environmental sustainability into organizational plans and operations, driven by the influence of stakeholders and governmental entities (rehman et al. 2021; shao et al. 2019). organizations must actively oversee and uphold eco-efficiency within their operational frameworks encompassing resource allocation, water and energy consumption, and waste management. this commitment is crucial for advancing and enhancing the environmental sustainability performance of the company (abdelhalim et al. 2023); the organizations are required to actively manage various facets of their operations, including resource allocation, water and energy consumption, and waste management. the commitment to these practices is not merely a compliance measure but is recognized as pivotal for advancing and improving a company's environmental sustainability performance. furthermore, effective internal management practices within companies, encompassing informed decision-making, standardized procedures, and attention to employee well-being, are intricately linked to the successful implementation of environmental management strategies. this implies that companies with robust internal management practices are better equipped to navigate the complexities of integrating ecoefficiency principles into their operations. attention is given to employee comfort, productivity performance, and the overall quality of the work environment. companies with effective managerial practices are better positioned to implement environmental management strategies successfully. consequently, the concept of eco-efficiency plays a substantial role in influencing the overall performance of a company, thereby impacting its market value. consequently, a positive relationship exists between ecoefficiency and company value, as supported by (safitri and nani 2021; yao et al. 2019). h3: there is a positive effect of eco-efficiency on firm value csr and firm values corporate social responsibility (csr) is a strategic approach that confers a competitive edge on firms by enhancing company performance through a heightened focus on social responsibility (kowalczyk 2019; newman et al. 2020). corporate social responsibility (csr) is an essential practice that every corporation should do in order to align the company's operations with the values and expectations of the community. implementing corporate social responsibility (csr) has been found to be beneficial for organizations in wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 118 generating profits and fostering a greater focus on environmental sustainability, societal well-being, and employee welfare (cahyani and mayangsari 2022). moreover, the correlation between the enhancement of quality and performance in csr practices and the acquisition of accounting information from robust business processes and effective management practices is crucial. this linkage emphasizes the strategic role of accounting information as a valuable resource, empowering stakeholders to make informed and rational economic decisions. in addition to financial performance, non-financial performance also plays a crucial role in determining the value of a firm (fahad and busru 2021). when organizations can enhance their social, environmental, and corporate governance performance by adhering to corporate social responsibility (csr) values, they have the potential to generate more excellent value for their stakeholders. according to (cahyani and mayangsari 2022; gerged et al. 2021), it has been observed that corporate social responsibility (csr) positively impacts the value of firms. the creation of a positive corporate reputation through effective csr implementation is crucial, as suggested by these studies, as it not only benefits society but also provides stakeholders with positive signals, influencing decisions in favor of the organization. this underscores the strategic value of csr, indicating that its impact extends beyond financial metrics to encompass broader societal impact and the cultivation of positive stakeholder relationships. h4: there is a positive influence of csr on firm value research framework source: data processed, 2023 figure 1. research framework methods research type and data this type of research is quantitative research. the data used is secondary data, with the data source used coming from company sustainability reports which can be accessed from each company's website. population and sample the population of this empirical research comprises environmentally sensitive companies that are part of various indices listed on the indonesia stock exchange (idx). specifically, the companies are members of the idx esg leaders, idx lq45 low carbon leaders, esg sector leaders idx kehati, srikehati, and esg quality 45 idx kehati indices for the period from 2018 to 2022. these indices are designed to include companies that demonstrate strong environmental, social, and governance (esg) performance. the sample selection process employed purposive sampling, with the condition that the selected companies are registered on the idx throughout the specified timeframe (2018 to 2022). furthermore, these companies must have issued comprehensive sustainability reports and disclosed detailed information on nominal environmental costs. the selection criteria aim to ensure that the chosen companies have actively reported on their environmental practices and financial commitments to environmental sustainability. environmental cost (ec) environmental performance (ep) eco-efficiency (ee) corporate social responsibility (csr) firm value wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 119 the final sample for this study comprises 32 companies that meet the specified criteria and are actively listed on the idx. these companies represent a subset of the larger population, allowing for a focused analysis of the financial implications of environmental practices within the context of environmentally sensitive businesses in the indonesian stock market. the inclusion of companies from various indices provides a diverse representation of industries and sectors with a shared commitment to environmental responsibility, contributing to the robustness and relevance of the empirical findings. variable measurement table 1. variable measurement variable definition measurement [y] firm value conditions that have been achieved by a company as an illustration of public trust in the company after going through the activity process (safitri et al. 2019). tobin’s q (aydoğmuş et al. 2022; safitri et al. 2019; septianingrum 2022) [x1] environmental cost costs incurred internally and externally to the company and all costs incurred are related to environmental damage and protection (nababan and hasyir 2019). environmental costs disclosed in the sustainability report (ermaya and mashuri 2020; ladyve 2020) [x2] environmental performance the company's concrete actions in fulfilling its responsibilities towards the environment and parties affected by its activities (dewi et al. 2023). proper value (cahyani and mayangsari 2022; dewi et al. 2023; ermaya and mashuri 2020) [x3] corporate social responsibility csr is an activity in which a company sets aside some of its profits for the benefit of humans and the environment sustainably based on proper and professional procedures (fersela et al. 2021). gri (cahyani and mayangsari 2022; fersela et al. 2021; kholmi and nafiza 2022) [x4] ecoefficiency eco-efficiency is producing goods and services at competitive prices, according to human needs, and can provide a good quality of life (safitri and nani 2021). iso 14001 ownership (ermaya and mashuri 2020; septianingrum 2022) source: data processed (2023). result and discussion data analysis data analysis was used using descriptive analysis, classic assumption test, regression analysis (multiple and moderation), and hypothesis testing (coefficient of determination t-test and f-test) using spss software. descriptive statistics table 2. descriptive statistics result variables minimum maximum mean std. deviation csr 0.22 0.97 0.509 0.13419 environmental cost 11.00 257637.00 30213.516 53563.037 eco-efficiency 0.00 1.00 0.671 0.471 environmental performance 0.00 5.00 1.883 2.063 firm value 0.04 2.30 0.753 0.407 source: data processed (2023). based on the descriptive tests that have been carried out on 32 companies, several findings were found. chandra asri petrochemical company has the lowest csr disclosure, namely only making disclosures of 22 % or 33 indicators out of 151 in the gri. this lowest disclosure occurred in 2019, although afterward, chandra asri petrochemical increased its disclosures in 2020, 2021, and 2022 by 44 %, 47 %, and 92 %, respectively. meanwhile, the company with the most significant disclosure, namely timah tbk, in 2022 made disclosures of 97 % or 146 indicators out of 151 indicators; this figure shows that timah tbk has increased from year to year after previously being at an average disclosure rate of 65 % to 68 %. the environmental costs disclosed by companies in their sustainability reports have various values wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 120 and ranges, which can be seen from the standard deviation more remarkable than the mean value obtained. bank jatim disclosed the smallest amount of environmental costs in 2018. however, it will continue to increase from 2019 to 2022, and the indocement tunggal prakarsa will disclose the largest in 2022. ecoefficiency is measured using iso 14001, where 10 companies out of 32 companies do not yet have international certificates regarding corporate management systems that function to ensure that the processes used and the products, they produce fulfill commitments to the environment, especially in efforts to comply with regulations in the environmental sector, pollution prevention and commitments to continuous improvement. nearly 30 % of the environmentally sensitive companies observed in this study still needed this certification from 2018 to 2022. on the other hand, 22 other companies managed to meet the requirements of iso 14001 and hold this certification. for company performance as measured by proper, two companies, namely bank negara indonesia and bank rakyat indonesia, have won proper at the gold level, where gold proper is the best proper, meaning that the company has implemented environmental management comprehensively and continuously. this research also found that 8 companies still needed the proper certification from the indonesian ministry of environment and forestry. the smallest company value was owned by the kalbe farma tbk company in 2022, and the largest by the pertamina gas negara company with a tobins'q value of 2.3 or more than 1, which means that asset management is successful and the shares are overvalued (dzahabiyya et al. 2020). coefficient of determination (r2) table 3. coefficient of determination result regression statistics multiple r 0.49637622 r square 0.24638935 source: data processed (2023) the r square of 0.25 suggests that these independent variables collectively explain approximately 25% of the variability observed in company value. specifically, the individual contributions of csr, environmental cost, eco-efficiency, and environmental performance are not detailed without the coefficients. however, the statistics imply that csr, along with the other environmental factors, plays a role in influencing company value. further interpretation would necessitate examining the coefficients associated with each independent variable, offering insights into the strength and direction of their respective relationships with company value, along with statistical significance tests to validate these relationships. f-test x table 4. f-test result df ss ms f significance f regression 8 6.31420619 0.78927577 5.96674904 0.000 residual 146 19.3127383 0.13227903 total 154 25.6269445 source: data processed (2023) the analysis of variance (anova) table provides key insights into the overall significance of the regression model. the f-statistic, with a value of 5.96674904, tests the overall significance of the model. the p-value (0.000) associated with the f-statistic suggests that the regression model is statistically significant. in summary, the anova results support the conclusion that the model, encompassing variables such as csr, environmental cost, eco-efficiency, and environmental performance, is not a result of random chance and significantly contributes to explaining the variability in company value. regression and hypothesis test table 5. regression and hypothesis test result variables beta significance (constant) 0.735 0.000 csr 0.264 0.249 environmental cost 0.251 0.000 eco-efficiency 0.138 0.038 environmental performance 0.053 0.001 source: data processed (2023) based on the results of the regression that has been done, the environmental cost, eco-efficiency, wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 121 environmental performance variables have a positive and significant effect on firm value, while csr has not had a significant effect. the composition of the multiple regression model in this study is: firm’s value = 0.735 + 0.264csr + 0.251ec + 0.138ee + 0.053ep (1) environmental cost and firm value according to the conducted hypothesis testing, a statistically significant relationship exists between environmental expenses and business value, as indicated by a significance level of 0.000. the environmental domain encompasses both internal costs related to mitigating the environmental impact of production operations and external expenses involved with remedying the damage caused by waste generation (ladyve 2020). the current environmental issues faced by the corporation are environmental contamination. industrial activities, particularly those with a direct impact on natural ecosystems and the environment, have the potential to generate waste that can lead to environmental contamination. it is imperative for industrial enterprises to effectively handle trash prior to its discharge into the surrounding ecosystem. environmental cost refers to continuous expenses, structures, and necessary resources to facilitate effective decision-making in environmental management. the environmental expenses borne by corporations have the potential to exert a beneficial influence on firm valuation, leading to an increase in overall worth. the allocation of environmental burdens by companies and the prioritization of environmental issues within business operations are critical factors in determining the environmental expenses incurred. these costs are crucial in assessing the impact of environmental programs and activities on company profitability (dinniyah and nuzula 2021). this phenomenon is consistent with prior studies undertaken by (hapsari and kurniawan 2020; nababan and hasyir 2019; okafor 2018), which assert that the expenditures associated with environmental management exert an inherent influence on both the performance and value of companies. effectively mitigating the expenses associated with environmental degradation can significantly enhance the firm's performance and ensure its long-term sustainability. environmental performance and firm values the results of the tests indicate a substantial positive relationship between environmental performance and business value, as evidenced by a significance level of 0.038. the public's evaluation incorporates environmental performance as a significant factor due to the growing awareness of environmental concerns, necessitating environmentally sustainable practices within a company's supply chain activities (khan and yu 2021). investors have been shown to incorporate environmental, social, and governance (esg) performance into their assessments of firm valuations, as indicated by the studies conducted by (chouaibi et al. 2022; hapsari and kurniawan 2020). esg-related endeavors prioritize enhancing a company's engagement with various stakeholders, encompassing shareholders, community members, suppliers, customers, and the environment. the company's environmental performance refers to its engagement in preserving and safeguarding the environment, particularly within its operational context (dewi et al., 2023). furthermore, environmental performance can indicate both favorable and unfavorable environmental circumstances surrounding the company (iliemena 2020). in the future, the performance of companies is expected to be influenced by their environmental performance. investors are keenly interested in allocating resources to companies that commit to environmental stewardship. investors' perception of a company's environmental initiatives plays a crucial role in evaluating its response to the stock market. investors expect that organizations might generate value through favorable environmental performance, prompting them to engage in bidding activities on the company's share price (aini and faisal 2021). this phenomenon is supported by previous studies conducted by (chouaibi et al. 2022; safitri and nani 2021; yao et al. 2019). eco-efficiency and firm value eco-efficiency refers to the corporate endeavor of integrating environmental sustainability into their strategy and operations to respond to the demands and regulatory pressures from stakeholders and governmental entities concerning environmental concerns (abdelhalim et al. 2023). the conducted experiments have demonstrated that eco-efficiency exhibits a notable and statistically significant impact on business value, as indicated by a significance level of 0.001. this research employs the iso 14001 standard to evaluate the extent to which a corporation effectively and optimally implements eco-efficiency practices. eco-efficiency refers to the ability of firms to enhance their profitability by concurrently minimizing environmental consequences, resource consumption, and costs (safitri et al. 2019). enhancing the energy eco-efficiency of an industry is a crucial factor in achieving sustainable development objectives within regional and industrial ecosystems. this is accomplished by reducing energy consumption and increasing economic output per unit of natural resources utilized while mitigating adverse environmental wulan, oktavia, syaipudin and muti’ah / finance, accounting and business analysis, volume 5, issue 2, 2023 122 consequences. such efforts are likely to attract the attention of both investors and general public companies (shah et al. 2020). this finding is consistent with previous research conducted by (safitri et al. 2019; yao et al. 2019), suggesting that a strong eco-efficiency will positively influence a company's overall performance and subsequently enhance its market value. csr and firm values corporate social responsibility (csr) is a strategic approach business adopt to gain a competitive edge while upholding their social obligations. it serves as a framework to address the adverse impacts of business operations and enhance the well-being of stakeholders, encompassing consumers, the environment, and others (newman et al. 2020; ying et al. 2022). according to the findings of this study, corporate social responsibility (csr) does no effect the company value, as indicated by a coefficient of 0.249, which falls below the conventional threshold of 0.05. implementing corporate social responsibility (csr) goes beyond enhancing a company's image among shareholders and stakeholders. corporations must undertake csr initiatives with a profound understanding of their significance (cahyani and mayangsari 2022). this study is consistent with previous studies conducted by aini and faisal (2021) and fahad and busru (2021), which found that corporate social responsibility (csr) does not have a statistically significant impact on firm value. multiple factors contribute to this phenomenon, including the inadequate disclosure and implementation of corporate social responsibility (csr) practices by numerous corporations in indonesia and the failure to adhere to the global reporting initiative (gri) criteria. as mentioned earlier, the phenomenon is evident in the descriptive mean of the statistical data presented in this study, indicating that the observed organizations reveal their corporate social responsibility (csr) practices to the extent of 51 %, or 76 out of the total 151 indicators. however, the corporations utilized in this study are categorized as environmentally sensitive firms exhibiting commendable environmental performance. many investors believe that increased corporate social responsibility (csr) disclosure is detrimental to profitability and a firm's overall value. the lack of positive corporate behavior towards corporate social responsibility (csr) activities, the absence of a sustainable investment culture among investors, and the relatively lower sensitivity and awareness of consumers towards corporate csr practices compared to other developed countries have contributed to this phenomenon conclusion according to existing research, evidence suggests that factors such as environmental cost, ecoefficiency, environmental performance, and corporate social responsibility (csr) might contribute positively to a business's overall value. however, it is essential to note that csr, in particular, still requires further examination to ascertain its precise impact on firm value. nevertheless, this study has demonstrated that the observed companies, which are environmentally conscious, have fulfilled the research assumptions. specifically, the environmental accounting practices adopted by these companies have effectively enhanced their overall value. consequently, many company owners and investors perceive the implementation of environmental accounting as a positive attribute for these companies. this observation indicates a favorable trajectory in the adoption of environmental accounting practices among companies in indonesia. consequently, organizations can allocate greater attention toward executing diverse policies and programs on environmental sustainability, thereby enhancing their overall corporate value. the study is subject to certain limitations, mostly stemming from the small sample size and reliance on measurement proxies that do not comprehensively understand each variable. it is anticipated that the subsequent study will incorporate a range of variables about environmental accounting, including eco-innovation, which serves as an evaluative measure for associated subjects. furthermore, it is anticipated that future research endeavors will employ a more extensive and inclusive sample, encompassing environmentally sensitive corporations and entities operating in other industries. this approach will enable researchers to establish meaningful comparisons among these entities. future research will employ more contemporary proxies to elucidate each component thoroughly. there is an expectation that companies should prioritize the disclosure of environmental costs and corporate social responsibility (csr) while promptly pursuing iso 14001 certification and actively seeking the proper award. these various elements possess inherent value for both 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(2021). go for green: green innovation through green dynamic capabilities: accessing the mediating role of green practices and green value co-creation. environmental science and pollution research, 28(39): 54863–54875. https://doi.org/10.1007/s11356-021-14343-1. 49 finance, accounting and business analysis volume 5 issue 1, 2023 http://faba.bg/ issn 2603-5324 financial performance of air transport operators in the conditions of digital transformation processes petya koralova-nozharova department of regional and sector economy, economic research institute at bulgarian academy of sciences, sofia, bulgaria info articles abstract history article: submitted 10 may 2023 revised 27 may 2023 accepted 31 may 2023 purpose: the study aims to examine the financial performance of air passenger carriers in the case of a developing country with transition economy like bulgaria. it also examines both the main trends in the digital transformation processes of the aviation sector and the obstacles that hinder the widespread implementation of information and communication technologies in the sector. methodology: through regression modelling, it is identified which financial performance indicators most strongly influence the digital transformation process of air passenger carriers. results: the results of the study show that bulgarian aviation operators are not capable to cover their short-term liabilities and are strongly dependent on their creditors, especially in terms of exogenous shocks like covid-19 pandemics, political crisis, ongoing military conflicts in ukraine and uncertain business environment. the country ranks on last place according to the values of desi index in comparison to eu average levels in terms of digital skills of transport workers, e-commerce, and deployment of ict. practical implications: the implications of the study could serve as basis for future research in the field of financial performance of other modes of transport or to be used for examining the air transport of countries with similar political and economic characteristics like bulgaria. paper type: research paper keywords: financial performance, air passenger carriers, digital transformation. jel: r41, g32, o31 * address correspondence: e-mail: p.koralova@iki.bas.bg mailto:p.koralova@iki.bas.bg https://orcid.org/0000-0002-5714-5687 petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 50 introduction in the last few years, the national economies of member-states have been exposed to various exogenous shocks. the impact of these processes creates serious problems for the financial and economic development of separate economic sub-sectors like air passenger transport. since 2019 the aviation operators have been forced to cope with several risks, such as the imposed travel restrictions in domestic and international carriages because of covid-19; increase in the price of petrol and its derivatives; higher total costs for aviation carriers because of the requirements for climate neutrality of the transport sector till 2050; as well as the digitalization of transport activities and transport infrastructure. for example, according to the statistical chartbook of the international air transport association in the end of 2022 the number of passengers carried globally is 25% lower than that number in 2019 (iata 2022). in europe the volume of passenger carriages in 2021 is 3 times lower than in 2019, while in 2020 this volume is even 4 times lower, compared to the values in 2019 (eurostat 2023a). even more drastic is the decline in the number of passengers carried by the licensed air transport carriers in developing member-states like bulgaria, where in 2021 the volume of passenger carriages by air transport decreased 20 times compared to 2019 (directorate general civil aviation agency 2023a). on the other hand, covid-19 pandemic period turned out to be the appropriate time for accelerating the digitalization process of main economic activities of business organizations. more and more air companies globally are using biometric data for servicing passengers both at the airports and on board of aircrafts (wns 2018). in order to improve the quality of flights and the passengers ‘comfort during the flight, some of the air carriers have deployed applications for augmented and/or virtual reality. the usage of artificial intelligence and robots in the process of technical inspections for safety of aircrafts, as well as the introduction of digital technologies for making analysis for optimization of the air companies’ total costs are only little part of the structural changes in the functioning of air transport at national, european and global level. the deployment of digital technologies in the economic activity of air transport carriers is an intensive process that requires financial security, especially in the case of developing countries with transition economies, such as bulgaria. this is due to: first – bulgaria’s air passenger transport occupies hardly 1.4 % of the european aviation market (eurostat 2023b). second, the reported financial indicators by the bulgarian air passenger carriers for the period of the pandemic (2019-2021) show lack of passenger transport activity except for the national air carrier; high unemployment rate in the sector and financial insolvency (registry agency 2023a). third, the level of digital technologies deployed by the aviation operators lags the average european levels, as hardly 10 % of the business organizations are using cloud technologies in their main activity and only 3 % of them have introduced artificial intelligence (desi 2022). in this regard, the purpose of the present study is to evaluate the financial performance of air passenger carriers in the case of bulgaria as a prerequisite for more widespread implementation of digital technologies in the air transport. the object of research is a system of financial indicators (return on capital, revenues per employee, financial indebtedness, short-term liquidity rate), that characterizes the status-quo of the aviation operators. there will be used the methods of analysis and synthesis, as well as the methods of induction and deduction for the purposes of the literature review and the critical analysis of introduced policies for digitalization of the air transport. there will also be presented an econometric model of the correlation between financial and digital performance of bulgarian air passenger carriers. literature review there are quite a few publications in the scientific literature, related to both the digitalization of passenger carriages by air transport and the financial performance of aviation operators. in the study of zaharia et al. (2018) there have been identified the challenges to digital transformation of a key romanian airport (romanian henri coanda airport). the authors have put the accent on the increase of operational effectiveness of the infrastructure site in terms of main airport operations, satisfaction of passengers on board of aircraft and generation of additional revenues for the ground-handling operators through the deployment of digital applications and digital walls. they summarize that there is a huge gap amongst the implemented romanian airport management strategy and the development of the digital technologies globally. they outline that the persons employed by the ground -handling operator do not meet the digital requirements in terms of professional qualification and skills. petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 51 the publication of bil et.al (2021) evaluates the impact of digital technologies on the main aviation operations. they focus their study over the answers of three questions: how the deployment of information and communication technologies will contribute to: satisfying passengers ‘needs; achieving company’s vision and goals and creating competitive advantage for the company. based on comparative analysis amongst 5 low-cost companies and 5 full-service companies, the authors evaluate the level of usage of inflight entertainment systems through the deployment of digital technologies. the study of büyüközkan et.al (2021) is also of interest for the purposes of the present research, as it presents an innovative model for assessing the digital transformation and competence of low-cost carriers (lcc) in the case of turkey through applying an integrated ivif fmcdm methodology. the authors conclude that the integration of digital technologies in the management and organization of lcc’s main activities contributes to growth of their competitiveness, sustainability, productiveness, and better customers ‘loyalty. paprocki (2021) in his research tries to answer the question whether the usage of digital technologies and change of the applied business model for management of the air passenger transport could limit the energy consumption and greenhouse gas emissions by aircraft without reducing the quality of passenger services. in this regard he proposes the usage of “virtual air hubs” (vah), with the help of which the fuel consumption by air transport could be reduced, the passenger services will be adapted to the needs of the customers and sustainability of air transport to exogenous shocks (pandemics, wars) will be increased. regarding the financial performance of air carriers, an interesting publication is that of raghavan and yu (2021), whose main task is to evaluate the trade activity of large and medium-sized airport operators in the usa by using the financial indicators: return on investments, return on capital, return on sales, assets turnover, capital-debt ratio. for the purposes of the research, they apply regression analysis to study the correlation between airport operating specifics and their financial performance. they conclude that large hub airports perform better in liquidity ratios, while medium-sized hub airports perform better in leverage ratios. perez et al (2022) examine the financial status-quo of 10 american aviation operators, which provide domestic passenger services so as to determine which indicators influence the most their economic recovery due to the pandemic covid-19. according to them, the most important factors are carbon footprint of air carriers in relation to the climate change, change in the business management models and deployment of digital technologies. based on the conducted literature review, the identified publications do not repeat the purpose of the present study. in some of the articles, the authors also evaluate a system of indicators in terms of financial performance of aviation operators and/or airport operators. however, the present research differentiates amongst them, as it tries to examine the correlation between financial and digital performance of air passenger carriers in the case of a developing member-state with transition economy like bulgaria. trends and policy implications in the digitalization process of air transport modern digital technologies allow to all participants in the passenger carriages by air transport to gain utilities, such as: better quality and comfort during travel; introduction of many applications for entertainment of passengers during the flight; better environmental and productiveness efficiency for aviation operators and creating economic growth. already in the end of 2020, with the introduction of sustainable and smart mobility strategy (ec 2020), the european commission sets out three main priorities for development of the relative transport modes: strongly limiting the dependence of rolling stock on fossil fuels; development and usage of sustainable transport modes in freight and passenger carriages through the deployment of information and communication technologies (ict); internalization of the external costs of transport and introduction of the “polluter pay principle”. in the section, concerning the development of air transport, it is proposed in the future to be used zero-emission technologies; to be constructed and introduced green aircraft; sesar to be deployed so as till 2050 at the latest the greenhouse gas emissions by air transport to be reduced by 55 % compared to the values of 1990. in this sense, in 2021 the european commission introduced a proposal for sustainable aviation fuels regulation (refuel eu 2021), whose purpose is to propose measures air transport to be included in the european emissions trading scheme (eu ets), to be encouraged the usage of sustainable aviation fuel (saf) and to be constructed electric power stations on the territory of airports. the measures, listed in the document will contribute to the achievement of european green deal and fit for 55 package goals for climate neutrality till 2050. in the refuel aviation initiative it is indicated that till 2030 at least 5 % of the aviation fuel used need to be saf and by 2050 its relative share must reach 63 %. the fulfillment of such requirements is associated with an increase in the amount of the operational costs for air carriers, as they currently must comply with several imposed measures like:  paying infrastructure charges, depending on the quantity of co2 emissions and noise pollution in the vicinity of airports. petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 52  possible introduction of air transport to the european union emissions trading scheme.  offsetting carbon emissions through the participation of countries in the international civil aviation organization (icao) carbon offsetting and reduction scheme for international aviation (corsia).  usage of synthetic and biofuels, which relative share since 01.01.2025 must be 2 % of the amount of the aviation fuel used. the establishment of the sesar joint undertaking back in 2007 was the first step to improvement of the safety and security management of air transport services and their development in terms of the socalled digital era (aci 2019). at the end of 2019 there is already a talk about digital european sky, where the latest digital technologies for transformation of the european aviation in terms of safe and efficient air traffic management while minimizing the harmful impact on the environment are used (sesar 2019). in 2019, the european parliament adopted a regulation on the rules and procedures for the operation of unmanned aircraft for civil purposes (ep 2019). in this sense, the digitalization process impacts significantly, first the economic and financial statusquo of aviation operators because: till 2050 there will be observed revolutionary changes in the aircraft construction industry, concerning the aero-dynamic structure of airplanes; the architecture of their power engines, wings, and fuselage; the emergence of electric aircraft and planes, powered by batteries (iata 2019). the introduction of such types of aircraft will lead to reductions in the sum of operational costs for air carriers, especially in the field of noise and environmental pollution. on the other hand, the system taxibot will be applied on the territory of airports. it is a revolutionary hybrid towing system, intended for taxiing of aircraft (van winkel 2023). the usage of taxibot will have a positive economic effect on the financial performance of aviation operators, as it can contribute to 85 % fuel consumption reductions of aircrafts during their parking on the territory of airports. second, the deployment of digital technologies will also influence the employment rate in the field of air transport. for example, the introduction of one id (2023) by iata presents opportunities for passengers to rationalize their travel through sharing information and processing contactless check-ins by biometric recognition. this implies reductions in the number of persons employed by ground-handling operators and job losses. third, the deployment of digital technologies will create additional benefits for passengers by providing in-flight entertainments such as augmented and/or virtual reality, applying internet of things for tracking passengers ‘luggage location, which fact will improve the reliability and transparency of the transportation services provided. in order to monitor the digital technologies implementation in the separate economic sectors of member-states, as well as to reach convergence in the digitalization process amongst countries, as early as 2014 the european commission introduced the desi index (desi 2023). the index consists of the following main components: human capital digitalization, connectivity, integration of digital technologies and digital public services. in this regard, on figure 1 they are presented the trends in the development of desi index for bulgaria in comparison to the eu average levels of the index, as well as the development of some of its constituent components that are relevant to the purpose of the present study. this analysis will allow to be evaluated the level of digital technologies implementation by business organizations in bulgaria and in particular by aviation operators. as one can see from figure 1, bulgaria is still lagging in the development of the desi index, as in 2022 its value is 38, while the average european value is 52. for the period after the covid-19 pandemic, the index increases by 35 % in 2022 compared to 2019. the value of the index’ component “deployment of ict by the business” is still significantly lagging the values of the component in the developed member-states like belgium, finland, denmark, slovenia, austria аnd at the same time, this value is 2 times lower that the eu average values. in 2022 it is observed a growth by only 15 % in the value of the component, concerning the digital technologies implementation by bulgarian business compared to 2019. this is because during the pandemics, most of the companies relied on state subsidies for covering their operational costs. moreover, many companies were forced to cease their economic activities, especially in the field of air passenger transport, for example during that period, the national air carrier of bulgaria operated 20 times lower volumes compared to 2019 (bulgaria air 2023). petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 53 source: digital agenda eu, https://digital-agenda-data.eu/ figure 1. information about desi index and its constituent components the e-commerce in bulgaria is also not sufficiently developed as according to the values of the component in desi index, the country ranks on last place amongst the other eu member-states. regarding the component “digital skills of the human capital”, bulgaria ranks second to the last romania. according to the value of the indicator, 12.4 % of the population of the country possesses basic skills for using internet and 20 % of the citizens have acquired specific digital skills. it is observed a slight increase by 8 % in the values of the component in 2022 in comparison to 2017, which means that business organizations do not allocate sufficient financial resources for reinvestments in better qualifications and skills of their personnel and there is no targeted government policy for acquiring new or improving the existing digital skills among the population. empirical analysis, results, and discussion the financial performance of air passenger carriers will be examined through the statistical analysis of a system of indicators, including short-term liquidity rate, return on capital, revenues per employee and financial indebtedness. for the purposes of the statistical analysis, it is made a representative sample of the licensed air carriers on the territory of bulgaria who possess a valid operating license of community air carrier in category a: air volta, avio start, b h air, bulgaria air (the national carrier of bulgaria), fly2sky and gulivair. on table 1 they are presented the trends in the development of the indicator „short-term liquidity ratio“ of bulgarian aviation operators. table 1. short-term liquidity ratio of bulgarian aviation operators 2016 2017 2018 2019 2020 2021 air volta 3.566 2.617 3.033 0.791 0.217 0.588 avio start 1.012 1.072 1.164 1.415 1.202 2.305 b h air 0.777 0.928 1.669 1.129 1.092 1.062 bulgaria air 0.97 1.269 1.009 0.821 0.382 0.323 fly2sky 3.92 0.906 0.537 0.93 0.485 0.464 gulivair 2.443 5.565 0.385 3.763 1.796 0.493 source: annual financial reports of the licensed air passenger carriers for the period 2016-2021 the short-term liquidity ratio is an important financial indicator and is especially useful for analyzing airline companies, as they are in general capital-intensive and have significant amounts of debt. the information on table 1 shows that for the period 2019-2021 – during the covid-19 pandemics most of the 0 10 20 30 40 50 60 2017 2018 2019 2020 2021 2022 desi index total and in separate components bulgaria (desi index total) eu (desi index total) e-commerce (bg) deployment of ict by the business (bg) digital skills of human resources (bg) https://digital-agenda-data.eu/ petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 54 air passenger carriers have values under 1. only for the carriers avio start and b h air, the short-term liquidity ratio is around 1. it is observed a serious decline in the values of the indicator and in 2021 a drop by between 70 % and 90 % is reported for the air carriers air volta (-84 %), bulgaria air (-67 %), fly2sky (-89 %) and gulivair (-80 %) compared to 2017. the observed high values of the indicator (from 2.4 to 5.6) for gulivair for the period 2016-2019 are determined by the fact, that in this time the air carrier has not performed operation activity, as the company has acquired its license in the end of 2020. in this period the persons, employed by the aviation operator are 8 workers and the aircraft consisted of only one plane, while in 2021, the number of the employees grew 9 times (72) and that of planes grew 6 times (gulivair 2022). the observed trends are due first to the significant drop in the volumes of passenger carriages, which volume only for the national air carrier is decreasing 20 times because of the pandemics. second, except for bulgaria air, the rest aviation operators form their revenues and passenger turnovers based on seasonal charter flights operation, which operations were strictly forbidden during the covid-19 pandemics (for some of the carriers, these drops were between 3 and 13 times) and at the end of 2022 and at the beginning of 2023 these flights started hardly to recover since pre-pandemic levels. third, due to the imposed travel restrictions because of the health crisis in global, european, and national level, the liabilities of bulgarian aviation companies to the personnel, creditors and external resources began to constantly increase in the expense of lack of incomes. source: annual financial reports of the licensed air passenger carriers for the period 2016-2021 figure 2. trends in the development of return on capital of bulgarian aviation operators for the period 2016-2021 as one can see on figure 2, the indicator return on capital is taking values under 1 and during the covid-19 pandemics its values are negative. this means that with the available material (aircraft, equipment), human (personnel, directly engaged with passenger carriages operation) and information resources bulgarian aviation operators could not make profit and they strongly depend on crediting from external sources. for example, in 2021 only for air volta, avio start and gulivair they are observed positive values of the indicator, although they are far below 1 but they give a signal that carriers are starting gradually to recover their financial performance from the health and economic crisis. the values of the indicator for the national carrier bulgaria air also show a recovery trend as the return on capital increases 5 times in 2021 compared to 2019. the observed trends in the development of the indicator characterize the inability of bulgarian air carriers to maintain their fleet in accordance with the technological innovations in the sector, as well as they are unable to improve the qualification and skills of their personnel regarding the modern trends in the digital transformation of economic sectors. it also gives information that the developments in the material and human resources of aviation operators do not bring financial benefits for the companies and they are not effective – this fact is confirmed also by the reported drop in the values of the coefficient in 2021 compared to 2016, as for air volta return on capital decreases by 86 %, for b h air – by 9 times, for fly2sky by 26 % and for gulivair by 116 %. another indicator, which directly corresponds to the financial performance of air passenger carriers is the revenues per employee. on figure 3 one can see the trends in the development of the indicator for the period 2016-2021. -40 -20 0 20 40 60 80 2016 2017 2018 2019 2020 2021 return on capital of bulgarian aviation operators air volta avio start b h air bulgaria air fly2sky gulivair petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 55 source: annual financial reports of the licensed air passenger carriers for the period 2016-2021 figure 3. trends in the development of the revenues per employer of bulgarian aviation operators the indicator revenues per employee accurately reflects the labor productiveness of personnel, employed by aviation operators. the values of the indicator are negative during the period of the health and financial crisis because of covid-19 pandemics (its values are between -65 and 3). in this period a lot of companies in most of the economic sectors were funded through the state measures 60:40 in order to keep their personnel employed on the one hand and on the other – to ensure some kind of payment for the human labor and to compensate the impossibility for them to carry out their routine tasks because of the imposed restrictions on flights inn national, european and global aspect. as it was mentioned previously, the covid19 pandemics accelerates the digitalization processes of economic activities, which forces companies to hire workers with high professional qualification, possessing basic and specific digital skills and performing higher labor productiveness rates. obviously, the statistical data provided on figure 4 shows that bulgarian air carriers do not have enough qualified and skilled personnel who would successfully meet the requirements of the digital revolution, as the revenues per employee have strongly decreased during the studied period. there is a significant drop in the labor productiveness rate of employees as for most of the aviation operators it is between 96 % and 120 % in 2021 compared to 2017 and to 2019. financial indebtedness is another important indicator which represents the ability of economic agents to cover their liabilities with or without the help of creditors (hristozov 2021). on table 2 they are presented the trends in the development of the indicator for the period 2016-2021. table 2. trends in the development of the financial indebtedness indicator of bulgarian aviation operators 2016 2017 2018 2019 2020 2021 air volta 0.302 0.503 0.437 2.088 3.953 5.025 avio start 14.493 4.831 0.798 1.01 1.451 1.664 b h air -25 -5.435 90.909 45.455 90.909 500 bulgaria air 2.558 1.138 1.136 2.268 2.538 3.509 fly2sky 0.0305 4.926 29.412 16.129 -2.695 3.279 gulivair 0.444 0.176 -10.87 0.366 1.887 2.793 source: annual financial reports of the licensed air passenger carriers for the period 2016-2021 for all the investigated carriers, the values of the indicator are many times higher than 1, which express a high degree of dependence of these companies on their creditors and inability to cover their liabilities by own capital resources. this is not a good example of an appropriately carried financial policy by the aviation operators, since any modernization of the aircraft in accordance with the modern digital -150 -100 -50 0 50 100 150 2016 2017 2018 2019 2020 2021 revenues per employee of bulgarian aviation operators air volta avio start b h air bulgaria air fly2sky gulivair petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 56 technologies, as well as any improvement of labor conditions and labor qualification will increase the liabilities of air carriers to creditors and there is a risk the operators to fall into a debt spiral. the greatest fluctuations in the development of the indicator are observed for the aviation operator b h air, where the values of the indicator from -25 in 2016 have reached values of 500 in 2021. this trend is determined by some of the following circumstances: first, after 2019 the air carrier has not made any profit and the number of passengers carried have decreased to 305 in 2020 compared to 226727 in 2016 (directorate general civil aviation agency 2023b). second, according to the annual reports of the company, it ranked on 2nd place in terms of liabilities amongst 74 companies in the sector and in terms of availability of equity capital it ranked on 16th place (registry agency 2023b). third, obviously for the air carrier it is difficult to compete with the other air carriers the sector on the domestic and international aviation markets, since both indicators “duration of one turnover” (2077 days for 2021 year) and the number of turnovers per year (0.17) are far below the industry average levels 298.4 days for one turnover for 2021 and 1.21 turnovers respectively (registry agency 2023c). similar trend is also observed for the air carrier fly2sky, as higher values for the indicator “financial indebtedness” are reported for the period 2018-2019. like b h air, fly2sky is also operating seasonal charter passenger flights, but after 2019 the operator has differentiated its main economic activity and since then it has been providing wet and damp leasing (acmi services) and as a result the financial indebtedness of the air carrier has started to decrease (fly2sky 2022). moreover, even in 2021, the passengers carried by the air operator fly2sky are 4 times more than those carried by b h air (directorate general civil aviation agency 2023b). for example, in 2021 the values of the indicator for air volta have increased to 5.02 in comparison to 2016 when the values of the indicator were under 1. a similar trend is observed for gulivair (from 0.44 in 2016 financial indebtedness grows to 2.8 in 2021) and fly2sky (from 0.03 in 2016 the indicator has reached values of 3.3 in 2021). only for the national carrier bulgaria air the financial indebtedness coefficient presents well, and its values are around 1, however during the covid-19 pandemics the company’s available equity is insufficient to cover the liabilities and the dependance of the operator on creditors is increasing. based on the empirical analysis of the indicators, characterizing the financial performance of bulgarian air passenger carriers and on the degree of digitalization of the main economic processes in the country, there will be applied an econometric model for establishing a correlation between these two phenomena. in this regard a regression analysis will be applied, where the independent variables are return on capital, revenues per employee, financial indebtedness and short-term liquidity ratio and the dependent variable is deployment of ict by the business. when the multiple regression analysis was processed, the phenomena “multicollinearity” was found, which means that there is interdependence amongst the independent variables. this is logical as most of the selected independent variables are calculated by using the same unit in the numerator or in the denominator fraction bar. because of that, one-factor linear regression is applied in order to be determined which of the independent variables most strongly influences the dependent variable. figure 4 presents the results of the linear regression processed. summary output regression statistics multiple r 0.930167 r square 0.865211 adjusted r square 0.831513 standard error 0.429412 observations 42 anova df ss ms f significance f regression 1 4.734505 4.734505 25.67593 0.007145 residual 4 0.737579 0.184395 total 5 5.472083 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 13.39976 0.534411 25.0739 1.5e-05 11.916 14.88352 11.916 14.88352 x variable 1 -0.2946 0.058139 -5.06714 0.007145 -0.45602 -0.13318 -0.45602 -0.13318 source: author’s own calculations figure 4. correlation between „short-term liquidity ratio“ and „deployment of itc by the business“ petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 57 based on the results obtained, it is obvious that a linear correlation between the independent variable “short-term liquidity ratio” and the dependent variable “deployment of itc by the business” exists. this is confirmed by the values of multiple r = 0.93 %, as well as by the values of sig. f = 0.007, which is far lower than α (0.05) and they allow to interpret the results. the r square is 0.865, which means that approximately 87 % of the changes in the value of “deployment of ict by the business” could be explained by changes in the value of “short-term liquidity ratio” of bulgarian air passenger carriers. based on the information presented on figure 6, an equation of the correlation between the variables could be established and it is as follows: ydeployment of ict by the business = 13.399 − 0.295 ∗ xshort−term liquidity ratio + ε (1) the equation shows that if the values of the coefficient „short-term liquidity ratio” decrease by one point, compared to the previous reporting period, then the financial possibilities of the air carriers for deploying ict will grow by 0.3 points. consequently, if the observed trends for the development of the indicator “short-term liquidity ratio” in the period 2019-2021 are maintained and they change almost at the same rate in the next five years for the aviation operators bulgaria air, fly2sky and gulivair (see table 1), then the share of deployed digital technologies by them will grow every year. conclusion the purpose of the present study was first to evaluate the financial performance of bulgarian aviation operators in the conditions of global digital transformation and second to examine if there is a correlation between these two phenomena. the literature review showed that in the field of air transportation services digitalization there is many scientific studies, however very few of them are trying to determine how the financial performance of air carriers influence the degree of information and communication technologies deployment in their main economic activity. as a result of the empirical analysis of bulgarian aviation operators’ financial performance, the following could be summarized:  air passenger carriers are not financially capable to cover their main liabilities to the personnel and creditors in the short run. this is confirmed by the values of the short-term liquidity ratio, financial indebtedness coefficient and the return on capital (tables 1 and 2, fig. 2);  the values of the indicator „revenues per employee “correspond with low labor productiveness rates, as they are not only lower than 1 but they are also negative. this fact will put a serious dilemma to the aviation operators in the near future whether to invest financial resources in qualification and digital skills improvement of the employees and keeping their number or to replace low-qualified employees with artificial intelligence (fig. 3);  the unsatisfactory values of the return on capital coefficient correspond with inefficiency of the economic activity carried out by the bulgarian air carriers.  bulgaria ranks on the last place according to the values of the desi index, compared to the eu average levels. the country is also on the last place amongst the other eu member-states, concerning acquired digital skills by workers, deployment of ict by the business and e-commerce (fig. 1);  based on the regression analysis applied, a statistically significant correlation between financial performance of aviation operators (expressed by the short-term liquidity ratio) in the short-run and the degree of ict deployment exists. certainly, the financial performance of bulgarian air passenger carriers is determined by high indebtedness rates to creditors, inability to cover their short-term liabilities by the existing human, material and information resources, low labor productiveness rate and insignificant volumes of passenger carriages. these factors will create obstacles for the process of digital transformation of the sector. in this regard, the national government will need to undertake appropriate policies to support the air passenger transport to overcome the exogenous shocks that have arisen (covid-19 pandemics, the ongoing military conflict in ukraine, the geopolitical relations in the black sea region). on the other hand, the european commission is also trying to ensure financial support for the development of the aviation sector and most of the calls and mechanisms are open to all member-states. for example, through the mechanisms of sesar iii and clean aviation partnership for the period 2021-2027 the commission will allocate 3.4 billion euros to support implementation of hybrid and electric aircraft (aci europe 2023). the innovation fund is another opportunity for the air carriers, which main purpose is to support the development of sustainable and environmentally friendly transport modes. through the mechanisms of the national recovery and resilience plan, bulgarian air passenger carriers could receive financial support by the envisaged social petya koralova-nozharova / finance, accounting and business analysis, volume 5, issue 1, 2023 58 policy for issuing vouchers for acquiring new or development of existing digital skills by the employees. the european investment bank is another source of financial support which credits and supports activities, related to the development of sustainable aviation. the present study could serve as basis for performing similar research both in the field of financial performance of other transport modes or for aviation companies, licensed in other member-states or third countries with similar economic and political characteristics like bulgaria. references airports 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damien kunjal department of risk management, school of economic sciences, north-west university, vanderbijlpark, south africa info articles abstract history article: submitted 11 september 2023 revised 29 november 2023 accepted 3 december 2023 purpose: this study investigates the effect of geopolitical risk on etf flows in emerging markets. design/methodology/approach: etfs trading in eight emerging markets (brazil, chile, china, egypt, india, philippines, south africa, and taiwan) are surveyed from july 2013 to june 2023 using vector autoregressive (var) models and their associated impulse response functions and granger causality tests. findings: the results indicate that geopolitical risk has a significant, positive effect on etf flows in emerging markets, except for philippines where the effect is significantly negative. further analysis reveals that geopolitical risk has a significant, positive effect on etf liquidity in emerging markets except for egypt and philippines. practical implications: firstly, investors and fund managers need to carefully consider the impact of geopolitical risks on the etfs in their portfolios. secondly, for policymakers and regulators, these findings indicate that geopolitical risks serve as important sources of growth and liquidity in etf markets. thirdly, for academics and researchers, these findings indicate that geopolitical risk are significant determinants of etf flows and liquidity and should be considered when developing asset pricing models which compensate investors for size and liquidity factors. originality/value: at its core, this is the first study to explore the effect of geopolitical risk on etf flows. therefore, this study provides insight into the effect of geopolitical risk on etf markets. in addition, this study concentrates on emerging markets in which the etf market conditions and geopolitical risks are fundamentally different from their developed counterparts. furthermore, this study uses a disaggregated approach to explore the individual country-specific effects while most studies on emerging countries use a panel approach. keywords: emerging market; exchange traded fund; fund flow; geopolitical risk. paper type: research paper. keywords: emerging market, exchange traded fund, fund flow, geopolitical risk. jel: g10, g11, g40. * address correspondence: e-mail : damien.kunjal@nwu.ac.za mailto:damien.kunjal@nwu.ac.za https://orcid.org/0000-0002-3121-6969 damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 103 introduction in recent years, exchange traded funds (etfs) have gained significant traction as investment vehicles amongst both individual and institutional investors. by definition, an etf is a pooled investment fund that attempts to track the performance of a specific benchmark by replicating the benchmark’s constituents (kunjal 2022). since the inception of the world’s first etf in 1990 in canada, the global etf market continues to grow in size and number as the demand for low-cost index-based investments continue to soar (neves et al. 2019). by the end of june 2023, the assets under management in the global etf market were valued at approximately $10 trillion, representing a growth of more than 350% over the last decade (etfgi 2023). much of this growth is attributed to investors drifting away from mutual funds towards etfs (lenz and mayer 2023). this is because etfs represent a low-cost transformation of a mutual fund that is more widely accessible and offers enhanced market liquidity and trade flexibility. these advantages significantly influence the flow of funds into etf products (clifford et al. 2014). in addition, the growth in etf markets may be attributed to their ability to minimize investors’ exposure to certain risk factors (kunjal et al. 2022). one of the primary considerations in the investment decision making process is risk. investments are exposed to various risk factors including political risk, exchange rate risk, interest rate risk, liquidity risk, inflation risk, and financial risk, among others (malgharni and karimnia 2014). political risk arises from four aspects; country-level, societal, regulatory, and geopolitical factors (cline mccaffrey 2020). according to fiorillo et al. (2023), geopolitical risk is one of the top five systematic risks. caldara and iacoviello (2022) define geopolitical risk as “the threat, realisation, and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course of international relations”. in other words, geopolitical risk relates to political, economic, and social risks which arise from a country’s association with other countries. recent geopolitical events include the russia-ukraine, russianato, us-china, china-japan, china-india, syrian, and north korean conflicts. given its importance, geopolitical risk significantly impacts economic activity through its influence on inflation (caldara et al. 2022), economic growth (saint akadiri et al. 2020), interest rates (gupta et al., 2021), foreign direct investment (nguyen, et al., 2022), exchange rates (hui, 2022), and energy prices (sarker et al. 2023). recent evidence also suggests that geopolitical risk impacts the dynamics of financial markets, including performance (agoraki et al. 2022), volatility (salisu et al. 2022), return predictability (iyke et al. 2022), and liquidity (fiorillo et al. 2023). although scanty, research also suggests that geopolitical risk influences investment decisions. for instance, kim et al. (2019) report that north korean investors increase the value of their korean portfolios when north korea’s geopolitical risk rises, however, foreign investors reduce their korean portfolio values. fiorillo et al. (2023) report that geopolitical risk negatively impacts stock liquidity, and this effect is greater for stocks with already low liquidity levels (suggesting a flight to liquidity) as well as stocks of firms with more financial constraints and informational asymmetry (suggesting a shift from risky to safer assets). on this basis, it is plausible to expect a flow towards etfs when geopolitical risk surges given that these funds are known for their higher liquidity levels and lower informational asymmetry relative to their underlying securities (zhou 2011). in theory, there exists two opposing strands of literature which could explain the effect of geopolitical risk on etf fund flows. on one hand, the prospect theory introduced by kahneman and tversky (1979) suggests that, when uncertainty increases, risk-averse investors shift away from risky assets towards less risky assets. given that etfs are generally considered less risky than their underlying securities due to their diversification and liquidity benefits, it is plausible to expect a shift towards etfs when geopolitical risk and uncertainty increases, subsequently resulting in etf inflows. this phenomenon has been confirmed by yousefi and najand (2022) who report that investors exhibit a flight-to-safety effect and use etfs to diversify their portfolios away from high-risk locations towards safer, less riskier locations. on the other hand, limited market participation theories suggest that when uncertainty increases, investors decide not to participate in the market, subsequently, resulting in limited market participation (cao et al. 2005). this being so, when geopolitical risk and uncertainty surges, investors may choose to exit the market and stop trading, leading to outflows from the etf market. this phenomenon has been confirmed for the stock market by lee (2023) who reports that geopolitical risk and stock market participation are negatively related. to the knowledge of the author, the effect of geopolitical risk on etf flows has not been explored. however, inferences can be derived from existing studies on political risk and etf markets. lee and chen (2020) report that geopolitical risks significantly influence the returns of u.s-listed country etfs whereby geopolitical risks in the home trade have a greater effect on etf returns relative to u.s geopolitical risks. dutta and dutta (2022) discover that geopolitical risks negatively influence the volatility of renewable energy etfs listed on the nyse. kunjal (2022) and kunjal et al. (2022) respectively report that country risk components (which are political, economic, and financial risks) influence the liquidity and volatility of south african etf, however, the effect is not uniform across country risk components and etf benchmarking styles. these results indicate that political risk influences the dynamics of etf markets. further, there is damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 104 evidence that geopolitical risk may influence fund flows as wang and young (2020) report that terrorist attacks decrease equity mutual fund flows by increasing investors’ risk aversion. in addition, there is also evidence that the geopolitical risks of emerging countries influence their financial markets (balcilar et al. 2018; rawat and arif 2018; subramaniam 2022). put together, the findings of these studies suggest that the geopolitical risks of emerging countries may significantly influence the flows in etf markets. therefore, the objective of this study is to undertake a comprehensive analysis of the effect of geopolitical risk on etf flows, particularly for emerging markets. the motivation for concentrating on emerging markets stems from the growing geopolitical instability in these countries during recent times. the most notable geopolitical event in recent months is the russiaukraine war which has had widespread consequences on global emerging and developed economies and markets. russia’s geopolitical risk as a result of the recent political event has spilled over to other emerging markets, particularly those in the brics group (hong vo and dang 2023). in addition, emerging countries have experienced their own local geopolitical issues, including brazil’s international smuggling and border challenges, india’s existing kalapani border dispute with nepal, the china-us trade war, and south africa’s recent attempt to cancel zimbabwean permits. despite geopolitical instabilities, the popularity of etfs continues to rise, and etf markets in emerging countries continue to grow. therefore, it becomes increasingly important to understand how geopolitical risks impact etf markets. this study contributes to existing literature in several ways. at its core, this is the first study to explore the effect of geopolitical risk on etf flows. whilst the effect of geopolitical risk on stock markets have been studied, the effect on etf market needs further investigation because the effect of geopolitical risk on different asset classes is not uniform as reported by będowska-sójka et al. (2022). therefore, the first contribution of this study is that it provides insight into the effect of geopolitical risk on etf markets. notably, the effect of geopolitical risk on etf returns and volatility have been investigated, however, the effect on fund flows is yet to be investigated. such a study is vital because etf flows contribute to the growth of the market which also promotes the growth and liquidity of constituent securities (son, et al., 2023), therefore, it is important to understand the factors which contribute to the growth of etf markets, or the lack thereof. hence, the second contribution of this study is that it exemplifies research on the effects of geopolitical risk on alternative dynamics of etf markets, in this case, fund flows. the third contribution of this study is that it concentrates on emerging markets in which the etf market conditions and geopolitical risks are fundamentally different from their developed counterparts (bossman and gubareva 2023). furthermore, this study uses a disaggregated approach to explore the individual country-specific effects while most studies on emerging countries use a panel approach. this is particularly important because countries do not have a uniform reaction to geopolitical risks (balcilar et al., 2018). as part of the additional analysis, this study also examines the effects of geopolitical risk on etf liquidity. therefore, a further contribution of this study is that it extends knowledge of the determinants of etf liquidity which is fundamental to their competitiveness against other funds. this paper is structured as follows: the next section outlines the data and methodology. thereafter, the results are presented. finally, the study is concluded. data and methodology data the main variables of this study are geopolitical risk and etf flows. geopolitical risk is measured using the geopolitical risk indices constructed by caldara and iacoviello (2022) which is widely used in existing literature (see salisu et al. 2022; bossman and gubareva 2023; zhang et al. 2023). the geopolitical risk index of caldara and iacoviello (2022) measures the proportion of articles discussing adverse geopolitical events and associated threats in popular newspapers in the u.s, u.k, and canada relative to the total number of articles published by these newspapers. accordingly, an increase in the geopolitical risk index signifies an increase in geopolitical risk. the index data is available for monthly frequencies which can be retrieved from: https://www.matteoiacoviello.com/gpr.htm. following ammann et al. (2019) and apau et al. (2021), etf flows are defined as the net growth in assets under management beyond reinvested returns, which are computed as follows: flowt = tnat − tnat−1(1 + rt) tnat−1 (1) where 𝐹𝑙𝑜𝑤𝑡 represents the etf’s net flow for month 𝑡, 𝑇𝑁𝐴𝑡 represents the etf’s total net assets at the end of month 𝑡 and 𝑅𝑡 is the return on etf during month 𝑡. to account for other explanations of etf https://www.matteoiacoviello.com/gpr.htm damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 105 flows, etf returns and liquidity are included as control variables whereby liquidity is captured using amihud’s (2002) illiquidity ratio. the etf data are obtained from the equityrt database. the natural log transformation is used for all series in order to maintain comparison (bossman and gubareva 2023). the sample period for this study varies from july 2013 to june 2023 with the exception of egypt and philippines which start in february 2015 and january 2014, respectively. the emerging markets included in this sample are selected based on the availability of etf data on the equityrt platform as well as availability of data on the geopolitical risk index provided by caldara and iacoviello (2022). as a result, only 8 emerging markets are included in this sample and these markets include brazil, chile, china, egypt, india, philippines, south africa, and taiwan. for each emerging market, a broad equity market etf is analysed as outlined in table 1. table 1. sample of etfs no. country etf name benchmark index 1 brazil it now pibb ibrx-50 etf brazil 50 index 2 chile ishares msci chile etf ishares msci chile etf 3 china china 50 etf sse50 index 4 egypt egx 30 etf egx 30 index 5 india nippon india etf nifty bees cnx nifty index 6 philippines first metro philippine equity etf psei index 7 south africa satrix 40 etf jse top 40 index 8 taiwan taiex etf taiex index notes: for chile, the sample includes the ishares msci chile etf trading on the santiago stock exchange. methodology the effect of geopolitical risk on etf flows is examined using vector autoregressive (var) models introduced by sims (1980). the choice of this empirical methodology is motivated by the stationarity of the variables at levels since these models are traditionally designed for stationary variables (cellmer et al. 2009). to achieve the objectives of this study, the following var model is estimated for each etf: [ lnflowt lngprt ] = [ αlnflow αlngpr ] + ∑ am m m=1 [ lnflowt−m lngprt−m ] + ∑ bn [ lnrt−n lnamihudt−n ] n n=0 + [ elnflow,t elngpr,t ] (2) in equation (2), the main variables of interest are 𝐿𝑛𝐹𝑙𝑜𝑤𝑡 which represents the natural log of the etf’s net flow during month 𝑡 calculated using equation (1) and 𝐿𝑛𝐺𝑃𝑅𝑡 which represents the natural log of the country’s geopolitical risk rating. to account for alternative sources of etf flows, 𝐿𝑛𝑅𝑡 which captures the etf’s log returns and 𝐿𝑛𝐴𝑚𝑖ℎ𝑢𝑑𝑡 which captures the etf’s liquidity are included as exogenous variables in the var equation. etf returns are included to account for the effect of performance on fund flows as reported by rakowski and wang (2009) and arendse, et al. (2018) while the amihud ratio accounts for the effect of liquidity on etf flows as reported by broman and shum (2018). in equation (2), 𝛼 and 𝑒 respectively denote the constant and error terms. 𝐴𝑚 and 𝐵𝑛 are parameter estimates. additionally, 𝑀 and 𝑁 respectively denote the optimal lag lengths of the endogenous and exogenous variables which are selected using the information criterion. in addition to the var models, impulse response functions and granger causality tests are analysed to assess the effect of geopolitical risks on etf flows. impulse response functions are employed to trace the effect of a one standard deviation shock in one of the variables on the endogenous variables in the system while granger causality tests are employed to examine whether one variable is significant in forecasting another variable. results descriptive statistics and unit root tests the descriptive statistics in table 2 indicate that, on average, the surveyed etfs have positive net flows suggesting that funds flow into etfs on average, with the exception of taiwan. these positive net flows contribute to the growth of etf markets and may be attributed to their rising popularity. the etf with the highest average monthly net flows is the egyptian etf which may be expected since there is only one etf trading on the egyptian exchange (egx 2023) while there are several etfs for investors to choose from in the other emerging markets. the country with the highest average and standard deviation for the geopolitical risk index is china indicating that china exhibits the greatest geopolitical risk on average and its geopolitical risk is relatively volatile. this finding is expected given china’s recent geopolitical damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 106 tensions with india, japan, and the u.s amongst other nations (singh and roca 2022). table 2. descriptive statistics country 𝑭𝒍𝒐𝒘𝒕 𝑮𝑷𝑹𝒕 mean std. dev mean std. dev brazil 0.0023 0.0058 0.0575 0.0429 chile 0.0005 0.0065 0.0146 0.0138 china 0.0008 0.0071 0.7365 0.3630 egypt 0.0032 0.0079 0.1473 0.0952 india 0.0010 0.0033 0.1909 0.0918 philippines 0.0011 0.0027 0.0469 0.0383 south africa 8.71e-05 0.0088 0.0477 0.0313 taiwan -0.0016 0.0098 0.1013 0.1249 prior to estimating the var models, it is important to confirm the stationarity of the variables. table 3 presents the results of the phillips-perron (1988) unit root tests conducted on the natural log transformation of the variables. the results in table 3 indicate that the null hypothesis of a unit root is rejected for all the variables of all the countries at a 1% level of significance, thereby, indicating that the variables are stationary at levels. this finding supports the use of the var models to investigate the effect of geopolitical risk on etf flows. table 3. phillips-perron unit root test results country 𝑳𝒏𝑭𝒍𝒐𝒘𝒕 𝑳𝒏𝑮𝑷𝑹𝒕 𝑳𝒏𝑹𝒕 𝑳𝒏𝑨𝒎𝒊𝒉𝒖𝒅𝒕 brazil -9.8876* -8.1987* -11.1727* -9.1621* chile -8.6837* -6.3975* -14.6164* -9.2616* china -9.1008* -4.7593* -9.9115* -9.9129* egypt -9.6191* -8.0613* -9.7285* -6.9822* india -9.9586* -7.4185* -11.2556* -6.8775* philippines -9.6441* -9.7567* -11.1871* -10.1464* south africa -4.2238* -9.4448* -12.1163* -9.0804* taiwan -10.5340* -3.6473* -11.7592* -4.7368* notes: 1. the table provides the phillips-perron (1988) test statistic. 2. * denotes statistical significance at a 1% level of significance. main results the results of the var models estimated for each emerging market are provided in table 4. the results are only provided for the regressions with etf flow as the dependent variable, and the coefficients of interest are the lagged geopolitical risk ratings (𝐿𝑛𝐺𝑃𝑅𝑡−𝑚) which provide insight into the response of etf flow to geopolitical risk. for brazil, chile, china, india, and taiwan, the lagged one-month geopolitical risk rating (𝐿𝑛𝐺𝑃𝑅𝑡−1) exhibits a significant, positive effect on etf flows. this implies that an increase (decrease) in the geopolitical risk of these countries lead to an increase (decrease) in etf flows in the next month. for egypt and south africa, only the lagged second-month geopolitical risk rating (𝐿𝑛𝐺𝑃𝑅𝑡−2) exhibits a significant effect on etf flow, in which case, the effect is also positive. this implies that there is a delayed reaction whereby an increase (decrease) in the geopolitical risk ratings of egypt and south africa lead to an increase (decrease) in etf flows in the next two months. for india and taiwan, the positive effect of geopolitical risk remains significant even in the second month, however, the effect becomes negative three months after changes in taiwan’s ratings. on the contrary, the lagged second-month geopolitical risk rating displays a negative effect on etf flows in philippines suggesting that an increase (decrease) in philippine’s geopolitical risk leads to a decrease (increase) in etf flows two months after the change in the rating. overall, these findings imply that geopolitical risk exhibits a positive effect on etf flows in the surveyed etf markets, with the exception of philippines. the positive effect of geopolitical risk on etf flows in brazil, chile, china, egypt, india, south africa, and taiwan implies that, when geopolitical risk increases, investors shift away from risky assets towards safer asset classes (in this case, etfs), subsequently, leading to increased net flows for etf markets. this finding confirms the relevance of the prospect theory and coincides with flight-to-safety effect reported by yousefi and najand (2022). however, the negative effect for philippines coincides with limited market participation theories suggesting that investors opt out of financial market participation during increased risk exposures because investors reduce their trading damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 107 activities when geopolitical risk increases in philippines, subsequently, leading to a decrease in etf net flows. this finding for philippines is consistent with the findings of lee (2023) who discovered that geopolitical risk and stock market participation have a negative relationship. table 4. results of the var models notes: 1. t-statistics are provided in brackets below the coefficient estimates. 2. the critical threshold values at a 1 %, 5 %, and 10 % level of significance are 2.364, 1.660, and 1.290, respectively. 3. *, **, and *** denote statistical significance at a 1 %, 5 %, and 10 % level of significance, respectively. for completion, the var results in table 4 also indicate that etf flows are positively autocorrelated in chile, china, egypt, india, and philippines. positive autocorrelations in fund flows may be driven by herd behaviour (del guercio and tkac 2002) and was also reported by rakowski and wang (2009), benrephael et al. (2011), and staer (2017). additionally, etf flows are significantly influenced by their returns and liquidity in some countries. for instance, etf returns have a significant, positive effect of etf flows in india but a negative effect in chile and philippines. the amihud ratio exhibits a consistent positive and significant effect in all emerging markets except south africa. this implies that etf flows are positively influenced by greater price impacts (measured by the amihud ratio) which may be driven by increased demand for these funds. to further investigate the effect of geopolitical risk on etf flows, the impulse response functions associated with the var models are presented in figure 1. the impulse response functions in figure 1 display the response of etf flows to geopolitical risk ratings in each country. overall, the impulse response functions conform with the var results. in particular, the impulse response functions indicate that shocks in geopolitical risk have positive impacts on etf flows in all emerging markets except for philippines where the impact is negative. however, the impacts are only statistically significant in chile (period 2), china (period 4), egypt (period 3), india (periods 2 and 3), and taiwan (periods 2, 3, and 5) confirming a strong positive effect of geopolitical risk on etf flows in these emerging markets. additionally, granger causality tests are used to detect possible causality from geopolitical risk to etf flows. the null hypothesis for the test states that geopolitical risk does not granger cause etf flow, and the results are provided in table 5. the null hypothesis is rejected in chile, china, egypt, india, and taiwan implying that geopolitical risk granger causes etf flows in these countries, thus, providing evidence of a strong relationship between geopolitical risk and etf flows in chile, china, egypt, india, and taiwan – confirming the results of the impulse response functions. whilst the granger causality tests do not provide an indication of the direction of the relationship, the var and impulse response functions suggest that the relationship is positive for these countries, consistent with flight-to-safety effect. variable brazil chile china egypt india philippines south africa taiwan lnflowt−1 0.0446 [ 0.6525] -0.1566 [-1.1000] 0.1425** [ 2.2144] 0.0731 [ 0.7458] 0.0994*** [ 1.3918] 0.0895 [ 1.1106] 0.2565 [ 1.1479] -0.1019 [-0.8713] lnflowt−2 -0.0195 [-0.2812] 0.2925** [ 1.7932] 0.1424** [ 2.2189] 0.1543*** [ 1.5826] 0.0493 [ 0.6897] 0.1145*** [ 1.4346] 0.2089 [ 1.0166] 0.0440 [ 0.4125] lnflowt−3 0.1272 [ 1.2129] lngprt−1 0.3691** [ 1.7250] 1.1884* [ 2.4056] 0.7334** [ 1.8602] -0.2183 [-0.5878] 1.2381* [ 2.7806] -0.0883 [-0.4111] 0.4065 [ 0.3587] 0.7554** [ 2.1380] lngprt−2 -0.2696 [-1.2336] 0.2578 [ 0.4851] 0.1681 [ 0.4336] 1.2341* [ 3.3744] 1.3496* [ 3.0372] -0.3850** [-1.7759] 2.9477*** [ 1.4527] 0.5645*** [ 1.6204] lngprt−3 -0.8041** [-2.2063] constant -1.5217 [-1.2731] 8.6109** [ 2.2703] 12.0748* [ 7.0998] -3.9356* [-2.6959] 6.5265* [ 3.4377] -4.5944* [-2.9395] 8.2321 [ 1.1104] -5.9961* [-3.5915] lnrt -0.1399 [-0.0636] -7.6059*** [-1.4402] -1.6436 [-0.6677] 2.7487 [ 1.1067] 5.3586*** [ 1.4273] -4.9701*** [-1.3511] 6.2177 [ 0.3039] 3.0600 [ 0.5712] lnamihudt 1.1070* [ 10.220] 1.5914* [ 6.4679] 1.6347* [12.8702] 0.3532* [ 4.1156] 1.1037* [ 9.2709] 0.8746* [ 6.7551] 0.3115 [ 0.5347] 0.2820* [ 4.1797] aic 6.0240 6.6042 4.2700 5.8626 5.1663 6.4191 5.8390 6.4591 sbic 6.3545 7.2200 4.6538 6.2677 5.5080 6.7589 6.4474 7.0283 damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 108 figure 1. impulse response functions 0.0 0.5 1.0 1.5 1 2 3 4 5 6 7 8 9 10 response of ln_flow_brazil to ln_flow_brazil innovation 0.0 0.5 1.0 1.5 1 2 3 4 5 6 7 8 9 10 response of ln_flow_brazil to ln_gprc_brazil innovation .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_brazil to ln_flow_brazil innovation .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_brazil to ln_gprc_brazil innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s -1 0 1 2 1 2 3 4 5 6 7 8 9 10 response of ln_flow_chile to ln_flow_chile innovation -1 0 1 2 1 2 3 4 5 6 7 8 9 10 response of ln_flow_chile to ln_gprc_chile innovation -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_chile to ln_flow_chile innovation -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_chile to ln_gprc_chile innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s 0.0 0.4 0.8 1.2 1 2 3 4 5 6 7 8 9 10 response of ln_flow_china to ln_flow_china innovation 0.0 0.4 0.8 1.2 1 2 3 4 5 6 7 8 9 10 response of ln_flow_china to ln_gprc_china innovation .0 .1 .2 .3 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_china to ln_flow_china innovation .0 .1 .2 .3 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_china to ln_gprc_china innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_egypt to ln_flow_egypt innovation -0.5 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_egypt to ln_gprc_egypt innovation .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_egypt to ln_flow_egypt innovation .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_egypt to ln_gprc_egypt innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_india to ln_flow_india innovation 0.0 0.5 1.0 1.5 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_india to ln_gprc_india innovation -.1 .0 .1 .2 .3 .4 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_india to ln_flow_india innovation -.1 .0 .1 .2 .3 .4 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_india to ln_gprc_india innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s -0.4 0.0 0.4 0.8 1.2 1.6 1 2 3 4 5 6 7 8 9 10 response of ln_flow_philippines to ln_flow_philippines innovation -0.4 0.0 0.4 0.8 1.2 1.6 1 2 3 4 5 6 7 8 9 10 response of ln_flow_philippines to ln_gprc_philippines innovation -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_philippines to ln_flow_philippines innovation -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_philippines to ln_gprc_philippines innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s -8 -4 0 4 8 12 16 1 2 3 4 5 6 7 8 9 10 response of ln_flow_sa to ln_flow_sa innovation -8 -4 0 4 8 12 16 1 2 3 4 5 6 7 8 9 10 response of ln_flow_sa to ln_gprc_sa innovation -2 0 2 4 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_sa to ln_flow_sa innovation -2 0 2 4 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_sa to ln_gprc_sa innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s -0.4 0.0 0.4 0.8 1.2 1.6 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_taiwan to ln_flow_taiwan innovation -0.4 0.0 0.4 0.8 1.2 1.6 2.0 1 2 3 4 5 6 7 8 9 10 response of ln_flow_taiwan to ln_gprc_taiwan innovation -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_taiwan to ln_flow_taiwan innovation -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ln_gprc_taiwan to ln_gprc_taiwan innovation response to cholesky one s.d. (d.f. adjusted) innovations ± 2 analytic asymptotic s.e.s damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 109 table 5. results of the granger causality tests country chi-squared stat. prob. brazil 3.5522 0.1693 chile 7.1602** 0.0279 china 8.3291** 0.0155 egypt 11.3883* 0.0034 india 26.0474* 0.0000 philippines 3.5622 0.1684 south africa 2.2621 0.3227 taiwan 11.5307* 0.0092 notes: 1. null hypothesis: 𝐿𝑛𝐺𝑃𝑅 does not granger cause 𝐿𝑛𝐹𝑙𝑜𝑤. 2. *, **, and *** denote statistical significance at a 1 %, 5 %, and 10 % level of significance, respectively. further analysis further analysis is conducted on the effect of geopolitical risk on etf liquidity. liquidity is proxied using amihud’s (2002) illiquidity ratio, and the results of the var models are provided in table 6 for the regressions with the amihud ratio as the dependent variable. the results in table 6 indicate that historical geopolitical risk ratings exhibit a significant negative effect on the etfs’ amihud ratios in all emerging markets except egypt and philippines. this implies that an increase (decrease) in geopolitical risk leads to a decrease (increase) in the amihud ratio and, thus, an increase (decrease) in liquidity. put together, these findings suggest that geopolitical risk exhibits a positive effect on etf liquidity in all emerging markets except egypt and philippines. this positive effect on etf liquidity contradicts the findings of fiorillo, et al. (2023) who discover that geopolitical risk has a negative effect on stock market liquidity. in addition, the results in table 6 also indicate a consistent, positive relationship between etf flows and the amihud ratio in line with the main results. the combined results, therefore, indicate that, on average, higher geopolitical risk increases the net flow to emerging markets’ etfs and brings about additional liquidity except for egypt in which case etf liquidity is not significantly impacted by geopolitical risk and philippines where etf flows are negatively impacted by geopolitical risk while liquidity is not impacted. table 6: results of the var models for liquidity notes: 1. t-statistics are provided in brackets below the coefficient estimates. 2. the critical threshold values at a 1 %, 5 %, and 10 % level of significance are 2.364, 1.660, and 1.290, respectively. 3. *, **, and *** denote statistical significance at a 1 %, 5 %, and 10 % level of significance, respectively. variable brazil chile china egypt india philippines south africa taiwan 𝐋𝐧𝐀𝐦𝐢𝐡𝐮𝐝𝐭−𝟏 0.1574** [ 2.3025] 0.0627 [ 0.5572] 0.0646 [ 0.9726] 0.2561** [ 2.3520] 0.2566* [ 4.1886] 0.0886 [ 1.0856] 0.0313 [ 0.3163] 0.5781* [ 6.8334] 𝐋𝐧𝐀𝐦𝐢𝐡𝐮𝐝𝐭−𝟐 0.0672 [ 0.9839] -0.1630*** [-1.3977] 0.0105 [ 0.1563] 0.0706 [ 0.6685] 0.1428** [ 2.2648] 0.1433** [ 1.7912] 0.0752 [ 0.7626] 0.1324*** [ 1.5352] 𝐋𝐧𝐀𝐦𝐢𝐡𝐮𝐝𝐭−𝟑 0.2316* [ 3.6569] 𝐋𝐧𝐆𝐏𝐑𝐭−𝟏 -0.2987** [-2.2816] -0.3690*** [-1.5025] -0.3548** [-1.7502] -0.3961 [-0.8738] -0.2162 [-0.9669] -0.1108 [-0.8287] -0.2472 [-1.1102] -0.4798** [-1.8092] 𝐋𝐧𝐆𝐏𝐑𝐭−𝟐 0.1488 [ 1.1005] -0.2953 [-1.1065] -0.0870 [-0.4347] -0.5208 [-1.0961] -0.3875** [-1.7270] 0.1439 [ 1.0391] -0.5286** [-1.7239] -0.1007 [-0.3649] 𝐋𝐧𝐆𝐏𝐑𝐭−𝟑 -0.2551 [-1.1771] 𝐂𝐨𝐧𝐬𝐭𝐚𝐧𝐭 -0.972*** [-1.3101] -6.8674* [-3.9458] -7.0205* [-6.0886] 2.1183 [ 1.5111] -1.1778 [-1.0219] -0.1774 [-0.1833] -6.5401* [-4.8314] 2.8369* [ 2.9889] 𝐋𝐧𝐑𝐭 0.5338 [ 0.4004] 3.9858** [ 1.7114] -0.1461 [-0.1298] -2.6050 [-0.8842] 0.8317 [ 0.4527] 2.0108 [ 0.8663] 10.1199* [ 3.0661] -3.9371 [-0.8908] 𝐋𝐧𝐅𝐥𝐨𝐰𝐭 0.4457* [ 10.661] 0.3165* [ 4.8269] 0.3887* [ 11.579] 0.4474* [ 3.5967] 0.4089* [ 11.7741] 0.3455* [ 6.8270] 0.2293* [ 3.9220] 0.6049* [ 6.5757] aic 5.0476 5.5387 3.0203 6.2286 3.7465 5.4206 5.0440 6.5454 sbic 5.3781 6.0361 3.3721 6.6338 4.1785 5.7604 5.4738 6.9057 damien kunjal / finance, accounting and business analysis, volume 5, issue 2, 2023 110 implications of findings overall, except for philippines, the results of this study suggest that geopolitical risk contributes to the growth of emerging markets’ etfs by increasing net flows to etf markets when geopolitical risk increases. this may be attributed to the flight-to-safety effect whereby investors view etfs as safe havens during periods of heightened geopolitical risk, consequently, resulting in a shift towards etfs. this shift towards etfs subsequently creates additional liquidity in etf markets except in egypt and philippines. therefore, geopolitical risk serves as an important source of etf liquidity in emerging markets. these important findings have implications for various stakeholders. firstly, for investors and fund managers, these findings indicate that etf markets are not immune to the effects of geopolitical risks. therefore, investors and fund managers need to carefully consider the impact of geopolitical risks on the etfs in their portfolios. for instance, etfs with exposure to geopolitical risks may be subject to shocks in fund flows and liquidity when geopolitical risk ratings change. thus, investors who are primarily concerned with stability in liquidity should avoid etfs with excessive exposure to geopolitical risks. secondly, for policymakers and regulators, these findings indicate that geopolitical risks serve as important sources of growth and liquidity in etf markets. therefore, policymakers and regulators should devise policies to maintain stability in geopolitical factors rather than attempting to reduce geopolitical risk as this could have adverse consequences on etf growth and liquidity which could, subsequently, spill-over to broader financial markets. further, the presence of the flight-to-safety effect may indicate that investors are subject to behavioural biases and, therefore, it is important for regulators to provide financial education which aims to eradicate the presence of behavioural biases in the investment decision-making process. thirdly, for academics and researchers, these findings indicate that geopolitical risk are significant determinants of etf flows and liquidity and should be considered when developing asset pricing models which compensate investors for size and liquidity factors. however, it is important to acknowledge that the effect of geopolitical risk is not uniform across emerging markets. in terms of recommendations for future studies, it is important for future studies to explore the effect of other forms of political risk on etf markets to determine whether the effect is uniform across different forms of political risk. likewise, it is also important to understand how geopolitical risks impact other dynamics of etf markets, such as volatility and return predictability, which are important considerations when making etf investment decisions. further research can also provide a comparison of the effect of geopolitical risk on etf flows in emerging and developed markets to identify whether the effect varies across different countries. in a similar manner, future studies can compare the effect on fund flows to etfs and mutual funds to shed light on whether the effect is uniform across different funds. it is also important to examine whether these effects have been magnified by extreme geopolitical events such as the russiaukraine war once there is enough data observations. conclusion despite increasing geopolitical risks in emerging markets, etfs trading in these markets continue to grow both in size and number. to further understand the connection between geopolitical risk and etf markets, this study investigated the effect of geopolitical risks on etf flows in emerging markets. to achieve this objective, etfs trading in eight emerging markets (which are, brazil, chile, china, egypt, india, philippines, south africa, and taiwan) were surveyed from july 2013 to june 2023 using var models and their associated impulse response functions as well as granger causality tests. consistent with the flight-tosafety effect, the results indicated that geopolitical risk has a significant, positive effect on etf flows in the emerging markets except for philippines where the effect is significantly, negative. further analysis revealed that geopolitical risk has a significant, positive effect on etf liquidity in emerging markets except for egypt and philippines. these findings have important implications for various stakeholders including investors, regulators, and researchers. noteworthy is that these findings imply that geopolitical risks in emerging 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http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.11 does urban fixed-line telecommunication density influence profitability and operational efficiency in greece's telecommunications industry? emmanouil taxiarchis gazilas department of economics, university of piraeus, greece info articles abstract history article: submitted 29 october 2024 revised 9 december 2024 accepted 13 december 2024 purpose: this study investigates the influence of urban fixed-line telecommunication density on financial performance in greece's telecommunications industry, focusing on the nation’s three leading telecom companies. design/methodology/approach: using a balanced panel dataset covering a ten-year period, the study employs fixed and random effects regression models to assess the impact of urban fixed-line telecommunication density on key financial indicators. the hausman test is applied to identify the most suitable model for each metric, while the breusch-pagan test evaluates the presence of heteroscedasticity. findings: the results reveal a substantial relationship between urban fixed-line telecommunication density and financial performance, with fixed effects proving more suitable for certain indicators and random effects for others. potential heteroscedasticity detected in several models suggests the need for robust estimations. practical implications: this study underscores the importance of telecommunications infrastructure in supporting financial growth and operational efficiency, providing insight for policymakers and industry leaders on prioritizing infrastructure improvements. originality/value: the research offers a unique perspective on the role of fixed-line telecommunication density in enhancing financial performance in a liberalized, competitive market, filling a gap in telecommunications and infrastructure research in greece paper type: research paper keywords: telecommunications, financial performance, urban density, fixed-line services, greece jel: l96, l25, g30 address correspondence: e-mail: mgazilas@unipi.gr https://doi.org/10.37075/faba.2024.2.11 mailto:mgazilas@unipi.gr https://orcid.org/0009-0003-0554-500x emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 229 introduction telecommunications infrastructure is becoming more and more important in the digital age, influencing social connections and economic growth. even though mobile technologies are gaining popularity faster than fixed-line telecommunications, fixed-line services are still an essential part of urban infrastructure, especially in developed nations like greece. the extent to which fixed-line telecommunication services are prevalent in urban areas is a measure of how widely available and accessible communication technology is—a necessity for households, businesses, and government operations alike. to better understand this aspect of urban infrastructure, the urban fixed-line telecommunication density (ufltd) has been calculated, a key metric that captures the relationship between fixed telephone subscriptions and the urban population. by estimating this ratio (ufltd = fixed telephone subscriptions / urban population), research aims to quantify the extent to which fixed-line infrastructure is deployed across greece’s cities. this calculated ratio serves as an essential indicator of the fixed-line network's spread and helps measure how effectively telecommunication companies reach urban populations. greece's economic and social progress has long been based on the telecommunications sector, whose evolution reflects broader global trends. as a historical and infrastructure statistic, urban fixed-line telecommunication density (ufltd) has been essential to comprehending the connection between economic outcomes and telecommunications infrastructure. ufltd offers a strong lens through which to examine the financial performance of major industry participants, especially in greece, a nation distinguished by its distinct urbanization patterns, regulatory changes, and economic difficulties. but as the telecommunications industry changes, it's unclear if ufltd is enough to fully capture the range of its effects, particularly in light of innovative advancements like satellite-based technologies. greece's historical reliance on fixed-line infrastructure reflected its attempts to upgrade and incorporate the telecoms framework of the european union. ufltd is an essential component of this journey, especially in cities where economic activity and productivity are driven by connectivity. ufltd is a significant indicator in urbancentric studies like this one because the growth of fixed-line networks represented advancement and modernization for greek telecom behemoths like ote, vodafone, and wind. according to our investigation, ufltd showed strong relationships with financial performance indicators, confirming its ongoing importance in cities where dependable, fast connections are still necessary for both homes and enterprises. however, the conventional dominance of fixed-line networks is being challenged by the emergence of cutting-edge satellite systems, such as those offered by starlink. the future of telecommunications is represented by these technologies, which are intended to address connectivity gaps in isolated and underserved areas. greece's geographic characteristics, such as its islands and rugged terrain, make it a prime target for using satellite technology to supplement current networks, even though the country has historically placed a high priority on urban connectivity. this change forces a reassessment of ufltd's suitability as the exclusive measure of telecoms advancement. in spite of this, ufltd is still significant in the greek setting. it offers a historical standard by which new technologies may be evaluated, reflecting the history and effects of urban connection. future studies must, however, incorporate contemporary metrics like satellite connections, mobile data usage, and broadband adoption in order to stay forward-looking. the interaction between established and new technologies in influencing financial performance and economic outcomes would be more accurately captured by this more comprehensive framework. developing an understanding of the connection between urban fixed-line communications density and telecom businesses' financial success might help one better understand the dynamics of the industry as a whole. companies that offer fixed-line telecommunication services must modify their business strategies to satisfy the growing need for dependable and quick communication services from urban populations while preserving profitability. the three biggest telecom providers in greece—cosmote, vodafone, and wind (since merged with nova)—are the subject of this paper. these companies control almost 80% of the telecom sector and hold a significant market share in both mobile and fixed-line services, making them the leading enterprises in the greek market. the greek telecom industry experienced several challenges in the past decade, such as the global covid-19 pandemic and the financial crisis that overtook the nation from 2009 to 2018. fixed-line telecommunication services have remained crucial in despite these challenges, especially in cities where households and businesses continue to depend on reliable communication lines. since fixed-line infrastructure is frequently used to supply broadband internet services, the density of these lines is critical to the financial sustainability of telecommunications companies. the primary objective of this paper is to examine the correlation between cosmote, vodafone, and wind's financial performance and changes in urban fixed-line telecommunication density (ufltd) between 2013 and 2022. this study intends to evaluate how changes in urban fixed-line telecommunication density over time have affected these companies' profitability by concentrating on important profitability ratios like return on equity emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 230 (roe), return on capital employed (roce), gross profit margin (gpm), operating profit margin (oppr), and net profit margin (npm). these ratios offer a thorough understanding of a company's capacity to make money from operations, equity, and capital, and are generally recognized as crucial markers of its financial well-being and effectiveness. cosmote, vodafone, and wind have a combined market share of more than 80% in fixedline services, making the greek telecom industry a fiercely competitive market controlled by only a few of major firms. the market leaders in mobile and fixed-line telecommunication services include cosmote, a division of ote (hellenic telecommunications organization), vodafone, and wind. to handle the growing urban population and the rising need for quicker, more dependable internet and communication services, these businesses have made significant investments in enlarging their infrastructure. in greece, the years 2013–2022 are especially intriguing for telecommunications research. greece had several macroeconomic changes during this time, including the financial crisis' recovery, the introduction of highspeed broadband, and growing urbanization. these elements most certainly have an impact on the operational effectiveness and financial success of telecom firms. moreover, as distant work, e-commerce, and online education proliferated, the global covid-19 epidemic sped up the adoption of digital communication technology, making fixed-line services essential for families and companies alike. demand for dependable fixed-line telecommunication services, especially for high-speed internet, which is frequently provided via fixed infrastructure, increased along with greece's urban areas. an indicator of the accessibility of these services in metropolitan areas is the metropolitan fixed-line telecommunication density (ufltd) measure, which shows how well-positioned cosmote, vodafone, and wind are to serve the populace. we may gain a better understanding of the relationship between changes in infrastructure deployment and these organizations' profitability and financial resilience by examining the changes in ufltd. this paper seeks to address the following research questions: rq1: how has the urban fixed-line telecommunication density (ufltd) evolved from 2013 to 2022 for the three major telecommunication companies in greece (cosmote, vodafone, and wind)? rq2: what is the relationship between ufltd and the profitability of these telecommunication companies over the same period? rq3: does an increase in ufltd positively correlate with improvements in profitability ratios such as return on equity (roe), return on capital employed (roce), gross profit margin (gpm), operating profit margin (oppr), and net profit margin (npm)? to answer these questions, the following hypotheses has been developed, based on the assumption that an expansion in fixed-line telecommunication density translates into better financial performance. this assumption is grounded in the expectation that higher urban fixed-line telecommunication density reflects a larger customer base and more efficient infrastructure utilization, which, in turn, should lead to higher profitability for telecommunication companies. research hypotheses: h1: increases in urban fixed-line telecommunication density (ufltd) are positively correlated with improvements in the overall profitability of telecommunication companies. h2: there is a positive relationship between ufltd and the operational efficiency of telecommunication companies, as measured by key financial ratios. literature review within the service industry, the telecommunications sector has become one of the most competitive and rapidly expanding during the last 20 years. in the current digital era, this sector is essential to many facets of human existence. additionally, in the face of increased rivalry, telecommunications companies are placing a greater emphasis on customer happiness (drosos et al. 2015). greece's economy depends heavily on mobile communications and telecommunications, which boost government revenue, job creation, and income growth (drosos et al. 2011; goyal and kar 2020; abor et al. 2018). three huge companies control the majority of the greek telephone market: wind, vodafone, and cosmote, which continuously has the most market share (rizomyliotis et al. 2018). customer happiness and quality have a big impact on corporate performance, which is essential to the effective administration and running of businesses. both financial and non-financial indicators, such as organizational structure, process efficiency, and reputation, can be used to assess a company's performance (bontis 1998; bontis et al. 2000). financial measurements include market share, earnings, and return on investment. this study uses financial ratio analysis to evaluate the performance of businesses. emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 231 since the late 1800s, financial ratio analysis has been a fundamental component of evaluating the performance of businesses (o'connor 1973). for meaningful interpretation, raw accounting data must be converted into ratios, as horrigan (1965) pointed out. in order to facilitate comparisons between businesses and industries, the harvard business review (1925) emphasized the value of financial ratios for a wide range of stakeholders, including executives, investors, credit managers, and financial institutions. this method is essential for determining if a business is performing better or worse than industry standards. however, knowledge of the benefits and drawbacks of financial ratios is necessary for their efficient application. enhancing shareholder value through increased firm profitability is the main goal for telecommunications companies (dong et al. 2020; liu et al. 2021). although using debt as a funding source can increase financial risks, using borrowed money wisely can increase profitability. on the other hand, poor debt management might result in losses (notta and vlachvei 2014). because it allows shareholders to maintain control while exposing creditors to the majority of the company's risk, leverage is essential to profitability. shareholder returns are increased if debt-financed investments produce returns higher than interest expenses (brigham and houston 2021). leverage can boost returns during economic expansion, but it also raises the danger of losses during downturns, warn nugroho et al. (2019). when gazilas and vozikis (2024) looked at the general private clinics sector in greece from 2012 to 2020, they discovered a significant positive relationship between market concentration as indicated by the herfindahl-hirschman index (hhi) and financial indicators like operational profit margin and return on equity. greater profitability and operational efficiency were linked to higher market concentration. barnes (1987) highlighted the strategic importance of financial ratio analysis, which helps with regulatory compliance, performance comparisons, and management effectiveness evaluation. additionally, ratios equalize firm size, which makes cross-company comparisons more relevant. furthermore, industry norms act as benchmarks that impact strategic planning, according to lev (1969). in order to assess performance, theuri (2002) emphasized the significance of regularly monitoring financial ratios in the context of small and medium-sized businesses (smes). he suggested that smes begin with a small number of crucial statistics before expanding their investigation, classifying them into categories like management effectiveness, profitability, and financial stability. for internal decision-making, relying only on financial statements that adhere to gaap, fasb, or sec standards might not offer the level of detail required. however, more efficient performance evaluation is made possible by combining ratio analysis with these claims (berry and lusch 1996). according to sudaryo et al. (2021), interest rates and financial distress are positively correlated in a number of industries, including telecommunications. they emphasized how important it is for managers to keep an eye on interest rates in order to reduce financial risks. similarly, khafid et al. (2019) showed that high debt-to-equity or debt-to-asset ratios, which indicate excessive leverage in telecom companies, dramatically raise the risk of financial distress. andersen et al. (2011) emphasized the significance of managing operational risks in telecoms and other businesses by connecting the financial crisis to poor risk management. according to belesis et al.'s (2023) analysis of the effects of covid-19 on greece's leading publicly traded enterprises, industries such as gasoline manufacturing and car rentals saw sharp drops in income. on the other hand, gazilas (2023) investigated how resilient greece's energy companies were to the epidemic, demonstrating that some managed to sustain high net profit margins while others had difficulties. these results are consistent with those of patrone and dubois (1981), who promoted the use of financial measures in comparison while taking external factors and industry standards into account. even if there aren't many studies on how capital structure affects telecommunications profitability (e.g., wiyasa and basyith 2020; fauzi et al. 2022), what is known emphasizes how crucial it is to contextualize financial ratio analysis in order to fully capture sector-specific dynamics. data and methodology this study employs a balanced panel dataset (n = 3 and t = 18)2 , focusing on financial and operational metrics from the three primary telecommunications providers in greece cosmote, vodafone, and wind over a 10-year period from 2013 to 2022. the panel structure allows for consistent observations across time, enhancing the robustness of the analysis by mitigating potential biases associated with unbalanced data. each company’s performance is measured annually, yielding insights into how key financial ratios and operational metrics evolve across a stable timeframe. the financial data was sourced from official company reports, and population data necessary for urban fixed-line telecommunication density (ufltd) calculation was derived from national statistics and world data indicators website. summary statistics and econometric models are applied to uncover relationships among these variables and assess the influence of ufltd on financial performance over time, accounting for intercompany and temporal variations through robust panel data techniques. the independent variable, urban fixed-line telecommunication density (ufltd), quantifies the emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 232 ratio of fixed-line telecommunications per capita within urban areas, reflecting infrastructure accessibility. this is defined by: 𝐔𝐅𝐋𝐓𝐃 it = fixed line subscriptions it urban population it (1) where: 𝒊 denotes the company, 𝒕 represents the year. in this paper, financial performance is assessed through five key ratios, each offering a distinct perspective on profitability and operational efficiency. return on equity (roe) measures the company's effectiveness in generating profit from shareholders' equity, indicating how well the firm uses investors' funds to generate earnings. return on capital employed (roce) evaluates the overall efficiency in utilizing capital to produce earnings, providing insight into longterm profitability and the company’s capacity to maximize returns on investments. net profit margin (npm) reveals the portion of revenue that translates into net profit, reflecting overall cost management and profitability. gross profit margin (gpm) represents the percentage of revenue retained as gross profit after accounting for the cost of goods sold, illustrating production efficiency and pricing strategy. finally, operating profit ratio (oppr) shows the proportion of operating income relative to revenue, highlighting operational efficiency in generating income from core business activities. together, these ratios offer a comprehensive view of financial performance, combining profitability, operational success, and investment efficiency. 𝐑𝐎𝐄 it = net income it shareholders′ equity it (2) 𝐑𝐎𝐂𝐄 it = earnings before interest and taxes it total assets it − current liabilities it (3) 𝐍𝐏𝐌 it = net income it total revenue it (4) 𝐆𝐏𝐌 it = total revenue it − cost of goods sold it total revenue it (5) 𝐎𝐏𝐏𝐑 it = operating income it total revenue it (6) where: 𝒊 denotes the company, 𝒕 represents the year. to comprehensively describe the data distribution, the following summary statistics are calculated for each variable with the formulas below: mean (average), is a measure of central tendency that represents the central value of a dataset. it is calculated by summing all values in a dataset and then dividing by the number of values. for a set of 𝑛 values 𝑋 = {𝑥1, 𝑥2, … , 𝑥𝑛}, the mean �̅� is given by: x̅ = 1 n ∑ xi n i=1 (7) standard deviation (std dev) is a measure of the spread or dispersion of a set of values around the mean. it provides insight into how much individual data points typically deviate from the average value. standard deviation is especially useful because it is in the same units as the data, making it easier to interpret. σx = √ 1 n − 1 ∑(xi − x̅)2 n i=1 (8) variance, is a statistical measure that describes the spread or dispersion of a set of values around their mean. it tells us how far each value in the data is from the mean and, therefore, from each other. in essence, variance quantifies how much the values in a dataset vary from the average value. emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 233 for a set of 𝑛 values 𝑋 = {𝑥1, 𝑥2, … , 𝑥𝑛}, with a mean �̅�, the variance 𝜎2 is calculated as: σx 2 = 1 n − 1 ∑(xi − x̅)2 n i=⊥ (9) skewness, is a measure of the asymmetry of the distribution of data around its mean. it helps describe the shape of a distribution and whether it leans more to one side than the other. for a set of 𝑛 values 𝑋 = {𝑥1, 𝑥2, … , 𝑥𝑛}, with a mean �̅�, swekness (𝛾) can be calculated as: γ = 1 n ∑ (xi − x̅)3n i=1 ( 1 n ∑ (xi − x̅)2n i=1 ) 3 2⁄ (10) kurtosis, is a statistical measure that describes the "tailedness" or peak sharpness of a distribution relative to a normal (bell curve) distribution. while skewness describes asymmetry, kurtosis focuses on the height and sharpness of the distribution's peak and the weight of its tails. for a set of 𝑛 values 𝑋 = {𝑥1, 𝑥2, … , 𝑥𝑛}, with a mean �̅�, kurtosis (𝜅) can be calculated as: 𝜅 = 1 𝑁 ∑ (𝑥𝑖 − �̅�)4𝑁 𝑖=1 ( 1 𝑁 ∑ (𝑥𝑖 − �̅�)2𝑁 𝑖=1 ) 2 (11) correlation coefficients between variables are computed to detect multicollinearity, given by: corr(x, y) = ∑ (xit − x̄)t t=1 (yit − ȳ) √∑ (xit − x̄)2t t=1 ∗ √∑ (yit − ȳ)2t t=1 (12) the fixed-effects model controls for unobserved heterogeneity across companies, expressed as: 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐑𝐚𝐭𝐢𝐨𝐢𝐭 = αi + β 𝐔𝐅𝐋𝐓𝐃it + ϵit (13) where: 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑹𝒂𝒕𝒊𝒐𝒊𝒕 is the dependent variable (e.g., roe, roce, npm, gpm, oppr), 𝜶𝒊 denotes company-specific fixed effects, 𝜷 represents the effect of ufltd, 𝝐𝒊𝒕 is the error term. the random-effects model assumes company-specific effects are random and uncorrelated with ufltd: 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐑𝐚𝐭𝐢𝐨𝐢𝐭 = αi + β 𝐔𝐅𝐋𝐓𝐃it + 𝐮𝐢+ ϵit (14) where: 𝒖𝒊 represents the random effect for each company, distributed as 𝒖𝒊~𝑁(0, 𝜎𝑢 2) to choose between the fe and re models, the hausman test evaluates the null hypothesis that random effects are consistent and efficient. if the null hypothesis is rejected, the fixed-effects model is preferred. h = (β̂fe − β̂re) ′ ∗ (var(β̂fe) − var(β̂re)) −1 ∗ (β̂fe − β̂re) (14) to verify the assumptions underlying the regression models, diagnostic tests are applied. the breusch-pagan test checks for heteroscedasticity, calculated as: x2 = ∑ ( (yi − yî)2 σ2 ) 2 n i=⊥ (15) where: 𝑋2 follows a chi-squared distribution under the null hypothesis of homoscedasticity. emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 234 results and discussion table 1. summary statistics ufltd roe percentiles smallest percentiles smallest 1% 0.565 0.565 obs 30 1% -2.3195 -2.3195 obs 30 5% 0.565 0.565 5% -0.6789 -0.6789 10% 0.5675 0.565 mean 0.602 10% -0.654 -0.6598 mean -0.186 25% 0.581 0.57 std. dev. 0.024 25% -0.3703 -0.6482 std. dev. 0.494 50% 0.607 50% -0.0175 largest largest 75% 0.623 0.628 75% 0.1078 0.149 90% 0.632 0.636 variance 0.001 90% 0.17445 0.1999 variance 0.244 95% 0.636 0.636 skewness -0.161 95% 0.2186 0.2186 skewness -2.823 99% 0.636 0.636 kurtosis 1.572 99% 0.224 0.224 kurtosis 12.619 roce gpm percentiles smallest percentiles smallest 1% -0.234 -0.234 obs 30 1% 0.2987 0.2987 obs 30 5% -0.2007 -0.2007 5% 0.3017 0.3017 10% -0.1428 -0.1574 mean -0.01 10% 0.30645 0.3057 mean 0.4707 25% -0.0375 -0.1282 std. dev. 0.0975 25% 0.3395 0.3072 std. dev. 0.1399 50% -0.0057 50% 0.44725 largest largest 75% 0.0523 0.101 75% 0.505 0.7207 90% 0.1235 0.146 variance 0.0095 90% 0.7271 0.7335 variance 0.0196 95% 0.1506 0.1506 skewness -0.395 95% 0.7396 0.7396 skewness 0.6693 99% 0.1576 0.1576 kurtosis 2.8365 99% 0.7444 0.7444 kurtosis 2.4649 oppr npm percentiles smallest percentiles smallest 1% -0.2846 -0.2846 obs 30 1% -0.2846 -0.2846 obs 30 5% -0.2013 -0.2013 5% -0.2084 -0.2084 10% -0.1819 -0.1956 mean 0.2098 10% -0.19845 -0.2013 mean 0.0245 25% 0.1157 -0.1682 std. dev. 0.2064 25% -0.0918 -0.1956 std. dev. 0.1833 50% 0.2832 50% -0.00725 largest largest 75% 0.3508 0.3851 75% 0.1068 0.296 90% 0.3881 0.3911 variance 0.0426 90% 0.34395 0.3919 variance 0.0336 95% 0.4345 0.4345 skewness -1.057 95% 0.4024 0.4024 skewness 0.6922 99% 0.4713 0.4713 kurtosis 3.0256 99% 0.4338 0.4338 kurtosis 2.9628 source: provided by author (calculated in stata 14.2) the urban fixed-line telecommunication density (ufltd) shows a mean of 0.6015 with minimal variation (sd = 0.0245), suggesting relatively consistent fixed-line service penetration across companies. in contrast, return on equity (roe) demonstrates substantial variability with a mean of -0.1861 (sd = 0.4940) emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 235 and a range from -2.3195 to 0.224, indicating fluctuating profitability and potential challenges in generating shareholder returns. similarly, return on capital employed (roce) has a mean of -0.0101, reflecting difficulties in capital efficiency. gross profit margin (gpm), with a mean of 0.4707 and moderate variability, signals stable revenue retention. operating profit ratio (oppr) and net profit margin (npm) reveal wider dispersions (sd = 0.2064 and 0.1833, respectively), underscoring the diverse profitability and cost management practices within the industry. table 2. correlation coefficients ufltd roe roce gpm oppr npm ufltd 1 roe -0.2935 1 (0.1154) roce -0.5138* 0.7795* 1 (0.0037) (0.000) gpm -0.5703* 0.4741* 0.5057* 1 (0.001) (0.0081) (0.0044) oppr -0.7331* 0.6138* 0.8143* 0.6200* 1 (0.000) (0.0003) (0.000) (0.0003) npm -0.4838* 0.6684* 0.9474* 0.3264 0.7541* 1 (0.0068) (0.0001) (0.000) (0.0784) (0.000) source: provided by author (calculated in stata 14.2) urban fixed-line telecommunication density (ufltd) is moderately negatively correlated with return on equity (roe) (-0.2935), though this relationship is not statistically significant (p > 0.05), suggesting that telecommunication density may have a limited direct impact on shareholder returns. conversely, ufltd shows a significant negative correlation with return on capital employed (roce) (0.5138, p < 0.01), indicating that as telecommunication density increases, capital efficiency in generating earnings might decrease. the gross profit margin (gpm) also exhibits a statistically significant negative correlation with ufltd (-0.5703, p < 0.01), suggesting that higher telecommunication density might be associated with reduced gross profitability. notably, the strongest observed relationship is with operating profit ratio (oppr) (-0.7331, p < 0.01), which implies that increases in telecommunication density could be associated with substantial declines in operating efficiency. finally, the net profit margin (npm) similarly demonstrates a negative correlation with ufltd (-0.4838, p < 0.01), further indicating an inverse relationship between telecommunication density and overall profitability. these findings suggest that increasing ufltd may correspond with declines in both operational and overall profitability metrics. table 3. hausman test results variable coefficient (b) coefficient (b) difference (b b) standard error chisquared statistic p-value model selection roe -5.5 -5.9 0.4 0.22 2.72 0.098 re roce -0.5138* -0.0101 -0.5037 0.0975 12.46 0.0004 fe gpm -0.5703* -0.0034 -0.5669 0.0821 10.77 0.001 fe oppr -0.7331* -0.0121 -0.721 0.0948 10.99 0.0009 re npm -0.4838* 0.0123 -0.4961 0.0932 12.14 0.0005 fe source: provided by author (calculated in stata 14.2) the coefficients for roe from both models are close, with the fixed effects model yielding a coefficient of -5.9 and the random effects model yielding -5.5. the hausman test shows a chi-squared statistic of 2.72 with a p-value of 0.098. since the p-value is above the conventional significance level of 0.05, this indicates that there is no significant difference between the fe and re estimates for roe. thus, the random effects model is more appropriate for roe, suggesting that the unobserved effects may not be correlated with the independent variable. the fe model shows a coefficient of -0.5138, significantly different from the random effects estimate emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 236 of -0.0101, with a chi-squared statistic of 12.46 and a p-value of 0.0004. since the p-value is well below 0.05, we reject the null hypothesis of no systematic difference between the coefficients, indicating that the fixed effects model is preferred for roce. this suggests that unobserved heterogeneity is indeed correlated with the independent variable, necessitating the use of the fe model to obtain unbiased estimates. similar to roce, gpm has a significant difference in coefficients between the two models: -0.5703 (fe) versus -0.0034 (re). the chi-squared statistic is 10.77 with a p-value of 0.001, leading us to reject the null hypothesis. therefore, the fixed effects model is appropriate for gpm, indicating that higher levels of ufltd are correlated with lower gpm, emphasizing the adverse effect of unsecured debt on gross profitability. the oppr results show a fixed effects coefficient of -0.7331, contrasting with the random effects coefficient of -0.0121. the chi-squared statistic is 10.99 with a p-value of 0.0009, which leads to the rejection of the null hypothesis. consequently, the random effects model is deemed more suitable for oppr, indicating that the effects of ufltd on operational profitability may not require the fixed effects adjustment, possibly suggesting that operational efficiency is less influenced by unobserved companyspecific factors. the analysis for npm shows that the fe coefficient of -0.4838 differs significantly from the re coefficient of 0.0123, with a chi-squared statistic of 12.14 and a p-value of 0.0005. the low p-value indicates a rejection of the null hypothesis; thus the fixed effects model is appropriate for npm. this suggests a significant negative association between ufltd and net profitability, reinforcing the need to control for individual firm effects when analyzing the impact of debt on profitability. table 4. regressions (random and fixed effects models) random effects models fixed effects models variables roe oppr roce gpm npm ufltd -5.929** -6.186*** -2.049*** -3.262*** -3.626*** -2.565 -0.77 -0.298 -0.553 -0.568 constant 3.380** 3.930*** 1.222*** 2.433*** 2.206*** -1.562 -0.468 -0.179 -0.333 -0.342 observations 30 30 30 30 30 r-squared 0.646 0.572 0.61 companies 3 3 3 3 3 note: standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 source: provided by author (calculated in stata 14.2) random effects models the random effects model provides insights into the average effects of ufltd across different companies while assuming that the unobserved effects are uncorrelated with the independent variables. in this model, the coefficient for ufltd is -5.929 for roe and -6.186 for oppr. however, the associated standard errors of 2.565 for roe and 0.77 for oppr indicate that these coefficients are not statistically significant at conventional levels. this suggests that while there may be a negative association between ufltd and these performance metrics, the evidence is insufficient to draw strong conclusions in this model framework. the absence of significant results in the random effects model may stem from the assumption that the unobserved heterogeneity across firms does not correlate with the independent variable, which could potentially obscure the true relationship between ufltd and financial performance. fixed effects models in contrast, the fixed effects model reveals more robust findings, indicating a statistically significant negative relationship between ufltd and the financial performance metrics analyzed. specifically, the coefficients for ufltd are -2.049 for roce, -3.262 for gpm, and -3.626 for npm, all of which are significant at the 1% level (denoted by ***). this suggests that an increase in ufltd is associated with a notable decrease in profitability across these financial indicators. return on capital employed (roce): the coefficient of -2.049 implies that for each unit increase in ufltd, roce decreases by approximately 2.049 units, reflecting a negative impact on the efficiency of capital utilization. gross profit margin (gpm): the coefficient of -3.262 indicates that higher levels of ufltd lead to a significant reduction in gross profit retention after accounting for the cost of goods sold, demonstrating the financial strain imposed by increased debt levels. net profit margin (npm): with a coefficient of -3.626, this result underscores the adverse effect of ufltd on overall profitability, suggesting that higher debt levels erode the percentage of revenue that translates into net income. emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 237 the r-squared values for the fixed effects model indicate a substantial proportion of variance explained by the model: 0.646 for roce, 0.572 for gpm, and 0.610 for npm. these values suggest that the fixed effects model provides a good fit for the data, demonstrating that ufltd has a noteworthy impact on these financial performance metrics. table 5. breusch-pagan test results variable chi-squared statistic p-value conclusion roe 3.45 0.063 potential heteroscedasticity detected roce 2.79 0.095 potential heteroscedasticity detected gpm 1.56 0.213 no evidence of heteroscedasticity oppr 4.22 0.04 significant heteroscedasticity detected npm 2.88 0.088 potential heteroscedasticity detected source: provided by author (calculated in stata 14.2) the breusch-pagan test results indicate varying levels of heteroscedasticity across the financial performance ratios assessed. specifically, the test yielded a chi-squared statistic of 3.45 for roe, with a corresponding p-value of 0.063, suggesting a potential presence of heteroscedasticity in this model. similarly, roce showed a chi-squared statistic of 2.79 and a p-value of 0.095, further indicating potential heteroscedasticity. in contrast, gpm exhibited a chi-squared statistic of 1.56 and a p-value of 0.213, suggesting no evidence of heteroscedasticity. on the other hand, oppr revealed a significant chi-squared statistic of 4.22 with a p-value of 0.040, indicating substantial heteroscedasticity, which could impact the efficiency of the regression estimates. lastly, npm displayed a chi-squared statistic of 2.88 and a p-value of 0.088, again pointing to potential heteroscedasticity. these findings imply that for the roe, roce, oppr, and npm models, the presence of heteroscedasticity may necessitate the use of robust standard errors to ensure valid inferences. conclusions with a focus on fixed-line telecommunications specifically, this study aimed to determine how urban fixed-line telecommunication density affected the financial performance of greek telecom operators. this research offers major insights into the dynamics of financial performance within this crucial industry by examining a number of financial ratios, such as return on equity (roe), return on capital employed (roce), gross profit margin (gpm), operating profit ratio (oppr), and net profit margin (npm). the regression analysis produced significant findings about the impact of urban fixed-line telecommunication density on financial performance metrics. higher levels of urban fixed-line telecommunication density may result in lower returns for shareholders and decreased operational efficiency, according to the fixed effects models, which specifically showed that urban fixed-line telecommunication density had a significant negative impact on roe and oppr. on the other hand, the analysis revealed a significant correlation between roce, gpm, and npm and urban fixed-line telecommunication density, suggesting that efficient telecommunications infrastructure management can improve operational efficacy and profitability. these results are consistent with jensen's (1986) observations regarding the significance of careful capital allocation in optimizing firm value, especially in capital-intensive sectors like telecoms. while the random effects model was considered more appropriate for roe and oppr, the hausman test findings confirmed that fixed effects were appropriate for roce, gpm, and npm. the necessity for rigorous statistical examination in financial assessments was further underscored by the breusch-pagan test, which revealed possible heteroscedasticity, especially in the cases of roe and oppr. according to wooldridge (2010), this kind of methodological rigor is essential to guaranteeing the accuracy of econometric findings. researchers in the future can broaden the study by incorporating data from other telecom industries or nations, which could provide comparative analysis and enhance the body of existing knowledge. additionally, examining how urban fixed-line telecommunication density interacts with non-financial performance metrics like brand loyalty and customer happiness may offer a comprehensive knowledge of how telecommunication density affects total business success. to further the depth of analysis in this area, future studies might also look at how macroeconomic factors like interest rates and market volatility affect the association between urban fixed-line telecommunication density and financial performance. emmanouil taxiarchis gazilas / finance, accounting and business analysis, volume 6, issue 2, 2024 238 references abor, j. y., m. amidu, and h. issahaku. 2018. mobile telephony, financial inclusion and inclusive growth. journal of african business, 1–24. 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entrepreneurship (gcbme 2018). paris: atlantis press, 88–92. wooldridge, j. m. 2010. econometric analysis of cross section and panel data (2nd ed.). cambridge, ma: mit press. http://dx.doi.org/10.5430/ijfr.v10n6p108 180 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.07 “the magnificent seven” technology stocks and their impact on the s&p 500: a review 4 years later dimiter nenkov department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 15 october 2024 revised 26 november 2024 accepted 2 december 2024 purpose: the subject of this research is the performance of the s&p 500 and the influence of the large technology stocks on it. the interest to this issue is provoked by the continued record-breaking process in the levels of the us stock market. the purpose of the study is to find out: whether recent growth of the index and of the seven large companies (apple, amazon, microsoft, alphabet, meta platforms, nvidia и tesla) is supported or not by the key financial indicators, and to what extent the index indicators are influenced by the seven large technology stocks. design/methodology/approach: the current study is a kind of a relook four years later, of the same issues, explored by the author during the covid-19 pandemic in 2020. historical performance of the s&p 500 is reviewed, using its key financial indicators, such as eps, eps growth, roe, as well as “price-to-earnings” (pe) and “price-to-book” (pbv) market ratios. the performance of the seven large technology stocks (apple, amazon, microsoft, alphabet, meta platforms, nvidia and tesla) is reviewed in parallel. findings: the elaborate comparative analysis of the above set of fundamental indicators does not seem to support the high current levels of the s&p 500 as a whole and of most of the companies from “the magnificent seven”. the major doubt comes because of the unreasonably high levels of most reported pe and pbv ratios, as compared with historic average levels for the market. at the end, fundamental pe and pbv ratios are also derived and compared with the actual market pes and pbvs of the index and of the seven companies. the derived fundamental pe and pbv ratios also do not support the high levels of the s&p 500 as a whole, and the prices of most of “the magnificent seven” technology stocks. practical implications: the important implications for investors are that the s&p 500 as a whole and most of “the magnificent seven” stocks look significantly overpriced at the background of fundamentals in 2024. originality/value: the analyses of this type are normally of private character, done mainly within business entities, specialized on financial markets. academic research of this matter, which is publicly available, and following the approach of the current study, is extremely limited. paper type: research paper keywords: stock market, s&p 500, the magnificent seven technology stocks, eps growth, roe, pe and pbv ratios, fundamental pe and pbv jel: g11, g12, g15 address correspondence: e-mail : dnenkov@unwe.eu https://doi.org/10.37075/faba.2024.2.07 mailto:dnenkov@unwe.eu https://orcid.org/0009-0007-9142-1570 dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 181 introduction the achievement of record-after-record high levels by the indices of the developed stock markets and in the first place the us market, continues at this stage. this naturally raises the question of whether the current high levels of market indices are justified. this question explains the relevance of the present study. the current research paper steps on the logic of a previous similar research on this matter by the author amidst the covid-19 pandemic in 2020 (nenkov 2021a). the new research is a re-look at the previous issues four years later. one of the curious stock-market phenomena in the conditions of the pandemic of covid-19 in 2020 were the consecutive price records on the us stock market. despite the severe damage the pandemic had inflicted on the global economy, in august 2020, us indices improved pre-pandemic records of february 2020, and continued further with their upward trend until the end of 2021. the study in 2020 did not quite confirm the validity of the s&p 500 levels then. neither the growth rate of eps supported the growth rate of prices, nor the average historical values of the “price-to-earnings” (pe) and “price-to-book” (pbv) ratios supported the significantly higher price levels of the index at that time (as of 21 august, 2020) (nenkov 2021a). another important conclusion of the previous study was that the so called “super six” large technology companies of that time had an extremely large impact on the overall performance of the s&p 500. the high prices of these six technology giants were indeed the most important factor for the impressive rise of the index during the pandemic of 2020 and later on. the “super six” companies were as follows: facebook, apple, amazon, alphabet, netflix and microsoft (faaanm or fangam). the analysis of the performance of the six companies showed that these companies had really impressive indicators for the growth of eps and return on equity (roe). regardless of this, however, the average pe and pbv ratios for the “super six” as a whole for the period 2006-2020 were defined as illogically high for 4 of the companies and for the group as a whole. the current pe and pbv as of august 21, 2020 were even higher and illogical. in other words, market ratios did not support the price levels of faaanm shares as a whole at that time (nenkov 2021a). the above conclusions are another reason to thoroughly research current s&p 500 levels and the impact of the large technology stocks on the index in 2024. this must include also a research of the validity of price levels of us indices in the longer term. these issues have been relevant throughout the period since the global financial crisis (blodget 2011). according to robert shiller, during this period there have been indications that some stock markets, most notably the us, were growing at a higher speed, while the global economic recovery was slower (shiller 2014). thus, for most of the last decade, there has been an intense debate about the validity of high levels of many stock market indices (nenkov 2017; 2018). the purpose of this research is to examine how far the current price levels of the s&p 500 as a whole and of the largest technology stocks are justified against the backdrop of their fundamentals. the object of the study is the level and dynamics of the s&p 500, as well as the price levels of the large technology stocks in the index. the subject of the research are the fundamental indicators, relevant to the value of the index and of the group of large technology stocks. large technology stocks are now presented by the so called “magnificent seven”, including: apple (aapl), amazon (amzn), microsoft (msft), alphabet (googl; goog), meta platforms (meta), nvidia (nvda) tesla (tsla). they are essentially the previous “super six”, but without netflix, and with added nvidia and tesla. the main hypothesis is that “the magnificent seven” above explain indeed the high current levels of the s&p 500, but at the same time fundamentals do not support the high stock prices of the companies in the group of “the magnificent seven”. the motives to focus the analysis on the s&p 500 among so many stock indexes are as follows: for most of the period from the beginning of this century until now, the us market has been the one that recorded the most remarkable price records. in principle, s&p 500 is one of the most widely monitored indices in the world. it is a very broad index, including 500 large public companies (503 constituents currently) in the us, traded on us stock exchanges (nyse, nasdaq, cboe bzx exchange) and according to many experts is the most representative of the us stock market as a whole. it is considered that its structure by sectors and industries replicates the structure of the us economy as a whole; dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 182 the s&p 500 is also highly representative of the global stock market, as it represents over 30 % of the market capitalization of all public companies in the world. the total market capitalization of the s&p 500 is about 75 % of the total market capitalization in the united states (data sources are pointed out in references). dynamics of the s&p 500 index in the period 1999-2024 and the impact of “the magnificent seven” since the beginning of this century, the stock markets have gone through many dramatic events and developments. figure 1 shows the dynamics of the s&p 500 index in the period january 1, 2000 – september 1, 2024. the values included in the chart are at the beginning of each month. the graph outlines very well the most significant peaks and falls of the index since the beginning of this century. the first peak is in the beginning of 2000, the next one in october 2007, then in 2015, and 2018, february 2020, january 2022. the highest value of 5 528.93 is at the very end of the period – on september 1, 2024. the significant declines are respectively in 2002-2003, march 2009, the beginning of 2016, december 2018, march 2020, septemberoctober 2022. very impressive is the increase of the index during the latest two-year period: from 3 850.52 on september 1, 2022, up to 5 528.93 points, or + 30.36 %. respectively, the rise from the covid-19 fall of 2652.39 in march 2020, is +52.03 % source: figure developed by the author. https://www.multpl.com/s-p-500-historical-prices figure 1. dynamics of the s&p 500 index during the period january 1, 2000 september 1, 2024 table 1 shows the earnings per share (eps) of the s&p 500 for the period 1999-2024. the eps are inflation adjusted and are in constant july 2024 us dollars. the net earnings per share (eps) increased from $90.03 in 1999 to $197.32 at the end of 2023. during the period eps indicate serious volatility, dropping down to only $22.26 in 2008. the other very significant drop is later in 2020 they drop down to $113.67 from $170.71. as of march 31, 2024, eps is $192.74. the cumulative growth for the entire period from 1999 to the end of 2023 amounts to 119.17 %. during this period there were three large-scale stock market crises, because of which not only stock prices, but also profits collapsed. these are: the bursting of the technology bubble in 2000-2002, the global financial crisis of 2007-2009, and the 2020 temporary collapse of the stock market, due to the covid-19 pandemic. 0 1 000 2 000 3 000 4 000 5 000 6 000 s e p 1 , 2 0 2 4 ja n 1 , 2 0 2 4 m a y 1 , 2 0 2 3 s e p 1 , 2 0 2 2 ja n 1 , 2 0 2 2 m a y 1 , 2 0 2 1 s e p 1 , 2 0 2 0 ja n 1 , 2 0 2 0 m a y 1 , 2 0 1 9 s e p 1 , 2 0 1 8 ja n 1 , 2 0 1 8 m a y 1 , 2 0 1 7 s e p 1 , 2 0 1 6 ja n 1 , 2 0 1 6 m a y 1 , 2 0 1 5 s e p 1 , 2 0 1 4 ja n 1 , 2 0 1 4 m a y 1 , 2 0 1 3 s e p 1 , 2 0 1 2 ja n 1 , 2 0 1 2 m a y 1 , 2 0 1 1 s e p 1 , 2 0 1 0 ja n 1 , 2 0 1 0 m a y 1 , 2 0 0 9 s e p 1 , 2 0 0 8 ja n 1 , 2 0 0 8 m a y 1 , 2 0 0 7 s e p 1 , 2 0 0 6 ja n 1 , 2 0 0 6 m a y 1 , 2 0 0 5 s e p 1 , 2 0 0 4 ja n 1 , 2 0 0 4 m a y 1 , 2 0 0 3 s e p 1 , 2 0 0 2 ja n 1 , 2 0 0 2 m a y 1 , 2 0 0 1 s e p 1 , 2 0 0 0 ja n 1 , 2 0 0 0 s&p 500 https://www.multpl.com/s-p-500-historical-prices dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 183 table 1. earnings per share (eps) of the s&p 500 for the period 1999 – 2024 year 1999 2000 2001 2002 2003 2004 2005 earnings per share (eps) ($) 90.03 90.39 43.95 47.97 83.18 96.78 111.61 year 2006 2007 2008 2009 2010 2011 2012 earnings per share (eps) ($) 127.05 99.11 22.26 74.24 111.00 121.19 118.51 year 2013 2014 2015 2016 2017 2018 2019 earnings per share (eps) ($) 135.24 137.05 115.07 123.18 140.20 165.75 170.71 end of year 2020 2021 2022 2023 31 mar. 2024 earnings per share (eps) ($) 113.67 223.23 183.08 197.32 192.74 source: https://www.multpl.com/s-p-500-earnings/table/by-year, (6.09.2024) table 2 shows the year-to-year percent change in eps of the s&p 500 index for the period 1999-2023. these year-to-year changes are indicative of the strong volatility in annual earnings per share. there are occasional high decreases and increases, ranging from -77.54 % in 2008 to +233.51 % in 2009. the mean (arithmetic average) annual growth rate for the entire period is 16.16 %. however, because of the high volatility, the mean growth rate is significantly biased upwards, and is not representative in this case. much more representative is the cumulative annual average growth rate (cagr) for the whole period, which is 3.32 %. table 2. earnings per share (eps) growth of the s&p 500 for the period 1999 – 2024 (in %, year-to-year) year 1999 2000 2001 2002 2003 2004 2005 eps growth (%) 0.40 % -51.38 % 9.15 % 73.40 % 16.35 % 15.32 % year 2006 2007 2008 2009 2010 2011 2012 eps growth (%) 13.83 % -21.99 % -77.48 % 233.51 % 49.52 % 9.18 % -2.21 % year 2013 2014 2015 2016 2017 2018 2019 eps growth (%) 14.12 % 1.34 % -16.04 % 7.05 % 13.82 % 18.22 % 2.99 % year 2020 2021 2022 2023 mean 2000-2023 eps growth (%) -33.41 % 96.38 % -17.99 % 7.78 % 16.16 % source: calculations of the author https://www.multpl.com/s-p-500-earnings-growth/table/by-year , (6.09.2024) the s&p 500 eps geometric average growth rate (point to point) for different periods, ending in 2023, is shown in table 3. for comparison, the geometric average growth rate (cagr) of the s&p 500 itself for the same periods, ending in 2023, is also presented in this table. the growth rates of eps and s&p 500 are both based on inflation adjusted eps and s&p 500 prices (in constant july 2024 us dollars). table 3. stock-price growth and eps growth of the s&p 500 until 2023 (calculated as geometric average) period s&p 500 stock-price growth (%) s&p 500 eps growth (%) difference (k.4-k.3) k.1 k.2 k.3 k.4 1871-2023 2.50 % 1.98 % -0.52 % 1979-2023 5.59 % 2.71 % -2.88 % 1989-2023 5.71 % 3.72 % -1.99 % 1999-2023 3.04 % 3.32 % 0.29 % 2001-2023 3.30 % 7.06 % 3.77 % 2010-2023 7.86 % 4.52 % -3.34 % 2015-2023 8.52 % 6.97 % -1.55 % source: calculations of the author, https://www.multpl.com/s-p-500-historical-prices, https://www.multpl.com/s-p-500-earnings https://www.multpl.com/s-p-500-earnings/table/by-year https://www.multpl.com/s-p-500-earnings-growth/table/by-year https://www.multpl.com/s-p-500-historical-prices https://www.multpl.com/s-p-500-earnings dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 184 the significant difference among the growth rates for different periods is normal, provided that the eps growth is quite uneven in different years and sub-periods. another factor for this are some specific features of the geometric average (point to point). the low value in the starting year of the respective period is a prerequisite for high calculated growth rate and vice versa. for example, the decreased eps after the bursting of the internet bubble in 2001 is the main reason for the relatively high eps geometric average growth rate of 7.06 % for the period 2001-2023. the above indicators show that eps growth rate of 6.97 % during the last eight years – from 2015 to 2023, is in the high range compared to the other periods. the values thus obtained and presented in the table 3 show that in almost each of the above periods until 2023, the average annual rate of increase of the market value of the s&p 500 index is higher than the rate of increase of eps (column 4). the two exceptions are the periods 1999-2023 and 2001-2023. all other things being equal, this could be used as an argument that the rise in the value of the index for most of the periods is not supported by a parallel rise in earnings per share. this normally results in increased pe ratios over time. the analysis of stock market performance inevitably involves market ratios, such as pe, pbv, ps and others. the market ratios are widely used, but little is written about them – they are not explored enough in specialized literature sources (bagna and ramusino 2017). the reason why they are widely used is that these market ratios (multiples) are excellent for comparing among companies, sectors and markets, because they are “standardized” stock prices (damodaran 2012). in this sense, the question of whether current stock market levels are too high, can be transformed into the question: is it normal for the current pe and pbv ratios of the s&p 500 to be sufficiently higher than their historical average levels? according to the supporters of the so called “new era”, “new economy”, or “new world order” (shiller 2014), the answer should be affirmative. they explain this with the new environment in which companies operate nowadays and with the changed structure of the s&p 500 and other indexes. these indexes are increasingly dominated by large technology companies, for which many analysts believe that it is normal for their market ratios to be higher than those in conventional businesses. as of august 15, 2024, the breakdown by weight of the top 10 sectors of s&p 500 is as follows (tun 2024): information technology: 31.87 % (up from 24.4% in the middle of 2020) health care: 12.26 % financials: 12.56 % communication services: 9.07 % consumer discretionary: 9.68 % industrials: 7.86 % consumer staples: 6.05 % energy: 3.70 % utilities: 2.59 % real estate: 2.37 % the information technology sector stands out with its share of 31.87 %. this share increased significantly from 2020, when it was 24.4 %. among the largest in the s&p 500 are the technology companies from the group of “the magnificent seven” (apple, amazon, microsoft, alphabet, meta platforms, nvidia, tesla). the abbreviation that will be used further for the group as a whole is aamamnt. with total freefloat market capitalization of $13.79 trillion at the beginning of september 2024, aamamnt companies represent about 30% of the total market capitalization of the s&p 500. the rest 70 % of the total market capitalization of s&p 500 belong to the rest 493 companies included in the index. this explains the key contribution of the aamamnt companies to the important indicators of the s&p 500 as a whole. for example, the total return of the s&p 500 from the beginning of 2024 until june 13, 2024 was 14.65 %. the major contribution to this impressive half-year return came from the companies in table 4 (conte 2024). out of the 10 companies with the greatest contribution to the total return of 14.65% during this period, 6 companies belong to the group of “the magnificent seven”. only tesla is not there, because of the serious decline of their stock during that period (di pizio 2024). these six large technology companies account for 9.52 percentage points of the total s&p 500 growth of 14.52 %. in other words, these 6 companies “produced” 65.56 % of the total growth of the index during the period. dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 185 table 4. contribution to s&p 500 return by companies (1 jan, 2024 13 june, 2024) rank company ticker contribution to s&p 500 return january 1 june 13, 2024 1 nvidia nvda 4.94 % 2 microsoft msft 1.24 % 3 alphabet googl 0.97 % 4 meta meta 0.84 % 5 apple aapl 0.81 % 6 amazon amzn 0.72 % 7 broadcom avgo 0.62 % 8 eli lilly & co. lly 0.60 % 9 berkshire hathaway brk.b 0.22 % 10 qualcomm qcom 0.21 % subtotal: first 6 companies 9.52 % total: 10 companies 11.17 % total s&p 500 return: jan 1, 2024 13 june, 2024 14.65 % source: calculations of the author, https://www.visualcapitalist.com/the-stocks-driving-sp-500-returns-in2024 the aamamnt companies are among the companies that have recorded the highest growth rates of their share prices in recent years and they have been pulling up the s&p 500. this is not anything new. according to jeffrey gundlach of doubleline funds, during the period from the beginning of 2015 until may 18, 2020, "the super 6" of that time had a huge impact on the overall performance of the s&p 500 (mcgeeney 2020). he illustrated separately the performance of only the six major technology companies as a group (faaanm facebook, apple, alphabet, amazon, netflix, microsoft) and separately the group of the other 494 companies in the s&p 500. the results of gundlah’s study indicated that the six of faaanm beat the remaining 494 companies of the s&p 500 with a striking difference. the average annual growth for the period of the “super six” was 26.60 % against 6.20 % for the rest 494 companies in the index (mcgeeney 2020). the polarization became even stronger during the covid-19 crisis in 2020, when these technology giants mainly benefited from this crisis. with regard to this, damodaran made the conclusion “the strong get stronger” (damodaran 2020). it is in this connection that there were increasing talks about a "highly polarized american market" (infostock 2020). the aamamnt companies are the leading representatives of the technology sector, which are traded at high market ratios, such as pe, pbv and others. given that the s&p 500 index is market-weighted, the companies with the highest market capitalization have the greatest weight in forming its averages (including pe and pbv ratios). this is used as one of the strongest arguments in defense of the "validity" of the higher current pe and pbv of the s&p 500, compared to their historical averages. one of the reasons why the pe and pbv ratios are in the focus of the study is that they are among the most widely used (bancel and mittoo 2014; fernandez 2017). at the same time, they are quite suitable when the stock market as a whole is concerned. analysis of key financial indicators of the “the magnificent seven” and the s&p 500 during the period 2009-2024 table 5 presents the price-earnings (pe) ratios of “the magnificent seven” companies (aamamnt), including their average values for the period 2009-2024 and the current pe as of september 6, 2024. the market-cap weights of each of the companies within the whole group are also provided, as of september 6, 2024. the total market capitalization of the 7 companies amounts to the impressive 14.49 trillion us dollars (and their free-float market cap is $13.79 trillion). the largest weight belongs to apple (23.34 %), followed by microsoft (20.61 %) and nvidia (17.41 %). alphabet accounts for 12.83 %, amazon for 12.42 % and meta platforms for 8.74 %. the lowest weight is that of tesla – 4.65 %. regarding the average pe for the period 2009-2024, only apple has a ratio below 20 times earnings 19.06, which is close to the historic average for s&p 500 of about 15 to 17. microsoft has a ratio of 24.55 and alphabet has a ratio of 27.45, quite above the historic average. the pes of meta platforms and nvidia are respectively 37.60 and 42.61 – too high. the pes of amazon and tesla are extremely high – 138.25 and 99.61 respectively, which is mainly due to the low eps in the beginning of the analyzed period. this results in abnormally high pe ratios, due to the counter-movement rule identified by nicholas molodvsky (1995). the arithmetic average for the group is 55.59. more representative, however, should be the weighted https://www.visualcapitalist.com/the-stocks-driving-sp-500-returns-in-2024 https://www.visualcapitalist.com/the-stocks-driving-sp-500-returns-in-2024 dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 186 average pe, which is 45.53. in this case, the weighted averages are used, because they most correctly take into account the influence of each company the largest is from those with the highest market capitalization. this is in line with the nature of the market-weighted s&p 500 index. as mentioned in one of the previous sections, the high relative share is the main reason for the extremely strong influence of "the magnificent seven" on the indicators of the whole index. the current pe as of september 6, 2024 is also predominantly high for the companies in the group. the lowest is 23.15 (alphabet), followed by 25.54 for meta platforms. the highest current pe is that of nvidia – 70.34. the average current pe for the group (as a weighted average) is 40.15 times profit, almost equal to the weighted average for the period 2009-2024 of 45.53. table 5. pe of aamamnt companies for the period 2009-2024 company weight in aamamnt average pe 20092024 current pe /6 sep, 2024/ difference (%) apple 23.34 % 19.06 33.61 76.34 % amazon 12.42 % 138.25 41.00 -70.34 % microsoft 20.61 % 24.55 34.01 38.52 % alphabet/google /class a/ 12.83 % 27.45 23.15 -15.66 % meta platforms /2012-2024/ 8.74 % 37.60 25.54 -32.07 % nvidia 17.41 % 42.61 70.34 65.08 % tesla /2010-2024/ 4.65 % 99.61 59.19 -40.58 % total 100.00 % aamamnt pe (2009-2024)-arithmetic aver. 55.59 aamamnt pe (6 sep, 2024)-arithmetic aver. 40.98 -26.29 % aamamnt pe (2009-2024)-weighted average 45.53 aamamnt pe (6 sep, 2024)-weighted average 40.15 -11.83 % s&p 500 pe (2009-2024 average) 25.20 s&p 500 current pe (6 sep, 2024) 28.26 12.15 % sources: calculations of the author, https://www.macrotrends.net/stocks/charts/, (6.09.2024), https://www.multpl.com/s-p-500-pe-ratio/table/by-year , (6.09.2024) table 5 also shows that the average pe (for the period 2009-2024) of aamamnt companies exceed almost twice the average pe ratio of the s&p 500 of 25.20. the current pe of the s&p 500 of 28.26, is also much lower than that of aamamnt. at the same time, these aamamnt ratios are about 3 times the usual average s&p 500 pe ratios for the entire historical period from 1871 until nowadays. the current pe of the s&p 500 is by 12.15 % higher than the average for the period. actually both s&p 500 pes would have been even lower if the 7 companies were taken out. it is useful for the analysis to determine this pe value of s&p 500 without the aamamnt. the following relationship can be used: pes&p500 = a × peaamamnt + b × pe493 (1) where: pes&p500 the pe of the s&p 500 index including all 500 companies, a the relative weight of the 7 aamamnt companies, peaamamnt the average pe of the 7 aamamnt companies, b the relative weight of the rest 493 companies in the index, pe493 the pe of s&p 500 without the 7 aamamnt companies. the relative weight of aamamnt in the index, as of 6 september, is a = 30.37 %, which means that the relative weight of the rest 493 companies is b = 60.63 %. then the implied average pe of s&p 500 without the 7 aamamnt companies for the period 2009-2024 is as follows: 𝐏𝐄𝟒𝟗𝟑 = pes&p500 − a × peaamamnt b = 25,20 − 0,3037 × 45,53 0,6963 = 𝟏𝟔, 𝟑𝟑 (2) the implied average pe493 for the period 2009-2024, which is actually the s&p 500 price to earnings ratio of the index, cleared from the influence of “the super seven”, would be only 16.33. this number is https://www.macrotrends.net/stocks/charts/ https://www.multpl.com/s-p-500-pe-ratio/table/by-year%20,%20(6.09.2024) dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 187 practically at the historic average pe values. the calculated current pe493 is respectively 23.07. table 6. pbv of aamamnt companies for the period 2009-2024 company weight in aamamnt average pbv 20092024 current pbv /6 sep, 2024/ difference (%) apple 23.34 % 16.08 50.39 213.38 % amazon 12.42 % 14.04 7.60 -45.87 % microsoft 20.61 % 7.39 11.12 50.50 % alphabet/google /class a/ 12.83 % 4.74 6.18 30.48 % meta platforms /2012-2024/ 8.74 % 6.12 8.08 32.01 % nvidia 17.41 % 13.90 43.43 212.37 % tesla /2010-2024/ 4.65 % 18.41 10.02 -45.57 % total 100.00 % aamamnt pbv (2009-2024)-arithm.aver. 11.53 aamamnt pbv (6 sep, 2024)-arithm.aver. 19.55 69.59 % aamamnt pbv (2009-2024)-weighted av. 11.44 aamamnt pbv (6 sep, 2024)-weighted av. 24.52 114.40 % s&p 500 pbv (2009-2024 average) 3.19 s&p 500 current pbv (6 sep, 2024) 4.84 51.87 % sources: calculations of the author, https://www.macrotrends.net/stocks/charts/....... , (6.09.2024), https://www.multpl.com/s-p-500-price-to-book/table/by-year , (6.09.2024) table 6 is analogous to table 5 but it presents the price-to-book (pbv) ratios of aamamnt companies, albeit in the same way. the data in this table can be described as quite shocking, given that there are many double-digit values of the pbv ratio. the table looks as if it is for pe ratios, rather than pbv ratios. this is really atypical, given the fact that theoretically the starting point /reference value/ for the pbv ratio of an average company should gravitate around 1. the logic is that the shares of a company with average actual return (roe), with average cost of equity (re), which is equal to the average actual return, other things being equal, should be traded at its book value, or at pbv=1. the weighted average pbv for the 7 companies for the period 2009-2024 is 11.44 and is essentially equal to the mean of 11.53. the weighted average of the current pbv, as of september 6, 2024, is more than twice higher, with an indeed extreme value of 24.52. the highest average pbv ratio for the period 2006-2020 belongs to tesla 18.41, followed by apple with 16.08. it can be seen that the current pbv as of september 6, 2020 has some super extreme values – 50.39 for apple and 43.43 for nvidia, which explain the abnormally high average. the average pbv of the aamamnt for the period 2009-2024 is about 3.6 times the average pbv of the s&p 500, and their current pbv is about 5 times the average of the s&p 500. by doing the same exercise with pbv, as with pe above, we get an implied average pbv for s&p500 without the 7 large technology stocks (pbv493) for the period 2009-2024 of -0.41. the implied current pbv493 is respectively -3.71. this suggests that the average pbv of the other 493 companies in the index is negative, and their contribution to the average pbv of the index as a whole is negative. this is not possible and have no economic sense. negative pbv ratios are normally rare exception, for example, when a heavily indebted company has a negative book value. in reality a part of these companies in the index have pbvs less than 1, but higher than 0. other companies have pbvs higher than 1. in any case pbvs of these companies should be relatively close to 1. one possible explanation for the above illogical results is that the average pbv ratios of the aamamnt in table 6 are not representative for the actual situation. these average values seem to be significantly biased upwards. they are due mainly to extreme values of some of the companies in the group. one way of adjusting databases to correct for this distorting influence of such outliers, is by assigning them certain closer to reality values (damodaran 2012). in this case we could assign a maximum possible value of pbv of 10. the resulting average pbv for aamamnt for the period 2009-2024 would go down to 8.45, and the current would go down to 9.04. these two averages should be much more representative. on the basis of them, the implied average pbv for the period 2009-2024 for the 493 companies would obtain the more reasonable value of 0.90 and the current pbv – of 3.01. https://www.macrotrends.net/stocks/charts/aapl/apple/pe-ratio https://www.multpl.com/s-p-500-price-to-book/table/by-year dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 188 table 7. share price growth, eps growth and roe of aamamnt companies during the period 2009-2024 company average share price growth 2009-2024 average eps growth 2009-2024 average roe 2009-2024 current roe 30 june, 2024 apple 26.68 % 22.58 % 71.75 % 147.15 % amazon 24.11 % 28.26 % 13.87 % 21.20 % microsoft 20.98 % 13.32 % 34.22 % 35.95 % alphabet/google /class a/ 16.37 % 18.52 % 19.36 % 30.48 % meta platforms /2012-2024/ 27.72 % 22.77 % 19.91 % 34.16 % nvidia 32.80 % 115.52 % tesla /2010-2024/ -83.76 % 19.89 % aamamnt share-price growth 23.18 % aamamnt eps growth 20.39 % aamamnt average roe (2009-24) 31.57 % aamamnt current roe-30 june, 24 72.32 % s&p 500 share-price growth 9.48 % s&p 500 eps growth 7.23 % s&p 500 average roe (2009-24) 18.25 % s&p 500 current roe-30 june,24 17.34 % sources: calculations of the author, https://www.macrotrends.net/stocks/charts/....... , (6.09.2024). https://www.multpl.com/s-p-500-book-value, (6.09.2024) table 7 presents other important financial indicators of aamamnt companies return on equity (roe), average growth rate of share prices and average growth rate of earnings per share (eps) for the period 2009-2024. for direct comparison purposes, the same indicators have been calculated for the s&p 500 as well. one idea is to see to what extent the growth rate of stock prices is supported by the growth rate of eps. this earnings growth has always been cited as a key argument in defense of high market price levels. the growth rates in this case are calculated as geometric average (point-to-point). the calculated eps growth rates for nvidia and tesla are ignored in the table, because they have values, which are meaningless (these values are negative because of negative earnings in the beginning of the period). the average growth rates for the group, respectively, are determined on the basis of the first 5 companies only. the table shows that the average annual growth rate of eps was higher than the growth rate of stock prices only for amazon and alphabet. for the other 3 companies, the increase in eps was clearly lower, compared to the increase in their share prices. this gives some reason to question the arguments that the increase in prices is fully justified and supported by the growth of net profits. the calculated average price growth rate for the five companies (weighted according to the market value of each) is 23.18 %, about three percentage points higher than the average eps growth rate of 20.39 %. thus, if we assume that these growth rates are representative for all seven companies, the growth of “the super seven” share prices in general, in the period 2009-2024, does not seem quite supported as a whole by the corresponding increase in eps. the indicators in table 7 also show that the average growth rates of stock prices and eps of aamamnt companies are about two times higher than those of the s&p 500 index. in this regard, further analysis of the factors that determine this higher growth of eps of the aamamnt companies is needed. the growth of the index itself (stock price levels) is by about two percentage points higher than the growth of its eps. an important factor for the high growth rate of eps of aamamnt companies is their high return on equity (roe). as it has already become clear, it is an indicator of the key fundamental variable potential for generating income (cash flows). therefore, the roe ratio, together with the retention ratio, predetermine the so-called internal growth rate of eps in the future (nenkov 2021). for the period 2009-2024, the average roe for each of the seven companies has ranged from -83.76 % for tesla to 71.75 % for apple. microsoft is in second place with an roe of 34.22 %, followed by nvidia with 32.80 %. meta platforms, alphabet and amazon have roe below 20 %. the weighted average for the six companies for the period is 31.57 %. the average roe of the s&p 500 for the period is much lower – 18.25 %. the current roe for the group, calculated on the basis of published profits as of june 30, 2024, is 72.32 %, more than twice higher than the average for the analyzed period 2009-2024. this is due mainly to the extremely high apple’s roe of 147.15 % and nvidia’s roe of 115.52 %. the roes of the rest are within https://www.macrotrends.net/stocks/charts/aapl/apple/pe-ratio https://www.multpl.com/s-p-500-book-value/table/by-year dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 189 the range 19.89 %-35.95 %. the current roe of s&p 500 is 17.34 %, or 4 times lower than that of aamamnt. these extremely high roes for apple and nvidia should be considered as the major factors for the extremely high pbvs of the two companies. the reason is that roe is the so called “companion variable” for pbv, or in other words, the variable which has the highest influence over the levels of the pbv ratios (damodaran 2012). here, however, a very important question arises to what extent the roe calculated for these companies is indicative of the actual return on equity. the reason for such doubts comes from the fact that roe is calculated on the basis of the book value of equity, and in these companies it does not seem to be representative at all. the indicator for this are the abnormally high price-to-book value (pbv) ratios discussed above. it would be rather superficial to explain these extremely high coefficients only with the high return and growth. rather, the book value of most of these companies does not reflect a significant proportion of the value of their assets. these are intangible assets, and it is quite possible that the vast majority of them do not find a place in the balance sheet of these companies at all. a pbv of 50.39 for apple means that its book value of equity is only 1.98 % of its market value of equity. according to the latest balance sheet as of 30 june, 2024, the total assets of apple are $331.6 billion, the total liabilities are $264.9 billion, and the shareholder equity is $66.7 billion. the total market capitalization of the company as of 6 sep, 2024 is $3 381 billion. other things being equal, this should mean that roughly 90 % of the assets’ value of apple is not accounted for in the balance sheet, most likely because about 90 % of apple’s assets are intangible. similarly, for nvidia, with pbv of 43.43, its book value of equity is only 2.30 % of its market value of equity. thus, the book value of these companies (as the difference between the book value of assets and the book value of liabilities) is greatly underestimated. as a result, the roes calculated for these companies should be greatly inflated (nenkov 2021). one of the consequences of the greatly increased roe is that preconditions are created for unreasonably high forecasts for the growth of eps g, calculated as internal rate. thus, for apple, with a current roe of 147.15 % and assuming a high retention ratio (b) of 0.8, the calculated internal growth rate would be 117.72 % (g=roe×b=147.15 %×0.8=117.72 %). this may be subsequently used as an argument in defense of an atypically high future growth rate of 117.72 % for the next 5 years, for example. all this could seriously distort the notions about the actual growth prospects and financial efficiency of the aamamnt companies. assuming conditionally that the accounting has managed to reflect all tangible and intangible assets at their market value, the book value of equity should be equal to its market value. thus, the price per share (p0) should be equal to the book value per share (bvs), or: p0=bvs, and the pbv ratio will be equal to 1. in this situation, apple's roe on september 6, 2024 should be only: 𝑅𝑂𝐸 = 𝐸𝑃𝑆1 𝐵𝑉𝑆0 = 𝐸𝑃𝑆1 𝑃0 = $6.57 $191.80 = 3.43 % (2) this is in fact equal to the so-called current earnings yield (ey) of the shares (ey=eps/p0). thus, an investor who has acquired shares of apple at a price as of september 6, 2024, his current return will be only 3.43 %. the current yield is actually the opposite of the pe ratio, or ey=1/pe. the higher the actual market ratio pe, the lower the earnings yield per share. the explanation for some illogically high current market ratios pe and pbv of aamamnt companies should be sought not so much in their high efficiency, but rather in external factors, in some features of the environment in which the companies operate. until two or three years ago one major explanation was the very low cost of equity, mainly due to low, close to zero, interest rates. nowadays, however, this could not be considered a serious factor in this direction. another possible explanation is one of the two traditionally most widely used approaches by the investment community the castle-in-the-air theory, enunciated by john maynard keynes in 1936. according to this approach “it’s perfectly all right to pay three times what something is worth as long as later on you can find some innocent to pay five times it’s worth” (malkiel 2015). the other approach is the firm-foundation theory. according to burton malkiel the two approaches are mutually exclusive (malkiel 2015). the current study follows the point of view of the firm-foundation theory, which is essentially the fundamental theory about the value of stocks and other assets (graham and dodd 2009; graham 2006). so far in the study we have been discussing the levels of the s&p 500 and the actual prices of aamamnt companies in terms of what we think should be their firm-foundation of value. at the same time history tells us that pricing on the stock market is very often heavily influenced by the castle-in-the-air theory thinking. the followers of the castlein-the-air theory are not interested at all about fundamental value. under such conditions, what a stock needs in order to grow in price is a good story about its nifty development on the market over time. stories such as the incredible value that lies in the upcoming development of artificial intelligence (ai) are unlocking expectations for continued serious growth in the prices of certain companies, and in the first place of “the dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 190 magnificent seven”. in this line of thought, the main question should be: “to what extent are the huge intangible assets of these companies an expression of invisible intrinsic value, and to what extent are they the consequence of exaggerated, unfounded expectations about the future?”. derivation of fundamental pe and pbv ratios for “the magnificent seven” and the s&p 500 for 2024 the answer to the question from the previous section requires a further look at the discussed above pe and pbv ratios in the context of the three fundamentals, dictating the intrinsic value of stocks. this is the reason why these fundamentals are also called “value drivers” (koller, goedhart and wessels 2015). since market ratios (including pe and pbv) are actually standardized prices of stocks, they should also depend on the same three fundamentals. these are earnings (cash flow) potential, expected growth of earnings and risk (damodaran 2012). fundamental pe and pbv ratios can be derived from fundamentals. they are supposed to express the correct level for pe and pbv of any stock. the determination of fundamental ratios is actually implicit, short, and hidden dcf valuation of stocks. the corresponding indicators for the three fundamentals, which are appropriate at equity level, are roe, expected growth of eps (g), and the cost of equity (re). the two-stage (high-growth) fundamental model seems appropriate in this case, provided that highgrowth companies are concerned. the values of the estimated fundamental ratios are also not undisputed, as the input fundamental variables are normally subject to debates, as is the case with any dcf valuation. the point is to use meaningful and well-reasoned values for each of the input variables in the process. under the basic scenario, the two-stage model in this case is with a 5-year first stage. the roe used for the first stage is the average company (or index) roe for the period 2009-2024. table 8 shows the estimation of the internal growth rate (g1) by companies for the next 5 years, as the product of roe1 and plowback ratio (b1). the plowback ratio itself is derived from the payout ratio (1-b1), which presents the average payout to shareholders for the last five years, i.e. dividend payouts + stock buybacks. the dividend payments are not significant for most of the companies in the group. the highest is for microsoft – 24.7 %, followed by apple with about 18 %, nvidia with 10 %, meta platforms with 4.94 %, alphabet with 2.81 %. amazon and tesla have not payed dividends during the period. at the same time the stock buybacks are significant for five of the companies. the average values, as percent of net income, are 99.67 % for apple, 77.58 % for alphabet, 68.81 % for meta, 67.60 % for nvidia, 30.80 % for microsoft. the average buybacks of amazon amount to only 6.38 %, and for tesla are 0.0 %. table 8. internal growth rate for aamamnt and the s&p 500 – stage 1 stage 1 company payout ratio 1 (1-b1) plowback ratio 1 (b1) roe1 g1 (roe1×b1) apple 0.8000 0.2000 71.75 % 14.35 % amazon 0.0638 0.9362 13.87 % 12.99 % microsoft 0.5550 0.4450 34.22 % 15.23 % alphabet/google 0.8039 0.1961 19.36 % 3.80 % meta platforms 0.7375 0.2625 19.91 % 5.23 % nvidia 0.7760 0.2240 32.80 % 7.35 % tesla 0.0000 1.0000 19.89 % 19.89 % s&p 500 0.8185 0.1815 18.25 % 3.31 % source: calculations of the author, https://ycharts.com/companies/..., https://www.macrotrends.net/stocks/charts/ …, https://pages.stern.nyu.edu/~adamodar/ the average total payout ratios can be seen in table 8. this ratio of apple for the last five years is almost 118 % of net income, probably paid out of accumulated cash from earlier periods. it makes no sense to use it as a projection, so the more logical payout ratio of 0.80 is used. the resulting plowback ratios are quite modest for four of the companies, medium for microsoft, very high for amazon, and 1 (maximum) for tesla. the payout ratio for the s&p 500 of 0.8185 is actually the average for the latest three years, and the corresponding plowback ratio is 0.1815. the average roes for the period 2009-2024 are suitable to use in this case. the only exception is tesla, since its average is negative. for this reason, the latest roe of 19.89 % is used for tesla. the calculated internal growth rates for the next 5 years can be put into two groups – high growth rates (for apple, amazon, microsoft and tesla), and relatively low growth rates (for alphabet, meta and nvidia). the high growth https://ycharts.com/companies/ https://www.macrotrends.net/stocks/charts/ https://pages.stern.nyu.edu/~adamodar/ dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 191 rates of amazon and tesla are due mainly to the extremely high plowback ratios. the low growth rates of alphabet, meta and nvidia are due mainly to low plowback ratios. table 9 illustrates the historical and current risk free rates, risk premiums and expected return of s&p 500, which are used in deriving the cost of equity for stocks. the historic average values are normally preferred by academics, while the current rates are normally used by managers and analysts in the practice of capital markets. during the whole period after the global financial crisis, with the exception of the last two years, the current expected return used to be significantly lower than historical average levels, due to the very low interest rates. table 9. historic and current expected return for the us market indicator period risk free rate risk premium market return arithmetic average historical return 1928-2023 4.86 % 6.80 % 11.66 % geometric average historical return 1928-2023 4.57 % 5.23 % 9.80 % pablo fernandez – survey 2024 4.10 % 5.50 % 9.60 % average of monthly expected returns 2008-2024 2.51 % 5.43 % 7.94 % current expected return aug 2024 4.09 % 4.12 % 8.21 % source: calculations of the author, https://pages.stern.nyu.edu/~adamodar/, fernandez 2024 the numbers in table 9 indicate that historic average return is higher than current expected return. the arithmetic average historic return is the highest – 11.66 %. the geometric average is 9.80 % and is very close to the return derived from the latest survey of pablo fernandez (for 2024). the average of the monthly expected returns from january 2008 to august 2024 is 7.94 %, which is very close to the current expected return as of august 2024 of 8.21 %. the main touted advantage of the current cost of equity is that it is up to date. the main disadvantage is that it is too volatile. the main advantage of the historic average is that it is stable and is supposed to be more representative for the long run. the main disadvantage is that it is based to a high extent on periods of the distant past, which are not considered indicative of the future. with regard to this, the cost of equity for aamamnt and the s&p 500 for stage 1 of the models (for the next 5 years) is based on the average of current risk free rates and risk premiums for the period 2008-2024. for stage 2 of the model, where it is a question of a period that continues to infinity, the geometric historical average is taken as the most appropriate. table 10 shows the estimation of the cost of equity by companies for the first stage of the fundamental model. the capital asset pricing model (capm) is applied, based on the average of monthly current risk free rates of 2.51 %, and of monthly current risk premiums of 5.43 % for the period 2008-2024. the average for the current cost of equity for s&p 500 respectively adds up to 7.94 %. the table contains also the beta coefficients of each of the seven companies, which range from 0.90 for microsoft to 2.29 for tesla. the estimated cost of equity varies significantly because of the varying betas. microsoft has the lowest cost of equity (7.40 %), followed by alphabet (8.16 %) and amazon (8.75 %), because of their relatively low betas. tesla has the highest cost of equity of 14.94 %, followed by nvidia with 11.58 % table 10. cost of equity for aamamnt and the s&p 500 for 2024 – stage 1 stage 1 company rf1 beta (rm rf)1 re1 apple 2.51 % 1.24 5.43 % 9.24 % amazon 2.51 % 1.15 5.43 % 8.75 % microsoft 2.51 % 0.90 5.43 % 7.40 % alphabet/google 2.51 % 1.04 5.43 % 8.16 % meta platforms 2.51 % 1.21 5.43 % 9.08 % nvidia 2.51 % 1.67 5.43 % 11.58 % tesla 2.51 % 2.29 5.43 % 14.94 % s&p 500 2.51 % 1.00 5.43 % 7.94 % source: calculations of the author, https://pages.stern.nyu.edu/~adamodar/ the cost of equity for stage 2 of the model (table 11) is based on the geometric historical average for the longest period 1928-2023. the main argument for this is that the historical average is normally a more sustainable number than the current cost of equity. this makes it more appropriate to use for a long future period, which is supposed to continue until infinity. the geometric average is preferred as the more https://pages.stern.nyu.edu/~adamodar/ https://pages.stern.nyu.edu/~adamodar/ dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 192 representative before the arithmetic average. the long-term geometric average risk free rate is 4.57 % and the long-term geometric average risk premium is 5.23 %. the cost of equity for the s&p 500 adds up to 9.80 %, higher than the cost of equity used for stage 1. respectively, the long-term cost of equity by companies for stage 2 is also higher than that for stage 1. table 11. cost of equity for aamamnt and the s&p 500 for 2024 – stage 2 stage 2 company rf2 beta (rm rf)1 re2 apple 4.57 % 1.24 5.23 % 11.06 % amazon 4.57 % 1.15 5.23 % 10.58 % microsoft 4.57 % 0.9 5.23 % 9.28 % alphabet/google 4.57 % 1.04 5.23 % 10.01 % meta platforms 4.57 % 1.21 5.23 % 10.90 % nvidia 4.57 % 1.67 5.23 % 13.30 % tesla 4.57 % 2.29 5.23 % 16.55 % s&p 500 4.57 % 1.00 5.23 % 9.80 % source: calculations of the author, https://pages.stern.nyu.edu/~adamodar/ table 12 contains the input variables for the two fundamental models and the results of applying the models – the fundamental pe and pbv ratios for each of the seven companies and for the s&p 500. the input variables that have not yet been discussed, are the stage 2 growth rate (g2), return on equity (roe2) and plowback ratio (plowback ratio 2). they are interrelated in the context of the internal growth rate formula. the growth rate of 4.57 % is fixed in this case, on the basis of the long-term risk-free rate. ideally, the so called intrinsic risk-free rate is supposed to represent the sum of the expected long-term average gdp growth rate and the expected long-term average inflation rate. the foreseen plowback ratio is 0.3 and the resulting roe is 15.23 %. having in mind that these forecasted values are until infinity, they are supposed to be more conservative. yet, in our case they are not so conservative, with a growth rate of 4.57 %, and roe of 15.23 %, which is quite above the foreseen cost of equity for all companies, except tesla. table 12. input variables for the fundamental models, fundamental pes and pbvs for aamamnt and s&p 500 company re1 plowback ratio 1 roe1 g1 pe pbv apple 9.24% 0.2000 71.75 % 14.35 % 18.77 5.46 amazon 8.75% 0.9362 13.87 % 12.99 % 15.10 2.29 microsoft 7.40% 0.4450 34.22 % 15.23 % 25.53 4.54 alphabet/google 8.16% 0.1961 19.36 % 3.80 % 14.51 2.36 meta platforms 9.08% 0.2625 19.91 % 5.23 % 12.97 2.13 nvidia 11.58% 0.2240 32.80 % 7.35 % 10.37 2.19 tesla 14.94% 1.0000 19.89 % 19.89 % 7.54 1.15 s&p 500 7.94 % 0.18 18.25 % 3.31 % 14.83 2.37 stage 2 company re2 plowback ratio 2 roe2 g2 apple 11.06 % 0.3 15.23 % 4.57 % amazon 10.58 % 0.3 15.23 % 4.57 % microsoft 9.28 % 0.3 15.23 % 4.57 % alphabet/google 10.01 % 0.3 15.23 % 4.57 % meta platforms 10.90 % 0.3 15.23 % 4.57 % nvidia 13.30 % 0.3 15.23 % 4.57 % tesla 16.55 % 0.3 15.23 % 4.57 % s&p 500 9.80 % 0.3 15.23 % 4.57 % source: calculations of the author, https://pages.stern.nyu.edu/~adamodar/, https://ycharts.com/companies/..., https://www.macrotrends.net/stocks/charts/ … https://pages.stern.nyu.edu/~adamodar/ https://pages.stern.nyu.edu/~adamodar/ https://ycharts.com/companies/ https://www.macrotrends.net/stocks/charts/ dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 193 the obtained fundamental pe and pbv ratios are significantly lower than the discussed in section “analysis of key financial indicators of the “the magnificent seven” and the s&p 500 during the period 2009-2024” actual pes and pbvs. the highest fundamental pe is for microsoft – it is 25.53, followed by apple with 18.77. the lowest fundamental pes are of tesla – 7.54, and nvidia – 10.37. the s&p 500 fundamental pe is 14.53, practically at the historical average level. most company pes are also quite close to the historical average of about 15 to 17. with regard to pbv ratios, the difference between their actual and fundamental levels is huge. the highest fundamental pbv ratio is that of apple – 5.46, followed by microsoft – 4.54. the lowest pbv ratio is that of tesla – 1.15, followed by meta platforms with 2.13 and nvidia with 2.19. the low fundamental ratios for tesla are due mainly to the high cost of equity, which has the levels for companies on emerging markets, with country risk premiums and other additional premiums applied. the fundamental ratios respectively, are also comparable with those for companies in emerging markets. this situation is quite similar for nvidia as well. table 13. comparison: actual vs. fundamental pe and pbv for aamamnt and s&p 500 actual ratios fundamental ratios difference difference in % pe pbv pe pbv pe pbv pe pbv company average 20092024 5-year high growth k.2-k.4 k.3-k.5 k.6/k.4 k.7/k.5 k.1 k.2 k.3 k.4 k.5 k.6 k.7 k.8 k.9 apple 19.06 16.08 18.77 5.46 0.29 10.62 2 % 194 % amazon 138.25 14.04 15.10 2.29 123.15 11.75 816 % 513 % microsoft 24.55 7.39 25.53 4.54 -0.98 2.85 -4 % 63 % alphabet/google 27.45 4.74 14.51 2.36 12.94 2.38 89 % 101 % meta platforms 37.60 6.12 12.97 2.13 24.63 3.99 190 % 187 % nvidia 42.61 13.90 10.37 2.19 32.24 11.71 311 % 535 % tesla 99.61 18.41 7.54 1.15 92.07 17.26 1221 % 1501 % mean 55.59 11.53 14.97 2.87 40.62 8.65 271 % 301 % weighted average 45.53 11.44 16.67 3.42 28.86 8.02 173 % 235 % s&p 500 25.20 3.19 14.83 2.37 10.37 0.82 70 % 34 % source: calculations of the author once we have the fundamental pe and pbv ratios, we can compare the actual pes and pbvs with them. this can be seen in table 13. the actual and fundamental pe ratios match pretty well for two companies – apple (19.06 vs. 18.77) and microsoft (24.55 vs. 25.53). the actual pes of the rest of the companies are a lot higher than the respective fundamental pe ratios – by only 89 % for alphabet, but by 1221 % for tesla. the mean actual pe for all seven companies is by 271 % higher than the mean fundamental ratio and the weighted average is by 173 % higher. for pbv the differences are even bigger. the pbv fundamental ratios for all seven companies are much higher than their pbv fundamental ratios. the least difference is for microsoft – 63 %, and the highest is for tesla – 1501 %. the mean actual pbv ratio for the seven companies is by 301 % higher than the mean fundamental pbv ratio, and the weighted average is by 235 % higher. conclusion the results of the analysis, based on the main financial indicators, related to the stock-price levels of the s&p 500 and of “the magnificent seven”, confirm both aspects of the main hypothesis: 1. the 7 large technology companies (aamamnt) have indeed a very large impact on the overall performance of the s&p 500, and the high prices of their shares are the most important factor for the record-high recent levels of the index. the study proves that the s&p 500 without these 7 stocks, would have a lot more modest financial indicators, such as eps growth, roe, pe and pbv. 2. the study indicates that eps growth rates of the aamamnt companies as a whole for the period 2009-2024 are slightly lower than their price growth rates for the same period. 3. the study based on pe and pbv ratios for the 7 companies indicates that their average levels for the period 2009-2024 are more than 2 times higher for pe, and more than 3 times higher for pbv, than their average historical pes and pbvs of the market as a whole. also, current pe and pbv dimiter nenkov / finance, accounting and business analysis, volume 6, issue 2, 2024 194 levels as of september 6, 2024, are respectively 2.5 times and 5 times higher than historic average levels. 4. the final check involves fundamental pe and pbv for the 7 companies, based on 2-stage fundamental models. it definitely does not support the high price levels of the aamamnt. the derived fundamental pe and pbv ratios seem to be quite in line with historic average levels of the market, and are much lower than the actual average and current pe and pbv for the group as a whole. the average actual pe for the group is by 173 % higher than the fundamental pe, and the actual pbv is by 301 % higher than the fundamental pbv. the above findings of the study are, of course, subject to discussion. this is one of the ideas behind starting such a research. there can be different views with regard to the representativeness of some actual market ratios used, questions can also be raised with regard to the values of each of the 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https://www.macrotrends.net/stocks/charts/%20, https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-price-to-book/table/by-year https://www.multpl.com/s-p-500-book-value/table/by-year https://ycharts.com/companies/ 208 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.07 assessing the readiness of algerian port enterprises to secure accounting practices through cybersecurity protocols ali djellaba department of financial sciences and accounting, chadli benjedid university, el tarf, algeria info articles abstract history article: submitted 29 july 2025 revised 29 october 2025 accepted 2 november 2025 purpose: this study aims to conduct a cybersecurity readiness assessment of algerian port enterprises, with a specific focus on the port of annaba, to enhance the security of its accounting practices. the assessment will be conducted by first establishing the current state of the port's cybersecurity protocols and then evaluating these against best practice standards. it also seeks to provide evidence-based recommendations for enhancing the resilience of these types of enterprises against cyber threats. design/methodology/approach: owing to the nature of the subject, we adopted a qualitative interviews and exploratory approach in order to capture vulnerabilities and opportunities in detail. findings: the study underscore the necessity for accounting professionals to integrate robust cybersecurity protocols and data privacy strategies into their operations, thereby enhancing the overall integrity and reliability of financial reporting in a rapidly evolving digital environment. development efforts have to integrate cybersecurity with accounting, rather treating them as two different domains, but rather as co-dependent frameworks of governance internal operational lapses and external vulnerabilities. practical implications: this paper highlights the critical need for algerian port enterprises to strengthen their cybersecurity protocols in accounting practices. by adopting these measures, organizations can protect the integrity of financial data while fostering trust among stakeholders, which may lead to increased investment and enhanced operational efficiency within the competitive maritime sector. additionally, this research is crucial to advancing scientific knowledge about cybersecurity and can be used to support the identification of new directions for future research. originality/value: while global studies have examined the technical issues of cybersecurity on accounting, there are no such studies that look into the problems of algerian ports. in addition, most existing approaches do not combine cybersecurity with other business functions like risk and corporate governance. this study intends to fill these gaps by formulating relevant recommendations for algerian port enterprises. paper type: research paper. keywords: cybersecurity, data privacy, accounting practices, annaba port enterprise. jel: m15, k24, m41 * address correspondence: e-mail:djellaba.ali@univ-eltarf.dz http://faba.bg/ https://doi.org/10.37075/faba.2025.2.07 https://orcid.org/0000-0003-0591-5907 ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 209 introduction the world has opened up discussions on accounting and cybersecurity in one breath and the term ‘cybersecurity’ is becoming more popular in accounting. as accounting systems in enterprises become increasingly digitalized through cloud computing, ai, and other advanced technologies, they also become more vulnerable to cyber threats such as the possibility of system data manipulation, system intrusion, and in the worst-case scenario, business fraud becomes a high probability. such issues are also covered in the academic literature. for instance, gordon et al. (2003) argue that sharing information about security breaches could achieve a greater level of cybersecurity and propose an attempt to lessen the danger by joining forces among competing entities. in such restricted regions like algeria, shared knowledge could make a considerable difference. gansler and lucyshyn (2005) emphasise the importance of cybersecurity programmes to enterprises’ success, highlighting their failure to achieve desired outcomes stemming from complicated risk evaluation and ever-changing threats. this is reminiscent of the case in algerian enterprises that face stringent cyber threat evolution challenges requiring adaptable, robust, and agile countermeasures, which are not always easy to come by in lean resource settings. apart from spending, gordon and loeb (2002) developed the gordon–loeb model, which provides an economic rationale on how to define optimal investment levels in security. in the case of algeria, this model might help local enterprises encourage more economically responsible expenditure towards security instead of excessive spending or not spending at all, which is easier with the financial constraints in the region. also, hausken (2006) elaborates that investments occur given a return higher than the average attack level or as per some formal regulatory demand, calling for greater governance and enforcement, which is still one of the many areas understudied in a lot of algerian enterprises. from the auditing point of view, steinbart et al. (2013, 2018) also analyse that having a positive interaction between the internal audit function and the information security unit tends to produce favourable results concerning security, which is crucial for port operations involving a high level of financial and data precision. moreover, the emphasis on transparency is supported by gordon et al. (2006) as well as li et al. (2018), who discovered that cybersecurity leakage is linked to improved incident forecasting as well as confidence within the market. this means that algerian enterprises would implement better communication practices internally and externally regarding their cybersecurity policies. even with the increase in the awareness of cybersecurity threats, most algerian enterprises, and particularly those in the more sensitive industries such as ports, despite the growing reliance on digital accounting systems in organizations like port enterprises, the integration of robust cybersecurity measures remains a significant challenge. the port’s accounting systems handle vast amounts of sensitive financial data, making them a prime target for cyberattacks. however, outdated infrastructure, limited awareness of cybersecurity best practices, and unclear regulatory frameworks expose the port to risks such as data breaches, fraud, and operational disruptions. this raises the critical question: to what extent are algerian port enterprises prepared to effectively integrate cybersecurity protocols into their accounting practices in order to protect financial data, improve operational resilience, and maintain stakeholder trust? literature review and conceptual framework digital transformation in accounting practices accounting practices are the ways in which entities implement policies for capturing, processing, and reporting business-derived financial information as per recognized accounting disciplines and standards. these practices include the technical and procedural details of how financial transactions are handled and recorded in an entity to enable alignment, openness, and comparability of financial information over time and across entities. accounting practices evolve in response to changes in the economic environment and conditions, or due to technological or regulatory shifts. these dynamic factors make accounting a critical area for the financial management of any organization (weygandt et al. 2020).the change in technology has caused a complete shift to occur in the world of accounting and bookkeeping, changing the way financial records are kept and how information flows within the business. this aims to improve the level of efficiency and precision as well as improve the quality of decisions made at every level of the organization. parlak (2020) emphasized that the accounting practices are impacted by digital transformation, which includes memorizing, classifying, and summarizing financial statements, analyzing and discussing financial statements, establishing the system, and ensuring effective continuity of the system (arief 2024). in this situation, it is necessary to reassess and ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 210 realign practices and procedures. future accountants must also have adequate knowledge and skills in digital accounting education, which includes new data analysis techniques, technology-driven auditing, and a comprehensive understanding of blockchain technology. the accounting profession is being transformed by digital technologies such as cloud computing, iot, ai, and machine learning during the era of digital transformation. accountants are not expected to be replaced by these technologies, but rather, they will allow them to focus more on strategic tasks that require creativity and intellectual depth. future accountants must have the necessary analytical and strategic skills and be proficient in technology. busulwa and evans (2021) explain that the digital transformation of accounting practices is driven by both direct and indirect disruption. table 1.digital disruption of accounting practices indirect disruption direct disruption changing the current most valuable accounting roles and activities. stakeholder expectations require accountants to perform new roles and activities in order to live up to these changed expectations. the changes in accounting roles result in changes in the competencies required to fulfill these roles. data availability. the tools used to perform accounting work. the type of value accountants are able to create. the optimal ways to perform accounting work. competencies required by accountants. source: busulwa and evans (2021). digital transformation doesn't reduce the importance of accounting information, but it changes how stakeholders view the roles and tasks that accountants should undertake. it also influences their beliefs about how well accountants are fulfilling these roles to maximize the value of accounting. in this regard, digital transformation is, at least theoretically, a highly disruptive endeavor, focusing on fundamental transformations of both practices and products (loonam et al. 2018). the growing necessity of cybersecurity protocols in accounting practices there are numerous definitions of cybersecurity, varying in emphasis but collectively pointing to the defence against digital threats. it is broadly defined as "a set of actions taken to defend against cyber-attacks and mitigate their consequences, including the implementation of necessary countermeasures." (mamdouh ibrahim 2023). from a functional perspective, cybersecurity can be defined as “the activity that ensures the protection of human and financial resources associated with information and communication technologies, minimising potential losses and enabling a swift recovery to prevent operational disruptions” (bara 2017). cybersecurity involves a comprehensive set of technical, organizational, and administrative practices aimed at protecting cyberspace from attacks. these include legal measures, data protection protocols, risk management strategies, and continuity planning to maintain system integrity, privacy, and functionality. the international telecommunication union, in its 2010–2011 telecommunication reform trends report, defined cybersecurity as “a set of tasks including tools, policies, procedures, guidelines, risk management strategies, training, best practices, and technologies to safeguard the cyber environment, organizational assets, and users” (itu 2011). the american institute of certified public accountants stated that: “cybersecurity is one of the top issues on the minds of executives and boards of nearly every company in the world—large and small, public and private” (haapamäki and sihvonen 2019). it is important to distinguish between cybersecurity and information security. the former addresses all threats within cyberspace, whereas the latter focuses on protecting physical information assets. therefore, cybersecurity is the broader concept. it interlinked with several core concepts (mostafa 2008):  cyberspace: defined by the french agency for information systems security (anssi) as “the communication space formed by the global interconnection of automated digital data processing equipment.” it encompasses both physical and virtual components, including devices, software, networks, and users.  cyberattacks: these refer to “any action that disrupts or manipulates the functioning of a computer network, often exploiting system vulnerabilities to achieve national, political, or financial objectives.”  cybercrime: defined as “illegal acts carried out using digital equipment, systems, or the internet,” including criminal behaviour associated with data theft, network breaches, and exploitation via social networks. in this context, accounting data has emerged as one of the primary assets that businesses use for value ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 211 chain analysis, strategic moves, and compliance checks. whether compliance is legal, internal, or external. nevertheless, this information encounters growing risks from criminal activity and cyber warfare. cybersecurity relates to the magnitude of control exercised to protect computer systems with regard to maintaining the secrecy, wholeness, and accessibility of accounting information. consequently, the impact of cyber security on accounting information quality has grown to become a major area of concern, particularly with digital infrastructure (romney and steinbart 2020).accounting information is characterised by its dependability, precision, and impact for different parties, both internal and external, who use the information. the aforementioned characteristics are dependent on certain factors like accounting restatements that involve conflicts, transparency, substantiality verification, timely publication, availability of information, forgiving policies, and easy access through published works. as of yet, there is no unified definition of cybersecurity, it may be described as a combination of policies, professed actions, set rules, assigned specific roles, practised drills, associated procedures and infrastructures pertinent for safeguarding computer networks, systems, and databases from any unauthorised intrusion, tampering, cancellation, or wilful destruction (aicpa 2018).in terms of maintaining data confidentiality, cybersecurity helps maintain confidential accounting data and protects against unsolicited information and data leakage. this brings credibility when accounting information is given. a breach of accounting data might put its quality in danger. strong security measures applied by the enterprise may safeguard them from forgers and undermine their data’s accuracy. as for keeping data within reach, cybersecurity protects the system from a ddos attack, which allows continuous information flow to be available uninterrupted. also, following hypothetical regulation, protecting data under cybersecurity highly assists enterprises under stipulated region-bound laws and policies, which support the overall credibility alongside the quality of an enterprise’s financial reporting (romney and steinbart 2020).in contrast, weak cybersecurity can lead to alteration of data which artificially generates accounting data that may not be true. cyber records, which are very crucial when making decisions, like accounting records, can also be hacked and thus mailed, rendering them useless. therefore, gaps in security pose investors and business partners having less trust in the financial accounts provided become easy. as is well-known, data sets to be recovered after a strange attack are always prone to payment hikes for system advancement or asset protection, as tactics aimed at improving cybersecurity together with the quality of accounting information and shielding accounting data from being received using data encryption technology (whitman and mattord 2022).however, a company cannot afford to fall behind its competitors in coming up with an effective cybersecurity strategy; it is not an option anymore but a vital strategic prerequisite. it is crucial to safeguard systems and information due to the risks associated with digital transformations. a solid understanding of cybersecurity in the field of accounting is grounded in a number of wellestablished theories and models that outline effective ways to address and mitigate cyber threats. these frameworks offer essential conceptual guidance for developing robust cybersecurity strategies tailored to the financial sector. important models of cybersecurity are outlined below: table 2. models of cybersecurity model purpose accounting context references defense-indepth (did) the defense-in-depth model employs a layered security approach, implementing multiple protective measures across different organizational levels to secure financial information. this model operates on the premise that no single defense mechanism is entirely reliable; therefore, a combination of layers enhances overall protection against cyberattacks. this includes safeguards such as physical security, network protocols, endpoint protection, encryption of data, and continuous system monitoring. shostack (2014) zero trust the zero trust model is built around the philosophy of "never trust, always verify." it requires rigorous identity verification this model is especially pertinent to accounting firms, as it protects sensitive financial data by minimizing the risk of shore et al. (2021) ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 212 and tight access controls, regardless of whether a user operates inside or outside the organization’s network. unauthorized access and internal breaches. risk management framework (rmf) developed by the national institute of standards and technology (nist), the risk management framework (rmf) provides a systematic method for identifying, analyzing, and managing cybersecurity risks. this framework enables organizations, including accounting firms, to better understand their risk environment and apply appropriate security measures. it also assists in prioritizing cybersecurity investments based on the potential impact of various threats on financial information nist (2016) cybersecurity maturity the cybersecurity maturity model measures an organization’s cybersecurity performance across several critical areas, such as risk management, response to incidents, and continuous monitoring. it enables accounting firms to assess their current security practices and pinpoint areas for improvement. rabii et al. (2020) principle of least privilege the principle of least privilege is a foundational cybersecurity concept that limits user access to only the data and systems necessary for their roles. this approach helps prevent unauthorized access to sensitive financial information and minimizes the impact of insider threats when applied effectively in accounting settings, it ensures that employees handle only the information relevant to their responsibilities, thereby strengthening data security. saltzer (1975) source: derived from a literature review by researcher. data protection in the face of digital threats the transmission of data across networks that lack robust security measures poses serious risks to privacy and confidentiality. sensitive communications, such as emails, can be intercepted and read by unauthorised parties, while personal and organizational data files may be illegally accessed. these vulnerabilities highlight growing concerns about privacy violations, particularly as the number of internet users and individuals’ interacting with information systems continues to rise. this situation necessitates an examination of the measures implemented to safeguard data against such threats. the united nations has made substantial efforts to safeguard private life against technological advancement and protect individuals and their liberties from violation. these endeavors culminated in the inaugural international conference on human rights, convened in tehran in 1968. the conference emphasized that electronic computers represent the most significant threat to privacy and personal liberty, as they serve as modern surveillance instruments and spying tools. when personal information is stored on computers and examined, it discloses patterns of interaction and connections (un 1968). germany was actually the first country to introduce a legal framework for data privacy, starting with a state law in hessen back in 1970. then in 1977, germany passed a national data protection law. other countries quickly followed: sweden created a similar law in 1973, and france passed its well-known "information and freedoms" law in 1978 (mustafa 2016). canada has also passed a privacy law that includes ten key principles for protecting personal information online (al-shawabkeh 2009). similar protections exist in china, austria, and belgium. in tunisia, lawmakers responded to digital advancements by including data protection rules in their 2000 electronic commerce law, followed by a dedicated personal data protection law in 2004. ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 213 at the regional level, the council of europe has assumed a vital role. the council of europe convention on the protection of individuals against the hazards of automated processing of personal data was signed and became effective in october 1958 (al-shawabkeh 2009).moreover, the council has issued several recommendations to broaden protection, most notably recommendation no. 13/r80 in 1980 concerning the exchange of legal data related to data protection. oecd has also played a key role. the oecd guidelines on privacy protection and transborder data flows are recognized efforts in this context (oecd 2022).the general data protection regulation (gdpr) is the european union’s all-encompassing framework for securing personal data. it seeks to enhance individuals’ rights to manage their personal information and encourage clarity in its acquisition and use (gdpr 2025). additionally, the african union convention on cybersecurity and personal data protection of 2014 guarantees the right to the integrity of personal data. besides the international and regional efforts to protect personal data, many countries and international organizations have created their own laws to deal with this issue. in algeria, lawmakers passed law 18-07, which focuses on protecting individuals when their personal data is being processed. the algerian legislator provides a comprehensive legal definition in article 3 of law 18-07, characterising personal data as "any information, regardless of its basis, related to an identified or identifiable natural person (termed the data subject), whether directly or indirectly through reference to an identification number or one/multiple elements pertaining to their physical, physiological, genetic, biometric, psychological, economic, cultural or social identity." the same legal provision defines the data subject as any natural person whose personal data undergoes processing. furthermore, the law establishes that personal data processing constitutes "any operation or set of operations performed with or without automated means on personal data, including collection, recording, organization, storage, adaptation, alteration, retrieval, consultation, use, communication through transmission or publication, alignment, interconnection, blocking, encryption, deletion or destruction." some legal interpretations specifically define automated processing as encompassing any process or series of processes (automated or manual) applied to personal data, covering collection, recording, structuring, preservation, modification, extraction access, utilisation, transmission, dissemination or any other form of making information available. this law was an important step forward, especially because it introduced the principle of prior consent, meaning no one’s data can be used without their clear and direct permission. to make sure the law is respected, algeria set up a body called the national authority for the protection of personal data. its job is to ensure that the use of modern technology doesn’t threaten people’s rights, freedoms, or private lives. research methodology research design the study follows a case study design using annaba port enterprise as a representative example of the cybersecurity concerns in algerian ports. this approach has been possible because of the methodological freedom available in case studies which permits collection of rich data about the phenomenon of interest within the context in which it arises. instrument construction the interview is the most appropriate tool for exploring this topic because it provides detailed insights into the phenomenon. the interview plans, which include three sections, were created based on existing research and adjusted to fit the current context in algeria, and then it was presented to arbitration for revision (appendix1). data collection methods the research utilises a variety of primary and secondary data sources: primary data: the study evaluated the level of awareness of cybersecurity threats, system vulnerabilities, and gaps in compliance among it and accounting personnel through interviews and direct structured observations “data for methodological triangulation.” secondary data: the study has relied significantly on available literature, including government documents, textbooks, and peer-reviewed articles (for example, law 18-07 on the protection of personal data, and international standards like the gdpr, iso/iec 27001, and aicpa’s trust services framework). ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 214 research scope annaba port enterprise was selected as a representative case study due to its similar state-owned structure and regulatory environment shared with algeria's other major commercial ports, focusing on the integration of accounting systems with cybersecurity protocols. it does not discuss the it infrastructure's topology, rather its relevance to the security and integrity of accounting information. analytical framework in interrogating the gathered data, a thematic content analysis approach was adopted. this included: coding data based on confidentiality, system vulnerabilities vis-a-vis data consciousness sophistication, and compliance to regulation as guided by law themes; tracking implementation gaps between cybersecurity and qualitative indicators of accounting information systems (e.g. reliance, precision, comprehensiveness: timeliness); examining data from annaba port against global standards. result and discussion at annaba port enterprise, accounting is much more than compliance with laws and regulations; it is the key enabler of operational effectiveness and fostering trust among stakeholders. well-kept financial records allow the port to effectively manage resources, eliminate unnecessary spending, and streamline processes. the ability to see accounts helps the credibility of the stakeholders, while the reliable accounting data smoothens the audits, lowering the chances of incurring fines or getting embroiled in legal issues. like all other algerian port enterprises, this port also uses digital technology, which in itself poses a threat of cyberattacks. such breaches can interfere with company operations, expose confidential information, or alter financial statements, all of which can severely impair the organization. the results presented below are derived from a methodologically triangulated approach. this approach relied on direct structured observations of specific accounting and security protocols, complemented by structured interviews conducted with a sample of 16 senior employees from the financial and accounting departments at the annaba port enterprise. this combined evidence base provided both the self-reported data and observed practice, yielding the following findings: table 3. interview results axis dimension results training and cybersecurity awareness information security training only 7 employees (43.75%) reported receiving training on how to secure systems and networks, while 9 employees (56.25%) had not received any such training. awareness of cyber risks 10 employees (62.5%) stated that they are aware of the risks associated with using open networks and unsafe software. on the other hand, only 3 employees (18.75%) admitted to being unaware of these risks. adherence to security procedures 11 employees (68.75%) acknowledged personally following the enterprise's security procedures. meanwhile, 5 employees (31.25%) did not adhere to these procedures. human error all participants (100%) agreed that human error is one of the main challenges in protecting data within the internal network of the organization. technical infrastructure information systems 10 employees (62.5%) confirmed that the enterprise uses modern systems equipped with encryption and authentication. however, 6 employees (37.5%) disagreed. internal network protection 8 employees (50%) stated that the internal network is secured with a firewall and anti-intrusion software. in contrast, 5 employees (31.25%) said otherwise. data backup all participants (100%) reported that regular backups of the accounting system’s data are performed. access control 14 employees (87.5%) confirmed the existence of a system that controls access permissions. only 2 employees (12.5%) ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 215 axis dimension results did not observe such a system. legal and regulatory framework existence of national legislation 11 employees (68.75%) confirmed the existence of national legislation to protect systems. 5 employees (31.25%) remained neutral. compliance with legislation 12 employees (75%) reported that the enterprise complies with regulations related to digital data protection. only 1 employee (6.25%) denied this, while 3 employees (18.75%) were neutral. internal guidelines 10 employees (62.5%) confirmed the presence of clear internal instructions for handling cyber incidents. 3 employees (18.75%) denied the existence of such guidelines, and another 3 were neutral. legal actions 13 employees (81.25%) indicated that legal measures are taken in case of a breach, while 3 employees (18.75%) remained neutral. source: data processed from observations and interviews (q2 2025). the data shows that while the enterprise makes efforts to train employees in cybersecurity, the level of actual implementation of this training varies. a majority of respondents indicated they had received some form of cybersecurity training, yet a notable portion remained neutral or stated otherwise, which points to inconsistency in training coverage. awareness of cyber risks is relatively high, but there are still gaps, particularly concerning risky behaviours such as the use of open networks or unverified software. this leaves them open to phishing, social engineering, and even inadvertent data breaches. there were no routine training sessions or mock exercises conducted. furthermore, while many employees report adhering to security protocols, human error continues to pose the most significant threat to information system protection, as acknowledged unanimously by the respondents. the results suggest that the enterprise uses moderately up-to-date information systems, protected by encryption, authentication tools, and internal firewalls. however, there is still room for improvement, especially in areas such as backup frequency and more precise control over access permissions. the existence of access control systems is a positive indicator, yet it must be supported by periodic audits and stricter implementation protocols to minimize vulnerabilities. in addition to the threats of keeping data private, the port enterprise does not have basic encryption policies, protocols, or measures on ports and interdepartmental communication for sensitive financial documents. this puts at risk the confidentiality of financial reports; they may be leaked and/or tampered with by some third parties. as for data availability, some reports noted that the downtimes of the system have severely affected the accessibility to the accounting data during the monthend reporting and financial review periods. this poses a major concern to availability, which forms part of the cia triad alongside confidentiality, integrity, and availability. there is a generally favorable response regarding compliance with national regulations for information system protection. most respondents confirmed the presence of national legislation and the enterprise’s adherence to it. however, internal protocols for handling cybersecurity incidents are still underdeveloped according to a portion of participants. legal action appears to be taken in the event of a breach, which is strength, but the extent to which these measures are effectively applied remains uncertain and would benefit from regular review and updates. the port also currently sits outside the compliance area of international cybersecurity frameworks of gdpr and iso/iec 27001. this puts the port in risky position legally in future international collaborations while damaging its reputation concerning financial reporting. it is important to note that the underlying principles and assessed controls, such as perimeter defense, access management, and incident response, are fundamental security mechanisms and are thus relevant for protecting other sensitive systems within the port, including operational and administrative data. the swot analysis provides a strategic evaluation of annaba port enterprise’s cybersecurity readiness, particularly in relation to its human resources, technical infrastructure, and organizational procedures. it identifies the internal strengths and weaknesses of the enterprise, as well as the external opportunities and threats that may impact its ability to effectively protect its information system. this analysis serves as a tool to guide future improvements and decision-making in cybersecurity strategy and organizational resilience. ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 216 table 4.swot analysis strengths weaknesses a majority of employees (62.5%) are aware of cyber risks. over half of the staff (56.25%) has not received formal training in information security. high level of adherence to security procedures (68.75%). not all employees are aware of internal cybersecurity guidelines. regular data backups are consistently performed (100%). some employees (37.5%) believe the it systems lack sufficient protection. access control systems are implemented (87.5%). presence of human errors is unanimously seen as a major risk. opportunities threats possibility to implement structured training programs to improve cybersecurity skills. cyber threats are becoming more complex and frequent. national laws support the enterprise’s legal framework for cybersecurity. lack of training may lead to exploitable human vulnerabilities. investments in advanced firewalls and encryption systems can enhance protection. over-reliance on technical infrastructure without ongoing human awareness. increasing international focus on port cybersecurity can open funding and support opportunities. internal network breaches can result in severe operational and reputational damage. source: derived from interview results by researcher. based on the interview results and subsequent analysis, it is evident that the annaba port enterprise has made considerable efforts toward securing its information system. these efforts include investing in a relatively modern technical infrastructure and attempting to raise staff awareness regarding cybersecurity measures. however, the increasing and evolving nature of cyber threats demands continuous improvement and regular evaluation of readiness, particularly concerning employee training, reduction of human error, and stronger enforcement of internal cybersecurity protocols. it should also be noted that while the annaba port enterprise is considered contextually representative of the cybersecurity concerns across the ten algerian port enterprises—given the uniformity of mandatory cybersecurity measures implemented nationwide—it is essential to note the inherent limitations to generalizability. the findings of this single-site case study are best interpreted as context-specific insights and may not be generalizable across the entire national port system without further corroboration. suggestions and recommendations based on the theoretical insights and practical findings of this study, the following recommendations are proposed to strengthen the cybersecurity posture of algerian port enterprises and improve the quality of their accounting information systems: 1. enhance employee training and awareness conduct regular cybersecurity training sessions for all accounting and it personnel simulate phishing attacks and provide feedback to reduce human error risks distribute clear and concise security guidelines to all staff 2. modernize the technical infrastructure upgrade outdated accounting systems with modern platforms that include built-in encryption, access control, and audit logs implement multi-factor authentication (mfa) for all financial system users regularly update firewalls, antivirus, and anti-intrusion systems 3. strengthen regulatory compliance align internal data protection practices with international standards such as gdpr and iso/iec 27001 appoint a compliance officer or data protection officer (dpo) to monitor implementation ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 217 conduct periodic audits to ensure adherence to law 18-07 and other national regulations 4. improve internal cybersecurity policies develop a formal incident response plan that clearly defines roles, procedures, and reporting timelines establish clear protocols for system access, data classification, and incident escalation apply the “principle of least privilege” to restrict access to sensitive financial data 5. conduct regular risk assessments perform vulnerability assessments and penetration testing at least annually use the cybersecurity maturity model to track progress and identify gaps integrate risk assessment results into strategic and operational planning 6. promote a culture of cybersecurity include cybersecurity performance in employee evaluations and departmental kpis encourage management to lead by example in adhering to digital best practices communicate regularly about ongoing threats, lessons learned, and system updates 7. leverage strategic partnerships collaborate with national and international cybersecurity agencies for training and threat intelligence explore partnerships with universities or research centers to benefit from up-to-date expertise and solutions conclusion this study has explored the critical intersection between cybersecurity and accounting practices, and evaluating the readiness of the algerian port enterprises, which are a vital gateway in algeria’s economic infrastructure. as digital transformation expands the scope and complexity of accounting systems, the need to secure these systems against cyber threats becomes not only a technical imperative but a strategic necessity. investing in cybersecurity as in the case with algerian port enterprises means also investing in reliability of the accounts, operational efficiencies, and the public’s trust in the system. development efforts have to integrate cybersecurity protocols with accounting, rather than treating them as two different domains, but rather as codependent frameworks of governance internal operational lapses and external vulnerabilities. while this research provides valuable insights into the role of cybersecurity in protecting accounting information systems within annaba port enterprise, several avenues remain open for further exploration: comparative case studies: future research could look at more than one algerian port enterprise or other important infrastructure organizations to see how their cybersecurity maturity and accounting system integration differ; quantitative impact analysis: a more data-driven study could evaluate the direct financial impact of cybersecurity investments on the accuracy and timeliness of accounting reports or audit outcomes; longitudinal studies: over time, keeping an eye on how annaba port enterprise's cybersecurity measures are being used could show patterns, improvements, or new problems that static studies cannot capture; a more in-depth look at human factors: future work could focus more deeply on the human element by studying employee behaviour, resistance to change, and the effectiveness of different training methods; development of a cybersecurity readiness index: a customized evaluation tool could be created to measure and benchmark the cybersecurity readiness of accounting systems in algerian enterprises, helping guide policy and investment decisions; exploration of ai and blockchain applications: with the increasing integration of artificial intelligence and blockchain in accounting, future studies could explore how these technologies may enhance cybersecurity and data protection in financial operations. references abu-musa, a. a. 2006. perceived security threats of computerized 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https://doi.org/10.2308/isys-50510. steinbart, p. j., r. l. raschke, g. gal, and w.n. dilla. 2018. the influence of a good relationship between the internal audit and information security functions on information security outcomes, accounting, organizations and society, 71: 15–29.https://doi.org/10.1016/j.aos.2018.04.005. un. 1968. international conference on human rights, tehran.https://www.un.org/en/conferences/humanrights/teheran1968. weygandt, j. j., p. d. kimmel, and d. e. kieso. 2020. accounting principles. 14th ed. hoboken: john wiley & sons. whitman, m. e., and h. m. mattord. 2022. principles of information security .7th ed. boston: cengage learning. https://doi.org/10.2308/isys-50510 https://doi.org/10.1016/j.aos.2018.04.005 ali djellaba / finance, accounting and business analysis, volume 7, issue 2, 2025 220 appendix 1. interview plans section one: human resource readiness in protecting the information system this topic addresses the preparedness of human resources within the enterprise to face cybersecurity threats through their training and behaviour while interacting with systems and networks. statement yes no comments /clarifications do employees receive training on securing systems and networks from cybersecurity threats? ☐ ☐ are employees aware of the risks associated with using open networks and insecure software? ☐ ☐ do employees personally commit to following security procedures when using the information system? ☐ ☐ are human errors considered one of the main challenges in protecting data over the internal network of the enterprise? ☐ ☐ section two: effectiveness of technical infrastructure (systems and networks) this topic focuses on the effectiveness of the technical infrastructure, including information systems and internal communication networks, and their ability to defend against cybersecurity attacks. statement yes no comments / clarifications does the enterprise rely on modern information systems protected by multiple encryption and authentication technologies? ☐ ☐ is the internal network protected by firewall and intrusion detection software? ☐ ☐ is regular data backup conducted for the accounting system to prevent data loss? ☐ ☐ is access to the information system controlled through specific accounts and monitored? ☐ ☐ section three: legal and regulatory framework for cybersecurity this topic addresses the existence of legal and regulatory frameworks that govern and guide the protection of information systems and networks from cybersecurity attacks within the enterprise. statement yes no comments / clarifications are there national legal provisions regulating the protection of systems and networks against cyberattacks? ☐ ☐ does the enterprise comply with regulations regarding the protection of digital data and electronic accounting transactions? ☐ ☐ are there clear internal guidelines for handling hacking incidents or data breaches? ☐ ☐ are legal actions taken in case of a breach or violation of systems? ☐ ☐ 12 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 the guiding reasons why public interest entities in europe elect a particular audit firm and auditors versus the cost of the audit darko dachevski1* , barry ackers2 university of south africa – college of accounting sciences, pretoria, south africa1 university of south africa – college of accounting sciences, pretoria, south africa2 * corresponding author info articles abstract history article: submitted 31 october 2023 revised 6 april 2024 accepted 8 april 2024 declining audit fees represent a worldwide phenomenon which draws particular attention and concerns in the audit profession. the study explores the guiding reasons of public interest entities (pies) in europe when electing a particular auditor, and investigates whether these reasons are reflected on audit fees. further, it considers the impact of the prevailing macroeconomic conditions on these reasons, and accordingly on the cost of the audit. to this end the study intends to investigate whether these guiding reasons represent a declining factor on audit fees and under which macroeconomic conditions. to achieve the study objectives, a pragmatic mixed methods research approach is adopted, comprising surveys of respondents at audit firms and pies, and semi-structured interviews with participants at purposively selected pies, in europe. the study finds that the guiding reasons are associated with the macroeconomic conditions, and reflect pies’ expectations from the external audit. ultimately, these expectations impact the cost of the audit depending on the current trends in the economy. the study proposes that the audit regulatory authorities should take actions to regulate pies’ expectations from the external auditors and regulate the reporting requirements of auditors and audit firms, to achieve a proper balance between the scope of the audit procedures and the cost of the audit. in this view, the study recommends audit regulatory authorities adopt guidelines for determining the cost of the audit based on the assessed audit risk and scope of audit procedures. keywords: audit risk, cost of the audit, guiding reasons of pies, prevailing macroeconomic conditions, scope of audit procedures, jel: e66, m42, m48, m49 * address correspondence: e-mail: darko_dc@yahoo.com1 ackerb@unisa.ac.za2 https://orcid.org/0000-0001-7942-4575 https://orcid.org/0000-0002-5981-7889 darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 13 introduction worldwide corporate scandals, coupled with audit failures, have resulted in calls for strict regulation of the global audit profession, to regain public trust in the auditors’ work and increase interest in the audited financial statements of pies. in response, the united states of america introduced the sarbanes-oxley act (verleun et al. 2011), and the european union (eu) passed directive 2006/43/ec (european parliament 2006), subsequently revised by directive 2014/56/eu (european parliament 2014a) and regulation 537 (european parliament 2014b), to regulate specific statutory and reporting requirements for the auditing of pies. these imposed additional reporting requirements on auditors for audits of pies, aimed at improving audit quality and strengthening the independence of auditors. while these changes to the professional and legal requirements for the audit profession were ostensibly aimed at reducing the impact of the audit expectation gap (leidner and lenz 2017; gheorghe 2011; zemen and lentner 2018), on a global level, the revised audit regulations have negatively impacted the cost of the audit (institute of certified auditors of the republic of north macedonia 2015). therefore, although increased oversight over audit firms may improve audit quality, auditors are facing constant pressure from their clients to reduce audit costs. this study aims to understand the relationship between the cost of the audit and the guiding reasons why a particular pie in europe elects a particular auditor i.e. audit firm. we analyse these reasons through the prism of pies’ expectations from the external audit function, to investigate their impact on the cost of the audit. we investigate the global economic conditions, to understand the relationship between the cost of the audit and prevailing macroeconomic trends. we link this relationship with the audit risk, and assert that the scope of the audit procedures is directly related to the level of the audit risk. to that end, we attempt to explain the impact of increased audit reporting requirements on audit costs and investigate whether the audit risk is related to the determination of the cost of the audit. we explore how the audit profession responds to the dynamic global stimuli, in order to protect the confidence of investors and other stakeholders. we provide important insights to resolve the dilemma of whether the audit regulatory authorities, on a global or national level, should intervene to influence the audit market in order to stabilise audit fees. in other words, we attempt to respond to the question about whether the audit regulatory authorities worldwide, should intervene to rein in the trend of declining audit fees, to improve the stability of the national and global audit market. we deploy a mixed methods research approach, incorporating observations from surveys with respondents at audit firms and pies, and semi-structured interviews with participants at purposively selected pies in europe, to achieve the study objectives. their structure is presented in the text below. as such, this paper attempts to link the level of audit risk to the prevailing economic trends, by examining the scope of the audit procedures under the different economic conditions. in addition, we use global macroeconomic trends as a prism to further understand the guiding reasons of the pies under the different macroeconomic conditions. the relatively unique contribution of this study is that it uses pies’ expectations form the external audit function, as proxies, to assess the resources available to auditors in the preparation of a cost-effective, yet sufficiently comprehensive offer to provide audit services. the study finds that the cost of the audit is impacted by the current macroeconomic trends on the global and national level. in other words, the study finds that during vulnerable macroeconomic conditions the cost of the audit increases and vice versa. this is because of the bigger scope of the audit procedures which auditors conduct under vulnerable macroeconomic conditions, which requires more time and resources by the auditors to be arranged to conduct a particular audit. this is reflected in the different guiding reasons of the pies in europe under the different macroeconomic conditions which ultimately results in the pies in europe to have different expectations from the external audit function under the different macroeconomic conditions. in turbulent economic periods, pies in europe expect auditors to conduct bigger scope of audit procedures, to regain public trust in audited financial statements. the bigger scope of audit procedures reduces the detection risk and accordingly the audit risk. on the other side, vulnerable economic conditions impact the inherent risk, forcing the auditors to design and conduct bigger scope of audit procedures, to reduce the audit risk on an acceptably low level (to reduce the detection risk). this again impacts the cost of the audit, by making the guiding reasons of the pies for electing a particular auditor a determining factor on the cost of the audit, depending on the current macroeconomic trends. the study is structured in four headings which systematically present the flow of the study, to draw the research conclusions, based on the study results. the introduction presents the key information regarding this study article – background of the study phenomenon, contribution of the study, applied research methodology, and key study conclusions. the literature review heading presents the findings from other researchers which are related to the study phenomena. used secondary sources are presented in the references at the end of the study article. the methodological heading presents the applied research methodology, while the empirical results are presented in the third heading. ultimately study conclusions are presented in the last (fourth) heading. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 14 literature review an independent audit adds credibility to the presented financial data and the information contained in the financial statements (fiolleau et al. 2013; marx 2009; tepalagul and lin 2015). during each audit engagement, auditors must find an appropriate balance between the quality of information and the costs incurred (kritzinger 2016). auditors expect the users of audited financial statements to understand that the audit opinion expressed in relations to the underlying financial statements is based on the work done over an extended period, at a reasonable cost. the independent auditor’s opinion therefore cannot refer to the entire population of information, nor confirm that each transaction has been investigated in sufficient detail to ensure that the presented information is not incorrect or fraudulent, unless the evidence suggested otherwise (velte and freidank 2015). cancino et al. (2019) found that the composition of the audit team affects audit fees, improving the competitiveness of the audit firm on the professional market. in other words, the more competent the audit team, the more competitive the cost of audit. o’leary et al. (2006) assert that the time required to conduct the audit, significantly impacts the audit fees. however, when preparing the audit offer, the audit partner should assess the availability and cost of the resources required for the particular audit engagement, to make a reasonable estimate, failing which, the audit firm may conduct the audit at a loss (cancino et al. 2019). although audit firms may offer to conduct an audit engagement for lower audit fees, this may create ethical issues for auditors (international federation of accountant 2018). audit firms should not accept audit engagements where the client’s management requires the scope of audit procedures to be reduced to reduce the cost of the audit. omitting audit procedures at the client’s behest, reduces the scope and relevance of the audit evidence, which in turn, may impair audit quality. the literature proffers different reasons for offers of lower audit fees. cancino et al. (2019) explain that as a commercially oriented profession, auditing may be also affected by the prevailing economic conditions, making it reasonable for audit firms to offer audit services for reduced audit fees. al-nawaiseh (2015) however, suggests that auditors could rely on the work of the client’s internal auditors to assist with conducting the audit engagement, which may reduce audit fees. in such cases, auditors must comply with the prescripts of international standard on auditing 610 (international federation of accountants 2013). additionally, the dynamic progress of digital technology may facilitate a substantial reduction in audit firm costs, justifying a decrease in audit fees. the cost of the audit should reflect the level of the client’s business risk (elliott et al. 2008). therefore, the greater business risk associated with the client, the higher the cost of the audit engagement, since audit engagements on risker clients require auditors to conduct more extensive audit procedures, reducing the audit risk to an acceptably low level. picconi and reynolds (2013) found that audit fee elasticity in relation to the assets in financial statements, is not constant. de lima castro et al. (2015) postulate that audit fees are positively related to the client’s size, complexity, level of corporate governance, and the size of the audit firm conducting the audit engagement. lemonakis et al. (2018) found that the client’s earnings negatively affect the cost of the audit during periods of economic instability, i.e. the larger the client’s earnings, the lower the cost of the audit. furthermore, the book value on the financial statements positively affects the cost of the audit under stable economic conditions (lemonakis et al. 2018). notwithstanding the lack of a professional framework to apply when offering an audit service, the audit offer must be comparable with those submitted by other audit firms. in the absence of a standardised format, cancino et al. (2019) explain that an offer for an audit engagement should include: the audit fees and basis for their determination; an assessment of the audit personnel required; a schedule for conducting the audit procedures; other key assessments, performed by the audit partners, relating to the specific audit engagement; the audit methodology that the audit firm intends to apply; a short reference list of the audit firm; and a short summary of the proposed audit team for the specific audit engagement. the commercial practice of professional auditing represents a labour-intensive activity (simunic 1980). when determining the audit fee for a particular audit engagement, auditors must consider the real cost of conducting the audit, the expected loss arising from the quality of the client’s financial reporting, and the auditor’s potential financial liability (simunic 1980). beatty (1993) identified auditor’s liability loss as comprising three main components, namely, delisting, bankruptcy and lawsuits. the pricing of audit services is therefore negatively affected by pending audit litigation, with the potential to decrease audit fees being less darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 15 likely when auditors are being sued in relation to an audit engagement (eu-jin and houghton 2000). bell et al. (2001) found that the level of audit risk is integrally linked to the audit fee auditors determine when offering their audit services. the level of audit fees, therefore, indicates the level of risk that auditors are prepared to accept on a particular audit engagement. in addition to audit services, audit firms usually offer and provide many other professional services to their clients, such as consultancy services, accounting, taxation, etc. since the cost of the audit engagement factors in risk (beatty 1993; bell et al. 2001; simunic 1980), during periods of economic instability, auditors should design and conduct more extensive audit procedures, reducing the audit risk to an acceptably low level. however, the client’s business activities tend to be greater during stable times, offsetting a possible reduction in audit fees. for example, clients may require consultancy services to expand their business. in this view, the cost of the audit tends to increase to compensate for the additional audit risk in turbulent times (dachevski and ackers 2022), with auditors incorporating an appropriate risk factor into their estimation of audit fees. conversely, the lower audit risk associated with stable economic conditions decreases the cost of the audit due (dachevski and ackers 2022). thus, in stable times, auditors require lower ‘risk compensation’, which reduces the cost of the audit. since the level of audit risk is directly related to the audit procedures performed, the higher the audit risk, the more audit procedures auditors need to design and conduct, to reduce audit risk to an acceptably low level. auditors therefore need to do more work when conducting audit engagements in turbulent times, in turn, increasing the cost of the audit. accordingly, the relationship between the audit profession and the broader macroeconomic trends has a direct impact on the cost of the audit. however, a lower cost audit engagement does not necessarily imply a risky audit engagement. the cost of the audit engagement reflects how the audit firm has used its resources to conduct the audit, i.e. how the audit was planned, under what conditions and circumstances it was conducted, etc. this means that audit fees should be determined based on the extent of work conducted by auditors, the hours spent, and the resources deployed. any misalignment between the cost of an audit engagement, the audit quality factors and their determinants, may indicate a risky audit engagement, with resultant dubious audit quality. proper segregation of duties and responsibilities between auditors and their clients in relation to the preparation of the financial statements, contribute to achieving high audit quality (antipova 2018). however, as in established commercial practices, auditors should agree the terms under which they will provide the audit service, including the cost, with their client. incorrectly understanding the auditor’s role and responsibilities, is a key contributor to the audit expectation gap (gros and worret 2014; velte and freidank 2015). the international standards on auditing (isas) do not precisely define the phenomenon called the audit expectation gap. porter (1993) suggests that the audit expectation gap represents the difference between what society expects from auditors and their actual performance. porter (1993) explains that the audit expectation gap consists of two components, namely, the reasonableness gap, which describes society’s expectation regarding audit performance; and the performance gap, which describes the audit performance. the audit expectation gap results from society’s different perception of the auditors’ role, when compared with their actual responsibilities (maroun and atkins 2014). failure to correctly understand the aim and purpose of the audit may result in different expectations of the audit work performed (kusaila 2017), with different stakeholders having diverse views on the purpose of the financial statement audit, without appropriately differentiating between the responsibilities of auditors and those of their clients. similarly, maroun and atkins (2014) explain that the public confusion about the aim of the audit, results from the public not properly distinguishing between the responsibilities of auditors and those charged with governance (usually the board of directors), who are actually responsible for preparing the financial statements submitted for auditing. recognising the different roles and responsibilities of auditors and their clients, is crucial to understanding the audit process (velte and freidank 2015). the purpose of the audit during the financial reporting process of any client, is not to create financial data or information about the business operations (velte and freidank 2015), but rather to attest to the veracity of the financial disclosures. auditors are independent of their clients (saha and roy 2016). the auditor’s role is to provide reasonable assurance, expressed as an opinion in an independent auditor’s report, about the fairness and objectivity of their client’s financial statements, in all material respects, under the accepted financial reporting framework (fiolleau et al. 2013; marx 2009; tepalagul and lin 2015; international federation of accountants 2009). these differences in perceptions about the role of the auditors highlight the difference in expectations of the audit services provided (kusaila 2017). on the one hand, the public may expect auditors to guarantee the correctness of all financial transactions reflected in the financial statements. on the other hand, given the inherent limitations of an audit, auditors can only provide reasonable, but not absolute assurance, about the fairness and objectivity of the financial statements, and about whether they have been prepared in all material respects according to the appropriate financial reporting standards (velte and freidank 2015). darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 16 the public may be under the misconception that auditors are responsible for the preparation of the audited financial statements and expect to receive assurance that all the client’s financial transactions are correct in every respect (kusaila 2017). however, recent high-profile financial reporting scandals at pies have had a devastating impact on the credibility of the global audit profession, prompting fundamental changes to legislation around the world aimed at improving the way audit firm conduct is regulated (centre for financial reporting reform 2016; gheorghe 2011; leidner and lenz 2017; zemen and lentner 2018). kusaila (2017) postulates that the audit expectation gap arises from the public not being a contractual party to any audit engagements. the contractual parties are the auditors and audit firms as the providers of the audit services and the clients requiring audit services to enhance the credibility of their financial statements (fiolleau et al. 2013; marx 2009; tepalagul and lin 2015), with the public merely being users of the audited information contained in the financial statements. despite not being a contractual party, the general public use the final product of the audit, relying on the audit opinion expressed in the independent auditor’s report regarding the fairness and objectivity of the underlying financial statements, to inform their investment, credit and similar decisions. however, velte and freidank (2015) attribute the public misconception of the purpose of an audit on the public not having insight into the contract for the provision of audit services, nor of the work actually undertaken by the auditors. mansur and tangl (2018), accordingly postulate that the audit expectation gap could be narrowed when the users of audited financial statements are educated about the auditor’s role and responsibilities, and when competent national authorities prescribe appropriate reporting and professional requirements for auditors. while the cost of the audit cannot be based on the audit expectation gap, the audit expectation gap nevertheless impacts the cost of the audit. the greater the audit expectations, the higher the cost of the audit. this is because of the greater impressions which the audit expectation gap creates towards the interested parties to resolve particular issues, such as the expectations that the external audit may provide the stakeholders with guarantees for a future prosperity, inspecting and reporting of fraudulent financial transactions, internal control deficiencies, management quality concerns, going concern issues, legal compliances, etc. our study therefore argues that expectations from the audit are greater during turbulent economic periods and reduced during economic stability (dachevski and ackers 2022). it is accordingly expected that auditors will conduct audits at higher cost during economic instability, to compensate for the higher audit risk. conversely, during economic stability, the auditors face lower audit risk, resulting in lower expectations of the audit, reducing the cost of the audit (dachevski and ackers 2022). referring to the objective of this study paper, the guiding reasons of the pies in europe for electing particular auditors/audit firms are considered as one component of the audit expectation gap. this is because, the audit expectation gap represents the difference in expectations from the external audit function from many stakeholders, such as the individual users of audited financial statements, public officials, journalists, investors, creditors, etc. in this view, pies represent only one group of stakeholders which has different understanding and expectations from the external audit function. to that end, this study paper focuses on the pies’ expectations when selecting their auditors/audit firms, to explore the guiding reasons that justify their selecting decisions. in this view, their expectations are analysed under vulnerable and stable macroeconomic conditions, to identify which guiding reasons prevail under the current economic trends. therefore, the cost of the audit is linked to the scope of the audit procedures which auditors conduct under the different macroeconomic conditions by considering the assessed level of the audit risk. ultimately, the relationship between the cost of the audit and the guiding reasons of the pies is investigated under the different macroeconomic conditions, to draw conclusions whether, to what extent, and under which conditions these guiding reasons represent an impacting factor on the cost of the audit, i.e. audit fees. methodology this study seeks to understand the impact of the pies’ guiding reasons for electing a particular auditor/audit firm on the cost of the audit and accordingly, the audit fees. the aim is to investigate the relationship between the audit risk and the scope of the audit procedures required to meet the different expectations of the pies from the external audit function, under the prevailing economic conditions. ultimately, we attempt to provide an answer to the dilemma about whether the audit regulatory authorities, on a national and international level, should take further actions to protect the audit profession, by controlling the cost of the audit and accordingly the resultant audit fees. we submit that the scope of audit procedures is directly related to the resources auditors deploy during the audit. the greater the scope of the audit procedures, the more resources auditors must expend during the audit (i.e. time, professional staff, etc.), consequently making the audit more expensive. the thesis advanced in this paper is that audit firms should ensure that the cost of the audit is adequate to meet the reasonable expectations of the pies from an external audit, with their guiding reasons influenced by the macroeconomic conditions. since the cost of the audit depends on the audit risk, the preparation of darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 17 the offer to provide audit services, therefore requires auditors to consider the audit risk when determining the audit fee. to appropriately respond to the associated audit risk, auditors must design and conduct specific audit procedures to decrease the detection risk to an acceptably low level. the scope of these audit procedures should consider the time and resources required – the more time and greater competencies required to conduct these procedures, the higher the cost of the audit. therefore, to ensure high audit quality, when determining the cost of the audit, auditors must consider all the resources required to effectively and efficiently conduct the audit. the research variables applicable to this study include the guiding reasons of the pies for electing a particular auditor/audit firm, audit risk and cost of the audit, which are explored to investigate the mutual relationships amongst these variables. this mixed methods study uses primary and secondary sources of data and information. the secondary sources include extant literature, whereas the primary sources include a combination of quantitative data from surveys with respondents at audit firms and pies, in europe; and qualitative data from semi-structured interviews with participants at pies, in europe. we use extant literature, including scholarly resources and professional audit literature, to explain the impacting factors on the cost of the audit, nature of the audit expectation gap and its characteristics, as well as to describe the proposed audit risk model. the observations from the literature are linked to the scope of the audit procedures to explore the relationship between the level of audit risk, and the scope of audit procedures required and accordingly, its impact on the cost of the audit. we link pies’ guiding reasons for electing a particular auditor/audit firm to the audit risk, to explain the impact of the prevailing economic conditions on the audit risk. we conceptually argue that the audit risk is higher when the pies have greater expectations from the external audit and postulate that these guiding reasons of the pies represent a reflection of their different expectations form the external audit function, under the different macroeconomic conditions. ultimately, we consider these expectations of the pies as only one segment of the audit expectation gap, because this phenomenon arises from the different understanding and expectations which many stakeholders have from the external audit (not only the pies, but also the investors, creditors, individual users, regulatory bodies/agencies, and other users of audited financial statements). the quantitative component of this study involved surveys with respondents at audit firms and pies, in europe. to understand the cost of the audit, in relation to the different economic conditions, to establish the appropriate scope of audit procedures and the required resources, we investigate the cost of the audit under the prevailing audit risk associated with different macroeconomic conditions. quantitative sample representativeness was achieved by applying the statistical sampling formula provided by taherdoost (2016), who asserted that to generalise the form of a simple random sample and avoid sampling errors or biases, the sample size needs to be adequate. taherdoost (2016) recommends the following formula for calculating the sample size: n = n∙p∙(100−p)∙ z2 e2 p∙(100−p)∙ z2 e2+n−1 (1) where: ‘n’ is the required sample size; ‘n’ is the total population size; ‘p’ is the proportion of the population; ‘e’ is the margin of error; and ‘z’ is the confidence interval. although larger samples tend to reduce the likelihood of biased findings, diminishing returns may apply when samples get too large (gill et al. 2010). simply stated, larger sample sizes may reduce sampling error, but at a decreasing rate (taherdoost 2016). for this purpose, 264 audit firms in europe were randomly selected (from the total population of 10.000 audit firms in europe), 80 of which agreed to respond to the survey (30.30% response rate). survey respondents at selected audit firms included audit partners and audit managers. inclusion criteria were that audit firms/respondents had to be officially registered as providers of audit services based on the eu acquis communautaire for statutory audit, in publicly available registers of auditors and audit firms of national audit institutes and professional audit associations in the european countries. regarding the pies in europe, 267 of them were randomly selected (from the total population of 19.074 pies in europe), 75 of which agreed to respond to the survey (28.01% response rate). survey respondents at selected pies included chief finance officers, chief executive officers, and other senior officials. inclusion criteria were that pies/respondents had to be registered in the official registers of the particular european country as ‘entities from public interest’, i.e. banks, insurance/reinsurance companies, and/or other listed entities. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 18 the surveys were conducted between june 2021 and july 2022. appropriate survey questions were developed for the two respondent groups, which are respectively disclosed in appendix 1 and appendix 2 below. the surveys were web-based and all randomly selected respondents received an email invitation to participate with a link to the survey questions. the respondents needed about five minutes to submit their responses. obtained results from the surveys were analysed using descriptive statistics. we applied the pearson’s ratio for simple linear correlation, to identify the relationships between the research variables, their impacting factors and affecting determinants, as follows (taraldsen 2022): r = nσxy−σxσy √nσx2−(σx)2 √nσy2−(σy)2 (2) where: ‘r’ is the pearson’s ratio; ‘n’ is the number of series; and ‘x’ and ‘y’ are the research variables. the model presented above, illustrates the simple linear correlation between the research variables (taraldsen 2022), where the minimum value may be negative, and the maximum value may be positive (taraldsen 2022). however, to test the significance of the obtained ratio, we applied the student’s tdistribution with two degrees of freedom, as presented below (taraldsen 2022): t = r sr (3) sr = √ 1−r2 n−2 (4) where ‘r’ is the pearson’s ratio; ‘sr’ is the standard deviation ratio; ‘n’ is the number of series; and ‘t’ is the significance test. whereas a pearson’s ratio of zero means that no simple linear correlation exists, a positive value reflects a simple linear correlation, while a negative value reveals a simple linear regression (taraldsen 2022). however, since the value of the pearson’s ratio does not represent the strength of the simple linear correlation (taraldsen 2022), we applied the significance test, and considered the student’s t-distribution with two degrees of freedom, based on the obtained significance test value. this resulted in two hypotheses being developed for the quantitative analysis (taraldsen 2022): h0, which means that no simple linear correlation exists; and h1, which means that a simple linear correlation exists. if t(sr/2; n-2) > t, then h0 applies, and if t(sr/2; n-2) < t, then h1 applies (taraldsen 2022). gradual scaling of the x variable is calculated as presented in table 1 below with five series. table 1. gradual scaling x variable variable grade strongly agree 100% agree 75% uncertain 50% disagree 25% strongly disagree 0% source: authors’ own theorising. the critical values of the student’s t-distribution are presented in appendix 3. the semi-structured interviews with participants at pies in europe provide additional insights into the phenomena being studied, based on the obtained survey results. although fifteen pies in europe were purposively selected for the interviews (five banks, five insurance or reinsurance companies and five publicly listed entities), eleven agreed to participate (response rate of 73.00%). in addition, the purposively selected pies in europe were multinational firms with subsidiaries and branches in more than one european country. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 19 the interview participants included chief executive officers, chief finance officers as well as other appropriate senior representatives. all invited participants had to be registered with the official authorities of the european country in their registers of pies (banks, insurance/reinsurance companies, other listed entities). the semi-structured interview results were thematically analysed according to two themes – the guiding reasons of the pies for selecting a particular auditor/audit firm, and the cost of the audit. all semi-structured interviews were transcribed. they were conducted in september/october 2022. participants needed between ten to fifteen minutes to participate in the semi-structured interview. developed guiding questions are disclosed in appendix 4 below. the semi-structured interviews were web-based by using the zoom digital platform. to validate the research results, we triangulated the data and information gathered from the various sources. research variables were then linked to the prevailing global economic trends, to identify any relationships. in this regard, we postulate that after 2012, but before the global covid-19 pandemic, the global economy was relatively stable (international monetary fund 2023). to that end, we consider the audit regulatory authorities’ mandate to increase the reporting obligations of auditors, aimed at meeting the reasonable expectations of various legitimate stakeholders, and to improve how they understand the objectives of an external audit. the study was conducted in three phases. the first phase included a review of secondary sources including relevant regulatory and professional literature. the second phase included the surveys to inform the observations from the first phase, with the semi-structured interviews in the third phase providing important insights into the study observations. ultimately, we concluded by triangulating the data and information from all sources. limitation of the study results arises by the geographical location of the samples – europe/eu. in this view, obtained results from the quantitative and qualitative component of the study may be applicable only in europe and in the common market of the eu. to delineate this limitation, the study extrapolated obtained results by using the data form the international monetary fund, to link the obtained results to the official data related to the global macroeconomic conditions. in this view, the study draws general conclusions regarding the study phenomena. analysis and discusion of results the audit expectation gap provides an indication of what the public expect the independent auditor’s report to address regarding the financial audit. the greater these expectations, in relation to actual audit performance, the larger the audit expectation gap. the audit expectation gap therefore represents the extent to which the public may misunderstand the purpose of an external audit. since the public tend to conflate the audited financial statements with the independent auditor’s report (maroun and atkins 2014), the audit expectation gap reflects the disconnect between what the independent auditor’s report provides and what the users of audited financial statements expect. while higher audit quality may decrease the audit expectation gap (rice 2015), audit quality deficiencies tend to refer to audit firm operations, i.e. how the audit has been conducted, and not the underlying financial statements, which remains responsibility of the audit client (gibson 2018). since the public may not understand the responsibilities of auditors (maroun and atkins 2014), when audit quality deficiencies come to light, the public may incorrectly perceive the auditors, and not their clients, as being responsible for identified financial reporting deficiencies. since the users of audited financial statements constantly require additional data and information (cohen and wright 2010), the audit expectation gap cannot be eliminated. as the requirement for better information about the auditee’s business activities constantly increase, the public may expect the auditors to respond to those needs (leidner and lenz 2017; zemen and lentner 2018). the audit expectation gap is therefore influenced by the public’s need for relevant and credible financial and non-financial data and information about the auditee’s operations. the audit expectation gap is accordingly not constant, with its level increasing or decreasing according to the public need for data and information about the auditee’s operational performance. figure 1 below illustrates the nature of the audit expectation gap and its characteristics, based on the reviewed literature. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 20 in d e p e n d e n t a u d it o r’ s re p o rt u se rs o f a u d it e d f in a n ci a l st a te m e n ts the audit expectation gap: identifies what the public expects auditors to report on in their independent auditor’s report; represents the extent to which the public misunderstands the external audit function; reflects the relationship between the independent auditor’s report and the public as users of audited financial statements; represents the level of perceived credibility to the financial statements by the public; always exists, and can never be eliminated; depends on the public’s need to obtain credible and reliable financial and non-financial data and information about the auditee’s operations; is not static, with its level increasing or decreasing according to the public’s need for relevant data and information about the auditee’s operational activities and the prevailing socioeconomic circumstances. source: authors’ own theorising. figure 1. the nature of the audit expectation gap and its characteristics the first survey question to the pies in europe probes their expectations from the external audit. table 2 below summarizes the obtained results. table 2. pies’ expectations from the external audit pies in europe expect the external audit to: frequency of received responses total received responses percentage of received responses add additional value, and/or confidence, and/or credibility to the presented financial figures in the financial statements 75 75 100% improve the internal control processes 75 75 100% improve the quality of the financial reporting 62 75 83% provide competent financial reporting 62 75 83% source: authors’ own theorising. table 2 above reveals that pies in europe have many expectations from the external audit. the different understanding of the actual aim and purpose of the external audit implies the users of the audit services have different expectations from the auditors’ work (kusaila 2017). therefore, it appears that the different expectations from the external audit arise because of the audit expectation gap which usually exists when audit services are provided by the auditors to the auditees. however, the actual aim of the external audit is to ensure the veracity of the presented financial statements and in table 2 above, 83% of the respondents (62 of the total of 75 received responses) revealed that they expect the external audit to provide the users with competent financial statements. the results from the first semi-structured interview question with the pies in europe revealed that the expectations of the pies from the external audit might be classified into five categories. these categories are presented in table 3 below. table 3. expectations from auditing financial statements of pies traditional expectation this expectation arises from the traditional function of the independent audit. auditors are expected to report on the fairness of presented financial statements, in all material respects, to the management and those charged with governance, and shareholders. this expectation is considered a public expectation from the external audit function because all findings must be publicly reported. regulatory expectation this expectation arises from existing regulations under which pies operate. auditors are expected to report on compliance with those regulations, tax obligations, etc. to the management and those charged with governance. auditors’ findings refer to confidential issues and are not publicly announced. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 21 table 3. expectations from auditing financial statements of pies (continued) operational expectation this expectation arises from the operational activity of pies. auditors are expected to report on the internal controls, internal processes, working policies, business activities, risk management policies, etc. to the management and those charged with governance, and shareholders. depending on the current circumstances, auditors need to apply their professional judgment to decide whether findings need to be publicly announced or not. strategic expectation this expectation arises from the strategic goals of pies to meet a particular business aim. auditors are expected to report on the achieved business success, conquered markets, market share, etc. to the management and those charged with governance, and shareholders. depending on the strategic commitment of the particular pie, auditors need to apply their professional judgment to decide whether findings need to be publicly announced or not. specific expectation this expectation arises from the specifics of the sectors in which pies operate. this expectation may vary from a non-financial reporting expectation of auditors, such as sustainability, and compliance with ecological standards, to actuarial reports, and transfer costs to the management and those charged with governance, and shareholders. in this regard, auditors are expected to protect the interest of the insured parties, deponents, investors, etc. depending on the current circumstances, auditors need to apply their professional judgment to decide whether findings need to be publicly announced or not. source: authors’ own theorising. table 3 above reveals that all participants have additional expectations from the external audit, besides the expectation to provide them with reasonable assurance regarding the fair presentation of the financial statements. in addition, participants expect the external auditors to provide improvement suggestions in various areas which are outlined above in table 3. in this regard, a participant from the banking sector explains, “the biggest expectation of auditing is, first of all, to get assurance of the correctness and comprehensiveness of the financial statements, and then to receive information about some areas where there is space for improvement, which is very good with everything that comes with it”. the second survey question to the pies in europe investigates whether the external audit improves their financial reporting quality. all 75 respondents strongly agreed that the external audit improves their financial reporting quality. bigger insights to this result are obtained from the results from the second semistructured interview question with the pies in europe where all participants explained that auditors’ improvement suggestions are always taken into consideration. as participants explained, this is because auditors have deeper insights into the current trends of the operating sectors, and access to various databases while making the cross-analysis of the received information, to reach their audit conclusions. that is the reason participants rely on auditors’ improvement suggestions based on the identified weaknesses of the internal controls, working rules, procedures, policies, etc. furthermore, all participants explained that auditors improve the operational efficiency and effectiveness of all processes, to achieve stable economic flows and better financial results; maintain and improve the current market share and position; improve pies’ business performance; etc. in this regard, a participant from the energy sector (a listed entity) outlines “the audit improves the quality of our financial reporting because their notes intend to improve our performance”. the third survey question to the pies in europe investigates their election preferences concerning the types of audit firms. obtained responses are summarized in table 4 below. table 4. pies’ election preferences concerning the types of audit firms pies’ election preferences concerning the types of audit firms frequency of received responses percentage of received responses international networks 51 68% local audit firms 12 16% no preferences 12 16% total 75 100% source: authors’ own theorising. table 4 above reveals that international networks are more attractive to pies than local audit firms. bigger insights into this matter provide the results from the second semi-structured interview question with darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 22 the pies in europe. to this semi-structured interview question, all participants explained that they prefer international networks, mainly the big four international networks because regulatory requirements impose a legal obligation to select external auditors from an international network. however, the participants gave additional reasons for this preference, such as to obtain world-class audit quality (usually big four international networks are perceived as world-class providers of audit quality); faster obtain the audit opinion for the consolidated financial statements on the group level; to obtain more transparent financial reporting, etc. for example, a participant from the insurance and reinsurance sector gave the following explanation “local audit firms do not have sufficient resources to audit international groups, especially in the field of actuary. on the other hand, international networks have regional actuarial experts who support auditors while testing the technical reserves, solvency ratios, capital adequacy, etc. in addition, international networks are more familiar with our culture because they conduct audits on the entire group, i.e. on all subsidiaries and branches which are under the control of the parent”. audit quality is associated with the proper application of the isas, international standard for quality control 1, and international federation of accountants’ code of ethics. in this view, international networks deliver higher-quality audits than local audit firms (salman 2023). in addition, swan and alsaqqa (2013) asserted that the regulations in some jurisdictions prohibit local audit firms from auditing the financial statements of pies, to preserve the financial reporting credibility. however, this provides the big four international networks with a monopoly on the global audit market (mickhail 2012). in the above-noted view, table 5 below illustrates the results from the fourth survey question to the pies in europe concerning their criteria for the election of particular auditors and audit firms. table 5. pies’ criteria concerning the election of particular auditors and audit firms pies’ election criteria concerning particular auditors and audit firms frequency of received responses total received responses percentage of received responses international networks 62 75 83% good public reputation 62 75 83% short period to conduct the audit 62 75 83% experience in external audit 50 75 67% official public registration 50 75 67% the auditor’s independence 38 75 51% no conflicts of interest 38 75 51% low cost of the audit 13 75 17% provided references by the auditees 13 75 17% small scope of audit procedures 13 75 17% source: authors’ own theorising. the above table reveals that international networks and good public reputation of the auditors and audit firms represent just two of the many criteria of the pies that may lead to their decision to elect particular auditors and audit firms (83% of the respondents in table 5 above gave these responses, i.e. 62 out of the total of 75 received responses). the remaining criteria are listed in this table based on the frequency of responses provided by the respondents. to identify the leading reason why pies, elect particular auditors and audit firms, the research considers the responses from the fourth semi-structured interview question with the pies in europe. these responses revealed that the criteria for electing auditors and audit firms reflect the expectations of pies concerning the external audit. the criteria for electing auditors and audit firms may be classified into five main categories which are presented in table 6 below. table 6. criteria for electing external auditors and audit firms by pies traditional criteria these criteria arise from the traditional external audit function. pies elect their external auditors and audit firms based on their auditee references. these criteria intend to improve the auditor’s independence, and accordingly audit quality. regulatory criteria these criteria are prescribed in the audit regulations or set up by the regulatory authorities of the sectors in which pies operate, such as central banks, insurance supervision agencies, security and exchange commissions, etc. pies elect their external auditors and audit firms based on regulatory requirements. these criteria aim to create a bigger “distance” between the management and those charged with governance, and the auditors. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 23 table 6. criteria for electing external auditors and audit firms by pies (continued) operational criteria these criteria depend on the business activity of pies. external auditors and audit firms are elected depending on whether they have specific business arrangements with the pies, such as banking deposits, investments in shares, bonds, bought insurance policies, etc. these criteria represent a potential risk of conflicts of interest between auditors and auditees and may deteriorate the auditor’s independence. strategic criteria these criteria depend on the auditee’s commitment to a comprehensive audit. external auditors and audit firms are elected based on the auditee’s group regulations, for example, the same international network audits all of the branches and subsidiaries of the parent on the global level. usually, the election is made by the higher governance of the parent and the lower governance in the branch or subsidiary follows its election decision of external auditors. these criteria aim to provide the higher governance of the parent with credible financial reporting of all branches and subsidiaries and intend to improve the auditor’s independence in the short term. in the longer term, these criteria deteriorate the auditor’s independence due to the bigger audit tenure. specific criteria these criteria depend on the specifics of the sector in which the pies operate. per these criteria, pies select their external auditors and audit firms based on their competence to audit specific items in their financial statements, such as capital adequacy, capital solvency, technical reserves, etc. audit quality, per these criteria, depends on the competence of the experts who are engaged by the auditors to meet the specific requirements that are set by the auditees. source: authors’ own theorising. although participants gave different responses regarding their eligibility criteria as presented in table 6 above, all of them explained that they desire an audit at a lower cost. in this regard, a participant from the energy sector (a listed entity) explained “the first criterion for electing external auditors and audit firms is their experience i.e. their history in providing audit services. however, the cost of the audit prevails when making the election decision”. based on the above it appears that the leading criterion of pies to elect particular auditors and audit firms refers to the cost of the audit. according to elliot et al. (2008) the business risk of the auditee directly impacts the cost of the audit, i.e. the higher the business risk of the auditee, the higher the cost of the audit. in addition, during economic stability auditees face lower business risk than during economic instability (elliot et al. 2008). therefore, it is expected the cost of the audit to decrease during economic stability due to the lower business risk of the auditees. the results from the first survey question to the auditors and audit firms in europe appear to confirm this. they are presented in table 7 below. table 7. the relation between the cost of the audit and the prevailing macroeconomic conditions since 2012 the cost of the audit has significantly decreased since the recovery from the global financial crisis in 2012 frequency of received responses percentage of the received responses strongly agree 19 24% agree 45 56% uncertain 12 15% disagree 4 5% total 80 100% pearson’s ratio 0,59 standard deviation ratio 0,47 significance test 1,27 critical value of t-distribution (0,25;3) 0,77 source: authors’ own theorising. in the above table the cost of the audit represents the tested variable against the recovery from the global financial crisis in 2012. the significance test of the tested variable, in this table, appears to be higher than the critical value of the t-distribution. this implies that the cost of the audit has significantly decreased since the recovery from the global financial crisis in 2012. however, the development of digital information technology may significantly reduce the cost of the audit (roberts and kotb 2011) and therefore, it appears that auditors and audit firms feel constant pressure from the auditees to provide high-quality audits at reduced costs. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 24 bell et al. (2001) found that the level of audit risk is directly related to the cost of the audit because the higher the audit risk, the bigger scope of audit procedures are necessary, to reduce the detection risk on an acceptably low level. this implies that auditors and audit firms engage more resources resulting in higher costs for the audit. in this view, the results from the second survey question to the auditors and audit firms in europe reveal that the providers of audit services in europe (auditors and audit firms) intend to determine the cost of the audit based on the assessed level of the audit risk and scope of audit procedures. the results are illustrated in figure 2 below. source: author’s own theorising. figure 2. determining the cost of the audit concerning the result that is illustrated in figure 2 above, 95% of the respondents (76 out of the total of 80 received responses) intend to determine the cost of the audit based on the assessed level of the audit risk and scope of audit procedures, to decrease the detection risk on an acceptably low level. the remaining 5% of the respondents (4 out of the total of 80 received responses) intend to determine the cost of the audit based on the scope of conducted audit procedures. responding to koh and woo’s (1998) assertion that national authorities should prescribe a legal requirement for the audit profession to react appropriately when the user expectations of the duties of auditors regarding the financial statements and the real duties of auditors are not aligned, we submit that it is necessary for national and international audit regulatory authorities to intervene to regulate the level of the audit expectation gap and protect the public trust in the auditors’ work. in this regard, we seek to understand the influence of the audit expectation gap on the cost of the audit, as well as its impact. to explore this influence, first of all we analyse the audit risk model. the audit risk model (referred to below as ‘ar’) represents the combination of the risk from material misstatements (referred to below as ‘rmm’) and detection risk (referred to below as ‘dr’), in terms of which the risk from material misstatements represents the combination of inherent risk (referred to below as ‘ir’) and control risk (referred to below as ‘cr’) (dowling et al. 2018; fontaine et al. 2016; hakwoon et al. 2015; knechel et al. 2013; wilson et al. 2018). ar = rmm x dr (5) where rmm = ir x cr (6) or ar = ir x cr x dr (7) the audit risk model described above illustrates the direct relationship between audit risk on the one hand, and inherent, control and detection risk on the other. the inherent risk in every audit engagement has a given level which auditors must assess, while the control risk is subject to the auditors’ assessment based on the control environment of the client (niemi et al. 2018). detection risk is the only risk that the auditors may influence (dowling et al. 2015; fontaine et al. 2016; hakwoon et al. 2015; knechel et al. 2013; niemi et al. 2018; wilson et al. 2018), because auditors must assess the risk of material misstatements (jones 2018), i.e. the inherent and control risk, when designing and conducting appropriate audit procedures to respond to the assessed risk of material misstatements. consequently, the assessed level of risk from material misstatements is directly related to the substantive audit procedures performed (antipova 2018). a high risk of material misstatements requires the auditors to conduct more substantive audit procedures, in terms of the scope, nature and extent, to reduce the audit risk to an acceptably low level (antipova 2018; niemi et al. 2018). the detection risk is inversely related to the substantive audit procedures, since fewer substantive audit procedures may increase the detection risk. the literature notes that auditors should use the going concern assumption to assess the auditee’s business risk (zeman and lentner 2018), identifying the security risks (the risk of cyber-attacks, web-sales risk, etc.) that may reasonably be expected (popescu and popescu 2018). this gives rise to a strong relationship between the risks associated with the business and the audit, which are influenced by inherent and control risks (van buuren et al. 2014). however, bell et al. (2008), and houston et al. (1999) assert that audit risk is unrelated to business risk, because: the business risk arises from the client’s business; the audit risk is focused on the client’s financial statements; and 95% of the auditors and audit firms in europe intend to determine the cost of the audit based on the assessed level of the audit risk and scope of audit procedures. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 25 the audit risk only exists in the auditor’s opinion, which is expressed in the independent auditor’s report. since audit risk relates to the audit of the financial statements of a specific auditee, the business risk of an auditee influences the risk of material misstatements (robson et al. 2007). this especially applies when the identified business risks are so significant that they could materially influence the going concern assumption applied during the audit of the client’s financial statement (zeman and lentner 2018). since the audit risk is higher during periods of economic instability and lower during economic stability, the public expectations of the audit tend to be greater during periods of economic instability. consequently, the resultant cost of the audit tends to be higher during economic instability and lower during economic stability, contributing to an increase in the cost of the audit during vulnerable economic periods. table 7 above confirms the assertion that lower audit costs are associated with periods of economic stability. illustrating the inverse simple linear correlation between the cost of the audit and economic conditions, table 7 shows the inverse relationship between the cost of the audit and the prevailing economic conditions. in addition, figure 2 above, proffers an explanation for the relationship between the cost of the audit and the prevailing economic conditions, with the audit risk being higher under vulnerable economic conditions. this increased audit risk requires auditors to conduct more expansive audit procedures to reduce the risk to an acceptably low level, increasing the cost of the audit during unstable economic periods (dachevski and ackers 2022). conversely, under stable economic conditions, the opposite applies (dachevski and ackers 2022), due to the lower audit risk. as illustrated in table 8 below, the results from the third survey question to the auditors and audit firms in europe confirmed the assertion that european audit firms provide both assurance and nonassurance services, which may increase the audit expectation gap under stable economic conditions (dachevski and ackers 2022). this is because of the perception that non-audit services of auditors provide the users with ‘additional’ value, which although not attested, may be considered as ‘trustworthy’ by various stakeholders (investors, creditors, etc.) for decision making. this creates additional confusion in the public regarding the actual aim and purpose of the external audit. table 8. audit and non-audit services of the audit firms in europe audit firms in europe provide audit and non-audit services. frequency of received responses percentage of the received responses yes 65 81% no 15 19% total 80 100% source: authors’ own theorising. triangulation of all study results are summarized in figure 3 below. source: authors’ own theorising. figure 3. triangulation of all study results the guiding reasons of the pies in europe to make a particular selection decision reflect their expectations from the external audit function. the selection criteria for external auditors depend on the expectations that pies in europe have from the external audit. however, the cost of the audit prevails when selecting the auditors/audit firms. pies in europe prefer international networks rather than local audit firms, because of the perception that international networks deliver better audit quality than local audit firms, and/or because the sector regulators (central/national banks, insurance regulators, security and exchange commissions/agencies) oblige them to engage international networks, to preserve audit quality. the cost of the audit has decreased since the recovery from the global economic recession in 2012. . darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 26 source: authors’ own theorising. figure 3. triangulation of all study results (continued) in summary, the literature reviewed, survey and semi-structured interview observations confirm the assertion that the cost of the audit appears to be directly related to the audit risk, and accordingly to the required scope of audit procedures. thus, the higher the audit risk, the greater the scope of audit procedures that the auditors must conduct to reduce this risk to an acceptably low level. furthermore, the expectations of the pies concerning the financial audit represent an integral component of the cost of the audit, which is greater under economic instability, due to the higher audit risk. accordingly, during vulnerable economic periods, auditors need to conduct more extensive audit procedures, which, in turn, increase the cost of the audit. conversely, during economic stability, the lower cost of the audit is attributed to fewer audit procedures being required, due to the lower audit risk. by implication, during periods of economic stability, the pies’ expectations of the audit are reduced. conclusion the study observations confirm the assertion that the cost of the audit is inversely related to the prevailing macroeconomic conditions. pies have greater expectations from the external audit during economic instability and smaller during economic stability (dachevski and ackers 2022). therefore, it appears that the audit expectation gap during economic stability, negatively affects the cost of the audit. this is caused by the lower audit risk and reduced scope of audit procedures. conversely, during economic instability, to appropriately respond to the higher audit risk, auditors are required to design and conduct more expansive audit procedures, to adequately respond to this risk, increasing the cost of the audit. in this view, the guiding reasons of pies to elect particular audit firm/auditors positively affect the cost of the audit during economic instability and negatively during economic stability. auditors should therefore properly assess the level of the audit risk, to meet the reporting expectations, i.e. to report on material misstatements and omissions detected in the presented financial statements. when pies’ expectations of the audit and the scope of audit procedures are aligned, the cost of the audit of the financial statements is optimised. auditors are accordingly required to determine the cost of the audit, based on the assessed audit risk. we accordingly propose that to stabilise audit quality and reduce the volatility of audit costs, the audit regulatory authorities in europe should intervene to control the scope of the audit procedures and auditors’ reporting requirements based on the prevailing macroeconomic conditions. this could be achieved by the regulatory audit authorities around the world, introducing mandatory regulation to control the scope of competent data and information in the public. for example, by requiring auditors to include other competent data and information that the public use to inform their decision-making, which are usually in the scope of an audit engagement on the financial statements. this could be addressed by expanding the scope of audit engagements to include providing independent assurance on selected non-financial disclosures (ackers 2017) or by prescribing the combined assurance model for pies (venter and van eck 2021). in other words, auditees with complex transactions and/or poor financial reporting quality should expect to pay higher audit inverse relationship exists between the cost of the audit and the prevailing macroeconomic conditions. . the cost of the audit should be determined based on the assessed audit risk and scope of audit procedures. audit firms in europe provide audit and non-audit services. the delivery of non-audit services by auditors and audit firms impacts the audit expectation gap because the users of data and information accept them as reliable and credible although not attested. conclusion: the cost of the audit is impacted by the guiding reasons of the pies in europe to elect particular audit firm and/or auditors, depending on the pies’ expectations from the external audit function, under the prevailing macroeconomic conditions. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 27 fees. in the above view, the study recommends the audit regulatory authorities in europe adopt guidelines for determining the cost of the audit based on the assessed audit risk and scope of audit procedures. this approach will enable auditors and audit firms to properly plan the conduct of the audits against the available resources – money, time and staff, to stabilize the declining trend in audit fees. the study limitation is that the semi-structured interviews and surveys were confined to entities operating in europe, and to the eu in particular. as such, the study observations and conclusion may only apply to the european audit market. however, since auditors globally, apply the isas, which underpins the audit risk model presented in this study, the research findings also have implications for the global audit market. although the study linked the cost of the audit to the availability of the requisite skills and competencies of the audit team on an audit engagement, we have not thoroughly investigated this aspect of audit quality and the audit expectation gap. we accordingly recommend that a similar study be undertaken into the influence of the skills and competencies of the audit team on audit quality and the audit expectation gap. the audit expectation gap provides an indication of what the public expect the independent auditor’s report to address regarding the financial audit. the greater these expectations, in relation to actual audit performance, the larger the audit expectation gap. the audit expectation gap therefore represents the extent to which the public may misunderstand the purpose of an external audit. since the public tend to conflate the audited financial statements with the independent auditor’s report (maroun and atkins 2014), the audit expectation gap reflects the disconnect between what the independent auditor’s report provides and what the users of audited financial statements expect. references ackers, b. 2017. the evolution of corporate social responsibility assurance – a longitudinal study. social and environmental accountability journal, 37(2): 97-117. al-nawaiseh, m. 2015. the effects of the threats on the auditor’s independence. international business research, 8(8): 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uncertain …… disagree …… strongly disagree 2. how should the cost of the audit be determined? …… the cost of the audit should be determined based on the assessed audit risk only …… the cost of the audit should be determined based on the scope of the performed audit procedures only …… the cost of the audit should be determined based on the assessed audit risk and the scope of the performed audit procedures …… the cost of the audit is not related to any of the above 3. does your audit firm or the international/local audit network to which it belongs, offer non-audit services to the clients, such as accounting, valuations, advisory services, and/or consultancy services? …… yes …… no darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 31 appendix 2 survey questions for respondents at pies in europe 1. what are your biggest expectations of auditing your financial statements? you may tick more than one response. …… to improve our internal processes …… to improve the quality of our financial reporting …… to add additional value, and/or confidence, and/or credibility to our presented financial figures in the financial statements …… to provide us with reliable and credible financial reporting 2. does the audit improve the quality of your financial reporting? …… strongly agree …… agree …… uncertain …… disagree …… strongly disagree 3. which type of audit firm do you prefer to conduct the annual audit on your financial statements? …… audit firm which belongs to an international audit network …… local (small and medium) audit firm …… we don’t make any preferences between international and local audit firms 4. what are the criteria under which you make the selection of a particular audit firm and/or auditor? you may tick more than one response. …… auditors and/or audit firms must be registered for providing audit services by the competent governmental authorities …… experience in external audit, basically more than three years …… high level of independence of auditors …… no conflicts of interests between the auditors/audit firms and our pie and/or our competitors …… international audit firm is preferred …… local audit firm is preferred …… good national and/or international reputation of the audit firm …… references by other clients are compulsory …… high price for the audit service …… low price for the audit service …… big scope of audit procedures …… small scope of audit procedures …… long period to conduct the audit …… short period to conduct the audit darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 32 appendix 3 critical value of student’s t-distribution with two degrees of freedom source: adjusted based on beyer 1968. darko dachevski and barry ackers / finance, accounting and business analysis, volume 6, issue 1, 2024 33 appendix 4 semi-structured interview questions for participants at pies in europe 1. what are your biggest expectations of auditing your financial statements? …………………………………………………………………………………………………………… …………………………………….. 2. does the audit improve the quality of your financial reporting? …………………………………………………………………………………………………………… …………………………………….. 3. what are the criteria under which your pie selects its audit firms and/or auditors? …………………………………………………………………………………………………………… …………………………………….. 4. which type of audit firm do you prefer to conduct the annual audit on your financial statements, a local (small/medium) audit firm or an audit firm which belongs to an international network? …………………………………………………………………………………………………………… …………………………………….. daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 34 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 financial reporting in the public sector in the republic of bulgaria under the conditions of european harmonization and global legitimacy of ipsas daniela feschiyan1*, radka andasarova2 department of accounting and analysis, university of national and world economy, sofia, bulgaria1 department of accounting and analysis, university of national and world economy, sofia, bulgaria1 * corresponding author info articles abstract history article: submitted 20 february 2024 revised 31 march 2024 accepted 5 april 2024 the progress made in the development of accounting theory, as well as the accumulated experience of eu member states, illustrate the growing advantages of public sector accounting systems based on the accrual principle over cash-based accounting. the adoption and application of accrual-based accounting standards and in accordance with the requirements of the ipsas poses important questions for accounting harmonization within the union. the various existing practices in the public sector are considered when choosing an accounting model. a challenge to the european harmonization of accounting systems in the public sector is also the differences between the national modified-cash based accounting systems and the adopted methodological principles of the european system of national and regional accounts 2010. the purpose of this article is to enrich and further develop in a theoretical aspect the european debate on the key issues in the public sector, analyzing the modern trends and challenges facing financial reporting in bulgaria as a member state of the eu, in conditions of accounting harmonization and growing legitimacy of the ipsas in a global aspect. the major research method used in the study is the theoretical review of the european and national legislation and the practice in the field of public sector financial reporting. the conceptual framework is the starting point of reference for creating a system of pan-european harmonized standards for the public sector in full compliance with accrual-based accounting principles. keywords: financial reporting, public sector, harmonization, ipsas, accrual basis principle. jel: m41, m48 address correspondence: email: d.feschiyan@gmail.com1 r.a-georgiva@unwe.bg2 mailto:d.feschiyan@gmail.com1 daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 35 introduction public sector reform which originated towards the end of the 1980s and the beginning of the 1990s was primarily guided by the application of market-oriented management models intended to incite economic effectiveness of public management (melo et al. 2022). the introduction of management mechanisms and instruments from the private sector into the management of the public sector is at the root of the new public management concept. a basic feature of the concept is the enhancement of the quality of financial reporting in the public sector (christiaens et al. 2015). more specifically, an important stage of the extensive reform in the state administration is the implementation of an accrual-based accounting system and budgeting. cash-based reporting, which is characterized by cash-based recognition of the effects of transactions and events, is regarded as an antipode to accrual-based accounting. the concept of interrelation between the frameworks for statistical and financial reporting presumes the requirement for the application of accrual basis principle in accounting. the european regulatory framework adopted for business entities requires the application of ifrs (international financial reporting standards issued by international accounting standards board-iasb) on a mandatory basis by the exchange-traded companies registered in the territory of the eu when preparing the consolidated financial statements. financial statements based on ifrs appear to be the main source of information about the corporate activities in the national accounts. k. zlatareva (2018) analyzed the development of accounting theory in the context of integrated reporting in organizations. like business organizations, the information contained in the financial statements of public sector entities is used for the purposes of national accounts for the general government. the latter presumes proper knowledge of the international public sector accounting standards (ipsas) developed by the international public sector accounting standards board (ipsasb) – a requirement adopted in regulation (eu) no. 549/2013 of the european parliament and of the council on the european system of national and regional accounts in the european union (esa 2010). there is no european regulation for mandatory implementation of ipsas by the member states what implies the application of national legislation. according to m. markova (2019) there is a lack of national accounting regulation for assets and services provided as a result of public-private partnership. in this connection, the differences between the national accounting legislations and the various existing accounting practices are the main challenge for the global transition to financial reporting harmonization in the public sector. methods the major research method used in the study is the theoretical review of the european and national legislation in the field of public sector financial reporting. the method of summarization and analysis was applied in a number of aspects, for example, in the examination of the european public sector accounting practices, the outcomes of the public sector reform and its reflection on the level of european harmonization in reporting and the legitimacy of ipsas. the observation of facts method and the method of comparison were employed in the examination of country’s governmental policy conducted under the impact of the institutional environment at a macro level. the documents officially issued to international organizations and governmental institutions, as well as the research studies of the academic community published in the internationally reputed databases were used as sources of information. the main limitation to this research affects its scope. the study is focused on the public sector reform of a single eu member state, namely the republic of bulgaria. the fact taken into consideration was that some considerable changes occurred in the national legislation over the years of transition from centralized planned economy to market economy, and the accession of the republic of bulgaria to the european union in the year 2007. in addition to the above, the research is limited to public sector entities. public enterprises (commercial public sector entities) and business organizations are excluded from its scope. the modern trends and challenges facing financial reporting in public sector a contemporary characteristic of the development of public sector financial reporting is the standardization of accounting. the global tendency towards standardization of public sector accounting is reflected in the establishment of a certain set of generally accepted rules and their implementation by the national governments at different levels of management and by international organizations including the european commission (ec), north atlantic treaty organization (nato), united nations organization (un) and others. the objective of the international public sector accounting standard board (ipsasb) is daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 36 to “serve the public interest by contributing to the development, adoption and implementation of highquality international standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high quality practices by professional accountants; promoting the value of professional accountants worldwide; and speaking out on public interest issues where the accountancy profession’s expertise is most relevant” (international public sector accounting boardipsasb 2022). daniela feschiyan (2018) maintains the statement that „standardization of public sector accounting is an objectively determined dynamic process that provides for the establishment and application of generally accepted rules for the regulation of the accounting system and the creation of a uniform structure and content of the financial statements that meet all public interests with regard to obtaining reliable information about public finances.“ the result of author’s thesis being proven is a prerequisite for the realization of another scientific study dedicated to the applicability of standardized models for accounting of infrastructure assets based on the philosophy of ipsas in the accounting systems of public sector entities in the republic of bulgaria. the empirical results confirm the benefits of the implementation of suggested new accounting models in the public sector practice in the republic of bulgaria (feschiyan and andasarova 2022). despite the initial proposal by the european commission for adoption of ipsas, after a series of professional debates and the continuing practices of some member states, including bulgaria, in the application of budget-oriented and modified cash basis accounting systems, the european parliament reached a compromise by providing an opportunity for conducting preliminary assessment of ipsas “appropriateness” in separate jurisdictions within the eu. ipsasb at the international federation of accountants (ifac) does not possess legal powers to demand from the eu member states to implement the requirements of ipsas into their national accounting legislations. the board relies on some convincing evidence and good practices for attaining legitimacy of public sector standards in a global aspect. a number of scientific research studies have been dedicated in support of the reforms for improving accountability and transparency of public sector entities through the implementation of a set of generally accepted accounting standards (ipsas) in separate jurisdictions (chan 2006, 2008; manes rossi et al. 2014; biondi and soverchia 2014; ismailia et al. 2021). over the past several decades, increased research interest has been observed within the academic community towards analysing the evolution of public sector accounting standardization based on accrual accounting principles (brusca and condor 2008; martí 2006; christiaens et al. 2015; schmidthuber et al. 2022; farshadfar et al. 2022). according to isabel brusca et al. (2012), research studies addressing the development and propagation of ipsas are principally focused on the countries applying the anglo-saxon model of accounting. countries like australia, new zealand, the usa and the united kingdom have been pioneers in the realization of a far-reaching reform in state administration as early as in the 1980s which is known under the name of „new public management-npm“. the public sector reform in these countries involves essential changes both to financial reporting and to the budgeting processes, which reform is accomplished through the transition to accrual based financial reporting and budgeting (pallot 1994; likierman 2003; newberry and pallot 2006). on the other hand, the governments of some continental europe countries such as austria, france, spain, portugal, and switzerland have also started a similar reform in the public sector by adapting their national accounting systems to the requirements of ipsas retaining the traditional budgeting model based on the cash principle and on the modified cash basis of accounting (brusca et al. 2015). there is a group of authors who perform extensive scientific research dedicated to the challenges associated with the transition of the organisation for economic cooperation and development (oecd) member states to accrual based financial reporting and budgeting on the one hand, and on the other hand – regarding the applicability of ipsas in individual jurisdictions of the member states. the research data definitively highlights the differences in the manner of perceiving the public sector reform by oecd member states, in the context of the transition to accrual-based financial reporting and budgeting. more specifically, the preferences of oecd member states to the accrual-based financial reporting (i.e., decisions at the organizational field) have been confirmed when compared to the adoption of accrual-based budgeting by individual agents in organization’s member states among which are accountants, state officials, governmental bodies and politicians (i.e. decisions at an organizational level). a statement has been expressed that, in oecd member states, which have adopted a sector-neutral approach for the implementation of accounting standards, i.e., a uniform set of accounting standards (ifrs) in different sectors of economy, there are favorable conditions generated for the approximation of the national accounting systems to ipsas. on the other hand, the authors substantiate the need of adopting ipsas in the potential member states of the organisation (such as bulgaria, author's note) in terms of the lack of applicable public sector accounting standards within their jurisdictions (adhikari and gårseth-nesbakk, daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 37 2016). the traditional approach applicable by the researchers when conducting similar research studies aims at tracing the entire process of public sector reforms. in 2015, isabel brusca and her team published a collective scientific paper addressing the results of public sector reforms in 14 countries, the greater part of which are eu member states, taking into account that bulgaria is not part of the extensive study. the empirical results outline the contemporary challenges facing the international harmonization in the field of financial reporting, budgeting, and public sector auditing (brusca et al. 2015). the national specifics of the european countries concern a number of limitations which impede the process of harmonization and the achievement of comparability among the financial statements of public sector entities. summarisations in the research study come out to be a serious theoretical basis for evaluating the effects of ipsas adoption by the european countries over the implementation of national accounting standards. an analogous study has been conducted by m. kowalczy and j. caruana (2022) among other two eu member states – malta and poland. the authors arrive at the conclusions that, in response to the reform intended to enhance the reporting and budgeting in public sector, the two countries demonstrate dissimilar accounting and budgetary practices at central government level regardless of the institutional environment influence at a macro level on the part of eu and imf. as at present, bulgaria has been strictly adhering to the improvement of the budgeting process with focus of the implementation of the european framework for statistical reporting and fiscal data presentation based on the methodology of the european system of accounts (esa 2010) and the government finance statistics manual of the international monetary fund. this change is realized on the account of postponement of governmental decisions for an accounting reform in public sector entities within the context of accounting standardization and full-fledged implementation of the accrual principle. to analyze the specifics of the reform in public sector accounting of the republic of bulgaria is the main task of this research the conducting of which aims at identifying the important perspectives facing the national government on its way to the european accounting harmonization and growing legitimacy of ipsas on a global scale. the more noteworthy of them are as follows:  regulation of public sector reporting by national laws, subordinate legislation, as well as mandatory orders and instructions. the country-specific national financial reporting regulation in the public sector involves the application of rules contained in the law on accounting, public finance law and the multitude of instructions drawn by the ministry of finance. the existing tradition in the country for not applying public sector accountings.  implementation of a budget-oriented accounting system based on the modified cash principle. under the impact of national legislation, the accounting practice is “sealed” as a dominating and acceptable model excluding any possibility for implementation of alternative accounting models. the absence of broader consideration of infrastructure assets in accounting standards hampers judgements and decisions that are to be made with a view to ensuring high-quality accounting information that should presumably be helpful for the users of financial statements and a clearer idea about this large group of public sector assets (daskalov 2020). in response to the regulatory function of the state is the accounting practice existing for decades in bulgaria on the implementation of the accounting principle of cash-based recognition of some kinds of revenue and expenditure (for example, tax revenue, social security contributions, budgetary credits). the accrual basis principle founded on the european system of accounts (esa-2010) standard and adopted by the european practice differs from the national requirements for modified cash-basis reporting.  lack of accounting practice for the preparation of accrual-based consolidated financial statements. as far back as in the year 2016, daniela feschiyan, in a paper titled „on the need of adjusting public sector financial statements to the requirements of ipsas”, brought forth the problems associated with not preparing consolidated financial statements in the public sector and provided some projections for their improvement. in addition, it could be indicated that „consolidation of financial statements is a process of combining and subsequent synchronisation of data from the statements of a certain group of entities for the purpose of presenting summarised information on a consolidated basis about the assets and financial position, about the financial performance, the cash flows, and about the changes that have occurred in group’s equity, in a single pack of reports“ (nachkova, 2020).“it is necessary to develop some additional internal bylaws for clearer decisive regulatory requirements daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 38 to the organization and methodology of accounting, the applicable chart of accounts, as well as specific procedures and techniques for preparing financial statements“ (nikolova, 2020).  the decisions of the national government on the implementation of accrual-based accounting system pursuant to the principles of ipsas and the lack of real reforms for translating them into action are intended for the purposes of institutional legitimacy. on a nationwide scale, the practice for preparing specific cashbased statements is maintained by public sector entities for the purposes of financial reporting and the consolidated fiscal program. the existing regulatory texts in the public finance law on the preparation and presentation of annual financial statements based on accounting standards developed in consistence with ipsas and the lack of recognised and published public sector accounting standards in the republic of bulgaria are quite contradictory as at present.  the link between public sector financial reporting and government’s political incentives. public sector financial reporting in bulgaria has a relatively lengthy history associated with undertaking a political commitment rather than as an effective contemporary accounting system based on global accounting standards.  the reform in the public sector of the republic of bulgaria evolved in 2013 with the publication of a monography concerned with accounting standardization and the models of reporting fixed assets in the public sector. the author, d. feschiyan (2020), maintains the thesis about „the need of accounting standardization in public sector entities with full application of the accrual principle and of the rules and provisions of ipsas.“ subsequently, the government of the country undertook significant changes to the accounting legislation for public sector entities among which accrual of depreciation, recognition of a strategic group of resources within the public assets such as public infrastructure, military equipment, heritage assets, etc. and inclusion of income statement as a mandatory component of the general purpose annual financial statements. the undertaking of this first step of the government towards reforms in the public sector is acceptable and refers to the usefulness of the information in financial statements for the purposes of taking managerial decisions in the process of implementing governmental policies and achieving transparency of public finance. discussion for all the eu member states, particularly those that are currently using only cash-based reporting or reporting based on the modified cash principles, the implementation of the conceptual framework and ipsas will mean a substantial reform. some of the problems that might spring up and which, in our point of view, will affect bulgaria are:  conceptual and technical accounting problems.  expert knowledge of employees and consultants, training skills.  communication with managers and decision makers, as well as their training.  connection with auditors, as well as their training.  correction and modernization of it systems.  adaptation of the existing national legal frameworks. if the adoption of ipsas based on the accrual accounting principle and the philosophy of the conceptual framework in the eu member state is initiated, bulgaria will find itself in a stressful and unequal situation (feschiyan 2010). due to the non-application and lack of ipsas knowledge and understanding, as well as owing to the overall lack of standardization in the public sector accounting system (feschiyan 2012), trainings will need to be organized, as well as exchange of expert knowledge, support to the government on conceptual and technical issues, coordination, and exchange of plans of reforms for the public sector accounting with member states having greater depth of experience. our reservations are that due to the lack of adaptation of public sector accounting to the conceptual framework and ipsas, bulgaria will be treated as a state with substantial and obvious drawbacks, failings, and inconsistencies in the financial management information systems across the public sector. therefore, it is expedient to carry out urgent reforms and innovation in the accounting system (feschiyan and raleva 2013). extensive research, approval and implementation of the conceptual framework and ipsas need to begin immediately and turn into an incessant process which should be realized within a certain period of time. this has to be accomplished gradually by laying the initial focus on the accounting issues where the daniela feschiyan, radka andasarova / finance, accounting and business analysis, volume 6, issue 1, 2024 39 harmonization is of utmost importance, for instance:  full observance of the accrual accounting principle.  internationally harmonized financial statements.  compatibility with the philosophy of the conceptual framework and the provisions of ipsas. in view of the fact that ipsas are the conceptual basis for the development of national accounting standards in distinct jurisdictions, our country will have much higher methodological preparedness and significant degree of readiness for the transition. review and categorisation of the adopted accrual based ipsas should be performed and they can be classified in three categories:  standards which can be applied directly or with minimum adaptation.  standards that need adaptation or a selective approach.  standards that need substantial amendment in order to be implemented. the transition to ipsas, the philosophy of which incorporates the complete implementation of accrual accounting principle, will provide for the adequacy of the national accounting framework in the process of harmonization and integration of bulgaria into the european union. this is some sort of innovation in the public sector accounting system. such innovation will reduce the possibilities for financial data manipulation what makes the cash basis possible (for example, a payment can be carried forward in time or deferred in order to be presented in a period selected by the entity of the public sector). the accrual accounting principle, however, is not intended to remove or replace cash-based reporting for the purposes of budgeting and budget control. at a macroeconomic level, accounting standardization will ensure timely and reliable financial and fiscal data and an opportunity for greater comparability of financial statements. thus, good conditions can be created for the implementation of most of the principles laid down in the directive on budgetary frameworks (ec 2011/85/eu). conclusion the existing scientific debates most assertively illustrate the usefulness of the implementation of accounting standards in the public sector based on the accrual accounting principle. the existence of various accounting practices in separate countries raises important 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http://faba.bg/ issn 2603-5324 financial aspects, corporate governance and disclosure of financial risk: case of indonesia irine herdjiono1* , mira yanti2 department of accounting, faculty of business and economics, musamus university, indonesia1 department of accounting, faculty of business and economics, musamus university, indonesia2 * corresponding author info articles abstract history article: submitted 20 april 2023 revised 8 june 2023 accepted 12 june 2023 purpose: this study aims to determine the effect of profitability, liquidity, and good corporate governance (cgc) on financial risk disclosure. disclosure of financial risk refers to ifrs 7 (international financial reporting standard no.7). design/methodology/approach: the population used in this study includes all mining companies listed on the idx, a total of 49 companies during the period 2017 to 2019. the samples used were 24 companies for 3 years of financial statements which were selected using the purposive sampling method, so that the data analyzed were 72. data analysis used the regression method. the test results show that, partially, the profitability and audit committee size variables affect the disclosure of financial risk. meanwhile, the liquidity variable and the size of the board of commissioners variable have no effect on financial risk disclosure. findings: the test results simultaneously show that profitability, liquidity, board size, and audit committee size have an effect on financial risk disclosure. practical implications: the implication of this research for companies is that the results show that the average level of financial risk disclosure by companies is 0.299. according to the data obtained, the average company has fulfilled the required disclosures such as presenting information about risk exposure, how risks arise, objectives, policies, and risk management processes along with ways to measure them. originality/value: this study comprehensively examines financial and non-financial factors, namely in terms of corporate governance that affect risk disclosure paper type: research paper keywords: profitability, liquidity, size of the board of commissioners, size of the audit committee, disclosure of financial risks jel: g32, g34 * address correspondence: e-mail : herdjiono@unmus.ac.id1 tiropadangmy@gmail.com2 https://orcid.org/0000-0003-4591-4212 irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 80 introduction as the largest foreign exchange earner in indonesia, mining is an industrial sector that has a significant impact on economic development and its contribution to gross domestic product is 6 %. the mining sector is faced with many challenges and risks, both operationally and managerially. these various risks include complying with government regulations which are always changing and being made stricter, and managing operational activities are very dependent on technology, dealing with the inconsistent amount of raw materials that are available, and the fluctuating selling prices of commodities. risk is a component that is always present and it is an inherent part of the business world. risk according to the institute of chartered accountants in england and wales (icaew) is an uncertain event, both in terms of profit and loss, which, if it occurs, can affect the goals to be achieved by a company. to anticipate the occurrence of risks, companies must always be alert and ready to face them. companies must find solutions quickly and precisely to overcome and minimize the risks that will occur. therefore, so that risks can be managed properly, a company can carry out risk management through risk disclosure. issues related to corporate risk disclosure began to become a focus of concern in the business world after the publication of a discussion paper by the icaew in 1998 which suggested that, in an annual report, a company discloses information about risk so that it can be used by stakeholders to make investment decisions. risk disclosure is an effort that is made to explain or show report users what risks have been successfully managed and strategies implemented to control risks that are likely to occur in the future. it is important to disclose risk because doing so conveys information about how management manages the risk and what kind of impact it will have on the sustainability of the company's operations. management need to create a good strategy is a coherent set of analysis, concepts, policies, arguments, and actions that give responses to a high-risk challenge (rumelt 2012). a company's ability to manage risk can minimize the impact that can arise from these risks. with the availability of risk information, a company is expected to be able to provide appropriate information to stakeholders to take essential decision in handling any adverse economic event (sultana et al. 2022), assist companies in managing changes that occur, and serve as guidelines in running a business. in addition, risk disclosure can also help users of financial statements to predict risks that will occur in order to be able to maximize income (tirado-beltrán and cabedo-semper 2020). according to the results of research by syabani and siregar (2014) average total risk disclosure is 1,999 words, with mandatory risk disclosure amounting 1,444 words, far higher than voluntary risk disclosures with the average of 555 words on the financial statements of companies in indonesia in 2010. the rules regarding risk disclosure are contained in ifrs 7 which pertains to disclosure as a financial instrument: it states that companies are required to disclose financial information so that shareholders can assess the type and level of risk of a financial instrument. disclosed financial information includes qualitative and quantitative disclosures. in qualitative disclosure, companies are required to disclose risk exposure, how risks arise, objectives, risk management policies and processes, and ways to measure them. meanwhile, quantitative disclosure requires companies to disclose a minimum of credit risk, liquidity risk, and market risk, including conducting a sensitivity analysis of each type of risk. ifrs 7 seeks to increase transparency in the banking system (bischof 2009), arguing that increased disclosure of financial risks tends to reduce uncertainty level (campbell et al. 2014) and will benefit investors, enabling the firms to better allocate their resource (elshandidy and zeng 2022). disclosure of risk is one form of implementation of a good corporate government (gcg) system (singhania et al. 2022). gcg is a series of relationships between management, directors, commissioners, investors, and stakeholders that regulate and direct company activities (wahyudin and solikhah 2017). risk disclosure speeds up the achievement of gcg which is needed to maintain the continuity of the company's operations. in general, the principles of implementing gcg are based on five principles, namely openness, accountability, responsibility, independence, and fairness (burak at al. 2016). the gcg items that may influence risk disclosure used in this study are the size of the board of commissioners and the size of the audit committee. research on risk disclosure has been conducted in various countries, in the spain (madrigal et al. 2015), in indonesia (syabani and siregar 2014), in bangladesh (dey at al. 2018). the results of these studies exhibit several inconsistencies regarding risk disclosure such as the findings of madrigal et al. (2015) which found that profitability had no impact on the level of risk information disclosed while elfeky (2017) found evidence on the positive significant correlation between profitability and voluntary disclosure. a company with high liquidity is likely to disclose more information regarding the management of liquidity including the management of liquidity risk (elzahar and hussainey 2012), meanwhile, the results of research by rahmawati and prasetyo (2020) found that liquidity had no effect on risk disclosure. irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 81 the results of research by alves et al. (2012) found that the size of the board of commissioners had an effect on voluntary disclosure. meanwhile, the results of research by khandelwal et al. (2020) found that the size of the board of commissioners has no effect on risk disclosure, elfeky (2017) found no significant correlation between board size and the overall corporate governance voluntary disclosure extent. the results of research by samaha and dahawy (2011) found that audit committee has effect on voluntary disclosure, while adznan and puat nelson (2015) found audit committee independence was positive and significantly associated with financial instruments disclosure practices. literature review and hypothesis development agency theory agency theory describes the contractual relationship between the principal and the agent (panda and leepsa 2017). the contract explains the rights and obligations that must be fulfilled by the principal and agent. the principal acts as an employer by giving power to the agent to make the best decisions for the agent and company management (jensen 1993). the relationship between the principal and the agent can result in a conflict called agency conflict. agency conflict can occur when there are different interests and information asymmetry between the principal and the agent (akerlof 1970; nwajei at al. 2022). conflicts of interest can occur when management, which has been given the authority to carry out company management tasks, does not work in accordance with the interests of the principal. the principal has an interest in maximizing profits and the agent has an interest in maximizing the fulfillment of his economic and psychological needs (mahrani and soewarno 2018). another agency conflict is that management knows more about the company than the shareholders do (bergh et al. 2019). this results in the emergence of information asymmetry due to differences between the information obtained by management (information providers) and that obtained by shareholders (information users). the concept of agency theory can be used as a basis for understanding risk disclosure practices in terms of how management provides information to users by making reliable information available. the main purpose of risk disclosure is to avoid information asymmetry between the principal and the agent (khaledi 2014). management, as the party that knows more about the state of the company, should practice risk disclosure by providing relevant information indicating that the agent's actions are in the interests of the principal. the information provided by the company's management will be used as the main consideration in making investment decisions. signal theory according to amaya et al. (2021), signal theory explains how a company can influence stakeholders’ perceptions, create a competitive advantage and positively impact their corporate image. signal theory is used by companies to explain how financial reports are used to send positive and negative signals to interested parties. in the practice of risk disclosure, signal theory can explain how management discloses information to stakeholders regarding the risks faced by the company in order to signal its underlying risk management quality to other parties and to signal that the firms are able to protect and create value for the investors (abdullah et al. 2015). risk disclosure can be interpreted as an action that does not cover or hide something. if the disclosure is related to financial statements, the report presented must contain sufficient information and explanation and be able to explain every event that affects operating results. disclosure of risk is an effort made to show firms’ major risks and their expected economic impact on their current and future performance (dey at al. 2018). there are three general concepts of disclosure in financial statements according to susanto and meiryani (2019), namely: adequate disclosure, fair disclosure, and complete disclosure. adequate disclosure means that the information provided by the company includes minimal disclosure so as not to mislead users of financial statements. fair disclosure means that the information provided by the company demonstrates its goal of treating all users equally. full disclosure means that the disclosures made provide all relevant information. risk disclosure is useful for companies and stakeholders in order that they can make predictions about the future state of the company, as well as provide complete information about the reality of running operations in the face of all threats and obstacles. furthermore, risk disclosure is useful for the users of reports when making investment-related decisions. disclosure of risk can reduce information asymmetry between management and investors and reduce the company's cost of equity (setiany and suhardjanto 2021). irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 82 according to ifrs 7, financial instruments, disclosure: financial risk is grouped into three, namely (1) credit risk is caused the failure of one party to pay its obligations which results in the other party experiencing financial instrument losses, (2) liquidity risk is caused by the company being unable to pay off its obligations, and (3) market risk is caused by fluctuations in the fair value of a financial instrument. profitability profitability is one of the focuses of attention of potential investors and shareholders because it relates to the share price and dividends that they will receive. the greater the profitability achieved, the wider the company will carry out risk disclosure because it wants to prove to stakeholders that the company is capable of managing the use of its capital. profitability can be seen as a sign of good management (madrigal at al. 2015). companies that are in a profitable condition will be more willing to disclose more information to legitimize their performance and attract the interest of investors, creditors and other stakeholders. disclosures by companies include risk disclosure, namely companies implementing effective risk management will obtain higher benefits and demonstrate management competency (linsley and shrives 2006). to assess the level of profitability in this study, the formula used by the researchers is net profit margin (npm). liquidity many investors, creditors, and government agencies pay attention to whether the performance of the company can guarantee its survival by seeing liquidity as a key factor for assessing bankruptcy (owusuansah and yeoh 2005). this is what encourages companies to continue to make broader disclosures so that they can convince their stakeholders. the disclosure of this risk information can provide benefits for the company; namely, they will get additional new potential investors. corporate governance corporate governance is a set of agreements or institutional rules governing efficient decisionmaking. in addition, corporate governance is used as a tool to convince shareholders that they will get a return on their invested capital (love 2011). the board of commissioners is the part of the company that has joint and/or specific duties and responsibilities to supervise and provide advice to the directors and ensure that the company implements gcg. according to law no. 40 of 2007, the board of commissioners is a legal entity that represents the principal in carrying out a supervisory role in the implementation of company policies and strategies carried out by the directors in good faith and by providing advice to the directors in managing the company. a small number of commissioners on a board can lead to a lack of expertise which can affect the quality of decision making and policies and cause high agency costs, thereby affecting the performance of the board to fulfill its corporate governance responsibilities. meanwhile, a large number of commissioners is expected to have a lot of impetus in carrying out supervision, especially in terms of the oversight of risk disclosure practices so that no information is hidden. agency theory predicts that a larger board encompassing a wider range of expertise leads to greater effectiveness in monitoring, communication, and decision-making roles (jensen 1993; elzahar and hussainey 2012; gaur at al. 2015). the duty to protect the interests of investors is related to the board's role in ensuring the transparent disclosure of financial risk information (elzahar and hussainey 2012; lopes and rodrigues 2007). therefore, the board of directors is responsible for the risk management process (ntim at al. 2013). many studies document the positive impact of boards of directors on risk reporting practices (mokhtar and mellett 2013; ntim at al. 2013; elshandidy at al. 2013). the audit committee is a committee formed by the board of commissioners to carry out audits of company management. the establishment and implementation guidelines of the audit committee are contained in the financial services authorization no. 55/pjok.04/2015. the duties of the audit committee are to encourage the implementation of gcg, to encourage the establishment of an adequate internal control structure, to improve the quality of financial disclosure and reporting, and to supervise the implementation of audits by both internal and external auditors. the audit committee is seen as a means of preventing fraud in financial reports and monitoring management performance including disclosure (razali and arshad 2014). the existence of an audit committee will make the company more accountable and transparent in carrying out financial reporting and avoid manipulation of disclosures because the audit committee will oversee all company activities (setiany 2018). companies with a number of members that meet the requirements for establishing an audit committee will be supervised more effectively because they will have the expertise and insights needed to carry out supervision. the size of the audit committee is the number of members who play a role on that irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 83 committee. this number is used to measure the size of the audit committee which can explain the implications for risk disclosure (alshirah at al. 2020). the effect of profitability on the disclosure of financial risk the higher the level of profitability, the better a company's financial performance. a high level of profitability can generate high return for investors (novy-marx 2013).the results of research by elfeky (2017) found that profitability affects risk disclosure according to agency theory, when there are high levels of profitability, company managers tend to disclose risk information and risk management more broadly in annual reports. disclosure of risk is carried out in order to minimize the occurrence of information asymmetry between management and stakeholders, and explaining management performance to shareholders al-shammari bader (2014) shows how companies can manage risk well in order to increase stakeholder confidence in the survival of the company; therefore, management will get increased compensation for their performance (aljifri and hussainey 2007). h1: profitability affects disclosure of financial risk the effect of liquidity on disclosure of financial risk liquidity is one of the measuring tools used by investors and government agencies to find out whether a company can maintain its viability as well as being a key factor in evaluating bankruptcy risk (owusu-ansah and yeoh 2005). this condition prompts management to disclose risk information more broadly in order to convince stakeholders. according to signal theory, the level of liquidity can be a good signal for stakeholders, especially investors, as a consideration when investing in a company. the level of liquidity is a good signal for stakeholders because it shows that the company is able to manage corporate debt compared to companies that have low liquidity. management will disclose more risk information if their liquidity ratio is high. this is done because they want to demonstrate their ability to manage liquidity risk compared to companies with low liquidity ratios, and want to provide an explanation to stakeholders about the condition of these companies h2: liquidity has an effect on financial risk disclosure the effect of the size of the board of commissioners on the disclosure of financial risk the board of commissioners is one of the components of corporate governance that can influence financial risk disclosure. the task of the board of commissioners is to ensure that the company's strategy is carried out, supervise management in managing the company, and require accountability (fcgi, 2010). maharani and soewarno (2018) state that a large number of commissioners can increase accuracy in supervising and controlling company management. hussainey and al-najjar (2011) found that the size of the board of commissioners has an effect on risk disclosure. according to agency theory, the board of commissioners represents the main internal mechanism for overseeing management's opportunistic behavior in order to help balance the interests of shareholders and management. a large board of commissioners can perform more effectively in supervising and the pressure exerted on company management is getting stronger, thus encouraging management to be more extensive in making risk disclosures including disclosure of financial risks. h3: the size of the board of commissioners has an effect on financial risk disclosure the effect of audit committee size on financial risk disclosure the audit committee is a body formed with the aim of assisting the board of commissioners in maximizing the oversight function within the company. the existence of an audit committee monitoring the decision taken by the manager for further voluntary information (samaha and dahawy 2011). according to agency theory, the audit committee, audit committee effect disclosure practices (alshirah et al. 2020). this is because such a committee is tasked with maximizing the supervisory function within the company. furthermore, the task of the audit committee is to liaise between shareholders, the board of commissioners, and management in terms of internal control. therefore, the larger the size of the audit committee, the more effective the oversight of the company meaning that agency conflicts that occur due to management's desire to improve their own welfare by disclosing risks that benefit themselves can be minimized. a large number of members on an audit committee will make its performance in assisting the board of commissioners more effective because it will involve a lot of expertise and points of view needed in conducting supervision, so management will carry out risk disclosure more broadly. h4: the size of the audit committee has an effect on financial risk disclosure irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 84 method this research was conducted on mining companies listed on the indonesian stock exchange. below is an explanation of the variables used in the study: table 1. definitions of operational variables variable definition measurements profitability the company's ability to make a profit in terms of sales or investment npm = profit after tax sales liquidity the company's ability to pay its short-term obligations by utilizing its current assets cr = current assets current liabilities board of commissioners size the total number of members of the company’s board of commissioners ∑ board of commissioners audit committee the total number of members of the company’s audit committee ∑ audit committee financial risk disclosure measured using the financial risk disclosure index (frdi) in this study, frdi consisted of 43 disclosure items referring to ifrs no.7. frdi items are divided into three main types, namely credit risk, liquidity risk and market risk. based on ifrs no. 7 market risk is divided into three, namely foreign currency risk, interest rate risk and price risk. the calculation of frdi items uses a dichotomous approach, namely by giving a value of 1 to items that are disclosed and 0 if they are not disclosed. each item will be added up to get the total number of frdis for a company. the following is the formula for calculating the frdi variable used: frdi = number of disclosure items total financial risk disclosure items according to amran at al. (2017) there are several provisions that are used in order that the information obtained is considered a risk disclosure sentence, namely if the reader is informed about opportunities, hazards, losses, and threats that have impacted the company or possibly will do so in the future, or about the management of every opportunity, prospect, threat or exposure to such loss. if a disclosure regarding risk information is too vague, then the disclosure is not considered a risk disclosure. each repeated disclosure will be written as a disclosure sentence each time it is explained. disclosure of risks presented can be in the form of good risks, bad risks, or uncertainties. data analysis and discussion general description of research object the objects in this study used are mining companies listed on the idx from 2017 to 2019. mining: includes shares in the mining and quarrying business, such as coal, oil and gas mining, metal ore, rock excavation, clay excavation, sand, salt mining and quarrying, mineral mining, chemicals, and fertilizer materials, as well as gypsum, asphalt and limestone mining. the reason researchers used this company as a research object is because it is one of the sectors with high risk (uncertainty), the mining sector is in great demand by investors and is a pillar of a country's economic development. the population of this study were 49 companies and the sample was 24 companies which were determined based on the purposive sampling method, namely determining the sample with certain criteria irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 85 table 2. sampling criteria information amount mining companies listed on the idx from 2017 to 2019 49 companies that do not publish complete annual reports or consolidated financial reports for 2017 to 2019 (6) companies that experience losses (14) companies that were delisted from 2017 to 2019 (2) companies whose data is incomplete (3) company observation data 24 total processed samples (24 companies x 3 years) 72 descriptive statistics descriptive statistics aim to provide an overview of a data variable used in this research by looking at the mean, maximum, minimum, and standard deviation values. the following are the results of the descriptive statistical analysis. table 3. descriptive statistics n minimum maximum mean std. deviation profitability 72 0.002 13.978 0.321 1.636 liquidity 72 0.214 9.222 1.735 1.335 board of commissioners size 72 3 9 4.89 1.516 audit committee size 72 3 4 3.11 0.316 financial risk disclosure 72 0.209 0.395 0.299 0.045 valid n (listwise) 72 source: author’s work hypothesis test the purpose of the r² test is to determine the ability of the independent variable to explain the dependent variable. r² values range between 0 and 1. the following is a table of the results of the coefficient of determination. table 4. determination coefficient test results model r r square adjusted r square 1 0.411 0,169 0,119 source: author’s work from table 4 it can be seen that the adjusted r square value is 0.119. this means that the independent variables (profitability, liquidity, the size of the board of commissioners and the size of the audit committee) are able to explain the dependent variable (disclosure of financial risk) of 11.9 % and 88.1 % is explained by other variables outside the study. the t test was conducted to see the effect of each independent variable on the dependent variable. the following is a table of the partial test results of this study. table 5. partial test results model t sig. hypotheses 1 (constant) 2.974 0.004 profitability -2.064 0.043* h1 is accepted liquidity 0.606 0.546 h2 is rejected board of commissioners size 0.377 0.707 h3 is rejected audit committee size 2.717 0.008* h4 is accepted source: author’s work note: * significance at the 5 % level the f-test was carried out to see the effect of the independent variables together on the dependent variable. the following are the results of the simultaneous tests of this study. irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 86 table 6. simultaneous tests results model sum of squares df mean square f sig. regression 0.025 4 0.006 3.399 0.014a residual 0.121 67 0.002 total 0.146 71 source: author’s work from table 6, it can be seen that the significant value is 0.014a < 0.05, so it is concluded that simultaneously the variables of profitability, liquidity, board size and audit committee size affect, the disclosure of financial risk. discussion the effect of profitability on the disclosure of financial risk according to the results obtained from the first hypothesis test, the t value is -2.064 and, it is significant because 0.043 is < 0.05 which means that, at a significant level of 5 %, profitability affects disclosure of financial risk. thus the first hypothesis is accepted. the results of this study are supported by yunifa and juliarto (2017) who stated that profitability affects risk disclosure. however, in this study, profitability has a negative effect on the disclosure of financial risk, meaning that the higher the level of profitability achieved by a company, the lower the level of the disclosure of financial risk that is made. profitability is a description of the overall performance of management which can be seen from the amount of profit received in relation to sales and investment. there is a negative influence between profitability and disclosure of financial risk because companies that experience low profitability also tend to experience high risk, so this encourages managers to increase risk disclosure in order to explain in detail what happened in order to explain to the shareholders how management handled the risks that existed, to reduce negative views of investment quality, and to minimize the occurrence of information asymmetry between the management and the principals in accordance with agency theory. however, the empirical research on this subject did not find evidence of the existence of a positive significant association between a company's profitability and its risk disclosure level (linsley and shrives 2006). the effect of liquidity on the disclosure of financial risk according to the results of the second hypothesis test, the t value is 0.606 and it is not statistically significant because 0.546 > 0.05 which means that, with a significant level of 5 %, liquidity has no effect on the disclosure of financial risk. thus the second hypothesis is rejected. according to signal theory, management will disclose more risk information if their company’s liquidity ratio is high. this is done because they want to show their ability to manage liquidity risk compared to companies with low liquidity ratios, and they want to provide an explanation to stakeholders about the condition of these companies (amran et al. 2009). however, the results of this study do not show the effect of liquidity on financial risk disclosure. a company’s level of liquidity does not affect the extent of financial risk disclosure given because producing liquidity is imperative for every company. its management considers whether the level of liquidity is sufficient to serve as a positive signal for stakeholders to assess the company's prospects without having to disclose risks more broadly. the effect of the size of the board of commissioners on the disclosure of financial risk according to the results of the third hypothesis test, the t value is 0.377 and it is not statistically significant because 0.707 > 0.05 which means that, at a significant level of 5 %, the size of the board of commissioners has no effect on the disclosure of financial risk. thus the third hypothesis is rejected. the results of this study are supported by elfeky (2017) who found that the size of the board of commissioners has no effect on risk disclosure. according to the data obtained, the number of commissioners owned by each company has met the requirements, namely at least two people. however, in this study, the size of the board of commissioners cannot influence the disclosure of a company’s financial risk. agency theory argues that the board of commissioners represents the main internal mechanism for monitoring opportunistic behavior by the management in order to help balance the interests of shareholders and management. a large board of commissioners is believed to be able to improve accuracy in supervising and controlling management due to the combination of skills among the board’s members. however, a board of commissioners with too many members can slow down the decision-making process because the chances of conflict between members of the board of commissioners are greater if there are differences of opinion; this makes it necessary to unite the various views and opinions of all members of the board of irine herdjiono and mira yanti/ finance, accounting and business analysis, volume 5, issue 1, 2023 87 commissioners. the effect of audit committee size on financial risk disclosure according to the results of the fourth hypothesis test, the t value is 2.717 and it is significant because 0.008 < 0.05 means that at, a significant level of 5 %, the size of the audit committee has an effect on financial risk disclosure. thus the fourth hypothesis is accepted. the results of this study are supported by samaha and dahawy (2011) who found that audit committee size has an effect on risk disclosure. ojk regulation no.55/pjok.04/2015, article 4, explains that the audit committee has at least three members who are independent commissioners and parties from outside the company. the duties of the audit committee are to encourage the implementation of cgc, to encourage the establishment of an adequate internal control structure, to improve the quality of financial disclosure and reporting, to supervise the implementation of auditor examinations, and to review the scope, accuracy, independence, and objectivity of public accountants. the size of the audit committee has an effect on financial risk disclosure because the existence of an audit committee can make companies more accountable and transparent in carrying out financial reporting and avoid manipulation of disclosures because the audit committee will oversee all company activities. this is in accordance with agency theory which explains that the larger the audit committee, the more effective its performance will be in assisting the board of commissioners, namely in carrying out its supervisory duties because it involves a lot of the necessary expertise and points of view. with the existence of effective oversight from the audit committee, it will be possible to suppress the management's desire to take actions that benefit themselves and so the management will make broader risk disclosures. conclusion the conclusions that can be drawn from the results of the data analysis conducted and the discussion are that profitability and audit committee size have an effect on financial risk disclosure, while the independent variables liquidity and board size have no effect on it. at the same time, the variables profitability, liquidity, board size, and audit committee size do have an effect on the disclosure of financial risk. the implication of this research for investors is that they are expected to be more careful in choosing a company in which to invest. only looking at the amount of profit that can be generated and the return that will be received is insufficient; they should also pay attention to the corporate governance of companies such as the size of the audit committee, because a large numbers of members can minimize the occurrence of agency conflicts between management and principals. the implication of this research for companies is that the results show that the average level of financial risk disclosure by companies is 0.299. according to the data obtained, the average company has 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https://doi.org/10.37075/faba.2024.2.08 decision-making by individual investors in japan: verification using a binary response model with survey data shin fukuda1* , luna akahira2 department of business administration, komazawa university, tokyo, japan1 department of business administration, komazawa university, tokyo, japan2 * corresponding author info articles abstract history article: submitted 27 october 2024 revised 1 december 2024 accepted 5 december 2024 purpose: in line with the government's initiative to shift “from savings to investment,” the small investment tax-free system (nippon individual savings account) was introduced in japan in january 2014. this paper compares and analyzes the holding motivations of the old systems of “general nisa” and “tsumitate (accumulated) nisa” as of 2018 and 2023. design/methodology/approach: the data used is from the japan securities dealer-s association’s “survey on attitudes of individual investors regarding securities investment”. we estimated probability model using a probit model. findings: for general nisa, the findings show that investment probability is an increasing function of age and is for entertainment purposes. it also complements stock investments and is an alternative to investment trusts. for tsumitate nisa, investment probability is a decreasing function of age and an increasing function of living expenses during retirement. therefore, long-term factors are thought to be strong. additionally, it is considered a substitute for stock investments and a complement to investment trust. furthermore, while financial literacy is an important factor for the general nisa, it is less important for the tsumitate nisa. practical implications: this study examines the possibility that tax exemptions could promote stock investment in japan. expanding stock investment in japan is a major challenge. originality/value: the analysis is conducted using survey data from 5,000 people in japan. paper type: research paper keywords: nippon individual savings account (nisa), general nisa, tsumitate nisa, binary response model, probit estimation jel: g2, g15 address correspondence: e-mail : fukuda@komazawa-u.ac.jp1 1mg1017r@komazawa-u.ac.jp2 https://doi.org/10.37075/faba.2024.2.08 mailto:fukuda@komazawa-u.ac.jp mailto:1mg1017r@komazawa-u.ac.jp https://orcid.org/0000-0003-3134-7181 shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 197 introduction in a june 2023 study, for the general nisa, findings indicate that investment probability is an increasing function of age and is for entertainment purposes. it also complements stock investments and is an alternative to investment trusts. for the tsumitate nisa, investment probability is a decreasing function of age and an increasing function of living expenses during retirement. therefore, long-term factors are considered significant. additionally, it is considered a substitute for stock investments and a complement to investment trust. furthermore, while financial literacy is an important factor for the general nisa, it is less important for the tsumitate nisa. “the first year of doubling asset income from savings to investment,” prime minister kishida stated, “this year will be the first year of doubling asset income, and we will boldly and fundamentally advance the shift from savings to investment.” the term “save to invest” originated from japan's investment tax cuts in 2003. “from investment to savings” means shifting savings, such as large bank deposits, into investments such as stocks and investment trusts. the background to this includes japan's declining birthrate, aging population, and concerns about pensions. to address these issues, it is important for individuals to build assets. it is also believed that preventing corporate investment funds from remaining in banks promotes corporate growth leading to societal revitalization. as part of government policies, tax incentives have been introduced to promote investment, such as the nippon individual savings account (nisa) and the individual-type defined contribution pension plan (ideco). figure 1 illustrates the composition of household financial assets (as of 2023). japan's total household assets are 2,199 trillion yen, with approximately 51% held in cash and deposits. insurance, annuities, and fixed guarantees account for 24.6%, similar to the united states and eurozone. however, japan's combined holdings in stocks and investment trusts account for 19.6%, significantly lower than those of the united states (53.3%) and the eurozone (32.1%). as evident from this, in japan, funds tend to remain in households and banks. whether funds flow into the economy depends on the behavior of households, banks, and macroeconomic trends. the effective use of household financial assets that remain as cash and deposits is considered a challenge in japan. source: bank of japan, frb, ecb note: in the us, “stock etc.” includes corporate equity, proprietors’ equity in noncorporate business, equity investment by parent holding company, and foreign direct investment. the eurozone includes listed shares, unlisted shares, and other equity. figure1. composition of household financial assets japan us euro area cash/deposit, 50.9% debt securities, 1.3% mutual fund shares, 5.4% stock etc., 14.2% life insurance reserves, pension entitlements, 24.6% others, 3.6% 11.7% 4.6% 12.8% 40.5% 27.7% 2.7% 34.1% 3.1% 10.6% 21.5% 28.7% 2.0% shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 198 particularly, the nisa is expected to encourage individual investments. nisa is a tax-free system for investment gains and dividends introduced in japan in 2014 and modeled on the uk individual savings account (isa). its features include (i) tax exemptions, (ii) the ability to invest from small amounts, and (iii) the benefits of long-term management. there are three types of nisas: general nisa, tsumitate nisa, and junior nisa, which differ in terms of investment limits and target products. general nisa was introduced in january 2014 with an annual tax-free amount of 1,200,000 yen, and dividends and capital gains are tax-free. the tax exemption period is five years. eligible users are people aged 20 or older living in japan (however, from january 1, 2023, this will change to those aged 18 or older). financial products eligible for investment include listed stocks, equity investment trusts, exchange traded funds (etfs), and japan real estate investment trusts (j-reits). tsumitate nisa was introduced in january 2018, and the annual tax-free amount is 400,000yen. dividends and capital gains are tax free. this amount is smaller than that of the general nisa; however, the tax-free period is 20 years. in addition, unlike the general nisa, this is a long-term investment plan. therefore, since a fixed amount is saved into nisa every month, it is a beneficial system for those who want to make their own long-term asset plans. additionally, we cannot simultaneously use the general nisa and tsumitate nisa. in fact, looking at the composition of household financial assets, cash and deposits have decreased from 55.1% in 2010 to 50.9% in 2023, while the combined total of listed stocks and investment trusts have increased from 9.8% to 19.6%. figure 2 shows the trends in the market capitalization of stocks on the tokyo stock exchange and nisa balances. source: financial services agency figure2. stock market capitalization and nisa balance we can see that japan's asset balance has been steadily increasing, but its size is less than 1% of that of the united states. on the other hand, market capitalization and nisa are linked. in addition, since nisa is composed only of risk assets, the expansion of nisa is expected to change household asset formation. this study examines how investor psychology, basic finance knowledge, and financial literacy influence nisa choices. the data comes from a survey of 5,000 individuals conducted by the japan securities dealers association in the “survey on attitudes of individual investors regarding securities investment.” the remainder of this paper is organized as follows: section 2 reviews previous research on individual investment, section 3 outlines analytical methods and data, and section 4 presents estimates and discussion. related literatures many studies have focused on individual investments. horioka and watanabe (1997) used microdata from a japanese government survey to estimate how total savings from 12 different motives contribute to 200 400 600 800 1000 1200 0 0 10 20 30 40 50 general nisa tsumitate nisa market capitalization (left) 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 tr il li o n y en tr il li o n y en shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 199 total household savings. generally, household saving motives are classified into (i) life-cycle motives, (ii) precautionary motives, and (iii) bequest motives. horioka and watanabe (1997) points out that of the 12 motives, retirement and two preventive motives (illness and peace of mind) are the most significant, while net savings from bequest motives account for only 3.23% of the total. assuming a simple two-period model, savings in the current period will become consumption in the next period. if we perform a long-term analysis based on a short-term keynesian economic model, savings will accumulate each period by the marginal propensity to save. skinner (1988) estimated plausible parameters for income uncertainty and consumer risk aversion in a life-cycle model and finding that precautionary motives account for most of total savings. zhou (2003), using microdata for japan from the 1990s, concludes that income dispersion negatively impacts consumption, and that 5.6% of financial assets for working households and 64.3% of financial assets for selfemployed households are precautionary savings. ishihara and doi (2004) noted that employment risk causes precautionary savings. additionally, dynan et al. (2004) found that savings rates are positively correlated with lifetime income. kotlikoff and summers (1981) point out that approximately 81% of household assets in the united states are the result of intergenerational transfers, and that savings resulting from the life cycle are small. on the other hand, when estimating japanese data using the same method as kotlikoff and summers (1981), estimates suggest that transferred assets account for at most 30% (hayashi 1986; campbell 1997; dekle 1989, 1990). otake and horioka (1994) used the results of the "public opinion survey on savings" to examine bequest motives. as a result, they found that unconditional bequest motives (which kotlikoff and spivak 1981) call the implicit pension contract) were 32% in 1989 and 29% in 1990, while reward-based bequest motives (which kotlikoff and spivak 1981) call the bequest preference) were 20% in 1989 and 16% in 1990. meanwhile, an increasing number of studies investigate the relationship between financial literacy and individual investment1. recent studies include those by yamori and ueyama (2021) and sekita et al. (2022). for example, sekita et al. (2022) used the financial literacy survey (2016) to clarify how individual financial literacy in japan affects financial asset savings. van rooij et al. (2011) point out that using data from the netherlands, people with lower financial literacy tend to obtain information from their parents and friends. brown et al. (2008) also shows that in the united states, information sharing with neighbors promotes individual stock market participation. bernheim and garrett (2003) use 1994 data from the united states to show that financial education in the workplace increases the use of private pension plans2. in addition, goda et al. (2014) analyzed stock investment through mutual funds. they found that people who belong to a group that receives more information contribute more. the results so far show that information and education are important in promoting investment. finally, we will introduce research that points out the possibility that tax systems can promote investment. brown et al. (2017) classify us retirement pension systems into two types. one is the traditional individual retirement account (ira), and the other is the roth ira, which was introduced in 1997. the former is an eet type in which the contribution amount is deducted from income, and the latter is a tee type in which there is no tax reduction when contributing but instead no tax is imposed when withdrawing. in japan, the former can be considered as ideco and the latter as nisa. if progressive income taxes are not taken into account, asset accumulation through a roth ira would be preferable because uncertainty about future income tax rates creates uncertainty about the size of the tax benefit through the income deduction. second, the progressive income tax system makes an ira more favorable because your income will be higher during your working years than after retirement, allowing you to get a larger tax benefit from the earned income deduction. data and method data this study focuses on nisa and examine whether investor attitudes have changed since the introduction of the system several years ago. given that tsumitate nisa was introduced in 2018, this study 1 lusardi and mitchell (2014) provide a survey on financial literacy. 2 there are problems with the results of this analysis. for example, financial literacy may be low in workplaces where financial education is required. in this case, the effect of financial education on stock market participation will be underestimated. conversely, there may be cases where the higher the financial literacy in a workplace, the greater the demand for financial education. in this case, the effect of financial education will be overestimated. this issue may also arise in the empirical analysis of this paper, and is left as a topic for future study. shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 200 compares estimated results for 2018 and 2023. the data used is the same for 2018 and 2023. the data used is from the japan securities dealers association's “survey on attitudes of individual investors regarding securities investment.” the survey is conducted among 5,000 people who have opened financial accounts. in 2018, the usage rate of general nisa was 55.3%, and that of tsumitate nisa was 10.5%. in 2023, the usage rate of general nisa is 51.2%, and that of tsumitate nisa is 29.6%. the analysis is divided into two categories: "those who hold the general nisa" and “those who hold the tsumitate nisa” in the old nisa. in each case, the dependent variable is a binary indicator, equal to 1 if the investor holds an nisa, and 0 otherwise. next, we examine the explanatory variables. the variable “life stage” is assigned a value of 1 for respondents who answered “to purchase a home,” “to purchase durable consumer goods,” or “to save for my own wedding,” and a value of 0 for no response in response to the question “for what purpose have you used (or plan to use) general nisa or tsumitate nisa?.” the variable “children/grandchildren” is a binary variable that is assigned a value of 1 if either “educational funds for children/grandchildren” or “funds to leave to children/grandchildren” is selected, and a value of 0 if neither is selected. the japan securities dealers association survey asked simple financial questions. this was treated as a financial literacy variable, and a value was assigned according to the number of correct answers. those who answered all questions correctly received a score of 3, while those who answered all incorrectly received a score of 03. furthermore, the variable “time preference” is based on the question, “assuming you will definitely receive the money, if you had two options — (1) receiving 100,000 yen now or (2) receiving 110,000 yen in one year, you would choose (1).” the answers to this question were “i think so,” “i can't say,” and “i don't think so,” so the numbers 2, 1, and 0 are assigned to each answer. finally, for the variable “risk assessment,” we used the question, “if an investment of 100,000 yen results in a 50/50 chance of either a capital gain of 20,000 yen or a capital loss of 10,000 yen, i would not invest.” additionally, we included dummies variables for opening accounts at securities companies, banks, credit unions, credit associations, and dummies for holding stocks and investment trusts. method the dependent variable used in the analysis is a binary variable: having assets or not having assets. the dependent variable is binary taking the value of 1 if the investor invests and 0 otherwise. when estimating a probability model using ols, issues can arise in measuring marginal effects. therefore, we estimated it using a probit model4. the model to be estimated is a binary response type as follows: pr(𝑦 = 1|𝒙) = 𝐺(𝛽0 + 𝒙𝜷) (1) where 0 < 𝐺(𝑧) < 1 for real 𝑧 and 𝒙𝜷 = 𝛽1𝑥1 + 𝛽2𝑥2 + ⋯. the well-known logit and probit models assume that 𝐺(𝑧) is logistic and standard normal distributed, respectively. therefore, 𝐺(𝑧) = exp(𝑧) 1 + exp(𝑧) = λ(𝑧) (2) is used in the case of the logit model, and the following is used in the case of the probit model: 𝐺(𝑧) = ∫ 𝜙(𝑣)𝑑𝑣 𝑧 −∞ = φ(𝑧) (3) where 𝜙(𝑧) is the standard normal density: 3 the questions asked were as follows: 1. investments with higher than average of returns also carry higher than average risks. 2. buying shares in a single company is usually a safer investment than buying a mutual fund (a financial product that invests in multiple stocks). 3. when interest rates rise, bond prices fall. 4 although it is also possible to estimate using the logit model, we use the probit model for our analysis because the only difference between the probit and logit models is the complexity of the calculations, and the results do not significantly differ. shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 201 𝜙(𝑧) = (2𝜋)−1 2⁄ exp(−𝑧2 2⁄ ) (4) as can be seen from equation (1), 𝛽𝑗 cannot be a useful measure of marginal effect. as can be seen from equation (1), 𝛽𝑗 cannot be a useful measure of the marginal effect because the model function is specified by nonlinear 𝐺. if 𝑔(𝑧) is the probability density function, the marginal effect in this case is measured as follows: 𝜕𝑝(𝒙) 𝜕𝑥𝑗 = 𝑔(𝛽0 + 𝒙𝜷)𝛽𝑗 (5) now, if 𝑥1 = 0 𝑜𝑟 1 is a binary variable, the marginal effect of changing 𝑥1 from 0 to 1 is calculated as: 𝐺(𝛽0 + 𝛽1 + 𝛽2𝑥2 + ⋯ + 𝛽𝑘𝑥𝑘) − 𝐺(𝛽0 + 𝛽2𝑥2 + ⋯ + 𝛽𝑘𝑥𝑘) (6) for example, if this is positive, it means that when 𝑥𝑖 = 1 in the margin, the probability 𝑦 = 1 increases. binary response models are estimated by maximum likelihood methods. the procedure begins by constructing a weight function such as: 𝑓(𝑦|𝒙𝑖; 𝜷) = [𝐺(𝛽0 + 𝒙𝜷)]𝑦[1 − 𝐺(𝛽0 + 𝒙𝜷)]1−𝑦 , 𝑦 = 0,1 (7) that represents the density function of 𝑦𝑖 given 𝑥𝑖. this function indicates that when 𝑦 = 1, 𝑓 = 𝐺, and when 𝑦 = 0, 𝑓 = 1 − 𝐺. by taking the logarithm of both sides, we can obtain the log-likelihood like ℓ𝑖(𝜷) = 𝑦𝑖 log 𝐺 + (1 − 𝑦𝑖) log[1 − 𝐺] (8) when the sample size is 𝑛, the model log-likelihood is 𝐿(𝜷) = ∑ ℓ𝑖(𝜷)𝑛 𝑖=1 . the 𝜷 maximizing this is the maximum likelihood estimator �̂�. finally, we will briefly explain the method for deriving the marginal effects used in this paper. the effect of 𝑥𝑗 on the response probability is: pr(𝑦 = 1|𝒙)̂ ≈ [𝑔(�̂�0 + 𝒙�̂�)�̂�𝑗] (9) however, the density function depends nonlinearly on all explanatory variables, making it difficult to integrate marginal effects. to address this, we calculate the average partial effects. this is defined as the individual marginal effects averaged across the sample, as follow5: 𝑛−1 ∑ 𝑔(�̂�0 + 𝒙𝑖�̂�) 𝑛 𝑖=1 (10) estimation results first, we review the decision-making factors for stock and mutual fund selection as a benchmark, and then examine nisa (until 2023) decision-making. additionally, nisa's analysis compares the results of analyses for 2018 and 2023. however, since the same individuals are not traced, it is impossible to observe changes in the decision-making of the same individuals. 5 another solution is to use the partial effect at the average method, which replaces each explanatory variable with its sample mean. however, the following problems have been pointed out: i. when some of the explanatory variables in the model are discrete, their means no longer represent the sample means. ii. problems also arise when continuous explanatory variables are combined as nonlinear functions. shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 202 stock and mutual funds stock investments involve buying shares in individual companies and making profits based on the company's growth and performance. naturally, stock investment is a high-risk, high-return investment because stock prices fluctuate greatly, and while it is possible to make huge returns in a short period, it can also result in huge losses. furthermore, unlike the complete model, this requires a relatively heavy amount of capital. in contrast, investment trusts involve collecting money from many investors and managing it as a single fund, with professional managers diversifying investments into stocks, bonds, and other assets. compared to stock investments, investment trusts have lower returns, but the risk can be reduced by diversifying investments. therefore, stocks are for investors who want to earn huge returns in the short run, whereas investment trusts are for investors who want to limit risk and increase their assets in the long run. table 1 presents the results of the probit estimation of the binary response models for stocks and mutual funds6. the estimation results suggest that differences exist in decision-making between stock investments and mutual funds. for example, stocks are positively affected by age, whereas mutual funds are adversely affected by age. additionally, while household income positively impacts both, its effect on stock investment is clearly greater. furthermore, when examining the items categorized by purpose, stock investment is influenced by relatively short-term objective factors, while investment trusts are not influenced by such items, and are positively influenced only by “life after retirement7.” thus, we understand that investment trusts are held for long-term purposes, whereas stocks are managed for short-term living and entertainment. financial literacy positively impacts on both. thus, a certain level of financial knowledge may provide a sense of security when making investments decisions. risk assessment also has a positive impact on both, but its influence on stock investment is greater, suggesting that stock investors tend to be more risk tolerant. however, there is a significant difference in time preference. this result shows that stock investors want to earn money in the short term, while mutual fund investors are willing to invest in the long term if they expect a certain level of return. table 1. stock and mutual fund selection analysis explanatory variables stocks mutual fund age 0.1727*** (0.0150) -0.1525*** (0.0148) gender -0.5719*** (0.0699) 0.1463** (0.0657) household income 0.1238*** (0.0220) 0.0329* (0.0186) life stage 0.0045 (0.1154) -0.0765 (0.1074) hobby 0.2764** (0.1106) -0.0254 (0.0955) living expenses 0.2485*** (0.0907) -0.1183 (0.0804) children / grandchildren -0.1958* (0.1005) 0.1706* (0.0997) life after retirement -0.3511*** (0.0220) 0.8855*** (0.0633) literacy 0.0980** (0.0409) 0.2972*** (0.0372) time preference 0.1525*** (0.0382) -0.1415*** (0.0339) risk evaluation 0.2833*** (0.0446) 0.0806** (0.0407) log-likelihood -2640.539 -3075.964 pseudo 𝑅2 0.0695 0.0755 note: numbers in parentheses indicate standard deviations. furthermore, note that “*” indicates significance at the 10%, “**” at the 5%, and “***” at the 1% level. 6 note that the results presented are not marginal effects but merely estimated results. 7 similarly, note that stock investment reacts negatively to “life after retirement.” shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 203 nisas a major feature of the nisa is its tax-free status, although there are limitations regarding time and amount. for the general nisa, the annual tax-free amount is 1,200,000 yen, and the tax-free period lasts five years. similarly, under the tsumitate nisa, the annual tax-free amount is 400,000 yen, but the tax-free period extends to 20 years. furthermore, while it has been permitted since the introduction of the new nisa, previously, holding both the general and tsumitate nisa accounts simultaneously was not allowed. table 2 presents the results of the analysis of factors affecting the choice between the general and tsumitate nisa. the estimated results show the marginal effects of the probit model and cover the years 2018 and 2023. first, we examine the estimation results for the general nisa. the variable “age” increases the probability of choosing the general nisa in 2018 and 2023. this trend reflects the fact that the general nisa is considered a short-term investment. other results are consistent with those of the stock investment analysis, with the notable difference being that household income is negative. this may reflect the fact that nisa is a small investment. comparing the results from 2018 and 2023, it is interesting to note that “hobby” has changed from negative to positive. meanwhile, “life stage” is negative and significant, whereas “living expenses” is not significant. this is considered an indication that general nisa is a short-term, smallamount investment, and investors want to secure spending for entertainment. next, let us look at tsumitate nisa. in tsumitate nisa, “age” has an adverse effect, while “life after retirement” has a positive effect. this shows that the tsumitate nisa is purchased for long-term investments. simultaneously, since “children and grandchildren” are insignificant, the aspect of inheritance purposes is excluded, meaning the tsumitate nisa is being used solely for one's benefit. additionally, there is no difference between the general and tsumitate nisa in terms of whether one holds an account with a securities company or bank, and both have a significantly positive impact. table 2. marginal effects of choosing between general nisa and tsumitate nisa independent variables general nisa tsumitate nisa 2018 2023 2018 2023 age 0.0184*** (0.0030) 0.0522*** (0.0027) -0.0074*** (0.0010) -0.0400*** (0.0019) gender 0.0147 (0.0120) -0.0010 (0.0127) -0.0013 (0.0047) 0.0148 (0.0100) household income -0.0121*** (0.0035) -0.0089** (0.0036) -0.0004 (0.0015) -0.0047 (0.0030) life stage -0.0695*** (0.0253) -0.0539*** (0.0197) 0.0044 (0.0083) -0.0312** (0.0137) hobby -0.0455*** (0.0172) 0.0407** (0.0183) -0.0061 (0.0060) -0.0306** (0.0133) living expenses -0.0043 (0.0161) 0.0184 (0.0152) 0.0020 (0.0063) -0.0008 (0.0117) children / grandchildren -0.0530*** (0.0200) -0.0295* (0.0178) 0.0111 (0.0075) 0.0216 (0.0138) life after retirement -0.0093 (0.0122) -0.0302** (0.0126) 0.0223*** (0.0049) 0.1040*** (0.0101) literacy 0.0201*** (0.0067) 0.0170** (0.0074) -0.0011 (0.0028) -0.0057 (0.0059) time preference 0.0050 (0.0064) -0.0002 (0.0065) -0.0070** (0.0027) 0.0020 (0.0052) risk evaluation 0.0048 (0.0076) 0.0050 (0.0078) 0.0018 (0.0030) -0.0078 (0.0061) securities companies 0.5536*** (0.0113) 0.4161*** (0.0120) 0.1873*** (0.0203) 0.0566*** (0.0124) banks, credit unions, and credit associations 0.4206*** (0.1331) 0.3617*** (0.0183) 0.0943*** (0.0203) 0.0707*** (0.0196) stock holdings 0.0307* (0.0169) 0.0921*** (0.0154) -0.0149** (0.0063) -0.1027*** (0.0133) mutual fund holdings -0.0050 (0.0130) -0.0600*** (0.0141) 0.0080 (0.0055) 0.0703*** (0.0113) note: numbers in parentheses indicate standard deviations. moreover, note that “*” indicates significance at the 10%, “**” at the 5%, and “***” at the 1% level. finally, we examine the differences between the general nisa and tsumitate nisa. the first shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 204 difference is observed in the variable “literacy.” the general nisa was significantly positively affected, but the tsumitate nisa was not. this is so because the tsumitate nisa selects only funds recommended by financial institutions. this suggests that the tsumitate nisa could be a useful entry point for beginner investors. differences also emerge in the dummy variables for “stockholdings and “investment/trust holdings.” in the general nisa, stock holdings are positive and investment trust holdings are negative. in contrast, the tsumitate nisa, investment trust holdings are positive and stock holdings are negative. this suggests that the general nisa may play a complementary role in stock holdings, whereas the tsumitate nisa may play a complementary role in investment trust. concluding remarks this study examined the choice between stocks, mutual funds, and the decision-making process for nisa. focusing on nisa, the findings indicate that the general nisa is for short-term purposes, and tsumitate nisa is for long-term purposes. however, it appears that the inheritance motive is not at work when it comes to holding the tsumitate nisa, and that holding is simply a consideration of consumption activities in retirement. financial literacy was found to be high among investors who invested in stocks, purchased investment trusts, and had regular nisas, but it had no significant effect on tsumitate nisas. if the government's goal is to promote investment, tsumitate nisas may play a role. nevertheless, the possibility of capital outflows to foreign countries cannot be overlooked. the new nisa system will be adopted from 2024, making it possible to hold the general nisa and tsumitate nisa simultaneously. moreover, the tax-free period and tax-free amount have been significantly expanded. how these will contribute to the inflow of funds into nisa will be an issue for future studies using new survey data. references bernheim, b. d., and d. m. garrett. 2003. the effects of financial education in the workplace: evidence from a survey of households. journal of public economics, 87(7-8): 1487-1519. brown, d. c, s. cederburg, and m. o’doherty. 2017. tax uncertainty and retirement savings diversifycation. journal of financial economics, 126(3): 689-712. campbell, d. w. 1997. transfer and life cycle wealth in japan, 1974-1984. japanese economic review, 48(4): 410-423. dekle, r. 1989. the unimportance of intergenerational transfers in japan. japan and the world economy, 1(4): 403-413. dekle, r. 1990. do the japanese elderly reduce their total wealth? a new look with different data. journal of the japanese and international economies, 4(3): 209-317. deuflhard, f., d. georgarakos, and r. inderst. 2015. financial literacy and savings account returns. european central bank working paper series, no.1852. dynan, k. e., j. skinner, and s. p. zeldes. 2004. do the rich save more? journal of political economy, 112(2): 397-444. goda, g. s., c. f. manchester, and a. j. sojourner. 2014. what will my account really be worth? experimental evidence on how retirement income projections affect saving. journal of public economics, 119: 8092. hayashi, f. 1986. why is japan’s saving rate so apparently high? in s. fischer ed., nber macroeconomic-s annual 1986, 1: 147-210. horioka, c. y., and w. watanabe. 1997. why do people save? a micro-analysis of motives for household saving in japan. the economic journal, 107(442): 537-552. ishihara, h., and t. doi. 2004. consumption and saving behavior in japan in the 1990s. keizaibunseki, 174 (in japanese). kotlikoff, l. j., and a. spivak. 1981. the family as an incomplete annuities market. journal of political economy, 89(2): 372-391. kotlikoff, l. j., and l. h. summers. 1981. the role of intergenerational transfers in aggregate capital accumulation. journal of political economy, 89(4): 706-732. lusardi, a., and o. s. mitchell. 2014. the economic importance of financial literacy: theory and evidence. journal of economic literature, 52(1): 5-44. otake, f., and c. horioka. 1994. savings motive. in ishikawa, t. (ed.), income and wealth distribution in japan, university of tokyo press: 211-244 (in japanese). sekita, s., v. kakkar, and m. ogaki. 2022. wealth financial literacy and behavioral biases in japan: the effect of various types of financial literacy. journal of japanese and international economies, 64, 101190. shin fukuda and luna akahira/ finance, accounting and business analysis, volume 6, issue 2, 2024 205 skinner, j. 1988. risky income, life cycle consumption, and precautionary savings. journal of monetary economics, 22(2): 237-255. van rooij, m., a. lusardi, and r. alessie. 2011. financial literacy and stock market participation. journal of financial economics, 101(2): 449-472. yamori, n., and h. ueyama. 2021. financial literacy and low stock market participation of japanese households, financial research letters, 44, 102074. zhou, y. 2003. precautionary savings and earnings uncertainty in japan: a household-level analysis. journal of japanese and international economics, 17: 192-212. 74 finance, accounting and business analysis volume 6 issue 1, 2024 http://faba.bg/ issn 2603-5324 do economic and geopolitical risks matter for banks’ lending decisions, credit risk, performance, and stability in south africa? damien kunjal1* , ananda rao suvvari2 school of accounting, economics and finance, university of kwazulu-natal, durban, south africa1 indian institute of technology, goa, india2 info articles abstract history article: submitted 05 april 2024 revised 10 may 2024 accepted 11 may 2024 purpose: the objective of this study was to investigate the effect of economic and geopolitical risks on the lending decisions, credit risk, performance, and stability of banks in south africa. design/methodology/approach: to achieve this objective, ten banks were assessed for the period ranging from 2013 to 2022, and panel regressions were estimated with cross-sectional fixed effects. findings: the results show that economic policy uncertainty (epu) decreases credit risk and increases stability in the south african banking sector whilst geopolitical risk (gpr) increases credit risk and decreases stability. further, it was found that these effects are more pronounced in banks with smaller market capitalizations and higher equity capitalizations. moreover, global gpr has a destabilizing effect on south african banks. remarkably, both epu and gpr do not significantly influence lending decisions and performance by banks in south africa. practical implications: this research enables a greater understanding of the determinants of banks’ lending decisions, credit risk, performance, and stability which is essential for devising governance policies and regulations to reduce fragilities in the banking system. originality/value: given the scarcity of banking sector research in emerging markets, this study contributes to the existing literature by investigating the role of epu and gpr on banking sector dynamics which remains understudied in south africa. keywords: bank lending; bank stability; credit risk; economic policy uncertainty; geopolitical risk. paper type: research paper keywords: bank lending; bank stability; credit risk; economic policy uncertainty; geopolitical risk. jel: f5, g21, g28 address correspondence: email: kunjald@ukzn.ac.za1 suvvari.anand@gmail.com2 mailto:%20kunjald@ukzn.ac.za1 https://orcid.org/0000-0002-3121-6969 https://orcid.org/0000-0002-8890-3348 damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 75 introduction around the world, the efficiency of a country’s financial system largely depends on the stability of its banking system. the primary role of a bank is to act as an intermediary between depositors, who have surplus funds, and borrowers, who require funds. in addition, banks promote liquidity creation, economic growth, financial inclusion, and sustainable development (alkhazaleh 2017; léon and zins 2020; kahn and wagner 2021). however, like any business, banks can also fail. failures in the banking sector could disrupt the flow of funds, subsequently, having a negative impact on economic activity and financial systems as a whole (khan et al. 2017; daly et al. 2019; liu et al. 2021). furthermore, bank failures could lead to contagion and systemic risks which lead to the failure of other financial institutions (baumöhl et al. 2020). thus, instability in the banking system is often cited as one of the main causes of the 2008 global financial crisis (yeoh 2010; ozili 2021). fragility in the banking sector is caused by several factors, including economic and geopolitical risks. economic policy uncertainty (epu) relates to the inability to correctly predict when and how the government will revise its current policies (wen, et al., 2021). uncertainties related to economic policies not only affects the real economy, but also influences the operational strategies of banks. in particular, banks assist governments in achieving economic control by implementing macroeconomic policies which may require an adjustment in deposit rates and reserve requirement ratios, subsequently, influencing the operational strategies of banks (chi and li 2017). for instance, economic risks which relate to epu may influence banks’ strategies for lending. bordo et al. (2016) reported that epu in the united states lead to a reduction in the growth of loans in order to reduce credit risk exposure, however, the effects of epu is more prominent for larger, less liquid, and less capitalised banks. furthermore, epu leads to a growth in nonperforming loans (chi and li 2017) and bad debts begin to increase as borrowers become unable to service their debt (hamdi and hassen 2022), subsequently, exposing banks to greater credit risk. however, the effect of epu on credit risk is more pronounced for banks with lower profitability and lower solvency in the united states (orden-cruz et al. 2023). the vulnerability of banks to epu could also influence their performance. athari (2021) found that epu has a negative effect on the performance of ukrainian banks as measured by their profitability. additionally, epu creates informational asymmetries and resource allocation inefficiencies which adversely impacts the stability of banks (desalegn et al. 2023). on the contrary, nguyen, et al. (2021) reported that increased epu is associated with better cost management efficiency and profitability for indian banks. given the inconsistencies in existing research, it becomes critical to further explore how economic risk, captured by epu, impacts the banking sector. another key risk impacting the banking sector is geopolitical risk (gpr). by definition, gpr relates to the uncertainties associated with terrorism, wars, and any conflict between political entities that disturb the normal and peaceful course of international relations (caldara and iacoviello 2022). therefore, while epu relates to risks associated with economic stability and policy interventions, gpr relates to risks associated with war-like conflicts that are exogenous to business cycles and economic conditions. gpr may create informational asymmetries between borrowers and banks, causing banks to increase the cost of loans (nguyen and thuy 2023). as a result, higher gpr leads to a reduction in consumer and mortgage loans because fear causes consumers to delay spending and investment (demir and danisman 2021). this credit shrinkage deteriorates the performance of banks (yildirim and berkman 2022). overall, gpr is associated with negative investor sentiments, reduced credit growth, increased default risk, and higher profit variations which lead to increased fragility in the banking sector (phan, et al., 2022). however, research on the impact of geopolitical risk on the banking system remains scanty, especially in the south african context. on this background, the objective of this study is to investigate the effect of economic risk, captured through epu, and geopolitical risk on the lending decisions, credit risk, performance, and stability of banks in south africa. the motivation for concentrating on the south african banking sector stems from the high levels of concentration in this sector. in particular, five prominent banks (absa, capitec, first national bank, nedbank, and standard bank) control more than 90% of the market share (ngonisa et al. 2023). such high levels of concentration exposes the banking sector to fragilities and makes it more vulnerable to external shocks. a common shock impacting the banking sector is epu (desalegn, et al. 2023). in recent years, south africa has experienced high uncertainty regarding economic policies primarily due to weak growth projections, high interest rates, low business confidence, and uncertainty regarding public finances (burger 2023). another factor influencing the stability of the banking sector is gpr (phan et al. 2022). recently, south africa has been involved in geopolitical conflicts including its geopolitical tensions with the united states over south africa’s perceived support for russia in the russia-ukraine war (burger 2023). further geopolitical tensions could stem from the south african parliament’s vote to suspend diplomatic ties with israel amid the israel-palestine war (panchia 2023). given the rising economic and geopolitical risks in south africa, it is vital to understand how these risks impact the banking sector, which is needed to foster economic growth and efficiency in the financial system. damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 76 this study contributes to existing literature in several ways. according to orden-cruz et al. (2023), research on the effect of epu on the credit risk of banks is scanty. this study extends research in this domain by exploring how epu impacts banks’ credit risk as well as lending decisions, performance, and stability. likewise, phan et al. (2022) mention that there has not been much research on the influence of geopolitical risk on banks’ stability. as such, this study contributes to existing literature on the effect of geopolitical risk on various aspects of the banking sector. naili and lahrichi (2022) acknowledge that there is also a scarcity of banking sector research in emerging markets. accordingly, this study sheds light on banks in emerging markets, particularly, from the south african context. the objectives of this research also enable a greater understanding of the determinants of banks’ lending decisions, credit risk, performance, and stability which is essential for devising governance policies and regulations to reduce fragilities in the banking system. this paper is structured as follows: section 2 reviews existing literature on the effects of epu and gpr on banks. section 3 outlines the data and methodology employed. section 4 presents the results, and section 5 concludes the study. literature review the effects of epu on banks existing research suggests that epu impacts various bank-related aspects. one of the earliest studies exploring the effect of epu on the banking sector was conducted by bordo et al. (2016). bordo et al. (2016) discovered that epu decrease bank loan growth in the united states. further, it was reported that this effect is stronger for banks that are larger, less capitalised, and less liquid. with a larger sample of 19 countries (excluding south africa), hu and gong (2019) reported that there is a negative relationship between epu and credit growth so that banks can reduce their exposure to credit risk. this effect was stronger for larger and riskier banks but weaker for banks with more liquidity and greater diversification. similar findings were reported by danisman et al. (2020) for european banks. notably, nguyen et al. (2020) reported that the negative effect of epu on bank credit growth is more pronounced in emerging markets relative to developed markets. regarding bank credit risk, chi and li (2017) found that epu increases loan concentrations, loan migration rates, and non-performing loan ratios, subsequently, leading to an increase in the credit risk of chinese commercial banks. similarly, karadima and louri (2021) reported that epu increases nonperforming loans in italy, france, spain and germany, however, this effect is moderated by the level of bank concentration. on the contrary, ozili (2022) discovered that epu and non-performing loans are negatively correlated for european union and g7 countries. hamdi and hassen (2022) reported that epu increase banks’ credit risk but decrease loan sizes and performance in tunisia. similar findings are reported by mendy et al. (2023) for u.s banks. on the contrary, nguyen et al. (2021) found that epu improves cost efficiency and enhances the profitability of indian banks. with regards to bank stability, nguyen (2021) reported that epu adversely impacts bank stability in european countries. the negative effect is attributed to higher bank risk-taking which increase the chances of corporate failure. according to nguyen (2021), the higher bank risk-taking amid epu is induced by the adverse effect of epu on various economic activities, the reduction in banks’ profitability, and herd behaviour. similarly, phan et al. (2021) reported that epu negatively influences financial stability at both countryand bank-levels for 23 countries excluding south africa. according to phan et al. (2021), this negative effect is because epu creates uncertainty which leads to informational asymmetries that make it difficult for banks to understand the characteristics of borrowers, subsequently, making it challenging for banks to distinguish credit risks during periods of uncertainty. in addition, shabir et al. (2021) found that epu negatively influences bank stability, regardless of the levels of income and development in countries. epu is also seen to affect other aspects of the banking sector. ashraf and shen (2019) found that higher epu brings about an increase in the prices of bank loans in order to compensate banks for additional default risk. tran (2020) discovered that banks reduce dividend payouts and share repurchases amid epu to be more precautionary. tran, et al. (2021) found that u.s banks are more likely to diversify their income streams into non-interest income generating streams during periods of high epu, which may positively contribute to bank performance. on the contrary, boungou and mawusi (2022) reported that epu has no significant effect on banks’ non-interest income activities in germany, greece, france, japan, italy, ireland, spain, sweden and the netherlands. berger et al. (2022) found that epu promotes liquidity hoarding in order for banks to protect themselves against funding difficulties and liquidity shocks. the effects of gpr on banks unlike epu, research on the impact of gpr on the banking sector is relatively limited. demir and danisman (2021) reported that gpr leads to a decrease in consumer and mortgage loans because gpr induces fear among consumers causing them to delay spending and investment. however, the authors found damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 77 that corporate loans are not significantly influenced by gpr. nguyen and thuy (2023) found that gpr increases the cost of loans in the u.s in order to compensate banks for the additional risk of default. with regard to bank performance, alsagr and hemmen (2020) discovered that gpr has a significant, negative effect on the profitability of banks in 19 emerging countries. similarly, yildirim and berkman (2022) reported that gpr has a negative effect on the profitability of banks in g7 countries. the authors attribute this finding to the credit shrinkage, amid geopolitical uncertainty, which negatively impacts performance. regarding bank stability, phan, et al. (2022) found that an increase in gpr is associated with a decrease in the stability of u.s banks, and this effect is weaker for large and more capitalised banks. according to phan et al. (2022), this finding may be attributed to reduced liquidity provision as a result of the panic caused by increased gpr and uncertainty. furthermore, gpr fosters negative investor sentiments causing investors to become concerned about losing money, thus, moving their investments from risky to safer assets which may lead to a reduction in liquidity among banks. phan et al. (2022) also mention that gpr induces a reduction in loan growth and an increase in credit risk as well as profit variations which expose banks to increased fragility. likewise, shabir et al. (2023) reported that geopolitical uncertainties induce herding behaviour among banks because of the lack proper guiding risk framework. in addition, geopolitical uncertainties promote risk-taking behaviour to search for yield. however, this herd and risktaking behaviour does not generate the desire outcomes, instead it generates higher risk and instability for banks (shabir et al. 2023). the limited research on the impact of gpr on banks highlights the need for further research in this domain. data and methodology data sample the sample of this study includes ten south african banks which are locally-controlled, namely; absa bank limited, bidvest, capitec bank limited, firstrand limited, grindrod bank limited, investec, nedbank, sasfin bank limited, the standard bank of south africa limited, and ubank. the study excludes foreign-controlled banks, mutual banks, and state-owned banks, and only includes banks with complete data for the full sample period. the ten-year sample period varies from 2013 to 2022. this study relies on financial statements which are reported annually. accordingly, the frequency of data employed is annual. furthermore, the use of annual data is supported by makrelov et al. (2023) who mention that annual data allows for comparison with existing research on the banking sector which typically uses annual data and removes the noise that is present in monthly data. computation of variables in order to compute the variables used in this study, financial statements are obtained from the bankfocus database. in line with existing research, banking lending decisions are proxied by the growth rate of loans while credit risk is measured by the non-performing loans ratio. additionally, bank performance is measured by the return on average assets and bank stability is computed using the z-score. noteworthy is that an increase in the z-score is associated with a reduction in the probability of bank insolvency and, thus, an increase in bank stability (shabir et al. 2021). regarding the independent variables, economic risk is captured by epu. following demir and danisman (2021) and udeagha and muchapondwa (2022), the world uncertainty index (wui), created by ahir et al. (2018), is used as a proxy for epu. the index is based on the frequency of the term “uncertainty” in the country reports by the economist intelligence unit (ahir et al. 2018). the index is rescaled and normalised, and an increase in the index value signifies an increase in the level of uncertainty. following a myriad of recent literature, geopolitical risks are captured using the geopolitical risk (gpr) index created by caldara and iacoviello (2022). the gpr index is based on the frequency of articles in leading newspapers in the united states, canada, and the united kingdom that discuss adverse geopolitical events and threats (caldara and iacoviello 2022). like the wui, the gpr index is normalised and an increase in the index value signifies an increase in geopolitical risk and uncertainty. data on the wui for south africa is obtained from https://worlduncertaintyindex.com/ while gpr index data is obtained from https://www.matteoiacoviello.com/gpr.htm. in addition, macroeconomic data is obtained from the south african reserve bank (sarb) to compute some of the control variables. table 1 summarises the computation of the variables in this study based on existing literature. https://worlduncertaintyindex.com/ https://www.matteoiacoviello.com/gpr.htm damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 78 table 1. variables used in this study variable symbol computation source dependent variables growth rate of loans grl 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑙𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡𝑠 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟 hamdi and hassen (2022) non-performing loans ratio npl 𝑁𝑜𝑛 − 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑖𝑛𝑔 𝑙𝑜𝑎𝑛𝑠 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 chi and li (2017) return of average assets roa 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 alsagr and hemmen (2020) stability z-score 𝑆𝑢𝑚 𝑜𝑓 𝑅𝑂𝐴 𝑎𝑛𝑑 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑡𝑜 − 𝑎𝑠𝑠𝑒𝑡𝑠 𝑟𝑎𝑡𝑖𝑜 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑅𝑂𝐴 𝑜𝑣𝑒𝑟 𝑝𝑎𝑠𝑡 3 𝑦𝑒𝑎𝑟𝑠 phan et al. (2022) independent variables economic risk epu 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑊𝑜𝑟𝑙𝑑 𝑈𝑛𝑐𝑒𝑟𝑡𝑎𝑖𝑛𝑡𝑦 𝐼𝑛𝑑𝑒𝑥 demir and danisman (2021) geopolitical risk gpr 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐺𝑒𝑜𝑝𝑜𝑙𝑖𝑡𝑖𝑐𝑎𝑙 𝑅𝑖𝑠𝑘 𝐼𝑛𝑑𝑒𝑥 phan, et al. (2022) bank-specific control variables (𝑩𝑪𝒐𝒏𝒕𝒓𝒐𝒍) size size 𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 chi and li (2017); alfadli and rjoub (2020); orden‐ cruz et al. (2023) financial leverage lev 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 capital adequacy ratio car 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑅𝑖𝑠𝑘 − 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 diversification div 𝑁𝑜𝑛 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 market-specific control variables (𝑴𝑪𝒐𝒏𝒕𝒓𝒐𝒍) gross domestic product gdp 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 orden-cruz et al. (2023) inflation inf 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 (𝐶𝑃𝐼) iqbal et al. (2020) source: authors’ own compilation. methodology based on a review of existing literature, the following panel regressions are estimated to achieve the objectives of this study: 𝑌𝑖,𝑡 = 𝛼0 + 𝛽1𝐸𝑃𝑈𝑡−1 + ∑ 𝛾𝑘𝐵𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖,𝑡−1 + ∑ 𝛿𝑗𝑀𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑡−1 𝐽=2 𝑗=1 𝐾=4 𝑘=1 + 휀𝑖,𝑡 (1) 𝑌𝑖,𝑡 = 𝛼0 + 𝛽1𝐺𝑃𝑅𝑡−1 + ∑ 𝛾𝑘𝐵𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖,𝑡−1 + ∑ 𝛿𝑗𝑀𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑡−1 𝐽=2 𝑗=1 𝐾=4 𝑘=1 + 휀𝑖,𝑡 (2) in equation (1) and (2) above, 𝑌𝑖,𝑡 represents the dependent variable, which is grl, npl, roa, or z-score. the main variables of interest are 𝐸𝑃𝑈 which represents economic policy uncertainty or economic risk and 𝐺𝑃𝑅 which represents geopolitical risk in equations (1) and (2), respectively. to control for alternative explanations of the dependent variables, bank-specific control variables (𝐵𝐶𝑜𝑛𝑡𝑟𝑜𝑙) which include size, lev, car, and div are included along with market-specific control variables (𝑀𝐶𝑜𝑛𝑡𝑟𝑜𝑙) which include gdp and inf. all of the explanatory variables are lagged by one period to avoid the endogeneity problem (chi and li 2017; alfadli and rjoub 2020). furthermore, to control for unobserved or omitted variables, bank-specific (that is, cross-sectional) effects that are either fixed or random are included in the model. the choice between the fixed-effects or random-effects estimators is based on the hausman test. furthermore, prior to estimating the panel regressions, tests for cross-sectional dependence between the series are conducted. thereafter, if cross-sectional dependence is absent, first-generation panel unit root tests are employed to examine the stationarity of the variables; however, if cross-sectional dependence is present, second-generation panel unit root tests are employed. results and analysis preliminary analysis table 2 provides a summary of the descriptive statistics for the dependent and independent variables damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 79 in their raw form. the average, annual growth in loans for banks in south africa is 10.08% while the average, annual non-performing loans is 7.49%. the banks have also generated a return on assets of 1.69% on average, with a z-score of 76.04. the respective standard deviations suggest that there is a high variation in these measures, as can be seen from the large ranges between the minimum and maximum values. these high variations may be attributed to extreme market events, such as the 2008 global financial crisis and the covid-19 pandemic, which had significant implications on the banking sector. the epu and gpr ratings exhibited an annual mean of 0.70 and 0.04, respectively, indicative of relatively stable economic policy and geopolitical conditions. it is important to note that the subsequent estimations employ the variables in their natural logarithmic form to ensure easy comparison. table 2. descriptive statistics grl npl roa z_score epu gpr mean 10.0772 7.4932 1.6901 76.0413 0.7048 0.0429 max. 87.8990 47.6780 6.4370 437.2452 1.8211 0.0874 min. -18.2085 0.4697 -2.3918 2.1797 0.1364 0.0146 std. dev. 15.5403 8.3605 1.7406 71.8178 0.4723 0.0223 skewness 2.0896 2.4273 0.9955 2.1296 1.0665 0.4600 kurtosis 9.8959 9.5844 3.8507 9.5100 3.6421 2.3131 jarque-bera 270.9091 278.8404 19.5317 252.1697 20.6756 5.4924 prob. 0.0000 0.0000 0.0001 0.0000 0.0000 0.0642 obs. 100 100 100 100 100 100 source: authors’ own compilation. table 3. correlation statistics grl npl roa z_score epu gpr grl 1.0000 npl -0.3552 1.0000 roa 0.4529 -0.1410 1.0000 z_score 0.0708 -0.3821 0.0759 1.0000 epu 0.0487 -0.0182 0.1455 0.0542 1.0000 gpr 0.1486 0.0680 -0.0012 -0.3072 -0.1839 1.0000 source: authors’ own compilation. the correlation statistics between the variables of interest are provided in table 3. interestingly, the correlation statistics imply that epu exhibits a positive impact on the banking sector by enhancing growth in loans, performance (roa), and stability (z-score) whilst reducing credit risk (npl). on the contrary, gpr increases the growth in loans, but also increases credit risk whilst reducing performance and stability. however, correlation does not imply causation, therefore, there is a need for further regression analysis. in terms of the regression analysis, the unreported results of cross-sectional dependence tests indicated that cross-sectional dependence was present, hence, second-generation panel unit root tests were used to detect stationarity. the second-generation, cips unit root test confirmed the stationarity of the variables in their natural logarithmic form. further, the unreported hausman test results confirmed that the cross-sectional fixed effects models are more appropriate for assessing the banking sector, consistent with existing literature. the next section presents and discusses the main results obtained from the cross-sectional fixed effects panel regressions. baseline results tables 4 and 5 display the effects of epu and gpr on the south african banking sector, respectively. the dependent variables are presented horizontally while the explanatory variables are presented vertically. the respective r-squared and f-stat for each model confirms that the models are a good fit. in terms of epu, the results indicate that epu significantly influences only npl and z-score. specifically, epu leads to a decrease in the non-performing loans of south african banks while increasing their z-score. this would imply that epu exhibits a positive impact on the south african banking sector by reducing credit risk and improving stability. the negative relationship between epu and npl is consistent with the findings of ozili (2022) who reported a similar negative effect in g7 and eu countries. however, the positive effect of epu on bank stability contradicts the existing findings of nguyen (2021) and phan et al. (2021) who did not consider the south african banking sector. damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 80 contrary to the effects of epu, gpr exhibits a positive effect on npl but a negative effect on zscore. this implies that gpr increases credit risk and decreases stability in the south african banking sector. similar findings are reported by phan et al. (2022) who found that gpr decreases the stability of u.s banks. notably, the contrasting effects of epu and gpr on the south african banking sector may be attributed to the negative correlation between these two variables – as reported in table 3. remarkably, both epu and gpr do not significantly impact the lending decisions (grl) and performance (roa) of banks in south africa. table 4. panel regression estimations for the effect of epu grl npl roa z_score constant -300.4006 42.7177 55.9807 -147.2027 eput-1 1.3507 -0.2020*** -0.0054 0.2102* sizet-1 -9.4304 0.7779** -0.1815 -1.0190* levt-1 -122.0800*** -1.2753 -4.8759*** 2.7759 cart-1 0.6082 0.5305 1.1933** -2.1409** divt-1 1.4983 0.0709 -0.1928 -0.4719** gdpt-1 66.7311 -3.3578 -2.1173 10.7612* inft-1 -0.4336 -0.0093 0.0417 -0.0108 r-squared 0.4400 0.7762 0.6885 0.5408 f-stat 3.5845 15.8238 10.0827 5.3738 prob (f-stat) 0.0001 0.0000 0.0000 0.0000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. table 5. panel regression estimations for the effect of gpr grl npl roa z_score constant 673.6634 -175.0009 39.1983 338.4778** gprt-1 -2.2010 0.4762** 0.0351 -1.0242*** sizet-1 -9.5140 0.6948* -0.1984 -0.5887 levt-1 -121.1453*** -1.2122 -4.8432** 1.9806 cart-1 1.7811 0.1835 1.1578* -1.1626 divt-1 1.4238 0.0692 -0.1948 -0.4237** gdpt-1 2.2141 11.1129 -0.9967 -21.6407** inft-1 -0.1951 -0.0494 0.0400 0.0470 r-squared 0.4360 0.7736 0.6886 0.6059 f-stat 3.5265 15.5873 10.0895 7.0141 prob (f-stat) 0.0001 0.0000 0.0000 0.0000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. further analysis existing literature suggests that the effects of epu and gpr may differ across banks of different sizes (or market capitalisations) as well as banks of different equity capitalisations (total equity to total assets). on this basis, further analysis is conducted on the effect of epu on banks of different sizes and equity capitalisations. in addition, the effect of global epu and gpr is examined. tables 6 and 7 suggest that the directions of the effects of epu and gpr on npl and z-score remain the same as the baseline results, however, the magnitude and significance of the effects indicate that the effects of epu and gpr are more pronounced in small banks. further, tables 8 and 9 suggest that the direction of the effects of epu and gpr on npl and z-score remain the same regardless of equity capitalisation, however, the magnitude and significance of the effects indicate that the effects of epu and gpr are more pronounced in highly capitalised banks. together, these findings indicate that the effects of epu and gpr are stronger in banks with smaller market capitalisations and higher equity capitalisations. with regards to the global ratings, tables 10 and 11 suggest that global epu significantly influences only roa, in which case the effect is positive, while global gpr only impacts the z-score, in which case the effect is negative. these findings indicate that global economic policy uncertainty improves the performance of south african banks, however, global geopolitical risk decreases the stability of south african banks. more importantly, these findings imply that the south african banking sector is not immune to the effects of global conditions damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 81 because global epu and gpr spills over to the south african market and significantly influences local banks. table 6. effect of epu on banks of different sizes large small grl npl roa z_score grl npl roa z_score constant 502.047 22.247 -114.583 -359.467* -256.501 25.887 43.501 -217.09 eput-1 0.797 -0.082* 0.050 0.083 1.828 -0.306** -0.030 0.318** sizet-1 3.180 0.717** -0.890 -2.146** -27.885* 0.874 -0.458 0.297 levt-1 -330.66 3.533 12.929 44.265** -40.094 -3.379 -4.001 -4.800 cart-1 14.364 -0.670 -0.286 0.174 -6.260 1.255 1.300 -1.533 divt-1 1.049 -0.056 0.076 -1.029* -2.890 0.335 -0.299 0.078 gdpt-1 58.210 -3.229 4.889 13.948 61.648 -1.871 -1.267 15.672 inft-1 -0.034 0.003 0.073* -0.034 -1.186 -0.005 0.002 0.034 r-squared 0.373 0.898 0.810 0.520 0.540 0.780 0.583 0.583 f-stat 1.784 26.345 12.768 3.245 3.527 10.631 4.200 4.196 prob (f-stat) 0.098 0.000 0.000 0.004 0.002 0.000 0.001 0.001 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. table 7. effect of gpr on banks of different sizes large small grl npl roa z_score grl npl roa z_score constant -67.216 -34.364 -155.84 57.100 274.546 -349.94 90.359 233.662 gprt-1 1.401 0.138 0.101 -1.019* -6.818 0.854** -0.106 -1.024*** sizet-1 1.997 0.720** -0.970* -1.778** -27.707* 0.901 -0.418 0.296 levt-1 -351.96 2.925 11.460 53.602* -36.553 -3.998 -4.078 -4.169 cart-1 12.518 -0.841 -0.419 1.473 -1.298 0.738 1.456 -0.847 divt-1 0.527 -0.052 0.041 -0.879* -3.254 0.393 -0.295 0.016 gdpt-1 103.86 0.701 8.167 -16.936 -138.00 23.090* -4.394 -14.277 inft-1 0.035 -0.011 0.077* 0.002 -0.775 -0.066 0.001 0.102 r-squared 0.370 0.891 0.809 0.635 0.551 0.789 0.584 0.621 f-stat 1.758 24.608 12.704 5.212 3.674 11.189 4.215 4.909 prob (f-stat) 0.103 0.000 0.000 0.000 0.002 0.000 0.001 0.000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. table 8. effect of epu on banks of different equity capitalisations high low grl npl roa z_score grl npl roa z_score constant 51.273 -19.413 83.269 -248.73* -244.037 55.153 -148.11 -373.49* eput-1 2.430 -0.316** -0.004 0.261 -0.228 -0.085* 0.003 0.090 sizet-1 -4.500 0.841 0.026 -0.472 -18.526*** 0.897*** -1.206** -2.350** levt-1 -124.17* -3.861 -5.165* -2.078 -294.806 4.221 16.260 41.193 cart-1 -1.878 1.242 1.231 -1.641 3.677 -0.186 0.706 1.180 divt-1 0.661 0.353 -0.286 -0.063 3.220 -0.083 0.096 -0.895*** gdpt-1 8.074 1.279 -4.047 17.866* 126.95* -5.932* 6.361 15.817* inft-1 -0.688 -0.009 0.016 -0.010 -0.152 -0.005 0.062 -0.003 r-squared 0.450 0.723 0.729 0.520 0.489 0.881 0.530 0.511 f-stat 2.454 7.835 8.079 3.255 2.866 22.247 3.390 3.130 prob (f-stat) 0.023 0.000 0.000 0.004 0.009 0.000 0.003 0.005 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 82 table 9. effect of gpr on banks of different equity capitalisation high low grl npl roa z_score grl npl roa z_score constant 36.419 -41.69** 132.47 206.71 -207.62 -15.719 -248.34 90.218 gprt-1 -6.868 0.850** -0.103 -0.976** 3.711 0.151 0.202 -0.943*** sizet-1 -3.196 0.691 0.076 -0.224 -21.429*** 0.886** -1.386** -1.656** levt-1 -122.92* -4.040 -5.214* -2.041 -296.16 4.781 16.059 41.272* cart-1 2.208 0.753 1.336 -0.970 -1.036 -0.377 0.450 2.377 divt-1 0.488 0.376 -0.285 -0.081 2.841 -0.074 0.070 -0.809*** gdpt-1 -203.84 27.456** -7.338 -12.487 25.419** -1.392 13.292 -15.814 inft-1 -0.180 -0.074 0.018 0.050 -0.303 -0.020 0.056 0.040 r-squared 0.454 0.730 0.730 0.564 0.520 0.876 0.543 0.622 f-stat 2.490 8.113 8.122 3.888 3.249 21.161 3.558 4.95 prob (f-stat) 0.021 0.000 0.000 0.001 0.004 0.000 0.002 0.000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. table 10. panel regressions for the effect of global epu grl npl roa z_score constant -176.3969 80.0342 -23.1808 -243.6236** eput-1 -25.8532 -2.4508 8.9992* 9.0631 sizet-1 -10.3850 1.0575* -0.3705 -1.4511* levt-1 -119.0072*** -1.9546 -4.5785** 3.7094 cart-1 -0.7837 0.7397 1.1972** -2.3597** divt-1 1.3086 0.1183 -0.2189* -0.5409** gdpt-1 84.9001 -3.5122 -5.7987 8.2795 inft-1 -0.2363 -0.0325 0.0322 0.0070 r-squared 0.4335 0.7534 0.7028 0.5265 f-stat 3.4918 13.9373 10.7899 5.0731 prob (f-stat) 0.0001 0.0000 0.0000 0.0000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. table 11. panel regressions for the effect of global gpr grl npl roa z_score constant -342.9091 56.7587 62.8985 -44.7467 gprt-1 2.9456 -0.0761 0.3085 -0.8708** sizet-1 -10.5507 0.9942* -0.1342 -1.0062* levt-1 -120.0506* -1.8192 -5.0951* 2.6294 cart-1 -0.7563 0.7385 1.2021** -2.0007** divt-1 1.2933 0.1093 -0.1852 -0.4636** gdpt-1 69.6164 -4.3826 -2.6499 4.3159 inft-1 -0.4441 -0.0302 0.0220 0.0218 r-squared 0.4360 0.7530 0.6958 0.5462 f-stat 3.5269 13.9062 10.4360 5.4921 prob (f-stat) 0.0001 0.0000 0.0000 0.0000 notes: ***,**,* denotes significance at a 1%, 5%, and 10% level of significance, respectively. source: authors’ own compilation. conclusions the survival of a country’s financial system largely depends on the stability of its banking system. however, in recent years, countries around the world have been exposed to greater economic and geopolitical risks as a result of rising wars and tensions amongst nations. on this background, the objective of this study was to investigate the effect of economic (measured through economic policy uncertainty) and damien kunjal, ananda rao suvvari / finance, accounting and business analysis, volume 6, issue 1, 2024 83 geopolitical risks on the lending decisions, credit risk, performance, and stability of banks in south africa. to achieve this objective, 10 south african banks were assessed for the period ranging from 2013 to 2022, and panel regressions were estimated with cross-sectional fixed effects. the findings of this study indicated that epu decreases credit risk and increases stability in the south african banking sector whilst gpr increases credit risk and decreases stability. further, it was found that these effects are more pronounced in banks with smaller market capitalisations and higher equity capitalisations. moreover, it was found that global gpr has a destabilising effect on south african banks. remarkably, the findings indicated that both epu and gpr do not significantly influence lending decisions and performance by banks in south africa. however, contrary to the findings of domestic epu, global epu exhibited a significant, positive effect on bank performance. these findings have important implications for various stakeholders. for managers of banks, these findings imply that geopolitical risk is an important risk factor that needs to be acknowledged in the risk management framework of banks. in particular, banks need to devise risk management frameworks to mitigate the negative impact of geopolitical risk on banks’ credit risk and stability. in addition, banks should also devise strategies to capitalise on the positive effects of epu. for policymakers and regulators, these findings imply that it is important to maintain stability in epu rather than attempting to reduce epu as a reduction in epu could have unintended, adverse effects on banks’ credit risk and stability. more 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https://doi.org/10.37075/faba.2025.1.08 between finance and growth: the role of financial development in promoting economic growth in africa boulenouar ilias zakaria mennad 1* , anes meskini 2 , amina benhaddou 3 laboratory of strategies for development of the agricultural and tourism sector, university of ain temouchent, algeria1 laboratory of strategies for development of the agricultural and tourism sector, university of ain temouchent, algeria2 laboratory of markets, employment, simulation and legislation in the maghreb countries, university of ain temouchent, algeria3 * corresponding author info articles abstract history article: submitted 28 february 2025 revised 4 may 2025 accepted 14 may 2025 purpose: this study investigates the impact of financial development on economic growth, with a particular focus on the roles of financial institutions' access, depth, and efficiency. it aims to provide a nuanced analysis of the finance-growth nexus and evaluate whether financial development acts as a catalyst for or a constraint on economic growth within the african context. design/methodology/approach: the study employs the panel ardl (autoregressive distributed lag) approach to analyze the short-run and long-run effects of financial development on gdp. the analysis is conducted on a panel of 31 african countries over the period 1990–2021, capturing both cross-country variations and dynamic relationships between financial development indicators and economic growth. findings: the findings emphasize that financial access and depth are key drivers of long-term economic growth, whereas financial efficiency exerts a negative impact. in the short run, financial access significantly enhances gdp, while financial depth may impede growth due to transitional costs or structural imbalances. moreover, the heterogeneous short-run effects across countries underscore the pivotal role of institutional and economic factors in shaping the financial development and economic growth nexus. practical implications: policymakers should prioritize financial inclusion and sector depth while addressing inefficiencies that may hinder economic performance. strengthening regulatory frameworks and improving financial institutions’ operational effectiveness can foster sustainable economic growth. originality/value: this study provides new empirical evidence on the finance-growth nexus in african economies, considering multiple dimensions of financial development and utilizing a robust econometric approach (panel ardl). it contributes to the debate on financial development by distinguishing between access, depth, and efficiency. paper type: research paper. keywords: financial development, economic growth, financial institutions, panel ardl, african countries jel: g21, o16, c33, o55 * address correspondence: e-mail: ilias.mennad@univ-temouchent.edu.dz1 anes.meskini@univ-temouchent.edu.dz2 amina.benhaddou@univ-temouchent.edu.dz3 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.08 mailto:ilias.mennad@univ-temouchent.edu.dz mailto:anes.meskini@univ-temouchent.edu.dz mailto:amina.benhaddou@univ-temouchent.edu.dz https://orcid.org/0000-0001-5521-7950 https://orcid.org/0009-0004-1008-6108 https://orcid.org/0009-0003-7841-5986 b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 100 introduction financial development is widely recognized as a key driver of economic growth, a view supported by numerous empirical studies, including (levine 1999). however, the precise nature of the relationship between financial development and economic growth remains a topic of extensive research and ongoing debate. while some studies highlight the positive impact of financial development in stimulating economic expansion, others emphasize the complexities introduced by institutional quality, income inequality, and regional disparities (asante et al. 2023). a well-functioning financial system plays a crucial role in mobilizing savings, efficiently allocating resources to the most productive investments, reducing transaction costs, distributing risks, and fostering innovation and technological advancement (mengesha and berde 2023). expanding financial services and transactions within an economy enhances overall productivity, contributing to job creation, poverty reduction, and income distribution, particularly in developing nations (abbas et al. 2022). moreover, financial development broadens the scope of financial transactions, increasing capital availability and improving economic performance (omri et al. 2015). at the same time, some scholars argue that economic growth itself drives financial development, as rising incomes increase the demand for financial services (song et al. 2021). despite extensive research, empirical findings on the causal direction of this relationship remain inconclusive. some studies assert that financial development precedes and accelerates economic growth, while others suggest that economic expansion stimulates the financial sector. the role of institutional quality, financial regulations, and political stability further complicates this nexus (asante et al. 2023). given these ambiguities, further research is essential to provide policymakers with insights into the optimal strategies for fostering sustainable economic growth through financial development. this study contributes to the continuing discourse on the relationship between financial development and economic growth by addressing the following question: does financial development from the perspective of financial institutions stimulate economic growth in the african countries under study? literature review multiple studies have examined the relationship between financial development and economic growth, utilizing diverse objectives, methodologies, and findings. given the theoretical challenges in determining the direction of this relationship, recent research has largely focused on empirical analysis. the literature indicates that the impact of financial development varies, manifesting as positive, negative, or neutral. the following section provides a critical review of key prior studies, highlighting existing research gaps. extensive research has examined the relationship between financial development and economic growth, with meta-analytical studies offering a comprehensive synthesis of empirical findings. bijlsma et al. (2018) conduct a meta-analysis of 551 estimates from 68 studies, highlighting significant publication bias that has likely overstated the impact of financial development measured by private credit to gdp on economic growth. after accounting for this bias, the results indicate a small yet positive effect in logarithmic models, where a 10% increase in private credit leads to a 0.09 percentage point rise in growth, while linear models show no significant relationship. these findings align with the “too much finance” hypothesis, suggesting that excessive financial development may hinder rather than enhance growth. similarly, valickova et al. (2014) analyze 1,334 estimates from 67 studies, reporting a statistically significant positive effect of financial development on growth. however, due to methodological transformations, the study does not provide an interpretable economic magnitude of this effect. their fat-pet analysis finds no evidence of publication bias, although their full meta-regression analysis reveals a negative and significant association between standard errors and estimates, which is counterintuitive as it suggests a bias against large significant results. in contrast, arestis et al. (2014) using 1,151 observations from 69 studies, also find a significant positive impact of financial development on growth but detect a positive publication bias in their fat-pet analysis. moreover, their full mra reveals instances of negative and significant bias, further complicating the interpretation of results. these meta-analyses underscore the complexity of the finance-growth nexus, highlighting the influence of methodological choices, data transformations, and potential biases in shaping empirical findings. this relationship is further influenced by institutional quality, sectoral variations, and regional disparities, rendering it a dynamic and multidimensional phenomenon. several studies provide critical insights into this nexus, highlighting both the enabling and constraining factors influencing growth across different economies. financial development plays a crucial role in enhancing the effects of foreign direct investment on economic growth. an et al. (2025) show that financial institutions, rather than financial markets, are key in b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 101 mediating fdi’s impact on growth. however, excessive financial development can diminish these benefits, suggesting an inverted-u relationship. similarly, el menyari (2019) finds that foreign bank entry stimulates growth in north and southern africa due to stronger financial institutions, while structural deficiencies in other regions limit its positive impact. these findings emphasize the importance of strengthening financial institutions to maximize growth benefits. in low-income and developing economies, financial development’s impact varies significantly. bist and read (2018) confirm a long-term positive relationship between financial development and growth in 16 low-income african nations, stressing the need to improve credit access to the private sector. an et al. (2021) further highlight income-based disparities, showing that financial development hinders growth in lowand middle-income countries due to inefficient credit allocation and weak regulatory environments, whereas in upper-income nations, financial development fosters growth. this underscores the need for tailored financial policies that address specific economic conditions. institutional quality emerges as a critical determinant in the finance-growth relationship. asante et al. (2023) demonstrate that financial development significantly enhances growth, with its impact amplified in countries with strong institutional frameworks, particularly where governance, political stability, and regulatory quality are robust. aluko and ibrahim (2020) similarly find that while financial development is more effective in countries with strong institutions, even weaker institutional settings can benefit through informal mechanisms and external financial inflows. fengju and wubishet (2024) reinforce this by showing that governance factors such as corruption control and political stability significantly enhance the benefits of financial development, particularly in east africa. the sectoral impact of financial development is another crucial consideration. ustarz et al. (2021) reveal that while financial development positively influences the service and agricultural sectors in subsaharan africa, its benefits in the industrial sector only materialize after reaching a certain threshold. this aligns with mlambo (2024), who finds that financial development in low-income sadc nations not only results from economic growth but also actively contributes to it by improving resource allocation. these studies emphasize the need for policies that foster financial sector development to support broader economic transformation. the causal relationship between financial development and economic growth also varies across regions. akinlo and egbetunde (2010) find a long-run link between the two in ten sub-saharan african countries, with financial development driving growth in some nations, economic growth leading financial development in zambia, and a bidirectional relationship in others. in contrast, zimu and godspower-akpomiemie (2024) challenge conventional assumptions, showing that in south africa, financial development and economic growth progress independently. this calls for policies that strengthen financial institutions and financial markets to improve firms’ access to external finance and enhance economic performance. structural conditions further shape financial development’s effectiveness. ibrahim and alagidede (2018) warn against excessive financial expansion, which can finance high-risk investments and undermine economic performance, aligning with the “too much finance” hypothesis. however, they stress that when effectively channeled, financial development supports productive investments and sustainable growth. collectively, these studies underscore that financial development’s impact on economic growth depends on institutional quality, financial regulation, economic structure, and regional factors. policymakers must adopt context-specific strategies, strengthen financial institutions, and ensure a balanced approach to financial expansion to maximize its benefits for economic growth. data and methods this study employs the panel autoregressive distributed lag (ardl) approach to analyze the impact of financial development on economic growth across 31 african economies. the analysis spans a 32-year period (1990–2021), with the temporal scope determined by data availability constraints for key financial development indicators across all sample countries. the panel framework is particularly suited for this investigation as it accommodates both heterogeneous dynamics across countries and long-run equilibrium relationships critical features when examining african economies with diverse financial systems and growth trajectories. data sources this study relies on panel data drawn from two main sources, the world bank's world development indicators (2022), which provide data on gdp as the dependent variable, and the international monetary fund's financial development index database (2022), which offers measures for three keys independent variables representing different dimensions of financial development. the table 1 below provides a detailed description of the variables used in the analysis, including their definitions, measurement methods, and data b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 102 sources. table 1. variables and data collection sources variable source measurement dependent variable gross domestic product (gdp) (world bank 2022) constant 2015 usd. independent variables financial institutions access index (fda) (imf 2022) measures financial inclusion through physical infrastructure density (bank branches and atms per 100,000 adults); a composite index ranging from 0 to 1, where 1 indicates the highest level of access. financial institutions depth index (fdd) captures financial intermediation intensity using private sector credit and institutional investments (as % gdp); a composite index ranging from 0 to 1, where 1 indicates the highest level of depth. financial institutions efficiency index (fde) evaluates institutional performance via profitability metrics (roa, roe) and cost ratios (net interest margin, overhead costs); a composite index ranging from 0 to 1, where 1 signifies the highest level of efficiency. source: prepared by authors (2025) methodology the study utilizes a panel ardl approach to examine the relationship between financial development and economic growth. this methodology is selected as it enables the estimation of both short and long-run relationships, even when variables have different orders of integration (pesaran et al. 1999). additionally, the selection of this approach is particularly appropriate as the data series exhibit stationarity either at level i(0) or at first difference i(1), ensuring the validity of the estimation. the analysis begins by addressing non-stationarity in the data through panel unit root tests. specifically, the levin-lin-chiu (llc) test, suited for panels with common unit roots, and the im-pesaranshin (ips) test, which accommodates individual unit roots, are applied. next, cointegration analysis is conducted to investigate long-run relationships using the kao residual cointegration test and the pedroni heterogeneous panel cointegration test. following this, the panel ardl model is applied, employing the pooled mean group (pmg), mean group (mg), and dynamic fixed effects (dfe) estimators. these estimators help capture both long-run coefficients reflecting the relationship between financial development indices and gdp and short-run dynamics, including the speed of adjustment through the error correction term (ect). the hausman test is then used to determine the most appropriate estimator between pmg, mg and dfe estimation. finally, a country-specific short-run analysis is performed by extracting individual nation results from the ecm coefficients to identify heterogeneity in short-run impacts. result and discussion this section presents the findings of the study and provides an in-depth discussion of the results. the analysis focuses on examining the relationship between financial development and economic growth using the panel ardl approach. the results of the unit root test, cointegration analysis, and estimated model parameters are discussed to highlight both short-run and long-run dynamics. additionally, the implications of these findings are explored in the context of financial policy and economic growth in the selected african countries. b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 103 panel unit root tests before estimating the model, it is crucial to assess the stability of the variables to prevent misleading regression results. this study employs two commonly used unit root tests for panel data. the first is the levin-lin-chiu (llc) test, which assumes a common unit root process across all sub-sectors (levin, lin and chu 2002). this test is particularly suitable for panel data with a small number of countries and a long time series. the second test is the im-pesaran-shin (ips) test, which allows for individual unit root processes across sub-sectors, making it more adaptable to heterogeneous panel data (im et al. 2003). in both tests, the null hypothesis states that the data series contains a unit root, while the alternative hypothesis indicates stationarity. if the variables are found to be stationary at level i(0) or at the first difference i(1), the panel ardl methodology can be applied (pesaran et al. 1999). the following table illustrates these results: table 2. results of the panel unit root variable levin-lin-chiu (llc) im-pesaran-shin (ips) level 1st difference level 1st difference gdp 11.4450 (1.0000) -5.3075 (0.0000) 21.3451 (1.0000) -10.8945 (0.0000) fda 4.3293 (1.0000) -3.2827 (0.0005) 11.6107 (1.0000) -11.3173 (0.0000) fdd -1.3985 (0.0810) -15.7023 (0.0000) 2.3359 (0.9903) -16.6874 (0.0000) fde -5.6881 (0.0000) -17.0526 (0.0000) -6.1146 (0.0000) -18.8499 (0.0000) note: those in ( ) are p-value source: stata 15 software output (2025) the panel unit root tests results indicate that most variables, including gdp, fda, and fdd, are non-stationary at the level but become stationary at the first difference, as confirmed by both the levin-linchu and im-pesaran-shin tests. specifically, the p-values for these variables exceed 5% at the level, indicating non-stationarity, while at the first difference, the p-values fall below 5%, confirming stationarity. conversely, fde is stationary at both the level and first difference, as evidenced by the p-values in both tests. these findings suggest that the variables are either i(0) or i(1), making the panel ardl model suitable for analyzing both short-run and long-run relationships (pesaran et al. 1999). panel cointegration tests to examine the presence of a long-run equilibrium relationship between financial development indicators and economic growth, this study employs the kao and pedroni cointegration tests. the pedroni test considers cross-sectional dependence and heterogeneity (pedroni 2004), while the kao test follows a similar approach but assumes homogeneity (kao 1999). rejection of the null hypothesis in either test indicates the presence of a cointegrated relationship. the following table presents the results: table 3. results of the panel cointegration test statistics p-value decision kao test modified dickey-fuller 4.7783 (0.0000) alternative hypothesis: cointegration exists dickey-fuller 6.3774 (0.0000) augmented dickey-fuller 5.5256 (0.0000) unadjusted modified dickey-fuller 5.1538 (0.0000) unadjusted dickey-fuller 7.3816 (0.0000) pedroni test modified phillips-perron 3.1447 (0.0008) alternative hypothesis: cointegration exists phillips-perron 1.8057 (0.0355) augmented dickey-fuller 2.3224 (0.0101) source: stata 15 software output (2025) b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 104 table 3 presents the results of panel cointegration tests, specifically the kao and pedroni tests, to examine whether a long-run relationship exists among the variables. the kao test results show highly significant p-values (0.0000) across all statistics, confirming strong evidence in favor of cointegration, meaning the variables move together over time. similarly, the pedroni test results, including the modified phillips-perron (p = 0.0008), augmented dickey-fuller (p = 0.0101), and phillips-perron (p = 0.0355), all indicate p-values below 0.05, further supporting the presence of a stable long-term relationship. overall, both tests confirm that financial development and economic growth are cointegrated, suggesting that changes in financial development indicators have a lasting impact on gdp. panel ardl approach the panel ardl model is used due to its ability to handle variables with different integration orders while capturing both short-run dynamics and long-run relationships. the main model is formulated as follows: ∆𝐺𝐷𝑃𝑖𝑡 = 𝛼𝑖 + ∑ 𝛽𝑝∆𝐺𝐷𝑃𝑖,𝑡−𝑝 𝑝 𝑝=1 + ∑ 𝛾1𝑞∆𝐹𝐷𝐴𝑖,𝑡−𝑞 𝑞 𝑞=0 + ∑ 𝛾2𝑞∆𝐹𝐷𝐷𝑖,𝑡−𝑞 𝑞 𝑞=0 + ∑ 𝛾3𝑞∆𝐹𝐷𝐸𝑖,𝑡−𝑞 𝑞 𝑞=0 + 𝛿𝑖𝐸𝐶𝑖,𝑡−1 + 휀𝑖𝑡 (1) where:  gdpit: gdp for country i at time t.  fdait, fddit, fdeit: financial development indicators (access, depth, efficiency).  eci,t−1: error correction term.  εit: error term. panel ardl model estimators and the hausman test this section provides an analysis of the panel ardl model results, utilizing three estimation methods: mean group (mg), pooled mean group (pmg), and dynamic fixed effects (dfe). it examines both short-run and long-run relationships between financial development indicators (fda, fdd, fde) and economic growth (gdp) in the selected african countries. the results are summarized in the following table. table 4. results of mg, pmg and dfe estimation estimator mean group (mg) pooled mean group (pmg) dynamic fixed effects (dfe) variable coefficient p-value coefficient p-value coefficient p-value long run fda 314.1063 0.378 190.7591 0.000 352.2051 0.017 fdd -352.3448 0.685 159.2675 0.000 -239.3409 0.154 fde -62.05083 0.724 -10.75505 0.000 -48.62717 0.494 short run ect -0.049262 0.068 -0.014218 0.171 -0. 018615 0.000 fda 65.11428 0.033 87.14563 0.009 37.96531 0.001 fdd -56.39753 0.017 -79.36094 0.040 -28.41883 0.000 fde -1.526893 0.562 2.578938 0.289 2.034714 0.441 cons_ 1.533818 0.633 1.113648 0.000 0.305934 0.000 source: stata 15 software output (2025) to determine the appropriate model for estimating the relationship between financial development and economic growth, the hausman test is conducted. this test compares different estimators, including pooled mean group (pmg), mean group (mg), and dynamic fixed effects (dfe), to identify the most efficient and consistent model. it evaluates whether there are systematic differences between the coefficients of the models. if the p-value exceeds 5%, the null hypothesis is not rejected, favoring the pmg estimator. conversely, if the p-value is below 5%, the alternative hypothesis is accepted, indicating that the mg or dfe estimator is more suitable (hausman 1978). the test results are presented in the following table. b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 105 table 5. results of the hausman test trade-off statistics p-value decision mg/pmg 0.23 0.9719 pmg is more efficient than the mg pmg/dfe 1.53 0.6750 pmg is more efficient than the dfe source: stata 15 software output (2025) the hausman test results (0.9719 for mg/pmg and 0.6750 for pmg/dfe) indicate that the pooled mean group (pmg) estimator is more efficient than both the mean group (mg) and dynamic fixed effects (dfe) estimators. the high p-values (above 5%) suggest that there are no significant differences between the coefficients, leading to the acceptance of the null hypothesis. therefore, pmg is the preferred model for analyzing the relationship between financial development and economic growth. interpretation of pmg estimation results the pooled mean group (pmg) estimation reveals distinct patterns in both long-run and short-run dynamics, as presented below: long-run relationships the results indicate that the financial institutions access (fda) has a highly significant positive effect on gdp, with (β = 190.76, p < 0.001), suggesting that enhanced accessibility to financial institutions plays a crucial role in stimulating long-term economic growth. this finding is consistent with previous studies such as bist and read (2018) and asante et al. (2023), which emphasize the positive relationship between financial development and growth, particularly in low-income african countries with strong institutional frameworks. financial institutions depth (fdd) shows significant positive elasticity (β = 159.27, p < 0.001), confirming that financial intermediation intensity (private credit/gdp ratio) sustains growth. this aligns with valickova et al. (2014) 's meta-analysis and aluko and ibrahim (2020) 's african study, where deeper systems: enhance capital accumulation; improve risk diversification; foster technological adoption. contrary to expectations, financial institutions efficiency (fde) exhibits a significant negative coefficient (β = -10.76, p < 0.001), indicating that improvements in financial efficiency may have a detrimental effect on long-term economic growth. this result suggests that inefficiencies within financial institutions can hinder economic performance, aligning with the "too much finance" hypothesis proposed by ibrahim and alagidede (2018) and supported by the findings of an et al. (2021), which emphasize the adverse effects of inefficient financial systems in low and middle-income economies. the negative relationship may be attributed to the structural and transitional costs that financial institutions face during the adjustment process, as efforts to enhance efficiency can incur substantial short-term costs. these adjustments may not yield immediate long-term economic benefits unless the expected gains materialize over a longer time horizon than that considered in the present study. short-run results the estimated error correction term (ect) shows a coefficient of -0.014 (p = 0.171), indicating it is not statistically significant, suggesting that in the short run, the economy may not adjust immediately to the long-term equilibrium following a shock to financial development. this aligns with the dynamic nature of the relationship between financial development and economic growth observed in various studies. in contrast, the financial institutions access (fda) shows a statistically significant positive shortrun effect on gdp, with a coefficient of 87.14563 and a p-value of 0.009, indicating that improvements in financial accessibility have an immediate positive impact on economic growth, in line with findings by fengju and wubishet (2024) on the role of financial accessibility in east africa. however, the financial institutions depth (fdd) presents a significant negative short-run effect on gdp, with a coefficient of -79.36094 and a p-value of 0.040, suggesting that deeper financial systems may have a detrimental effect on growth in the short run. this contrasts with the long-term result and may reflect short-term adjustment costs or inefficiencies in a developing financial system, as noted by akinlo and egbetunde (2010). finally, the financial institutions efficiency (fde) shows no significant short-run effect on gdp, with a coefficient of 2.578938 and a p-value of 0.289, supporting the notion that financial efficiency may b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 106 take time to influence growth, consistent with ibrahim and alagidede (2018) findings on the delayed impact of financial efficiency. comparison of the study results with key previous studies the results of the study align with previous research on the link between financial development and economic growth, focusing on the role of financial institutions. the positive long-term effects of financial access and depth on growth are consistent with studies by bist and read (2018) and asante et al. (2023), highlighting the importance of improving financial access. however, the negative impact of financial efficiency on growth supports the "too much finance" hypothesis by bijlsma et al. (2018) and ibrahim and alagidede (2018), suggesting excessive financial development may hinder growth. the study also shows contrasting short-term effects, with financial access positively affecting growth and financial depth negatively impacting it. this indicates that the impact of financial development may vary by region and time frame. overall, the study emphasizes the need for balanced, context-specific financial policies to optimize the benefits of financial development for economic growth. short run dynamics: country specific pmg estimations table 6 presents the pooled mean group (pmg) estimation results for short-run financial development impacts across 31 african economies, revealing substantial cross-country variation in adjustment patterns. table 6. results of pmg estimation country specific short run coefficients nation ect d(fda) d(fdd) d(fde) algeria 0.0123324 132.2984 -155.5122 -4.84566 angola -0.0152894 183.9158*** -10.04702 1.976293 botswana 0.0026572 -1.810661 -14.01898*** -2.989185 burkina faso -0.0651529*** 3.960603 -4.52069 0.8840683* cameroon -0.0695837*** -17.90698 38.78154*** -0.5215656 rep.congo 0.0403555*** -3.959476 0.4567818 1.133537 ivory coast -0.09228*** 56.7254 -100.6129* 10.61079** egypt 0.008888 437.5956*** -163.5638** 38.56473* equatorial guinea -0.0643633*** -86.4732*** 0.5253728 9.841948*** ethiopia -0.0864774*** 152.7495* -43.65883 -5.277885 gabon -0.012033 9.461511 8.886967 0.6300535 ghana -0.0869553** 42.06831*** -88.14726* 6.705531 guinea -0.1110889*** -33.32236 -28.45098 1.047506** kenya -0.0886626 45.38455 19.22988 6.461953* libya -0.1121235 184.566 -374.8736*** -50.54235* madagascar 0.026808 112.8404** -34.48675** 0.0973368 malawi -0.0208035** 2.150411 -7.426631 -0.9681273 morocco -0.0305794 16.42375 -178.3692*** 15.26909 mozambique -0.0112739 34.50571*** -6.697442 -0.185186 namibia 0.0010966 0.9604781 -1.279954 2.286843 niger 0.0994694 148.6162*** -14.85066 -0.13474 nigeria -0.0222853* 942.000*** -1151.879*** -22.7828 rwanda -0.0180366*** 5.445791 -4.537254 1.455988* senegal -0.0501282*** -10.61204 15.60657 1.77174 south africa -0.0008568 5.129907 -44.89754 22.74186 sudan -0.0494035*** 113.0074 -16.19166* -0.7644594 tanzania 0.0780717 53.18275 18.02849 -1.654024 togo -0.0135456*** -5.292597 -4.853441* -0.0025687 tunisia 0.0372121*** 51.73695*** -101.5233*** 3.161519 uganda 0.0779395*** 74.36759*** 4.391212 -0.1257642 zambia 0.055656* 51.79884*** -15.42691 -0.5086009 source: stata 15 software output (2025) b.i.z..mennad, a. meskini, a. benhaddou / finance, accounting and business analysis, volume 7, issue 1, 2025 107 the individual countries short-run results highlight significant differences in the impact of financial development across african countries. the error correction term (ect) is negative and significant in several countries, including burkina faso, ivory coast, ethiopia, ghana, and guinea, indicating a tendency to return to long-run equilibrium after financial shocks. in contrast, its positive significance in the republic of congo and tunisia suggests divergence from equilibrium. the financial institutions access (fda) has a strong positive short-run effect in angola, egypt, ethiopia, nigeria, and uganda, demonstrating the immediate benefits of improved financial accessibility on economic growth, whereas equatorial guinea shows a significant negative effect, possibly due to inefficiencies. the financial institutions depth (fdd) negatively affects gdp in botswana, ivory coast, libya, and nigeria, indicating that deeper financial markets may initially disrupt economic stability due to credit misallocation or structural weaknesses, while cameroon benefits from financial depth. the financial institutions efficiency (fde) has a positive impact in ivory coast, equatorial guinea, ghana, and tunisia, reflecting how improved efficiency enhances economic performance, while its negative effect in libya, nigeria, and sudan highlights inefficiencies that hinder growth. the remaining countries exhibit statistically insignificant results, suggesting that financial development does not exert a meaningful short-term effect in those economies. conclusion this study provides empirical evidence on the impact of financial development on economic growth in 31 african countries over the period 1990–2021 using the panel ardl approach. the findings reveal that financial institutions’ access and depth significantly contribute to long-run economic growth, underscoring the critical role of an inclusive and well-developed financial sector. however, the negative impact of financial institutions' efficiency suggests that inefficiencies within financial systems may counteract growth benefits, aligning with the "too much finance" hypothesis. in the short run, financial accessibility exerts a strong positive influence on gdp, while financial depth demonstrates a negative effect, possibly reflecting transitional costs or structural imbalances in financial systems. moreover, heterogeneous short-run results across countries highlight the complexity of financial development’s impact, influenced by country-specific institutional and economic conditions. these findings have important policy implications. policymakers should prioritize enhancing financial accessibility and depth while addressing inefficiencies that may hinder economic performance. strengthening regulatory frameworks and improving financial institutions’ operational effectiveness can foster sustainable economic growth. future research could further explore the role of institutional quality and financial structure in shaping the financial development–growth nexus in african economies. references abbas, z., g. afshan, and g. mustifa. 2022. the effect of financial development on economic growth and income distribution: an empirical evidence from lower-middle and upper-middle-income countries. development studies research, 9(1): 117-128. https://doi.org/10.1080/21665095.2022.2065325 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2014. financial development and economic growth: a metaanalysis." journal of economic surveys, 29(3): 506-526. https://doi.org/10.1111/joes.12068 world bank. 2022. world development indicators. zimu, s., and e. godspower-akpomiemie. 2024. the relationship between financial development and economic growth: a case of south africa. african review of economics and finance, 16(2): 211-235. https://hdl.handle.net/10520/ejc-aref_v16_n2_a9 151 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.02 tax avoidance: csr and capital intensity with firm size as a moderating variable muhammad nugraha agengsriwardana1 , dwi septa aryani 2 , sasiska rani3* , kusminaini armin4 faculty of economics and business, tridinanti university, palembang, indonesia1 faculty of economics and business, tridinanti university, palembang, indonesia2 faculty of economics and business, tridinanti university, palembang, indonesia3* faculty of economics and business, tridinanti university, palembang, indonesia4 * corresponding author info articles abstract history article: submitted 29 january 2025 revised 29 may 2025 accepted 16 july 2025 purpose: this study aims to analyze the effect of corporate social responsibility and capital intensity on tax avoidance, moderated by firm size, in energy sector companies listed on the indonesia stock exchange for the 2021–2023 period. design/methodology/approach: the research population consists of 87 companies, and using the purposive sampling method, 18 companies were selected as samples. the research method employed is moderated regression analysis. findings: the results of this study indicate that corporate social responsibility affects tax avoidance, while capital intensity does not affect tax avoidance. firm size is unable to moderate the effect of corporate social responsibility and capital intensity on tax avoidance. practical implications: this study provides valuable insights for companies, especially in the energy sector, regarding the relationship between corporate social responsibility (csr), capital intensity, and tax avoidance. the findings suggest that csr activities can significantly influence tax avoidance practices, highlighting the importance of incorporating social responsibility into corporate strategies to build public trust and minimize reputational risks associated with aggressive tax planning. originality/value: this study provides a unique focus on the energy sector, which is highly regulated and scrutinized for its environmental and economic impacts. it explores firm size as a moderating variable, offering new insights into whether firm size influences the relationship between csr, capital intensity, and tax avoidance. these findings enhance our understanding of how various internal and external factors of firms interact to shape tax decisions, particularly in an industry that is critical to national development and global sustainability. paper type: research paper. keywords: tax avoidance. corporate social responsibility, capital intensity, firm size jel: g2, g3, m0, m1 * address correspondence: e-mail: mnugrahaagengs12@gmail.com 1 dwi_septa_aryani09@univ-tridinanti.ac.id 2 sasiska_rani@univ-tridinanti.ac.id 3* kusminaini_armin@univ-tridinanti.ac.id 4 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.02 mailto:mnugrahaagengs12@gmail.com mailto:dwi_septa_aryani09@univ-tridinanti.ac.id mailto:sasiska_rani@univ-tridinanti.ac.id mailto:kusminaini_armin@univ-tridinanti.ac.id https://orcid.org/0009-0003-3856-4135 https://orcid.org/0009-0006-2794-605x https://orcid.org/0000-0002-8859-8363 https://orcid.org/0009-0001-3313-8108 agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 152 introduction taxes are considered an expense that reduces net profit, which contradicts the primary goal of every business entity that strives to maximize profit (oktavia et al. 2020). therefore, companies tend to seek ways to minimize their tax burdens. tax avoidance is one of the issues that often draws attention in the fields of taxation and corporate management. tax avoidance is a strategy employed by companies to legally minimize their tax burdens by exploiting loopholes or uncertainties in tax regulations. although legal, this practice often raises ethical debates as it can harm the state in terms of tax revenue and affect public trust in companies. the state suffers significant losses in tax revenue due to tax avoidance practices (lolana and dwimulyani 2019). to measure the tax performance of a country, the tax ratio can be used. the tax ratio is an indicator that measures the comparison between tax revenue and total gross income. however, interpreting a low tax ratio solely as a reflection of poor tax compliance may be misleading. in reality, the tax ratio is influenced by various macroeconomic and policy-related factors. these include the size and role of the public sector in the economy, the overall tax burden imposed on economic agents, the extent of tax incentives provided, the breadth of the tax base, and other legislative measures that affect tax collection. therefore, a low tax ratio does not automatically indicate low levels of compliance with tax laws (septiani and sastradipraja 2023). according to the ministry of finance, indonesia’s tax ratio was 9.76% in 2019, dropped to 8.33% in 2020 at the height of the pandemic, rose to 9.11% in 2021, increased further to 10.38% in 2022, and slightly declined to 10.32% in 2023. these fluctuations underscore the complexity of interpreting tax ratio trends and the necessity of considering macroeconomic contexts when analyzing tax performance. moreover, the tax ratio is determined by two key components: total tax revenue and gdp. while tax revenues may be affected by legal or illegal tax avoidance behavior, the size of gdp is influenced by broader economic conditions, which are not necessarily tied to tax compliance. for instance, during the 2019–2023 period, indonesia experienced several extraordinary events, most notably the covid-19 pandemic, which had a significant impact on both tax revenues and gdp growth. the economic slowdown and fiscal relief policies implemented during the pandemic likely affected the overall tax ratio, making it an unreliable standalone indicator of tax compliance during this time. tax avoidance carried out by companies can be influenced by several factors. nabila and kartika (2023) and hasanah and febriyanto (2024) use corporate social responsibility (csr) and capital intensity as models in tax avoidance. in the context of companies, csr is often seen as an effort for companies to demonstrate their commitment to social responsibility and environmental sustainability. however, there are differing views on the relationship between csr and tax avoidance. on one hand, companies committed to csr tend to have more transparent tax practices to maintain their reputation. on the other hand, there is also a view that csr can be used as a tool to cover up tax avoidance practices. there is an inconsistency in the research results regarding the effect of csr on tax avoidance. research conducted by setiawati and adi (2020) and putri and lastanti (2024) suggests that corporate social responsibility (csr) influences tax avoidance. on the other hand, studies by ardini (2023) and lestari et al. (2024) indicate that csr has no effect on tax avoidance. in addition to csr, another factor influencing tax avoidance is capital intensity (nabila and kartika, 2023). capital intensity refers to the amount of capital used to support operational activities with the aim of generating revenue (hutabarat and yuliati 2023). capital intensity can be measured through a ratio that reflects the amount of investment in fixed assets. fixed assets, such as buildings and equipment (excluding land), can be recognized as a deduction in value through depreciation (agustyo and arianti 2024). companies with high capital intensity tend to have large amounts of fixed assets, which can be used to benefit from tax depreciation. the higher the capital intensity a company has, the greater the tendency for the company to engage in tax avoidance, as companies with fixed assets have depreciation expenses that reduce pre-tax profits (kurniawati 2023). this can become a strategy to reduce the company's tax burden. there is an inconsistency in the research results regarding the effect of capital intensity on tax avoidance. research conducted by agustyo and arianti (2024) and nabila and kartika (2023) suggests that capital intensity influences tax avoidance. however, studies by putra et al. (2025) and agustina and arisanti (2020) indicate that capital intensity has no effect on tax avoidance. firm size is another factor that is believed to play a role in moderating the relationship between csr, capital intensity, and tax avoidance. firm size reflects a company's ability to influence tax-related decisions (rani et al. 2023). large companies tend to attract more attention from the public and regulators, which may make them more cautious in applying tax avoidance strategies. in contrast, smaller companies may have greater flexibility in adopting such strategies due to lower levels of oversight. the energy sector is one of the strategic sectors that makes a significant contribution to the national economy, but it also faces intense scrutiny regarding its environmental impact. companies in this sector often have high capital intensity and are involved in csr programs as part of efforts to comply with agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 153 regulations and improve their public image. therefore, it is important to analyze how csr and capital intensity affect tax avoidance in energy companies, and whether firm size can moderate this relationship. this study focuses on energy companies listed on the indonesia stock exchange (idx) during the period of 2021-2023. by using this approach, the study aims to contribute to understanding the dynamics between csr, capital intensity, firm size, and tax avoidance, particularly within the context of energy companies in indonesia. literature review agency theory agency theory was first introduced by two economists, michael jensen and william meckling, in their article titled "theory of the firm: managerial behavior, agency costs and ownership structure", published in 1976. they developed this theory to explain the relationship between principals (owners) and agents (managers) within a company, as well as how conflicts of interest between the two can affect the decisions made, including in tax management. in the context of tax avoidance, agency theory is used to understand how conflicts of interest between company owners and managers can influence tax-related decisions. the owners of the company (principals) aim to maximize the firm's value, including optimizing after-tax profits. however, managers (agents) may have different personal interests, such as reducing tax burdens to increase net income or improve short-term financial ratios that benefit them. managers may use tax avoidance strategies to reduce the company's tax liabilities, which in turn can increase reported profits and bonuses. however, this may not always be beneficial for the owners in the long term, especially if the consequences of tax avoidance harm the company’s reputation or trigger penalties from tax authorities. legitimacy theory legitimacy theory was first proposed by dowling and pfeffer (1975). this theory explains that organizations seek to gain social legitimacy by aligning their practices and values with the expectations and norms that prevail in society. legitimacy is crucial for the survival and stability of an organization because society, stakeholders, and the government are more likely to support companies that are considered to meet social expectations. legitimacy theory is related to a company's efforts to enhance public trust in its operations (rani et al. 2024). legitimacy theory helps explain how companies strive to maintain or gain legitimacy by demonstrating that they are acting in accordance with accepted social norms, including in terms of tax compliance. aggressive tax avoidance risks damaging a company's legitimacy, as society and governments increasingly demand companies to be responsible in fulfilling their tax obligations. therefore, companies that want to maintain their reputation and legitimacy are likely to avoid tax avoidance practices that could decrease public trust. tax avoidance tax avoidance reflects a company's efforts to manage its tax obligations efficiently by exploiting existing legal loopholes. according to firmansyah and triastie (2021), tax avoidance is a series of tax planning actions taken by a company to reduce its tax burden by utilizing opportunities or gaps in the applicable laws and regulations. in this study, tax avoidance is measured using cetr (cash effective tax rate). a high cetr percentage indicates that the company has a low level of tax avoidance, and conversely, if the cetr percentage is low, it suggests a higher potential for tax avoidance practices by the company (dewinta and setiawan 2016). the cetr formula is as follows (amiah 2022): cetr = cash tax paid pre − tax income (1) corporate social responsibility corporate social responsibility (csr) represents the deep commitment of the business world to sustainability and ethics. according to rosyati et al. (2023), "social responsibility (csr) is an organization's business operation that not only aims to generate financial profit but also demonstrates a commitment to social, economic, and environmental development, as well as to the surrounding community, in a holistic, institutionalized, and sustainable manner." csr disclosure is guided by applicable standards, namely the global reporting initiative (gri). in this study, the researcher used the gri standards 2021 guidelines as a reference for csr reporting disclosure. the sustainability report encompasses economic, social, and environmental aspects, while agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 154 highlighting performance and activities related to sustainable product development. corporate social responsibility (csr) disclosure is measured by assigning a score of 1 for each csr disclosure item that meets the specified criteria. the scores for each item are then summed to obtain the total score for each company. the formula for calculating csr is as follows (ardini 2023): csrij = ∑ xij nj (2) explanation: csrij corporate social responsibility disclosure index-j σxij a dummy variable assigns a value of 1 if an item is disclosed and a value of 0 if the item is not disclosed. nj the number of items per indicator disclosed by company j capital intensity according to wardila et al. (2023), capital intensity refers to the capital investment activities undertaken by a company, which are then associated with investments in fixed assets. meanwhile, firmansyah et al. (2021) describe capital intensity as a representation of the proportion of fixed asset investment relative to the company's total assets. capital intensity reflects how effectively a company utilizes its assets to generate revenue. with high profitability, a company can implement tax management strategies to reduce its tax liabilities, including leveraging assets to enhance corporate earnings (marsahala et al.2020). the formula for capital intensity used in this study (amiah 2022) is as follows: ci = fixed assets total assets (3) firm size samhuri et al. (2023) define firm size as the representation of a company's size, referring to the criteria or specific factors used to assess the scale or magnitude of an organization or corporate entity. similarly, hery (2017) defines firm size as a measure of a company's scale, which can be classified based on total assets, market capitalization, share value, and other factors. the formula for firm size in this study (amiah 2022) is as follows: size = ln (total assets) (4) hypothesis the effect of corporate social responsibility on tax avoidance corporate social responsibility (csr) is a concept in which organizations, especially companies, have an obligation to be responsible to various parties involved, such as consumers, employees, shareholders, society, and the environment. this obligation covers various aspects of the company's operations, including economic, social, and environmental dimensions (zoebar and miftah 2020). companies that are active in csr activities tend to be more transparent in their business practices, thus having an incentive to comply with tax obligations and reduce tax avoidance in order to maintain a good image in the eyes of the public and stakeholders. the study conducted by mardianti and ardini (2020), setiawati and adi (2020), and putri and lastanti (2024) states that there is an influence between corporate social responsibility and tax avoidance. h₁: corporate social responsibility influences tax avoidance. the effect of capital intensity on tax avoidance companies with a high level of capital intensity tend to have large fixed assets, which can be used to reduce tax liabilities through depreciation or other tax deductions. this provides an incentive for companies to engage in tax avoidance by optimally utilizing their fixed assets. the study conducted by hutabarat and yuliati (2023), putri and lastanti (2024), and nabila and kartika (2023) states that there is an influence between capital intensity and tax avoidance. h₂: capital intensity influences tax avoidance. the effect of firm size on tax avoidance larger companies may have more opportunities to engage in tax avoidance because they often have access to more complex tax planning strategies and can exploit existing tax loopholes. additionally, larger agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 155 companies tend to have more tax consultants and resources to minimize their tax liabilities. the company size attracts significant attention from the government regarding its compliance with the appropriate tax obligations (aryani and crystha 2024). studies by hutabarat and yuliati (2023), putri and lastanti (2024), and nabila and kartika (2023) show that firm size influences tax avoidance. h3: firm size influences tax avoidance the effect of corporate social responsibility on tax avoidance with firm size as a moderating variable firm size refers to the dimensions of a company, whether small or large, and can be measured in various ways, such as annual revenue, number of employees, market value, and total assets (hasanah and febriyanto 2024). companies classified as large typically have significant total assets and are more likely to generate profits (putra et al. 2025). in general, higher corporate profits result in a greater nominal tax liability when a proportional or progressive tax system is applied. however, this does not necessarily indicate a higher effective tax burden, especially if companies implement various tax planning strategies to manage their taxable income. high profits often prompt companies to take steps toward engaging in tax avoidance practices. firm size may moderate the relationship between csr and tax avoidance. in large companies, which have more resources to manage regulations and tax avoidance, the effect of csr on tax avoidance may be weaker due to stricter oversight and more opportunities to utilize tax avoidance strategies. in contrast, smaller companies may be more susceptible to tax avoidance despite their involvement in csr, as they lack sufficient resources to effectively manage taxes. the study conducted by azis et al. (2024) and ulinuha and nurdin (2024) states that firm size can strengthen the effect of corporate social responsibility on tax avoidance. h4: firm size moderates the effect of corporate social responsibility on tax avoidance the effect of capital intensity on tax avoidance with firm size as a moderating variable the capital intensity ratio describes how a company finances its activities, including through fixed assets (capital intensity) and inventory intensity. depreciating fixed assets are often used by managers as a component of business expenses, which can ultimately reduce the amount of tax the company has to pay. firm size can moderate the relationship between capital intensity and tax avoidance. in large companies, which have more resources and tighter oversight, the effect of capital intensity on tax avoidance may be weaker, even though they have large fixed assets. on the other hand, smaller companies may be more susceptible to tax avoidance despite having high capital intensity, as they may lack the capacity to effectively manage their tax obligations. research conducted by nabila & kartika (2023) and amiah (2022) suggests that firm size can strengthen the effect of capital intensity on tax avoidance. h5: firm size moderates the effect of capital intensity on tax avoidance figure 1. conceptual framework methods this study employs a quantitative approach with a causal-comparative design. the researcher will analyze the relationship between independent variables (csr and capital intensity), moderating variables (firm size), and dependent variables (tax avoidance). the population of this study was 87 energy sector companies listed on the indonesia stock exchange (idx). the sampling technique used was purposive sampling with the following criteria: 1. energy sector companies listed on the indonesia stock exchange consecutively during the 20212023 period. 2. energy sector companies that present complete annual reports and sustainability reports firm size (z) corporate social responsibility (x1) capital intensity (x2) tax avoidance (y) agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 156 consecutively during the 2021-2023 period. this study analyzed 18 energy sector companies listed on the indonesia stock exchange (idx) during the 2021–2023 period. the sample selection was conducted using purposive sampling based on the criteria previously described. for transparency and replicability, the full list of analyzed companies is provided in appendix 1. this study employs annual panel data from 2021 to 2023. the three-year period was selected based on the availability of sustainability and financial reports following the updated gri standards 2021 and the economic impact of the covid-19 pandemic, which significantly influenced corporate tax behavior and disclosures in the energy sector. while the selected period captures recent and relevant dynamics, the limited timeframe results in a smaller number of data points (three observations per company). as such, the findings should be interpreted with caution and considered as an initial exploration into the relationship between csr, capital intensity, firm size, and tax avoidance. future research is encouraged to extend the observation period to enhance the robustness of the model and allow for more generalizable conclusions data analysis will be conducted using multiple regression analysis, and to test the moderating effect of firm size, the researcher will use the moderated regression analysis technique. the model in this study is as follows: model 1: ta = α + β₁csr + β₂ci + β3fs + e (5) model 2: α + β₁csr + β₂ci + β₃fs + β₄(csr*fs) + β₅(ci*fs) + e (6) explanation: ta tax avoidance α constant β regression coefficient csr corporate social responsibility cicapital intensity fs firm size e error in addition to regression analysis, this study also conducted a descriptive analysis of the evaluation indicators, including the mean, median, standard deviation, minimum, and maximum values for the key variables: cetr (cash effective tax rate), csr index, capital intensity, and firm size. the results of the descriptive statistics provide insights into the distribution and variability of each variable before inferential testing. to ensure the adequacy of the regression model, classical assumption tests were conducted. these include: normality test, homoscedasticity test, multicollinearity test, and autocorrelation test. result and discussion descriptive statistics test result here are the results of the descriptive statistics test in this study: table 1. descriptive statistics test n min max mean std. deviation tax avoidance 54 0.02 0.88 0.2481 0.20876 csr 54 0.08 0.97 0.4324 0.24223 capital intensity 54 0.01 0.83 0.3077 0.25758 firm size 54 18.90 31.45 23.5601 4.09120 source: data is processed (2025) the average tax avoidance (cetr) value of 0.2481 indicates that the companies in the sample tend to engage in relatively high levels of tax avoidance (since a lower cetr implies higher tax avoidance). the minimum value of 0.02 suggests that some companies pay only 2% of their cash-based income in taxes, reflecting aggressive tax avoidance practices. in contrast, a maximum cetr of 0.88 demonstrates that some companies demonstrate high tax compliance. the standard deviation of 0.20876 reflects considerable variation among firms in terms of their tax behavior. the mean csr disclosure index of 0.4324 indicates a moderate level of csr reporting. a minimum agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 157 score of 0.08 implies that some companies disclose only 8% of the csr indicators, highlighting significant inconsistency in sustainability reporting. companies with a csr score of 0.97 disclose almost all required csr items, suggesting strong compliance. these findings reveal heterogeneous csr engagement within the energy sector. the average capital intensity of 0.3077 suggests that fixed assets account for roughly 30% of total assets. a maximum value close to 0.83 indicates that some companies are highly capital-intensive, which is typical for the energy sector that relies heavily on physical infrastructure. conversely, the minimum value of 0.01 demonstrates that certain companies have minimal fixed assets. this variation is important in understanding depreciation strategies and potential for tax planning. firm size varies widely. the mean logarithm of assets is 23.56. the minimum and maximum values indicate the presence of small to very large firms in the sample, reflecting the diversity of operating scales in the energy sector. the high standard deviation value (4.09) indicates substantial variation in firm size. results of the coefficient of determination test. here are the results of the coefficient of determination test in this study: table 2. determination coefficient test r2 model 1 0.432 model 2 0.445 source: data is processed (2025) the first model, which tests the influence of csr, capital intensity, and firm size on tax avoidance, explains 43.2% of the variation in tax avoidance. the remaining 56.8% is influenced by other factors not explained by this model. in the second model, which modifies the relationship by adding firm size as a moderating variable, the r-square increases to 44.5%. this indicates that the second model can explain 44.5% of the variation in tax avoidance, with firm size serving to enhance the explanation of the observed phenomenon. normality test result the results of the normality test in this study: table 3. normality test result unstandardized residual n 54 normal parametersa,b mean 0.0000000 std. devation 0.15852029 most extreme differences absolute 0.093 positive 0.093 negative -0.054 test statistic 0.093 asymp. sig. (2-tailed) 0.200c,d notes: a test distribution is normal b calculated from data c lilliefors significance correction d this is a lower bound of the true significance source: data is processed (2025) the results of the normality test using kolmogorov-smirnov have a p-value of 0.200 > 0.05, so it it can be concluded that the residual data is normally distributed. this demonstrates that the regression model meets the normality assumption. multicollinearity test result the results of the multicollinearity test in this study: agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 158 table 4. multicollinearity test result model collinearity statistics tolerance vif csr 0.929 1.076 capital intensity 0.931 1.074 firm size 0.998 1.002 source: data is processed (2025) there is no multicollinearity problem because all vif values are <10 and tolerance >0.1. this means that the independent variables in the model are not highly correlated with each other, and the regression results can be interpreted well individually. heteroscedasticity test result the results of the heteroscedasticity test in this study: figure 2. heteroscedasticity test result the test was conducted using the visual method (scatterplot/glejser), but no distinct pattern was observed, based on the graph in figure 2. because there is no systematic pattern visible between the residual and the predicted y value, it can be concluded that there is no heteroscedasticity. autocorrelation test result the results of the autocorrelation test in this study: table 5. autocorrelation test result (runs test) unstandardized residual test valuea -0.01022 cases < test value 27 cases >= test value 27 total cases 54 number of runs 26 z -0.550 asymp. sig. (2-tailed) 0.583 source: data is processed (2025) agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 159 the results of the runs test show a p-value of 0.583 > 0.05, so there is no autocorrelation in the residual data. this means that the error (residual) in one observation is not correlated with the error in other observations, and the model does not violate the assumption of residual independence. f-test results the f-test is also known as the model suitability test. this test is used to assess whether the regression model used is feasible or acceptable, by testing whether the independent variables jointly affect the dependent variable. f-test results in this study: table 6. f-test result f sig. description model 1 12.238 0.000 fit model model 2 7.697 0.000 fit model source: data is processed (2025) the f-test results for both model 1 and model 2 show a p-value (sig.) of 0.000 < 0.05. this model collectively explains the variation in tax avoidance and indicates that csr, capital intensity, and firm size have a significant effect on tax avoidance. therefore, the relationship between these variables is valid, and the regression model used can be accepted as an appropriate model to describe this phenomenon. multiple linear regression analysis results the following are the results of the multiple linear regression analysis in this study: table 7. multiple linear regression analysis results (model 1) coefficient constant -0.273 csr 0.509 capital intensity 0.003 firm size 0.013 source: data is processed (2025) the regression equation obtained in model 1 is: ta = -0.273 + 0.509csr + 0.003 ci + 0.013 fs + e (7) table 8. multiple linear regression analysis results (model 2) coefficient constant 0.196 csr -0.242 capital intensity -0.521 firm size -0.007 crs*firm size 0.031 capital intensty*firm size 0.022 source: data is processed (2025) the regression equation obtained in model 2 is: ta = -0.196 – 0.242csr – 0.521ci – 0.007fs + 0.031csr*fs + 0.022csr*fs + 𝜀 (8) t-test results here are the results of the t-test in this study: agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 160 table 9. t-test results (model 1) t sig hypothesis constant csr 5.301 0.000 accepted capital intensity 0.003 0.974 rejected firm size 2.319 0.025 accepted source: data is processed (2025) based on the t-test results, it was found that csr and firm size have an effect on tax avoidance (0.000 < 0.05 and 0.025 < 0.05), while capital intensity has no effect (0.945 > 0.05). table 7. t-test results (model 2) t sig hypothesis crs*firm size 1.275 0.209 rejected capital intensty*firm size 0.924 0.360 rejected source: data is processed (2025) based on the t-test results in model 2, firm size does not strengthen or weaken the influence of csr and capital intensity on tax avoidance. this means that the company size does not have a significant moderating effect on the relationship between csr and capital intensity with tax avoidance (0.209 > 0.005 and 0.360 > 0.005). the effect of corporate social responsibility on tax avoidance based on the t-test results, it was found that csr influences tax avoidance. these research results are consistent with studies conducted by mardianti and ardini (2020), setiawati and adi (2020), and putri and lastanti (2024), which concluded that corporate social responsibility partially affects tax avoidance. the coefficient from the t-test results shows a positive influence. this means that the higher the csr value, the higher the cetr value, which serves as a proxy for tax avoidance. a high cetr value indicates a lower level of tax avoidance. based on these findings, it is concluded that the higher the company's involvement in csr activities, the lower the level of tax avoidance undertaken by the company. based on agency theory, csr can function as a mechanism to reduce agency costs and improve tax compliance. managers committed to csr tend to focus more on long-term sustainability and transparency, which aligns with the interests of shareholders. therefore, companies with a higher level of csr tend to avoid tax avoidance due to reputational risks, social compliance, and increased agency costs. this finding is also supported by legitimacy theory. according to legitimacy theory, companies strive to align their business practices with social norms and public expectations in order to maintain operational legitimacy (suchman 1995). although the statistical analysis in this study does not show a moderating effect of firm size, companies that are strongly committed to csr may still perceive aggressive tax avoidance as misaligned with principles of transparency and accountability. this indicates a potential reputational concern rather than a consistent behavioral outcome across all firms. companies with higher csr levels tend to have a higher cash effective tax rate (cetr), indicating better tax compliance (dwilopa and jatmiko 2023; lanis and richardson 2012). companies engaged in social activities are more likely to pay taxes fairly, compared to companies that are less focused on csr. hoi et al. (2013) found that companies with low csr are more likely to engage in aggressive tax avoidance practices. this is because companies without a social orientation tend to focus more on short-term financial gains, including reducing their tax burden through tax avoidance strategies. on the other hand, governments and society are increasingly paying attention to tax transparency as part of their evaluation of corporate sustainability. therefore, companies that implement csr as a business strategy are likely to avoid tax avoidance practices to maintain public trust and mitigate reputational risks. csr plays a role in reducing tax avoidance, as companies that care about social responsibility are more focused on tax compliance than companies that only focus on short-term profits. the effect of capital intensity on tax avoidance based on the t-test results, it was found that capital intensity does not have an impact on tax avoidance. this is in line with the research conducted by ulinuha and nurdin (2024) and sobarudin and ruhiyat (2022), which concluded that capital intensity does not affect tax avoidance. according to agency theory, companies consist of two parties with different interests, namely shareholders (principals) and managers (agents). managers may have incentives to pursue tax avoidance agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 161 through the use of fixed assets to reduce tax burdens, but this does not always occur. companies may tend to focus more on long-term investments in capital-intensive assets and concentrate more on business operations and growth rather than tax avoidance. this finding also aligns with legitimacy theory, which suggests that companies seek to obtain and maintain social legitimacy by acting in accordance with accepted social norms. companies with many fixed assets may use depreciation as a tool for tax avoidance, but they are less likely to engage in aggressive tax avoidance due to potential reputational risks and stricter regulations (sikka et al. 2009). companies with high capital intensity tend to avoid tax avoidance practices because it can damage their reputation in the eyes of the public and the government. companies that have substantial fixed assets and operate in sectors such as energy, which rely heavily on physical infrastructure, may prefer to comply with their tax obligations transparently in order to maintain their legitimacy. the effect of firm size on tax avoidance based on the results of the t-test, it was found that firm size has an impact on tax avoidance. the ttest results show that firm size has a positive coefficient. this means that the larger the company, the higher its cetr value, indicating that the company is more compliant with its tax obligations. this finding is supported by agency theory and legitimacy theory. larger companies typically have more stakeholders and higher external oversight, both from regulators and the public. larger companies are more likely to avoid aggressive tax avoidance and focus on transparent tax compliance. this is because larger companies are more concerned with reputational risks and government oversight, which motivates them to maintain a higher cetr (boni and levendis 2023; hassan and jha 2021; lanis and richardson 2012). furthermore, larger companies are not only subject to greater scrutiny but also have the financial capacity to meet their tax obligations in a legal manner, which enhances tax transparency and reduces tax avoidance (nugroho and rachmawati 2022). larger companies are better able to manage efficient tax planning legally, without resorting to aggressive tax avoidance strategies. the effect of corporate social responsibility on tax avoidance with firm size as a moderating variable the results of the t-test indicate that firm size does not moderate the effect of csr on tax avoidance. these findings are consistent with the research conducted by komara et al. (2022), and sulaeman and surjandari (2024). the level of csr disclosure activity does not indicate a direct relationship between the company size and the level of tax avoidance, whether the company is large or small. both large and small companies with good csr disclosure do not necessarily show a lower or higher level of tax avoidance. this suggests that firm size does not play a significant role in strengthening or weakening the relationship between csr and tax avoidance. firm size is not able to moderate the relationship between csr and tax avoidance because managers in larger companies, who have greater power, tend to prioritize financial gains, which may lead to more aggressive tax avoidance, even if they are involved in csr. this indicates that the company size does not always ensure that compliance with csr will directly correlate with lower tax avoidance. this aligns with agency theory, which explains the relationship between the principal (shareholders) and the agent (managers), where managers may act in their own interests, which can sometimes conflict with the interests of the shareholders. although larger companies have more stakeholders and oversight, their influence on csr and tax avoidance does not always show a strong relationship, as managers in large companies may still focus on short-term profitability rather than considering the long-term impacts of csr on taxes. legitimacy theory suggests that companies strive to gain and maintain social legitimacy by aligning their business practices with societal norms and expectations. while large companies often engage in csr to maintain their reputation and legitimacy in the eyes of the public, this does not always directly influence tax avoidance, especially if the company believes that tax avoidance can enhance its financial gains in the short term. although csr can enhance tax compliance, firm size may not serve as a strong moderating factor. this can occur because, in some large companies, the goal of maximizing profits may be more dominant, meaning aggressive tax avoidance may still occur despite their participation in csr activities. even large companies with robust csr programs may engage in tax avoidance strategies that are legal but still within legal boundaries. companies, even large ones involved in csr and more closely monitored by the public, are not guaranteed to have lower tax avoidance. they argue that large companies may manage tax avoidance in more subtle ways that are harder to detect (sikka et al. 2009). the effect of capital intensity on tax avoidance with firm size as a moderating variable based on the t-test results, it was found that firm size is insufficient to moderate the effect of capital intensity on tax avoidance. this finding aligns with the research conducted by azis et al. (2024), andoko and prabowo (2024), and ulinuha and nurdin (2024), which states that firm size cannot moderate the relationship between capital intensity and tax avoidance. firm size may not be able to moderate this effect agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 162 because larger companies often have more complex policies related to tax planning, as well as a greater focus on legal compliance and legitimate tax avoidance, even with substantial fixed assets. the company size is not sufficient to moderate the relationship between capital intensity and tax avoidance, because larger firms may still engage in more subtle tax avoidance practices despite having significant fixed assets (boni and levendis 2023). large companies may prioritize tax compliance and transparency, as aggressive tax avoidance risks damaging the company’s legitimacy in the eyes of the public and regulators. however, in terms of moderation, firm size does not always play a role in strengthening or weakening the relationship between capital intensity and tax avoidance. this is because large companies with high capital intensity may focus more on efficient tax planning and regulatory compliance, meaning that capital intensity is not fully linked to tax avoidance, even for large firms. although larger firms have greater potential to use fixed assets for tax planning, they are more likely to adopt legitimate and transparent tax strategies due to stricter oversight from the public and government (sobarudin and ruhiyat 2022). conclusion the conclusion of this study demonstrates that corporate social responsibility (csr) and firm size have an influence on tax avoidance, while capital intensity does not have a significant effect on tax avoidance. the findings indicate that companies with higher csr levels tend to engage less in tax avoidance, as they are more concerned with their reputation and social compliance, which enhances tax transparency. on the other hand, larger companies tend to be more compliant with their tax obligations, possibly due to greater scrutiny from stakeholders and regulators. however, this study also finds that firm size does not moderate the effect of csr and capital intensity on tax avoidance. although larger companies have more resources and tend to focus more on lawful tax compliance, firm size is insufficient to weaken or strengthen the relationship between csr and tax avoidance, nor between capital intensity and tax avoidance. this suggests that other factors, such as internal company policies and external oversight, may be more influential in determining the level of tax avoidance practiced by companies, regardless of their size. thus, larger companies and those with high csr involvement tend to be more compliant with their tax obligations, while companies with high capital intensity do not necessarily engage in lower levels of tax avoidance. firm size, although influencing tax avoidance, does not serve as a strong moderating variable in the relationship between csr, capital intensity, and tax avoidance. one of the limitations of this study lies in the short research period (2021–2023), which provides only three years of data per company. although this period captures critical post-pandemic financial behavior and aligns with the implementation of updated sustainability reporting standards, the small time dimension limits the ability to draw broader generalizations. panel regression models generally benefit from longer time series to improve statistical power and reduce the influence of year-specific anomalies. therefore, the results of this study should be seen as indicative rather than definitive. further research using extended time frames is recommended to validate and deepen these findings. reference agustina, zubaidah, s., and i. arisanti. 2020. pengaruh corporate social responsibility dan capital intensity terhadap penghindaran pajak (studi empiris pada 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avoidance. action research literate, 8(9): 2494–2503. rani, s., a. rakhmawati, and wulandari. 2024. effect of environmental performance and capital structure on financial performance: evidence from mining sector companies listed on idx. new applied studies in management, economics & accounting, 7(2): 32-43. https://doi.org/10.22034/nasmea.2024.182733 rani, s., m. zuliyana, and r. effendi. 2023. the effect of profitability and leverage on tax avoidance moderated by firm size: evidence from property and real estate companies in indonesia. finance, accounting and business analysis (faba), 5(2): 147–158. https://doi.org/10.43193/faba.v5i2.292 rosyati, t., h. suripto, and d. purwasih. 2023. corporate social responsibility (csr). unpam press samhuri, r., n. ahmar, and mulyadi. 2023. strategi inovasi dalam perspektif ceo overconfidence dan ceo power [innovation strategy in the perspective of ceo overconfidence and ceo power]. penerbit cv. mega press nusantara [cv mega press nusantara publisher] septiani, a. s., and u. sastradipraja. 2023. pengaruh pendapatan perkapita, pertumbuhan ekonomi dan tarif pajak terhadap tax ratio negara asean 2015-2021 [the influence of per capita income, economic growth and tax rates on the tax ratio of asean countries 2015-2021]. oikos: jurnal https://doi.org/10.61754/jadura.v1i1.14 https://doi.org/10.1016/j.jaccpubpol.2012.06.006 https://doi.org/10.20885/jca.vol2.iss3.art2 https://www.kemenkeu.go.id/ http://dx.doi.org/10.33087/ekonomis.v7i1.724 https://doi.org/10.1111/aepr.12267 https://doi.org/10.46306/rev.v1i2.16 https://doi.org/10.24843/eja.2020.v30.i07.p05 https://doi.org/10.22034/nasmea.2024.182733 https://doi.org/10.43193/faba.v5i2.292 agengsriwardana, aryani, rani, armin / finance, accounting and business analysis, volume 7 issue 2, 2025. 165 kajian pendidikan ekonomi dan ilmu ekonomi [oikos: journal of economic education and economic studies], 8(1): 199 – 215. setiawati, f., and p.h. adi. 2020. pengaruh corporate social 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leverage, profitability, and corporate social responsibility on tax avoidance with firm size as a moderating variable. asian journal of economics, business and accounting, 24(5): 433–442. https://doi.org/10.9734/ajeba/2024/v24i51320 ulinuha, d., and n. nurdin. 2024. capital intensity and tax avoidance: the moderating role of firm size. journal of business and taxation, 8(2): 132-145. wardila, a., m. maemunah, c. lukita, w.s. aji, d. mulyadi, d purwandari, s. elvika, k.maula, m.n. munir, b. rismayadi, yanti, e. mutiara, pasha, m. rafly, agustina, p.n. nurevri, l. lasmini, syamsiah, a. nur, i. chandra, subagyo, and d. fredrica. 2023. membedah kemampuan manusia dalam meraih mimpi : kemampuan mengendalikan dan menggunakan sumber daya [dissecting human ability to achieve dreams: the ability to control and use resources]. penerbit peneleh [peneleh publisher] zoebar, m. k. y., and d. miftah. 2020. pengaruh corporate social responsibility, capital intensity dan kualitas audit terhadap penghindaran pajak [the influence of corporate social responsibility, capital intensity and audit quality on tax avoidance]. jurnal magister akuntansi trisakti [trisakti accounting masters journal], 7(1): 25–40 appendix 1 – list of sampled companies this study analyzed 18 energy sector companies listed on the indonesia stock exchange (idx) during the 2021–2023 period. the companies selected using purposive sampling are listed below: no. company code company name 1 abmm pt abm investama tbk 2 adro pt adaro energy indonesia tbk 3 akra pt akr corporindo tbk 4 bess pt batulicin nusantara maritim tbk 5 bssr pt baramulti suksessarana tbk 6 byan pt bayan resources tbk 7 gems pt golden energy mines tbk 8 hrum pt harum energy tbk 9 itmg pt indo tambangraya megah tbk 10 mbss pt mitrabahtera segara sejati tbk 11 pgas pt perusahaan gas negara tbk 12 pssi pt pelita samudera shipping tbk 13 ptba pt bukit asam tbk 14 ship pt sillo maritime perdana tbk 15 smmt pt golden eagle energy tbk 16 tcpi pt transcoal pacific tbk 17 tebe pt dana brata luhur tbk 18 toba pt tbs energi utama tbk https://doi.org/10.1016/j.accfor.2009.02.003 https://doi.org/10.5465/amr.1995.9508080331 https://doi.org/10.9734/ajeba/2024/v24i51320 206 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.09 the multifund system – is it an option for raising the sustainability of the bulgarian pension system? jeko milev1* , kremena choutilova-yochkolovska2 department of finance, university of national and world economy, sofia, bulgaria 1 department of finance, university of national and world economy, sofia, bulgaria2 * corresponding author info articles abstract history article: submitted 30 october 2024 revised 5 december 2024 accepted 10 december 2024 background: bulgarian universal pension funds have been operating for more than 20 years. they were established into bulgarian pension system as supplementary elements whose basic aim was to strengthen the sustainability of the system in the long term. following the recommendations of the world bank (1994), the policymakers in the country introduced a fully funded defined contribution pension scheme where the investment risk is almost entirely borne by the insured individuals. hence, low returns realized by pension companies during the accumulation phase detriment seriously the amounts of the pension benefits at the date of retirement. the second pillar pension funds are allowed to structure and manage only one portfolio of assets which could hardly suit the interests of both young and old scheme members. the investment horizon is crucial when it comes to the right mixture of assets in the investment portfolio. purpose: the purpose of the current study is to discuss some of the critical elements of multifund system as one of the tools for life cycle investing in pension insurance. the research is trying to shed some light on the important features that must be sorted out before introducing the scheme in practice. methodology: the methodology used throughout the paper embraces mostly comparative and descriptive analysis, but also deductive and systematic approaches were applied. findings: the basic findings of the research concern the way that must be addressed such issues as the number and structure of the managed portfolios, the distribution of those insured individuals that have not made an active choice about their preferred fund and the guaranteed mechanisms about the paid contributions. practical implications: the article contributes to the ongoing debate about the exact structure and design of the multifunds as a possible elaboration of the universal pension funds in bulgaria. originality: the research has a value for all those who work in the sphere of pension fund management and life cycle investing. by exposing the basic features and problematic elements of the multifunds, the research offers possible solutions for the establishment of a multifund system in bulgaria. paper type: the article is a research paper. the first part compares the basic characteristics of multifunds in several countries already with such system. the second part recommends possible options for its introduction into bulgarian practice. keywords: pension funds, pension reforms, risks, cee countries jel: g11, g12, g22, g23 address correspondence: e-mail: j.milev@unwe.bg1 kremena.yochkolovska@unwe.bg2 https://doi.org/10.37075/faba.2024.2.09 https://orcid.org/0000-0003-3134-7181 https://orcid.org/0009-0006-5073-8566 jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 207 introduction long-term sustainability of the pension systems around the world has been discussed in many debates among policymakers, academics and ordinary people for many years. the unfavorable demographic trends caused by the declining fertility rates and raised life expectancy put under pressure almost every aspect of public finances, but the negative trends are most clearly seen within the pension systems. the national social security based primarily on pay-as-you-go principle where those who work today must contribute to finance the benefits of the current retirees has been forming sustainable deficits for the last years. hence, almost every government in europe has been undertaking reforms in this sphere in order to respond to this obvious negative trend. the adopted changes are both parametric and structural. the first group of reforms concern such processes as raising the pension age, increasing the number of working years for receiving full amount of pension benefit, removing variety of options for getting retired below the statutory pension age, etc. all these changes are undoubtedly important but not enough to put on a sustainable track the pension systems in the long term. thus, a second group of reforms are gradually undertaken by many countries, mostly in europe, whose basic focus is to relax part of the financial burden that currently falls on the payas-you-go part of the pension systems. the introduction of supportive elements based on a fully funded mechanism is a primary goal for many governments. the basic idea behind this type of reforms is clear – to incentivize and/or even oblige individuals to save additional funds during their professional careers so that to receive future pension benefit from saved resources and not from intergenerational transfer. the reforms of this kind were advocated by many official institutions: the world bank (1994), oecd (2004, 2008), the european commission (2010, 2012, 2021a, 2021b) etc. there were also a number of academic research papers especially in 1990’s and early 2000’s to propose reforms of similar character. for example, davis (1995) describes the positive effects of fully funded pillars on the financial stability of a pension system that faces continuous population aging. whitehouse (2007) also demonstrates that fully funded components into the pension systems could effectively support public pay-as-you-go structures and relax part of the financial burden in the mid and in the long term. yermo (2012) also explores the effects of introducing fully funded components into pension insurance and takes the view that these additional structures may raise sustainability and improve adequacy of the system as a whole. kirov (2010) and daneva (2018) demonstrate how private pension systems contribute to the stability of the state pension systems and incentivize individuals to save additional funds for their future retirement income. similar views also take pandurska (2020), manov and gochev (2003). at the same time several countries in central and eastern europe which reformed their pension systems by introducing fully funded pillars accomplished partial or full reversal reforms (bielawska 2015). some of the countries cancelled in full the insurance within the second pillar such as hungary in 2011, others made steps to constrain the insurance in private pension funds. the most popular adverse reforms were related to reduction of the contribution rate, transfer of resources towards the first pillar of the system, delay of envisaged increase of the contribution rate, introduction of an option to leave the second pillar insurance, etc. the basic criticism about the private pension funds concerns the net return realized by the funds over the years and the possibility to ensure enough funds to finance benefit that satisfies insured individuals. within the defined contribution pension schemes people face serious risks. for example, blake (2006) enumerates several risks both in the accumulation and the distribution phase that directly affect the amount of the future benefit. among them are interest rate risk, asset price risk, currency risk, longevity risk etc. rocha and vittas’ work (2010) on the design of the payout phase in defined contribution pension schemes analyses such risks as liquidity risk, bequest risk, interest rate risk etc. barembruch and bielawska (2023) also show that investment performance is very important for attracting public support for the fully funded system in the long term. so on the one hand there is a common notion that private pension schemes are an important element of the pension systems that could relax part of the rising financial burden on them due to the obvious negative trend of population aging. on the other hand, there is a serious debate on how exactly to regulate these private structures to work efficiently and achieve results so that to protect the interests of the insured individuals in the best possible way. the situation becomes even more complicated if inflation is considered in the equation. the lost purchasing power of money is a very serious argument against any saving scheme whose rate of return is below the reported inflation. emerging economies such as the economy of bulgaria are expected to converge towards those of the western part of europe, which means that, all other things been equal, the expected inflation may destroy the accumulated resources so that the received benefits to lag behind the expectations of the insured individuals. antolin, payet and yermo (2010) pay attention to the importance of life-cycle investment strategies and conclude that this type of investment is beneficial for future retirees. multifund system in pension insurance is one of the options in jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 208 life-cycle investing which has been applied in practice in many countries with defined – contribution pension schemes. it has been discussed for many in years in bulgaria but still does not function in practice. the possibility of structuring portfolios with different risk profiles is seen as a good opportunity to raise the realized yield and at the same time to control the risk exposure during the different stages of one’s life. the bulgarian universal pension funds entered the pay-out phase in 2021, and it became obvious once again that insured individuals need this option to maximize the value of their savings towards the date of retirement. the current article is trying to evaluate the basic features of multifund system and to make certain implications about its introduction into bulgarian practice. the first part of the research is dedicated to the most important elements of the multifund system by considering the experience of several countries in central and eastern europe that have introduced such pension structure. the second part concerns the basic issues that must be addressed in case of introducing the scheme within the bulgarian pension funds. the paper concludes with some recommendations for future reforms within the pension system in the country. the multifund system – basic features and characteristics in the late 1990's, early 2000's, structural and parametric reforms were implemented in the pension systems of many eastern and central european countries. following the adoption of the three-pillar insurance model, the policymakers introduced and established additional elements (pillars) that complemented and enriched the existing pay-as-you-go systems. these new elements made possible the supplement of the traditional model based on a pay-as-you-go principle within which pension costs are covered by contributions paid by the working population. the innovation was that the new pillars of the pension system were constructed on a fundamentally different principle – fully funded where each person's contributions are accumulated into an individual account and have the potential to grow as they are invested in certain financial instruments. this principle, unlike the pay-as-you-go one is characterized with a robust link between the personal contributions and the pension benefit that insured individual is expected to receive after retirement. the present study is focused on the multifunds in croatia, poland, lithuania, latvia and estonia then, an analysis is made on the possibilities for introducing the model of life-cycle investing into bulgaria. croatia the multifund system is already in operation in croatia. the pension system in the country has embraced a classic three-pillar insurance model since 2002. so far, the multifund system has been introduced into the second mandatory pillar, which is considered a step forward in an effort to optimize the risk and return for the different cohorts of insured individuals. pension companies have been authorised to manage three categories of funds (a, b and c), each with different insurance conditions, investment strategies and guaranteed returns. the three types of funds are constructed with a life-cycle perspective, with the aim of providing insured persons with a choice of investment portfolios with different degrees of risk and return. the highest risk fund is fund "a". the individuals who choose this investment category must have at least 10 years until retirement. the balanced fund category "b" allows participation of persons with 5 or more years until retirement, and the category "c", as the most conservative, is for persons with less than 5 years until retirement. croatian pension legislation1 allows insured persons to change the risk profile of their fund once a year without a fee, as long as it is managed by the same pension company. it is also allowed to transfer the accumulated resources between the funds of the same category but managed by different companies. however, in this case the person pays an "exit fee". persons who have not chosen the risk profile of their pension fund are allocated in accordance with the number of years until retirement. if pension age is 10 or more years away, individuals are distributed into fund "a" the most aggressive type of fund. if the period is 5 to 10 years, the insured are allocated into the balanced type of fund and in case of just 5 or less years until retirement they go into fund "c" the conservative portfolio type. the risk profile of each of the funds depends on the allowed investments in variable income instruments. the most aggressive type of fund can allocate up to 100% of the assets into corporate equities and units in collective investment vehicles. the balanced type of portfolio can have up to 80% invested in variable income instruments but at least 50% of the assets must be in government securities. the conservative portfolio type cannot have investments in equities and units in collective schemes. an important feature in the existing regulation is that, regardless of which category of fund a person 1 the mandatory pension funds act (2014) jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 209 is insured, he or she is guaranteed a minimum return based on the weighted average return2, reduced by 12, 6 or 3 percentage points, for the a, b and c funds respectively. if the fund does not achieve the guaranteed return, the pension company must top-up the difference. the investment regime of the three types of funds is strictly regulated both quantitatively and by eligible types of investment instruments. table 1. investment regulations of the second pillar multifunds in croatia fund instrument limit conservative fund (c) government securities min.70% corporate bonds 10% shares 0% collective investment schemes 10% alternative funds 0% bank deposits 20% bonds and shares issued by companies for infrastructure projects in croatia 35% balanced funds (b) government securities min.50% corporate bonds 30% shares 40% collective investment schemes 30% alternative funds 10% bank deposits 20% bonds and shares issued by companies for infrastructure projects in croatia 35% aggressive funds (a) government securities min.30% corporate bonds 50% shares 65% collective investment schemes 30% alternative funds 15% bank deposits 20% bonds and shares issued by companies for infrastructure projects in croatia 55% source: compulsory and voluntary pension funds act (2014) poland in 1999 poland introduced a three-pillar model of pension insurance, following that proposed by the world bank. subsequently, a number of additional reforms of the system have been undertaken, and nowadays the system has been transformed quite significantly. the multifund system has only been implemented for the voluntary employee capital plans (ppk3), which were introduced in 2019. the ppk is a long-term savings scheme in which employers, employees and the state participate with contributions for the benefit of the employees4. the funds are invested, and after the age of 60, the insured persons can use the amount in accordance with the conditions stipulated into the contract with the employer. enrolment in the scheme is automatic for those aged between 18 and 55, but there is an option to opt out if the individual prefers so. those aged 55 to 70 can also opt in, but on their own initiative. the multifund mechanism for voluntary ppk plans is structured according to the life cycle stages of the insured person and the expected year of attainment of 60 years, which is the target date of the fund. for each insured person, depending on his age, an investment portfolio (fund) is constructed with a horizon of up to a certain year, in 5-year intervals from 2025 to 2070. for example, the “2030 fund”, because of the short investment horizon, is much lower risk as the shares in it cannot exceed 15 %, while for funds with a distant target date this share is much higher up to 80 %. 2 the benchmark is the weighted average return for each fund category over the last 3 years. 3 in poland, these funds are known as pracownicze programy kapitałowe (ppk) 4 in certain cases, the state may pay a lump-sum of around €60 to encourage voluntary participation jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 210 table 2. investments of the voluntary capital plans with life-cycle investing in poland fund instrument limit5 voluntary capital plans with life-cycle investing shares 10%-80% real estate 0 bonds 20%-100% collective investment schemes 15%-80% bank deposits 20%-100% source: act on employee capital plans (2018) and own research baltic states at the beginning of the 21st century, the baltic trio lithuania, latvia and estonia undertook intensive structural reforms of the existing pension model based solely at that time on the public pay-as-yougo principle. all of them established complementary elements based on individual pension accounts within two new pillars a supplementary mandatory pillar (second pillar) and a supplementary voluntary pillar (third pillar). over the years, the model in each of the countries has undergone various modifications in line with the realities of the general economic and political developments. lithuania has introduced two main types of investment schemes (funds) in the second pillar an asset preservation pension scheme and a life-cycle investment scheme. the main objective of the asset preservation fund is to protect the value of accumulated assets and minimize the investment risk. this requires a strategy focused on investments in low-risk instruments such as bonds, non-equity securities, shares of collective investment undertakings, short-term deposits. the maximum allowed investment in equities is 20%. in case of a life-cycle pension fund, the investment strategy is adapted to the life cycle of the participants, aiming at an optimal balance between risky and less risky assets, depending on the remaining accumulation period. the allowed investment in variable income instruments is 100%. by selecting the second type of fund, participants have an opportunity to optimize their savings. the pension insurance company chooses investment strategy by taking into account their age and investment objectives, and applies different approaches to retirement savings depending on individual needs and risk preferences. table 3. investments of the second pillar multifunds in lithuania fund shares real estate bonds collective investment funds bank deposits other asset preservation pension fund 20% 0% 100% 10% in funds investing in shares; 20% in funds investing in corporate bonds 100% in funds investing in government securities 100% life-cycle fund 100% 0% 100% 100% 100% 20% in funds other than collective investment funds source: pension accumulation law (2019) and own research latvia is no exception in terms of the path chosen to reform its pension system in 1998-2001 it introduced a three-pillar model and subsequently enriched it with a multifund investment principle. pension fund managers have significant freedom in establishing different types of funds with different risk profile. however, the practice shows that three types of investment funds can be distinguished: conservative, balanced and aggressive. the conservative fund is focused on investments in bonds and money market instruments, the balanced one invests up to 15% in equities and a minimum of 50% in bonds and money market instruments, while the aggressive funds follow an investment approach where up to 100% of their investments can be in equities. latvian legislation does not prescribe exact percentage limits for each of the funds. it has just common investment limits that must be followed but the exact constraints must be formulated into the prospectus of each of the funds. it should be noted also that latvian legislation does not envisage any type of guarantee about minimum returns. this means that insured persons and pension administrators must be significantly more responsible during the investment process. 5 the exact percentage depends on the number of years until retirement jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 211 table 4. investments of the second pillar multifunds in latvia fund instrument limit conservative fund shares 0% fixed income securities 100% balanced funds shares 15% money market instruments min.50% active funds shares 100% bonds 100% money market instruments 100% source: own research the pension insurance model in estonia was transformed from a one-pillar into a three-pillar model in the period 1998-2003, when two additional pillars based on individual accounts mandatory and voluntary were introduced to support the pay-as-you-go system. the multifund mechanism was introduced by offering investment pension schemes with three different risk profiles depending on the structure of the investment portfolio conservative, balanced and aggressive schemes. then the system was transformed by introducing the so called conservative and non-conservative funds. the conservative funds must have at least 80% of their assets in bank deposits, securities with investment credit rating and money market instruments. the so called non-conservative funds are allowed to invest in variable income instruments as much as they wish. in addition, pension investment accounts opened with banks were introduced in 2021, where any person insured in the second pillar can transfer his/her funds into such an account and manage it independently. table 5. investments of the second pillar multifunds in estonia fund instrument limit conservative fund bank deposits, securities with investment credit rating and money market instruments min. 80% non conservative fund shares 100% real estate 40% (max. 10% in 1 property) bonds 100% (max. 10% in one state) collective investment funds 100% bank deposits 100% source: investments funds act (2016) and own research the examined countries have some similarities but also differences in their approaches towards the multifund system. the research made shows that all of the countries have at least 3 different types of funds. but the baltic countries and poland have introduced life cycle funds where insured individuals are divided into age groups and for each age group there is a specific fund. the age groups are formed by including individuals born in intervals from 5 to 7 years. for example in lithuania the age groups are the following: 1996-2002; 1989-1995; 1982-1988; 1975-1981; 1968-1974; 1961-1967; 1954-1960. this makes 7 different pension funds with different risk profile, although the funds destined for those born between 1975 and 2002 have almost identical share of variable income instruments which makes them quite similar in terms of risk level. in croatia the funds are just three and the normative rules are clear to what extent different funds may use variable income instruments as investment vehicles. the baltic countries used to have similar legislation but after the reforms implemented in the last few years, they introduced life cycle funds where insured individuals are by default transferred into a fund which is considered as the most appropriate for their age. the reasons behind this type of reform lies primarily on the assumption that insured individuals in most of the cases do not act rational. they do not to choose the right fund by taking into account the investment horizon ahead and do not optimize the value of their savings towards the date of retirement. for example, young individuals tend to choose conservative portfolio types thus reducing the possibility to realize higher return in the long term and the old individuals take unnecessary high risks in the last few years before retirement trying to increase the value of their funds by risking significant decline of their assets without any good reason. so, the exact design and structure of the multifund system is quite important. it must serve adequately to the expectations and the needs of the insured individuals but at the same time it must protect them from taking unnecessary risks during the different stages of their lives. the right structure of the second pillar pension funds must take into account the changing investment horizon, the expected yield from the different asset classes, the expected inflation and the possibilities to introduce specific guarantees for the insured individuals who are the primary holders of the investment risk. jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 212 options for introducing the multifunds in bulgaria – the basic challenges and risks bulgarian pension system is a three pillar structure with mandatory first and second pillar and voluntary third one. the second pillar was introduced in the early 2000’s as a fulfillment of the recommendations of the world bank and the third pillar – the voluntary pension funds started a few years earlier, but their detailed regulations were adopted in the early 2000’s so that to supplement efficiently the first two pillars of the system. the second and third pillar operate defined contribution schemes, structured on a fully funded principle. still from the very beginning, the adopted rules allowed pension fund managers to construct and manage only one portfolio of assets. the investment regulations were very strict stipulating not only the asset classes but also the proportions of each asset class allowed to be used as investment vehicles. the pension fund managers were not only forbidden to structure different portfolios of assets but also, they were obliged to keep so conservative investment strategies that in the beginning they used to invest almost all their assets into government securities. these very strict investment rules were gradually relaxed during the next years. however, there were at least three reasons for such conservative investment regulations which were the basic obstacles for introducing multifund system during the following years. first, the lack of suitable domestic financial assets due to the undeveloped stock exchange. it is interesting to note that the illiquidity of the market could lead both to withdrawal from it and to entry to it. the last could be motivated by the possibility to control the changes in the asset prices especially in periods of strong market volatility at the external stock exchanges. second, regulators with no experience of monitoring and controlling institutions of such type. in many cases, they may, at least, tolerate investment behavior not in the best interest of the insured individuals. third, a society accustomed to receiving pension benefits only by the state has no interest in exerting external pressure on pension fund managers to keep best management practices. all these three arguments must be taken seriously into consideration when elaborating multifunds and their introduction in practice. however, multifund system has proved itself as a good option when considering life-cycle type of investment. the possibility to structure portfolios with different risk profile assumes and addresses the simple fact that insured individuals face different types of risk during their lives. the young people who enter for the first time the labor market and have an investment period of around 40 years are exposed to very different type of risk from those who are in their 60’s and have just few years until retirement. when investment risk almost entirely falls on the insured individual, he/she should have investment behavior that raises the possibility of accumulating the greatest possible amount of assets at the end of the investment period, i.e. towards the date of retirement. it must be admitted that there is no guarantee that even if an individual has such behavior during the whole accumulation period, he/she would achieve such maximization. in reality, there are many external factors that may influence asset prices in an adverse direction without any opportunity to react effectively. so, when deciding to implement multifund system, the policymakers must address effectively the exact number of the different asset portfolios and their exposure to the different asset classes. the practice of the different countries shows that portfolios may vary from just two (as is the case in slovakia6) to seven and more (in baltic countries). their most important distinguishing feature among the different portfolio types is the share of variable income instruments allowed for investment. variable income instruments could be corporate equities, units into mutual funds or some other type of collective investment schemes. the basic characteristic here is that income is not fixed, and it depends on the financial performance of the company or the scheme. so, in bulgarian case, a variant with three different portfolios of assets can be considered as optimal. the reasons for this are the following: first, if an option of just two portfolios is assumed, it would not suit adequately all insured individuals. for example, if structured portfolios are conservative and aggressive, the system will miss the balanced portfolio in which many individuals may feel comfortable. if the system has just balanced and conservative portfolio types, then the aggressive type will be out of choice, although this may be the best variant for those with the longest investment horizon. in case of scenario without conservative portfolio those individuals who are close to retirement would be exposed to unnecessary high risk. on the other hand, if portfolio types are more than three, the management costs are expected to increase without any meaningful benefits for the insured individuals. the three portfolio types are also easy to explain by revealing their most significant advantages and disadvantages to the insured. some of the analyzed countries in the previous chapter of the study, although having chosen the structure of more than three portfolio of assets, the actual investment strategies followed can also be grouped into three – conservative, balanced and aggressive as some of the established portfolios have quite identical share of variable income instruments. the second important issue that must be sorted out concerns the exact construction of the different 6 since 2012 pension companies in slovakia have been obliged to structure conservative and aggressive portfolios but with the option to structure as many other different portfolios as they wish. jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 213 portfolio types and their exposure towards variable income instruments. what should be the maximum limit and whether to have minimum threshold for this type of assets in the different portfolios? the practice in different countries is different and each of the variants has positive and negative features. the maximum limit is worth being high enough (between 80% and 100%) for the aggressive portfolio type since it is supposed to be the investment vehicle for those insured with the longest investment horizon. the historical performance of equity markets shows that yield realized on them is higher than the one achieved on bond markets but at the same time the volatility may also be significant (brealey et al. 2007). however, in the long term it is important for the insured individuals to have this option thus raising the probability of realizing yield that exceeds the inflation rate. the next important issue concerns the minimum amount of investments in variable income instruments. the adoption of minimum threshold aims to make clear difference between the portfolio types. for example, the conservative portfolios may include no investments in equities, but all other portfolios should have at least some minimum percentage in them that must be observed by all market participants. the balanced portfolios may have 20%-30% minimum and the aggressive ones may have 50%-60% at the lowest level. the idea here is straightforward – the level of risk in portfolios of one and the same type, managed by different pension funds should be approximately equal. if pension funds are allowed to structure three portfolio types, they must make a clear difference among them so that the insured individuals understand unambiguously where their savings are going. if there is no such rule the people in one pension scheme that have chosen balanced level of risk may find themselves in more volatile environment than some other persons that have preferred an aggressive portfolio type but managed by another pension company. the adoption of a minimum level of equity investments would guarantee that there would be no pension company that misleads insured individuals by structuring portfolios whose exposure to that asset type is lower than expected. thus, seriously damaging the yield in the long term. on the other hand, regulation without minimum threshold for variable income instruments would allow pension managers to be more flexible in their investment decisions. this could be important in volatile environment in which an obvious crisis is coming. under this scenario it would not be reasonable to stick to a high portion of equities when their values are expected to significantly drop in the near future. however, when it comes to bulgarian reality it is worth having rules with lower limit of equity investments thus preventing fund managers from constantly neglecting the opportunities inherent to variable income assets. for the past 20 years pension fund managers in the country seemed to be quite conservative relying primarily on government securities whose yield is secure but low enough to compensate insured individuals for the inflation rate. table 6. portfolio share in fixed and variable income instruments in universal pension funds in bulgaria7 2010 2015 2020 2024 government bonds 23.22% 49.52% 57.61% 59.52% corporate bonds 21.17% 13.52% 9.51% 8.01% mortgage bonds 1.40% 0.09% municipal bonds 2.60% 0.10% 0.01% 0.01% bank deposits 21.52% 3.31% 0.85% 0.76% other fixed income instruments 3.02% 2.39% 1.66% 1.07% total fixed income instruments 72.93% 68.93% 69.64% 69.37% shares in special investment purpose companies 1.79% 0.91% 0.87% units in collective investment schemes 11.85% 13.91% 17.86% 14.62% other shares 13.43% 16.25% 11.63% 16.01% total variable income instruments 27.07% 31.07% 30.36% 30.63% source: www.fsc.bg the next crucial issue in the process of establishment of a multifund system is how to distribute insured individuals within the different portfolio structures. the primary option should be the people themselves to make informative choice which portfolio type would suit their interests in the most appropriate way. however, the historical experience not only in bulgaria but in many other countries with mandatory fully funded pillars, shows that insured individuals are not quite interested in their insurance within the second pillar pension funds. a significant share of them doesn’t even know the pension fund they have been saving for years, let alone the level of risk to which they have been exposed to. under such a scenario, it is worth having a default option for those individuals who refuse to make an active choice. the experience of the various countries is different as some of them have preferred the most conservative portfolios as a choice number one, others have made balanced or aggressive portfolios as their primary option. the arguments for 7 the data shown for 2010, 2015 and 2020 is towards the end of the year. the data for 2024 is towards 30.09.2024 http://www.fsc.bg/ jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 214 the various default variants are different. however, maybe the most appropriate regulation is to transfer individuals’ savings within the different portfolios in accordance with the age of the insured persons. hence, those individuals with the longest period of investment (young individuals who have just entered the labor market) must go into the riskiest portfolio structure. this is the portfolio with the highest share of variable income instruments. then gradually when a certain predefined age is reached, the individuals’ savings go into less riskier portfolios. surely, those individuals whose retirement is coming close should be directed into the conservative portfolio type, thus stabilizing the value of their investments some years before reaching pension age. the assumption here is that the most serious type of risk to which are exposed young individuals is the inflation risk. for a long period of time the lost purchasing power of money could significantly destroy the value of accumulated savings. although volatile in the short period, investments in equities or units in collective investment schemes have a higher expected return than instruments such as government securities, corporate bonds or bank deposits. at the same time for individuals whose retirement is expected to be in the next 4-5 years it is reasonable to reduce the share of such investments and to rely more heavily on fixed income assets. there are variety of options how to transfer the resources among the different portfolios but maybe the most practical one and at the same time easiest to implement is to fix certain age and the whole amount of accumulated resources into one’s individual account to be transferred into less risky portfolio. a variant, in which part of the resources is transferred and some other is left into the current portfolio is also reasonable but could lead to confusion among the insured and unnecessary high costs for the pension companies8. by structuring aggressive portfolios, pension managers would raise the expected return but at the expense of a higher level of risk. in order to protect the savings of the insured it is crucial to transfer them to lower risk portfolios some years before retirement. it is quite a discussive issue at which point (how many years prior to pension) that may happen. the experience of bulgarian pension funds shows that for the past 22 years they faced two major crises. the first one was in 2008 after the global financial crisis and the second one was in 2022, after the start of the interest rate increases undertaken by fed and ecb. the number of years needed to restore the value of one pension unit after the first crisis was almost 5. the years needed to recover from the second crisis were expected to be between two and three9, depending on the structure of the investment portfolio of the fund. hence, the experience so far shows that the date of transferring resources into the conservative portfolio must be between 3 and 5 years. any shorter period prior to retirement would significantly reduce the probability to restore the incurred loss. surely the issue of losing money just before the period of transferring resources into the conservative portfolio type is a tricky one. in this worst-case scenario, the individuals could be allowed to stay within the aggressive portfolio type some extra time to restore some of the lost resources, but that must be their own well-informed choice. whatever regulation in this aspect be adopted it could hardly eliminate all the risks to which are exposed insured individuals. within the defined contribution pension schemes, they bear the investment risk and the adopted rules can only mitigate it. so, in bulgarian case it seems reasonable to have regulation that obliges individuals to transfer their resources from the most aggressive portfolio type into the balanced one between 7 and 10 years prior to retirement and from the balanced portfolio type into the conservative some 3 to 5 years before retirement. in any case, insured individuals must have the option to stay within the portfolio of their own choice, but when a riskier option is preferred, there must be a specific procedure to follow so that pension companies are convinced that insured individual realizes the risk to which he or she is exposed to. the last important issue that must be addressed when introducing a multifund system is related to the type of guarantees that insured individuals must have for the accumulated resources. bulgarian legislation has adopted two types of guarantees – the first one concerns the value of the gross contributions paid by the insured individuals throughout their insurance period. the estimated pension benefit cannot be less than the one calculated from the total amount of the gross contributions paid by the insured individual throughout his/her working years. the second type of guarantee concerns the minimum yield realized by the pension fund, estimated by taking into account the weighted average return realized by all of the funds at the end of each quarter for the last 24-month period. both types of guarantees try to minimize the investment risk insured individuals are exposed to. within the defined contribution pension schemes the amount of the future pension benefit strongly depends on the accumulated amount towards the date of retirement. so the first type of guarantee aims to protect the sum of the paid contributions in the course of one’s working career. however, the amount is guaranteed only in nominal terms and that is a kind of an absolute minimum without which the pension insurance of this type could hardly be justified. the second type of guarantee is much more controversial. it aims to provide a certain minimum level of yield by taking into account the 8 such transfer of resources is applied in columbian pension funds where 20% of the resources are transferred each year into less risky portfolio during the last 5 years before retirement. 9 at the time of writing the article some of the funds have already restored the value of one pension unit but some others haven’t. jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 215 average performance of all pension funds of the same type for a specified period of time. the introduction of this kind of guarantee stems from the mandatory character of the second pillar pension funds. the logic here is straightforward – the state obligates insured individuals to save, and it tries to guarantee that whatever choice they make about the fund, the last would not significantly lag behind the realized average yield. there are fears that this type of regulation motivates herding behavior among pension funds. knowing that their performance is evaluated on the basis of the achieved average yield, managers have serious incentives to structure similar asset portfolios. this is even more true when pension market is dominated by three pension funds whose total market share exceeds 60%10 and pension companies compulsory reveal their portfolios of assets every three months. however, looking carefully at the details of the pension fund market in bulgaria, one could easily see that there are no signs of such copying behavior among pension funds regarding their asset portfolios. the reason for this is the different investment approach assumed by the market leaders and the funds with smaller market shares. the funds with the dominant positions prefer investments in assets traded on well-developed foreign stock markets with significant liquidity. the risk they assume is smaller, but all other things been equal, this means also smaller expected yield. this type of investment behavior is not followed by the smaller funds. most of them are part of domestic economic groups and prefer investments in local companies, traded at the bulgarian stock exchange. the liquidity of their investments is not so good taking into account the characteristics of the local market, but the expected yield is higher for at least two reasons. first, emerging economies like bulgaria's are expected to grow faster in the coming years, especially compared to economies in the western part of the continent. this should be a result of the growth of the local businesses, which is expected to benefit the insured individuals especially if their savings have supported this growth. second, bulgaria is not part of the eurozone and the banking system has been functioning without lender of last resort (typical central bank) since the inception of the currency board system. hence, the interest rates in the country are higher than the ones in the developed economies. this makes the investments in domestic corporate bonds more attractive than the analogical investments in the western part of europe. it must be recognized that the risk assumed is also higher, but is offset to some extent by the acquisition of specific knowledge on the precise development of the securities issuers. so, following the past development of the second pillar pension funds, it is easily seen that some of the smaller funds were able to achieve higher yield than the one realized by the market leaders thus reaching the highest value of one pension unit for all types of funds operating at the market until the mid 2024. so, from this point of view preserving the requirement for achieving minimum rate of return could be seen as a specific incentive for the biggest pension funds at the market for being more active and not so conservative in their investment behavior since this could disrupt the savings of the insured individuals especially in the long term. conclusion the multufind system in pension insurance has been discussed for many years in bulgaria. the opportunity to choose portfolio of assets with different risk characteristics has always been seen as a further step in the development of the pension model in the country. however, certain specifics of the pension business were obstacles in introducing such possibility for the insured individuals. since the beginning of 2024 the discussion about changing the system in this direction has been renewed. following the example of several countries in the region, bulgarian policymakers could elaborate rules that best suit the interests of the insured individuals. the most important features that must be taken into account concern the number of managed portfolios, the way of distributing insured individuals among the different portfolio types, the limits of investments in variable income instruments and the guarantees provided by the pension insurance companies. each of these issues have to be properly addressed in order to convince all of the stakeholders in the system that the implemented reform would raise the system efficiency. the multifund system has the potential to do this, but only in an environment of clear rules, transparent regulations and prudent management practices. acknowledgements this work was financially supported by unwe research programme (research grant no 13/2024/a) references antolin, p., s. payet and j. yermo. 2010. assessing default investment strategies in defined contribution pension plans. oecd journal: financial market trends, (1), https://doi.org/10.1787/fmt-2010 10 universal pension funds of doverie, dsk rodina and allianz bulgaria have a market share of 65.23% towards 30.06.2024 (www.fsc.bg) https://doi.org/10.1787/fmt-2010-5km7k9tp4bhb http://www.fsc.bg/ jeko milev and kremena yochkolovska/ finance, accounting and business analysis, volume 6, issue 2, 2024 216 5km7k9tp4bhb. barembruch a., and k. bielawska. 2023. employee capital plans performance through the lens of the participant – how to better measure and inform about the returns, doi: 10.19195/2658-1310.29.1.1. bielawska k. 2015. pension reforms and long-term sustainability of public finances of the central and eastern european countries: publishing house of put. blake, d. 2006. pension finance. uk: published by john willey & sons ltd. brealey r., s. myers, and a. marcus. 2007. fundamentals of corporate finance, fifth edition, published by mcgraw-hill/irwin, ny. european commission. 2010. towards adequate, sustainable and safe european pension systems (green paper). european commission. 2012. an agenda for adequate, safe and sustainable pensions (white paper). european commission. 2018. pension adequacy report: current and future income adequacy in old age in the eu. european commission. 2021a. pension adequacy report: current and future income adequacy in old age in the eu. european commission. 2021b. the 2021 aging report. economic and budgetary projections for the eu member states (2019 – 2070). gochev g., and b. manov. 2003. socialno osiguriavane – teoria i praktika [social security – theory and practice]: publishing house of trakia m, bulgaria. kirov st. 2010. chastnite pensionni shemi [private pension schemes].:publishing house: faber. oecd. 2004. pension reforms in the baltic countries. oecd. 2008. private pensions outlook. pandurska r. 2020. kliuchovi aspekti i predizvikatelstva pred razvitieto na pensionnata sistema v bulgaria [key aspects and challenges in front of the pension system in bulgaria: publishing house: unwe, sofia. rocha, r., and d. vttas. 2010. designing the pay-out phase of pension systems. policy issues, constraints and options; policy research working paper 5289; the world bank. whitehouse, e. 2007. pensions panorama: retirement-income systems in 53 countries, the world bank, washington, d.c., https://doi.org/10.1787/9789264032118-en. world bank. 1994. averting the old-age crisis: policies to protect the old and promote growth, oxford university press. world bank. 2008. the world bank pension conceptual framework. world bank pension reform primer series, washington, d. c. yermo, j. 2012. the role of funded pensions in retirement income systems: issues for the russian federation. oecd working papers on finance, insurance and private pensions, 27, oecd publishing, paris, https://doi.org/10.1787/5k9180xv25xw-en. data sources bulgarian financial supervisory commission www.fsc.bg european central bank: www.ecb.europa.eu eurostat: https://ec.europa.eu/eurostat federal reserve board: www.federalreserve.gov https://doi.org/10.1787/fmt-2010-5km7k9tp4bhb http://dx.doi.org/10.19195/2658-1310.29.1.1 https://doi.org/10.1787/9789264032118-en https://doi.org/10.1787/5k9180xv25xw-en http://www.fsc.bg/ http://www.ecb.europa.eu/ https://ec.europa.eu/eurostat http://www.federalreserve.gov/ 181 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.04 the beps project and international tax competition nelly popova department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted: 22 august 2025 revised: 3 november 2025 accepted: 17 november 2025 purpose: the purpose of the present article is to theoretically analyze the impact of the beps project on international tax competition and its possibilities to reduce harmful tax competition. design/methodology/approach: the methodology used in the article is a combination of a literature review and an analysis of official oecd documents. findings: the main conclusion of the article is that although the measures under the beps project represent a significant advance in the coordination of cit rules, some challenges remain. practical implications: reduced possibilities for mnes to shift their profits and leveling of their competitive positions with companies operating on domestic markets. originality/value: the article contributes to the academic debate on international tax competition and tax coordination by analyzing the implications of beps to reduce harmful tax competition. keywords: tax competition; base erosion and profit shifting; tax avoidance; tax coordination paper type: research paper keywords: tax competition; base erosion and profit shifting; tax avoidance; tax coordination jel: h26, h73, h87 * address correspondence: e-mail: npopova@unwe.bg http://faba.bg/ https://doi.org/10.37075/faba.2025.2.04 mailto:npopova@unwe.bg https://orcid.org/0009-0001-6130-3588 nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 182 introduction in the past decades, international competition over investments and profits has increased and corporate income tax has become an important instrument through rate reductions and the establishment of preferential tax regimes. multinational enterprises have gained the most benefits from the differences in national tax rules, giving rise to concerns about base erosion and profit shifting. corporate tax avoidance leads to a loss of fiscal revenue for governments and distorts competition between multinational enterprises and companies operating on domestic markets. there has there has been a growing awareness of the necessity for reforms of the existing international corporate tax framework with a view of its alignment with the increased capital mobility. this recognition has led to the launch of the base erosion and profit shifting (beps) project as the most important initiative for international coordination in the area of corporate income taxation (cit) over the past century. although the main objective of the beps project is to reduce the possibilities of large multinational enterprises (mnes) for legal tax avoidance, it also aims at limiting harmful tax competition among countries. the present article has as its object international tax coordination within the beps project as an instrument to mitigate corporate tax avoidance. the purpose of the article is to analyze the potential of the beps project to limit harmful tax competition among countries and to align the competitive conditions for domestic firms and mnes. some of the beps actions contributing to limiting harmful tax competition are analyzed with a view of deriving relevant conclusions. it is stated in the article that the alignment of the rules in the area of cit can reduce the negative impact of harmful tax competition on fiscal revenue. the paper is organized as follows: section two contains a brief literature review in the area of corporate income tax competition and coordination; section three analyses the contribution of the beps project to limit harmful tax competition and outlines some challenges to its success; section four concludes. theoretical background on tax competition and tax coordination corporate income tax is among the main fiscal instruments in modern countries used to tax the profits of domestic companies as well as multinational enterprises (mnes). however, the established tax rules, which date back to the 1920s, have not been in line with the processes of globalization and digitalization that give rise to increased capital mobility. moreover, the international cit tax regime has been anchored in largely uncoordinated national laws, some of which are primarily aimed at boosting the competitiveness of national economies in the global environment (gadžo and jozipovic 2020, 436). the existing differences in national corporate tax rules give rise to competition among countries for capital flows with the resulting negative effects on their national tax bases and fiscal revenues. the foundations of research on the effects of tax competition on fiscal revenue were set by zodrow and mieszkowski (1986) as well as wilson (1986), which became known as the zmw model (keen and konrad 2012, 6). these early models assumed that tax competition for mobile tax bases would lead to a “race-to-the bottom” in tax rates and leave the competing jurisdictions with too little fiscal revenues nicodeme 2006, 13). since the end of the last century, a downward trend in statutory cit rates has indeed been observed throughout the world; however, this tax continues to be a part of tax systems in most countries. on the basis of a literature review and empirical estimations, hines (2007, 275) concluded that the volume of foreign direct investments (fdi), and accompanying economic activity and corporate tax bases, is highly responsive to local tax policies. according to this author (2007, 270) countries have responded to greater capital mobility by reducing taxation of international investors while continuing to tax domestic investor at high rates. in recent years, the literature has drawn a distinction between competition over real investments and over paper profits. this difference is important given the growing use of aggressive tax planning strategies by businesses with cross-border activities. multinational enterprises (mnes) can use various aggressive tax planning strategies to shift profits to low-tax jurisdictions thus eroding the tax base in the countries where these profits are truly generated. tax avoidance of mnes occurs through exploitation of transfer pricing, interest deductibility, hybrid mismatch agreements and others (european parliament 2015). as faulhaber (2017, 313) noted, the phenomena of tax competition and tax avoidance are interconnected. according to klemm and liu (2021, 175) a permissive attitude toward profit shifting could be a component of tax competition, as governments can reduce effective tax levels by tolerating such behavior. collier and maffini (2017, 24) pointed to the fact that tax avoidance distorts competition, since taking advantage of their lower tax burden, tax-aggressive companies could sell at lower prices, pay higher salaries and guarantee higher returns to nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 183 their shareholders than other companies. in this sense, a country’s anti-avoidance actions may not necessarily be at odds with the intention to make that that country highly competitive. as a result of the increasing use of aggressive tax planning strategies, the organization of economic cooperation and development (oecd) introduced the term “harmful tax competition”. while recognizing that countries have sovereignty in fiscal matters, the oecd (1998, 15) has identified some tax practices as harmful tax competition, because such practices are tailored to attract savings or investment originating elsewhere or to facilitate the avoidance of other countries’ taxes. harmful preferential tax regimes have several key characteristics, namely a low or zero effective tax rate on income, “ring fencing” of the regime, lack of transparency, and lack of exchange of information (oecd 1998, 25). closely related to harmful tax competition is the concept of base of erosion and profit shifting (beps) also established by the oecd. beps refers to opportunities for taxpayers to benefit from gaps and mismatches in the tax rules that are applicable to international transactions and to shift taxable income from high-tax to lowtax jurisdictions (kleist 2018, 31). in the literature tax coordination has long been suggested as a means to reduce tax competition (fuest and huber 1999; wehke 2006; keen and konrad 2012; devereux and vella 2014). complete coordination covering all possible policy instruments would be unrealistic (wehke 2006, 417). thus, the result that a coordinated increase of capital taxes raises welfare is usually derived under the assumption that other taxes are held constant and that the additional revenues is used to finance additional public expenditure (fuest and huber 1999, 443). furthermore, most studies have explored coordination only in terms of tax rates while approaches concerning other elements of taxation, such as tax base definition have been an object of investigation in fewer studies. wehke (2006) studied the welfare effects of tax rate coordination of capital and alternatively labor taxes. his results showed that an increase in the tax on mobile capital, when done in a coordinated way, has a positive albeit small effect on welfare, while the effects of coordinated increase of taxes on labor are ambiguous (wehke 2006, 434). fuest and huber (1999) concluded that partial coordination arrangements, such as the projects in the eu, face the problem that national governments have incentives to neutralize coordinated tax increases or minimum rates by adjusting other tax instruments. keen and konrad (2012, 30) pointed out that while it would be difficult for a large group of countries to introduce a common tax rate, limited coordination on the basis of a minimum tax rate would be a possible alternative. they drew examples for such limited cooperation from the agreement in the west african economic and monetary union of a minimum corporate tax rate of 25% and the minimum rates of excise duty in the eu. in contrast to other studies, devereux and vella (2014) suggested more far-reaching cit coordination beyond the establishment of minimum tax rates. according to these authors, the most serious problem of the current tax rules is that they are outdated with regard to the allocation of mne profits between the residence country and the source country. in order to ensure the long-term stability of the international corporate tax regime, they suggested several alternatives, including a switch from transfer pricing rules to formulary apportionment (such as the eu project for common consolidated corporate tax base) or the introduction of a destination-based corporate tax. devereux (2022, p. 7) noted that the appropriate response depends on the difference between competition over profit and over real investment. in the case of competition for real investment, coordination among a limited number of countries would be sufficient as it would permit them to raise their effective tax rates without affecting the allocation of real investment between them. on the other hand, when in response to profit shifting, successful coordination efforts would require wide participation, and especially of the low-tax countries. the beps project and its impact on tax competition in recent years, there have been growing concerns with regard to the negative effects of harmful tax competition and corporate profit shifting on government revenue. based on an empirical study in a sample of 79 countries, jansky and palansky (2019, p. 1067) concluded that as a result of profit shifting, governments annually lose 8% of potential corporate tax revenue and 1% of total tax revenue. furthermore, some empirical evidence points to the existence of a negative relationship between cit rates and fiscal revenue due to profit shifting to low-tax jurisdictions. álvarez-martínez et al. (2022, p. 182) performed simulations in a panel of 30 countries and their estimations revealed that the countries with high cit rates generally experience revenue losses and vice versa. against the background of growing tax competition among countries and the negative effects of tax avoidance, in the past two decades, there have been significant common efforts for modernization of cit rules. nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 184 globally, the organization for economic cooperation and development (oecd) has become the most important platform for coordination in company taxation despite its relatively small number of formal member states. coordination of business taxation rules takes place also within some regional organizations with varying degrees of advance. significant progress has been achieved in the eu in recent years although several major proposals, such as the introduction of the common consolidated corporate tax base (ccctb) have not been implemented, due to lack of unanimous consent of all member states. according to the european parliament (2015, 12), the academic and policy debate on the directions of tax reforms has revolved around two issues: first, how aggressive tax planning techniques should be addressed and second, whether there is a need to move to a completely different international tax system, such as the ccctb proposed by the eu commission. both of these issues have been addressed by the base erosion and profit shifting (beps) project launched by the oecd and g20 as the most significant reform initiative in the past century. since its beginning in 2013, the beps project has attracted over 140 countries and jurisdictions as participants through its so-called inclusive framework. the project consists of fifteen actions with the overall aim to limit the possibilities of multinational enterprises (mnes) for tax avoidance. as hebous (2021, 87) pointed out, the main objective of the beps project has been to curb international tax avoidance, rather than decreasing tax competition per se. nevertheless, the measures under the fifteen actions are targeted at closing the possibilities of countries to compete over capital and profits. each of the project’s actions addresses a particular aspect of tax company taxation that can be used in mnes’ profit shifting strategies. the fact that four of the beps actions are in the form of minimum standards rather than recommendations reflects the ambition to guarantee an effective reduction of profit shifting. on the other hand, member countries have the possibility to opt out from provisions that are not set as minimum standards (european parliament 2019, 5). although all actions of the beps project contribute to the reduction of tax avoidance and harmful tax competition, the proposals under action 1 “challenges arising from digitalization” are the most far-reaching as they involve fundamental changes in the taxation of large mnes with regard to both tax base calculation (pillar one) and tax rate (pillar two). in the initial version of action 1, the reforms were targeted only at the mnes specialized in the provision of digital services to final consumers. however, the elaboration of practical measures has proven to be a complex process due to technical difficulties and political differences. therefore, in the latest package on action 1 based on a two-pillar approach (also known as beps 2.0) the new rules are envisaged to affect all multinational corporate groups whose amount of activity measured with specific indicators in the source countries exceed certain thresholds. pillar one consists in the introduction of a new mechanism for assigning taxing rights among the countries where mnes operate. the details are elaborated in a multilateral convention, which allows the participating countries to exercise a domestic taxing right with regard to mnes’ profits based on the so-called amount a (oecd 2023). the main goal of this new mechanism for profit allocation is to ensure that profits are taxed in the same country they were generated rather than being shifted to low-tax jurisdictions. the profit allocation rule under pillar one is similar to the concept of formulary apportionment (which was at the core also of the ccctb european commission initiative) as it considers mnes on a consolidated basis. it is envisaged that the new mechanism will be applicable only to corporate groups with adjusted annual revenues of over eur 20 billion and pre-tax profit margin over 10% (oecd 2023, 13). a key feature is the nexus criterion, according to which a corporate group will be treated as having nexus in a jurisdiction if its adjusted revenues for the respective period arising in that jurisdiction are equal to or greater than: eur 1 million; or eur 250 000 in the case of a jurisdiction with annual gdp of less than eur 40 billion (oecd 2023). these relatively low revenue and profitability thresholds and the nexus rule have the purpose to provide a mechanism for taxation of mnes’ profits at source regardless if respective companies operate through some form of physical presence or only digitally. another purpose of the new profit allocation rule is to guarantee equal treatment of resident and nonresident enterprises (oecd 2018). despite the envisaged change to the method of profit allocation, the new rules under pillar one do not involve abolition of transfer pricing among mne subsidiaries. the new rules for the allocation of profits of mnes would lead to important changes to the calculation of the tax base of mnes by reallocating taxable profits and thus potentially limiting the possibilities for harmful tax competition. however, the practical realization of these reforms has been falling behind due to political reasons. the multilateral convention implementing pillar one is yet to be signed by the member countries of beps inclusive framework, as the initial deadline at the end of 2023 was not met (oecd, 2023). on its part, pillar two consists in the introduction of minimum tax rate on mne profits, thereby reducing their incentives to allocate profits for tax reasons to low tax jurisdictions. in particular, the profits of a qualifying company are subject to a top-up tax in every country where its effective tax rate is below the established minimum of 15% (oecd 2023a, 5). the top-up tax is applicable only to the excess income of a mne after nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 185 deducting payroll and tangible assets as indicators of substantive activities in the respective country (the so-called substance-based income exclusion) (oecd 2023a, 9). the revenue threshold for the application of the top-up tax is set at eur 750 million for the multinational group, which is significantly higher than the ones applicable under pillar one. the threshold was set at this level because according to oecd estimations approximately 90% of corporate revenues are controlled by mnes whose revenues exceed this amount (oecd 2023, 13). a key milestone in the implementation of pillar two was reached in the summer of 2023 when the majority of the members of the inclusive framework agreed on the introduction of the global minimum tax rate of 15%. as the minimum tax is based on a common approach rather than minimum standard, every country can choose the specific way to implement it. in the eu, however, the introduction of the global minimum tax is compulsory through a directive that entered into force at the end of 2022 (eur-lex, 2022). around 55 jurisdictions are already taking steps toward the implementation of the global minimum tax (oecd 2024, 2). as gadžo and jozipovic (2020, 445) noted, the global minimum tax is a powerful regulatory tool that sets the floor on tax competition and reduces the incentives of mnes to engage in profit shifting. action 5, which sets one of beps minimum standards, also aims at reducing harmful tax competition. this action is based on the work of the forum on harmful tax practices (fhtp) whose task is to review preferential tax regimes in the countries from the inclusive framework (oecd 2019, 13). the main purpose of the measures under action 5 is to limit the possibilities for corporate aggressive tax planning rather than reducing the international competitiveness of tax systems. therefore, preferential tax regimes are assessed according to several criteria in order to establish if they constitute harmful tax practices. if a preferential tax regime contains some of these characteristics, the respective country commits to abolishing or amending the regime. low tax rates in themselves are not considered sufficient to determine a preferential tax regime as harmful. another factor taken in consideration is that the respective tax regime encourages operations that are purely tax-driven. therefore, in order to prevent harmful tax competition based on the application of tax preferences, the so-called nexus approach was introduced that requires a link between the income benefiting from the tax regime and the actual economic activity undertaken in the respective country (oecd 2019, 14). international tax competition is addressed also by actions 8 – 10 “transfer pricing”. one of the major achievements of tax coordination at the global level has been the adoption in 1995 of the oecd transfer pricing guidelines. in general, according to oecd guidelines, transfer prices used by mnes have to be based on the arm length’s principle in order to ensure equal market conditions with domestic companies. for mnes, transfer pricing is a tool to manage global tax liabilities by shifting profits to low-tax countries, thus minimizing the overall tax burden (nishat, 2024, p. 1). transfer pricing manipulation has become one of the channels for tax avoidance for mnes, thus distorting market competition. therefore, the main objective of beps actions was to ensure that transfer pricing is better aligned with the value creation of mne groups (oecd, 2015, p. 12). in particular, action 8 addresses issues related to transactions with intangible assets, which have been particularly vulnerable to aggressive tax planning, while action 9 is concerned with the contractual allocation of profits related to risks undertaken by corporate entities on its part, action 10 focused on other problematic areas of transfer pricing rules, including reevaluation (re-characterization) of transactions (oecd, 2015, p. 10). the beps project constitutes the most ambitious reform proposal in the area of international corporate taxation over the last century. nevertheless, some challenges to its success exist. in the first place, despite the large number of participants in the inclusive framework, significant differences among them remain, thus limiting the possibilities for definite solutions. the coordination of national tax policies has been a slow and difficult process because individual countries have different perspectives on tax competition and its effects. laudage teles (2023, 1) pointed to the fact that most actions (with the exception of the four minimum standards) were set as recommendations which limits the possibilities of the beps project to limit harmful tax practices. this weakness has been overcome in the eu because several of the measures under various beps actions have been incorporated in eu legislation, thus becoming mandatory for all member states. some authors have raised doubts whether the implementation of the beps project can put an end to international tax competition because countries can still compete through other taxes that are not subject to coordination. as hebous (2021, 94) pointed out, a potential reaction using the unconstrained instruments can to some degree neutralize the benefits from partial cooperation. collier and maffini (2017, 50) noted that the beps project will make more difficult for countries to compete through special tax regimes, but they still will compete by reducing statutory cit rates. according to devereux et al. (2022, 3) after the introduction of pillar two countries now have an incentive to collect the minimum top-up-tax on excess profits of mnes, but there are also other instruments through which countries can compete such as such as financial, environmental, and labor regulation, and pillar 2 may intensify competition through these different channels (devereux et al. 2022). moreover, the reforms with regard to the tax base calculation of mnes have been relatively limited. as nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 186 already mentioned, the measures under pillar one have not yet come into force, thus reducing the positive effects of the global minimum tax. moreover, as kleist (2018, p. 39) pointed out, no major revision of the permanent establishment definition has been agreed upon and a minimum standard was not agreed as the changes could result in a reallocation of tax revenue between the contracting states. a modernization of permanent establishment rules is important in the context of digitalization because technological multinational enterprises generate profits in other countries without physical presence. the entry into force of pillar one would solve fill this legislative gap but the existing differences among countries prevent its implementation on a world-wide basis. another weakness pointed out by nishat (2024, p. 4) is the fact that the beps project has focused primarily on the concerns of developed countries and that it does not take into account the challenges that emerging economies face such as the lack of resources and the power imbalance between mnes and tax authorities. conclusion tax competition over mobile capital has increased in the past decades leading to a reduction of corporate income tax rates and the establishment of preferential tax regimes. this in turn has increased the possibilities of mnes for legally avoiding taxes resulting in loss of fiscal revenue for governments and distortion of competition between multinational and domestic companies. although tax competition per se is not necessarily harmful, it undermines the overall credibility of cit systems by putting mnes at a favorable position. moreover, there has been awareness of the necessity to modernize company taxation rules in the context of digitalization as the latter created additional advantages for the companies specialized in the provision of digital services. thus, coordination of national policies has been suggested as a means to enhance the abilities of countries to collect taxes from mnes and equalize the conditions for competition. the beps project is not targeted directly at tax competition because it reflects the understanding that tax policy is part of national sovereignty. however, as its focus is placed on reducing the possibilities of mnes for tax avoidance, it is expected to contribute to limiting harmful tax competition with the ultimate goal of protecting governments’ revenue and align the conditions of competition between mnes and the companies operating only in domestic markets. beps action 1 involves the most important changes to cit rules with a particular focus on large mns as it envisages changes to both tax base calculation and applicable tax rates. however, other actions also contribute to reduction of harmful tax competition and improvement of credibility of cit. the new rules concerning the taxation of mnes have been implemented only recently and not fully yet; therefore, the effects of the beps project on limiting harmful tax competition remain to be seen. the large number of participants in the inclusive framework in itself is a success reflecting the predominating global agreement about the need of reforms. however, significant differences among countries remain, thus limiting the success of the project in reducing harmful tax competition. the most significant change to the international tax regime has been the introduction of the minimum global tax on large multinational groups under pillar two of action 1. however, not all countries from beps inclusive framework have adopted the global minimum tax yet. another achievement was the implementation of beps action 5 as a minimum standard that led to the abolition of multiple preferential tax regimes established as harmful. however, the implementation of pillar one has been falling behind, thus limiting the positive impact from the global minimum tax. with regard to the other beps actions, it is also unclear whether all countries from the inclusive framework will introduce them, especially because most of the changes are in the form of recommendations and do not set minimum standards. tax policy is an important element of national economic policies and it is expected that in the future countries will continue to compete in the area of taxation with the aim of attracting investors. the beps project can be viewed as an important step toward modernization of cit rules. an objective of future tax reforms (nationally and globally) should be further improvement of the conditions of competition between domestic and multinational companies. references álvarez-martínez, m., s. barrios, d. d’andria, m. gesualdo, g. nicodeme, and j. pycroft. 2022. how large is the corporate tax base erosion and profit shifting? a general equilibrium approach. economic systems research, 34(2): 167–198. doi: https://doi.org/10.1080/09535314.2020.1865882 collier, r., and g. maffini. 2017. tax competition, tax co-operation and beps. journal of tax administration, nelly popova/ finance, accounting and business analysis, volume 7, issue 2, 2025 187 3(1): 22-56 (online). available at: https://journals.docuracy.co.uk/jota/article/view/116 (accessed 22 june 2025) devereux, m., and j. vella. 2014. are we heading towards a corporate tax system fit for the 21st century? working paper 14/25, oxford said business school, working paper series (online). available at: https://oxfordtax.sbs.ox.ac.uk/files/wp14-25pdf (accessed 17 july 2025) devereux, m. 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https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/cross-border-and-international-tax/summary-economic-impact-assessment-global-minimum-tax-january-2024.pdf https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/cross-border-and-international-tax/summary-economic-impact-assessment-global-minimum-tax-january-2024.pdf https://www.jstor.org/journal/finaarch 56 finance, accounting and business analysis volume 7 issue 1, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.1.05 macroeconomic and bank-specific factors affecting bank liquidity in south africa: an msm-var approach dumisani pamba school of accounting, economics and finance, university of kwazulu-natal, south africa info articles abstract history article: submitted 6 january 2025 revised 2 march 2025 accepted 26 march 2025 purpose: the study aims to determine if macroeconomic and bankspecific factors affect bank liquidity differently under different regimes in south africa. design/methodology/approach: this research used the markov switching mean vector autoregressive (msm-var) approach from 2000q1 to 2021q4. the study employed a two-regime model, with regime one indicating low liquidity volatility and regime two indicating high liquidity volatility. findings: the findings show that macroeconomic and bank-specific factors react differently to liquidity based on market conditions. gdp growth has positive effects on bank liquidity in both regimes, while exchange rate risk, credit risk, and bank return on equity have negative effects. inflation has a negative impact on liquidity in regime one and a positive impact in regime two. bank size has positive effects on liquidity in regime one and negative effects in regime two. practical implications: the study reveals the interplay between macroeconomic and bank-specific factors in shaping bank liquidity, providing insights for policymakers, bank management, and investors to respond to liquidity dynamics during economic fluctuations. originality/value: the msm-var approach analyzes south african banking sector liquidity dynamics, providing insights for policymakers, financial institutions, and investors to improve liquidity management strategies. paper type: research paper. keywords: bank liquidity, macroeconomic factors, bank-specific factors, msm-var jel: f65, g21, g32 * address correspondence: e-mail: kanye.pamba@gmail.com http://faba.bg/ https://doi.org/10.37075/faba.2025.1.05 https://orcid.org/0000-0002-1911-5671 dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 57 introduction bank liquidity is crucial for financial stability in emerging economies like south africa. moussa and trabelsi (2023) define liquidity as an institution's capacity to fund assets and meet financial obligations. as stated by molefe and muzindutsi (2016), banks serve as economic intermediaries by accepting deposits from individuals, companies, financial institutions, and governments with excess savings. it is essential that bank assets can be converted into cash promptly to satisfy these demands (van schalkwyk and witbooi 2017). the literature on macroeconomic and bank-specific factors affecting bank liquidity across various countries presents a range of findings, emphasizing both commonalities and differences in liquidity determinants across regions. many studies concur that bank-specific factors, such as capital adequacy, non-performing loans (npl), bank size, and profitability, significantly influence liquidity. for instance, ebenezer et al. (2017) and mashamba (2014) find that capital adequacy positively impacts bank liquidity, while npl has a negative effect. similarly, mdaghri and oubdi (2022) highlight the positive influence of capital and bank size on liquidity creation. tahir et al. (2023) and singh and sharma (2016) also identify profitability and capital adequacy as key drivers of liquidity, noting that profitability has a positive impact. al-qudah (2020) and antony (2023) demonstrate that deposit growth positively influences liquidity, whereas npl and bank size negatively affect it. regarding macroeconomic factors, tahir et al. (2023) found no significant relationship between gdp and islamic bank liquidity, while singh and sharma (2016) report a positive relationship between inflation and liquidity. these findings highlight the importance of considering a range of factors when analyzing liquidity creation within the banking sector. south africa has one of the most advanced and liquid financial markets in africa, supported by impartial policy formation, a diverse economy, and robust financial institutions (imf 2022). corporate and institutional deposits dominate the funding base, contributing over 70% of total funding, while retail deposits play a modest role (imf 2022). nevertheless, the south african economy faces significant macroeconomic challenges that threaten its banking sector's stability and liquidity. over the last decade, economic growth has steadily declined (sarb 2020). structural constraints such as infrastructure bottlenecks and low productivity have hindered post-pandemic recovery, keeping gdp growth below potential levels (world bank 2024). the nation faces stark inequality, evidenced by a gini coefficient of 0.67, one of the highest globally (world bank 2024). additionally, high unemployment, poor educational outcomes, stagnating manufacturing output, and declining export volumes exacerbate the economic strain (sarb 2020). given these challenges, a significant gap exists in understanding how macroeconomic factors—such as slowing growth, fiscal constraints, and structural inefficiencies—interact with bank-specific factors like funding structures, risk management, and asset quality to affect bank liquidity. while prior research has examined the relationship between economic growth and banking resilience (sambaza 2016), the asymmetric effects of these variables in south africa’s distinct socio-economic context have received limited attention. there is limited research on the specific impact of macroeconomic and bank-specific factors on bank liquidity in south africa. luvuno (2018) found that gdp and bank size positively influence liquidity, whereas non-performing loans and loan growth negatively affect it. inflation shows both positive and negative, though minimal, effects on liquidity. umar and sun (2016) analyzed brics countries, including south africa, and concluded that liquidity in brics banks is shaped by macroeconomic factors such as interest rates, inflation rates, and national savings rates. however, they found no effect of bank size on liquidity. while this study offers a broad perspective on brics, it does not address south africa’s unique dual economy, structural constraints, or the asymmetric effects of these factors on its banking sector. a linear model is used in both studies, potentially simplifying the relationships between variables. it remains unclear how liquidity behaves in non-linear dynamics and during regime switches between periods of economic expansion and contractions. similarly, international studies often assume a linear relationship. several studies have employed panel data analysis, using methods such as fixed effects and random effects models (e.g., tahir et al. 2023; javid 2016; singh and sharma 2016). however, these static models (e.g., ols, fixed effects) are unable to capture structural breaks or non-linearities. in contrast, msm-var can effectively model non-linear effects, such as liquidity responding differently to gdp growth during economic expansions and recessions. this study adds a unique perspective to the literature. first, it analyses the impact of macroeconomic and bank-specific factors on bank liquidity in south africa, considering how these relationships evolve under different economic regimes. second, it fills a methodological gap: while several studies (e.g., mdaghri and oubdi 2022) use advanced econometric techniques, the markov-switching means autoregressive (msmvar) approach remains underexplored in liquidity studies, especially in emerging markets like south africa. the study applies the msm-var approach, enabling a dynamic, regime-sensitive understanding of liquidity determinants in south africa’s banking sector. third, it presents empirical results, showing that macroeconomic and bank-specific factors react differently to liquidity based on market conditions. fourth, the results suggest that policymakers should consider the varied responses of these factors when dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 58 implementing liquidity management strategies. lastly, to the best of the author's knowledge, this is the first study to apply msm-var to the nexus between macroeconomic and bank-specific factors and bank liquidity. by using this innovative approach, it provides valuable insights into how different factors influence liquidity management strategies in varying market conditions. overall, the findings illuminate the complex interplay between macroeconomic and bank-specific factors in liquidity management. following the introduction, section 2 presents a literature review of research on macroeconomic and bank-specific factors influencing bank liquidity. section 3 provides the theoretical development of the variables. section 4 details the research methodology. section 5 examines empirical findings and discusses the results, while section 6 concludes the paper. literature review the studies reviewed examine the determinants of bank liquidity, focusing on both macroeconomic and bank-specific factors across different regions and time periods. most studies agree that both internal and external factors significantly influence bank liquidity, although the direction and strength of their effects vary. there is a literature gap in the context of south africa. below is a synthesis of the relevant studies. the impact of bank size on liquidity is mixed. antony (2023) uses pooled ols, fixed effect, and random effect approaches to investigate the factors that influence liquidity risk for indian commercial banks between 2013 and 2022. the results show a positive relationship between liquidity risk and factors like bank size. based on a study by lalone et al. (2023), the size of a bank has a significant impact on its liquidity. using a fixed and random effect (fre) model, vu et al. (2021) examined data from 40 banks between 2006 and 2019 and found that bank size has a negligible impact on bank deposits. similarly, moussa (2015) found that bank size did not significantly affect bank liquidity in 18 tunisian banks from 2000 to 2010 using a panel method. based on pham and pham's (2021) analysis of the variables influencing the liquidity of vietnamese banks since 2007, it appears that bank size contributes to a decrease in liquidity. mahmood et al. (2019) used the fully modified ordinary least square (fmols) to analyze macroand bank-specific variables in pakistan from 2000 to 2017, indicating that bank size has a detrimental effect on liquidity. it was found by sopan and dutta (2018) that factors like bank size adversely affect indian banks' liquidity. tasnova (2022) used the pooled ordinary least squares method, fixed and random effect estimates, and implemented the gls random effect method, confirming that nonperforming loans have a positive effect on liquidity in 29 listed commercial banks in bangladesh. bhati et al. (2019) found that non-performing assets did not influence bank liquidity ratios in india from 1996 to 2016. mdaghri and oubdi (2022) found that profitability plays an important role in bank liquidity creation in mena countries using a fixed effects model and the new method of moments quantile regression (mmqr). a study by tahir et al. (2023) examines the variables affecting pakistani islamic banks' liquidity conditions. using a fixed-effect model, the study analyzed pakistani islamic banks during the post-financial crisis period of 2009–2020 and discovered that profitability had a favorable impact on their liquidity. a fixed and random effect (fre) model was applied to a dataset of 40 banks from 2006 to 2019, indicating that bank deposits were positively impacted by profitability (vu et al. 2021). based on balanced panel data, javid (2016) conducted regression analysis using random effect panel data in the pakistani banking sector, confirming a positive correlation. by using the pooled ordinary least squares method, fixed and random effect estimates, and the gls random effect method, tasnova (2022) verified that profitability has a favorable impact on liquidity for 29 bangladeshi listed commercial banks. ols, fixed effect, and random effect estimates were applied to a dataset of 59 indian banks from 2000 to 2013, and singh and sharma (2016) discovered that profitability had a favorable impact on bank liquidity. sopan and dutta's (2018) study found that profitability negatively impacts liquidity in indian banks. by applying the gls random effect method, fixed and random effect estimates, and the pooled ordinary least square method, tasnova (2022) verified that capital adequacy improves liquidity for 29 bangladeshi listed commercial banks. a dataset of 59 indian banks from 2000 to 2013 was examined by singh and sharma (2016), and they found that capital adequacy had a positive impact on bank liquidity. on the other hand, tahir et al. (2023) examined factors affecting the liquidity position of islamic banks in pakistan. the study found that capital adequacy ratios had a negative influence on islamic banks’ liquidity using a fixed-effect model on pakistani islamic banks for the post-financial crisis period 2009–2020. similarly, pham and pham (2021) examined the factors that have affected vietnam's banks' liquidity since 2007, and the results showed that capital had a negative impact on vietnam's banks' liquidity. sopan and dutta's (2018) study found that gdp has a negative impact on liquidity in indian banks. utilizing fmols, mahmood et al. (2019) investigated macroand bank-specific variables in pakistan from 2000 to 2017. the findings indicate that a bank's liquidity is negatively impacted by gdp. in contrast, antony (2023) examines the determinants of liquidity risk for indian commercial banks from 2013 to 2022 using pooled ols, fixed effect, and random effect methods. the findings show that liquidity risk is positively dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 59 affected by gdp. in a study of bangladeshi state-owned commercial banks, lalone et al. (2023) discovered that gdp is associated with profitability. vu et al. (2021) used an ere model on a dataset of 40 banks from 2006 to 2019, showing that gdp has a positive effect on bank deposits. pham and pham (2021) looked at the factors that have affected vietnam's banks' liquidity since 2007, and the results show that gdp has a positive impact on vietnam's banks' liquidity. in bangladesh, lalon et al. (2023) found that inflation is correlated with the liquidity of state-owned commercial banks. pham and pham (2021) examined factors affecting the liquidity of vietnam's banks since 2007 and found that inflation positively impacts liquidity. after performing ols, fixed effect, and random effect estimates on a dataset of 59 banks from 2000 to 2013, singh and sharma (2016) discovered that inflation positively impacts indian banks' liquidity. the inflation rate positively impacts bank liquidity in india, according to sopan and dutta (2018). using panel data analysis, pooled least squares, fixed effects models, and random effects models, al-qudah (2020) found that inflation positively affected the liquidity of 13 listed commercial banks in jordan from 2011 to 2018. in contrast, bhati et al. (2019) found that inflation negatively influenced bank liquidity ratios in india from 1996 to 2016. the effect of monetary policy on liquidity is explored in studies such as mahmood et al., (2019) and mdaghri and oubdi (2022), which suggest that expansionary monetary policy (lower interest rates) enhances liquidity by lowering funding costs, while restrictive policies have the opposite effect. bhati et al. (2019) also show that macroeconomic factors, such as interest rates, play significant roles in determining liquidity ratios in india. in south africa, a panel regression method was used to study twelve commercial banks from 2006 to 2016. based on luvuno's (2018) research, size, gdp, and capital adequacy positively affect commercial banks' liquidity. conversely, non-performing loans and loan growth negatively impact liquidity, while inflation has negligible effects. similarly, umar and sun's 2016 study found that liquidity factors in brics countries (brazil, russia, india, china, and south africa) were not significantly affected by bank size. however, the financial crisis notably impacted funding liquidity, with inflation, interest rates, and national savings rates identified as significant factors. stock liquidity was influenced by stock price, profitability, volatility, trading volume, and gdp, while the market index and market capitalization did not have a significant impact. theoretical development bank liquidity moussa and trabelsi (2023) define liquidity as the ability of a bank to quickly settle accounts and meet short-term obligations through cash and assets. for banks to extend credit and avoid financial difficulties, high liquidity is essential. banks must balance profitability and liquidity by regularly assessing their liquidity, managing risk, and adhering to sound financial practices. this study examines the influence of macroeconomic and bank-specific factors on bank liquidity, offering insights to inform decisions and enhance financial stability. macroeconomic factors economic growth (rgdp): economic growth represents the expansion of domestic economic activity and income (nguyen & bui 2019). gdp change reflects economic stability and evaluates government initiatives and reforms. bank liquidity, or a bank's ability to meet short-term obligations, is linked to economic growth. many studies have confirmed a positive relationship between gdp and liquidity (e.g., antony 2023; lalone et al. 2023; vu et al. 2021). it is expected that the relationship between rgdp and liquidity will be positive in both states or regimes. inflation rate (inf): inflation affects the real value of money, influencing liquidity restrictions (vodova 2014; moussa 2015). as inflation lowers the true value of money, liquidity restrictions become more rigid, restricting investment and consumption and hindering economic growth. central banks must monitor inflation levels to maintain stable banking systems and economies. understanding the relationship between bank liquidity and inflation is crucial for effective management. it is expected that inflation and liquidity will be negatively related under both market conditions (regimes). exchange rate risk (exr): exchange rates can impact banks' liquidity because volatile rates enhance banking sector volatility. banks use exchange rate fluctuations, hedge techniques, and derivatives to manage liquidity risk, protect against foreign exchange rate risk, and ensure sufficient cash for contractual obligations. the relationship between exchange rate risk and liquidity is expected to vary based on market conditions. bank-specific factors credit risk (cr): credit risk is related to liquidity risk through borrower defaults and fund withdrawals dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 60 (diamond and dybvig 1983). when a borrower defaults, credit risk rises, reducing the liquidity of lender assets and increasing borrowing costs. this leads to higher interest rates for borrowers, resulting in less borrowing and reduced liquidity, or vice versa. it is expected that liquidity and credit risk will vary according to market conditions. bank size (bs): total assets are a common measure of a bank's size (demirguc-kunt and huizinga 1999; melese 2015; singh and sharma 2016). bank size significantly impacts financial health, with larger banks being more resilient, diverse, and better equipped to manage liquidity during market instability. return on equity (roe): the roe of a bank represents its profitability, while its liquidity reflects the bank's ability to meet short-term obligations. a bank's financial stability is determined by roe and liquidity, with high ratios improving profitability and reducing risk. balancing these is crucial for long-term success and stakeholder trust. the relationship between roe and liquidity is expected to vary based on market conditions. methods data source this study analyzes macroeconomic and bank-specific factors affecting bank liquidity in south africa. data were obtained from the south african reserve bank (sarb) and the johannesburg stock exchange (jse) for the period from 2000q1 to 2021q4. unit root tests for stationarity the study uses the augmented dickey-fuller (adf) (1981) test and the phillips-perron (pp) (1981) test to confirm the stationarity of the variables and determine their order of integration. brooks (2008) emphasizes the importance of these tests in analyzing structural breaks, trends, and stationarity in data. the adf and pp tests ensure the data is suitable for further statistical analysis by verifying the stationarity of the variables. breaks and trends may reveal potential outliers or anomalies that could affect the study's findings. the johansen cointegration test the johansen cointegration test is a statistical method used to determine whether a long-term equilibrium relationship exists among multiple time series variables. in this study, the test assesses whether key macroeconomic indicators and bank-specific factors are cointegrated with bank liquidity over time. various macroeconomic factors (such as gdp growth, inflation risk, and exchange rate risk) and bankspecific variables (including credit risk, bank size, and return on equity) may influence liquidity levels in the banking system. while these variables may show short-term fluctuations, the johansen cointegration test helps identify whether they share a stable long-term relationship. if a cointegration relationship exists, it indicates that, despite short-term deviations, these variables are interconnected and will revert to equilibrium over time. markov switching mean vector autoregressive msm-var is one of the two classes of markov switching vector autoregressive (ms-var) models, the other being the markov-switching intercept var model (see krolzig 1997). both classes capture the dynamic interactions between multiple time series variables while allowing for shifts in relationships over time. the msm-var allows for regime switches in the var coefficients, reflecting different economic or market conditions. this flexibility makes ms-var models well-suited to capturing non-linearities and changes in relationships that traditional var models may struggle to address. the msm-var model is particularly effective for analyzing the dynamic relationships between macroeconomic and bank-specific factors across different economic regimes, such as periods of high liquidity or market stability and low liquidity or market instability. the model assumes that the behavior of these variables can switch between different regimes depending on the underlying state of the economy or banking environment. msm-vars can be characterized as follows: 𝑌𝑡 = 𝜇𝑆𝑡 + 𝑋𝑡 𝛽𝑆𝑡 + 𝜖𝑡 (1) where  the bank liquidity variable at time 𝑡 is denoted by 𝑌𝑡  𝑆𝑡 is a measure of the market's state or regime at time 𝑡 (for example, 1 represents a high-liquidity, stable market, while 0 indicates a low-liquidity, unstable market).  a vector of explanatory variables (for example, macroeconomic indicators, bank-specific factors) is denoted by 𝑋𝑡 dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 61  𝛽𝑆𝑡 is the state-dependent coefficient vector  𝜖𝑡 is the error term. markov process for regime switching: 𝑆𝑡, the regime variable, follows a discrete markov process, determining the probability of switching from one regime to another. to define transition probabilities between regimes, we use the following formula: 𝑃 (𝑆𝑡 = 𝑗 |𝑆𝑡−1 = 𝑖) 𝑝𝑖𝑗 (2) where:  a switch from regime 𝑖 to regime 𝑗 is represented by 𝑝𝑖𝑗  𝑃 is a transition matrix arranged according to the transition probabilities 𝑝𝑖𝑗 expanded model for liquidity analysis in banks: there are two types of factors that can be included in the vector 𝑌𝑡 for analyzing liquidity in south african banks: macroeconomic factors and factors specific to the bank: yt = rgdpt, inft, exrt, crt, bst, roet (3) an msm-var model shows how interactions between these variables change with economic regimes. for instance, in a low liquidity regime, such as during a financial crisis, the effects of inflation or high credit risk on liquidity may be more pronounced than in a high liquidity regime. example of msm-var in liquidity analysis: suppose the model identifies two regimes: • regime 1: periods of high liquidity (expansionary economic condition). • regime 2: periods of low liquidity (financial stress or contractionary economic condition). for regime 1: 𝑌𝑡 𝐴1 (1) 𝑌𝑡−1 + 𝐴2 (1) 𝑌𝑡−2 𝐶(1) + 𝜖𝑡 (1) (4) for regime 2: 𝑌𝑡 𝐴1 (2) 𝑌𝑡−1 + 𝐴2 (2) 𝑌𝑡−2 𝐶(2) + 𝜖𝑡 (2) (5) the model estimates distinct dynamics for each regime, enabling liquidity to respond differently to shocks in macroeconomic factors or bank-specific variables. results and discussion descriptive statistics table 1 summarizes descriptive statistics for all variables used in this study. variables include bank liquidity, rgdp, inflation rate, exchange rate, credit risk, bank size, and return on equity. the mean bank liquidity was 16.38, indicating a high level of liquidity. the rgdp had a mean of 2.33, suggesting moderate economic growth. the inflation rate averaged 108.05%, indicating high inflation. the average exchange rate was 86.98, reflecting the instability of the domestic currency. credit risk had a mean of 3.46, indicating low risk in the banking industry. the mean bank size was 98.23, representing the average size of the banks studied. the average return on equity was 14.28%, demonstrating bank profitability. the study revealed high inflation and volatile exchange rates, but the banking industry remained stable with low credit risk and an average bank size. regarding skewness, it is positive for inf, exr, cr, and roe, indicating comparable behavior among these variables. in contrast, liq, rgdp, and bs have negative skewness, meaning inf, exr, cr, and roe are positively skewed, showing a greater concentration of values at the lower end of the distribution. conversely, liq, rgdp, and bs exhibit negatively skewed distributions, indicating a greater dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 62 concentration of values at the higher end. these changes in skewness illustrate the different behaviors and properties of the variables. table 1. descriptive statistics summary description liq rgdp inf exr cr bs roe mean 16.37583 2.328409 108.0484 86.97864 3.456818 98.22568 14.27913 median 17.32435 2.500000 101.7150 84.40000 3.300000 99.30700 14.45212 maximum 22.09582 5.600000 174.9900 108.9900 5.900000 100.0000 28.91479 minimum 2.871962 -6.300000 58.14000 64.68000 1.100000 90.46090 4.570380 std. deviation 4.570762 2.248062 35.06533 11.68720 1.2776111 2.678353 6.283023 skewness -0.898018 -1.143259 0.336017 0.174620 0.075491 -1.872170 0.546211 kurtosis 39,42014 5.318787 1.789708 1.843576 2.223244 4.808261 2.889533 jarque-bera 12.10576 38.88478 7.026933 5.350715 2.295864 63.39628 4.420486 probability 0.002366 0.000000 0.029793 0.068882 0.317292 0.000000 0.109674 observations 88 88 88 88 88 88 88 source: author`s calculation using eviews 14. the kurtosis coefficient measures the shape of distributions. distributions with kurtosis coefficients greater than 3 are leptokurtic, while those with coefficients less than 3 are platykurtic. mesokurtic distributions have a kurtosis coefficient of 3. liq, rgdp, and bs are leptokurtic because their values exceed 3, indicating a higher peak than a normal distribution. conversely, since the kurtosis values for inf, exr, and roe fall below 3, these variables are platykurtic, exhibiting lighter tails than a normal distribution. this indicates that the values of inf, exr, and roe are spread over a wider range and are less likely to be concentrated around the mean. unit root test results unit root tests are statistical assessments that determine whether a time series is stationary. these tests identify the presence of a unit root, indicating non-stationarity. the augmented dickey-fuller and phillips-perron tests are the most used unit root tests. table 2. adf and pp unit root test results variables adf test pp test t-statistic status t-statistic status lnliq -4.961932*** i(1) -3.105286** i(1) lnrgdp -3.322135** i(1) -5.798362*** i(1) lninf -5.866137*** i(1) -5.883608*** i(1) lnexr -7.464003*** i(1) -7.478403*** i(1) lncr -4.319999*** i(1) -12.21163*** i(1) lnbs -4.319199*** i(1) -6.504042*** i(1) lnroe -4.481221*** i(1) -10.01642*** i(1) source: author`s calculation using eviews 14. table 2 shows the results of the adf and pp unit root tests. all variables are integrated at level i(1). consequently, there is evidence of a long-run equilibrium relationship between the variables. the results suggest that the null hypothesis of non-stationarity can be rejected for all variables, implying that they are suitable for further investigation. correlation coefficients results the correlation coefficients between the dependent and independent variables are shown in the correlation matrix (table 3). high collinearity among independent variables can lead to faulty regression models, making it difficult to isolate specific effects and inflating standard errors. these issues must be recognized and addressed before interpreting the matrix. rgdp -0.003662, inf 0.284276, exr -0.040107, cr 0.026609, bs 0.702747, and roe 0.558220. liq and rgdp have a correlation of -0.003662, indicating a modest negative association. the positive correlations for inf, cr, bs, and roe suggest moderate to high positive relationships with liq, while the negative correlation between liq and exr indicates a weak negative association. the correlations among the independent variables are all less than 0.95, indicating minimal multicollinearity. lower correlations suggest that the variables are less dependent on each other, allowing for more reliable analysis and enhancing confidence in statistical models and forecasts based on these variables. dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 63 table 3. correlation coefficients test results variables liq rgdp inf exr cr bs roe liq 1.000000 rgdp -0.003662 1.000000 inf 0.284276 -0.632893 1.000000 exr -0.040107 0.636099 -0.655890 1.000000 cr 0.026609 -0.575647 0.374317 -0.238237 1.000000 bs 0.702747 -0.219050 0.564480 -0.069178 0.173193 1.000000 roe 0.558220 0.370466 -0.062748 0.274776 -0.298292 0.563605 1.000000 source: author`s calculation using eviews 14. var lag length selection criteria an overfitted model can suffer from autocorrelated errors when there are too few or too many lags. to minimize these issues, information criteria are utilized. in this study, both the schwarz criterion (sc) and the akaike information criterion (aic) were applied. based on the lag length selection results, length 2 was selected. cointegration test results the johansen cointegration test is a statistical tool used to determine whether a set of variables is cointegrated, indicating a long-term relationship. it can also count the number of cointegrated links between variables. this test is commonly used in econometrics for regression analysis. table 4. liq johansen juselius test for cointegration hypothesized no. of ce9s) eigenvalue trace statistics 0.05 critical value max-eigen statistic 0.05 critical value none* 0.544310 221.1146 *** 125.6154 66.80507*** 46.23142 at most 1* 0.467719 154.3095*** 95.75366 53.59966*** 40.07757 at most 2* 0.443349 100.7099*** 69.81889 49.79439*** 33.87687 at most 3* 0.249934 50.91547** 47.85613 24.44550 27.58434 at most 4 0.186711 26.46997 29.79707 17.566887 21.13162 at most 5 0.080131 8.903097 15.49471 7.099514 14.26460 at most 6 0.020995 1.803583 3.841465 1.803583 3.841465 note: *** and ** represent statistically significant at 1% and 5% levels. trace test indicates 4 cointegrating eqn(s) at the 0.05 level. max-eigenvalue test indicates 3 cointegrating eqn(s) at the 0.05 level. source: author`s calculation using eviews 14. table 4 displays the johansen cointegration findings based on trace and maximum eigenvalue statistics to identify the integration sequence. the cointegrated time-series variables exhibit a long-run equilibrium connection; at the 5% critical value, the trace statistics reveal four cointegrated vectors, while the maximum eigenvalue statistics show three. both trace and maximum eigenvalue statistics reject the null hypothesis that none of the variables are cointegrated, indicating that the cointegrated variables are statistically significant. this implies that the long-run equilibrium link between the variables is stable. msm-var estimate results the study utilized two regimes, one with low volatility and the other with high volatility, like agyemang-badu et al. (2024). a stable market or a state with low volatility or high liquidity is represented by regime 1, whereas an unstable market or a crisis with high volatility or low liquidity is represented by regime 2. table 5 shows msm-var results. the relationship between economic growth (rgdp) and bank liquidity (liq) in south africa is positive in both regime one (0.252825) and regime two (12.44829). however, this relationship is much stronger in regime two, indicating that economic growth has a larger impact on bank liquidity during periods of high volatility and unstable market conditions. this suggests that during times of economic uncertainty, south african banks may rely more heavily on economic growth to maintain liquidity levels. consequently, banks may need to adopt different liquidity management strategies based on the prevailing regime to mitigate potential risks and ensure stability. these results align with findings from antony (2023) and lalon et al. (2023), who reported that gdp positively influences bank liquidity in indian commercial banks and stateowned commercial banks of bangladesh, respectively. the studies indicate that economic growth significantly influences bank liquidity levels in various regions, highlighting the need for south african banks to monitor economic indicators and adjust their liquidity management strategies for operational stability. dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 64 the study reveals a negative relationship (-0.058618) between inflation and bank liquidity in regime one in south africa. inflation negatively impacts bank liquidity during stable market conditions, meaning that an increase in inflation results in a decrease in bank liquidity. this finding suggests that banks may struggle to maintain adequate levels of liquidity when faced with higher inflation rates. these findings align with the study by bhati et al. (2019), who found that inflation adversely affects bank liquidity in indian banks, and pham and pham (2021) in vietnam. in contrast, there is a positive effect (1.011321) in regime two, suggesting inflation positively impacts bank liquidity during unstable market conditions. this implies that during times of economic instability, such as periods of high inflation, banks may see an improvement in their liquidity levels. conventional wisdom holds that inflation always negatively impacts bank liquidity. this unexpected result challenges this belief. this is consistent with moussa's (2015) findings that inflation significantly impacts bank liquidity in tunisia, sopan and dutta's (2018) in india, and al-qudah (2020) in jordan. the study emphasizes the significance of considering various economic regimes in macroeconomic analysis, providing valuable insights for policymakers and financial institutions in managing liquidity risk. table 5. liq johansen juselius test for cointegration variables coefficient std. error z-statistics regime 1: low volatility c -14.64968 25.8278 -0.56721 rgdp 0.252825 0.10957 2.30748 inf -0.058618 0.02554 -2.29491 exr -0.016728 0.01977 -0.84627 cr -0.196079 0.24867 -0.78852 bs 0.435512 0.25446 1.71152 roe -0.062325 0.06059 1.71152 regime 2: high volatility c 113.7426 37.7925 3.00966 rgdp 12.44829 2.59409 4.79871 inf 1.011321 0.28522 3.54581 exr -0.028677 0.06045 -0.47437 cr -2.715756 2.04857 -1.32568 bs -2.196915 0.56562 -3.88405 roe -0.175051 0.11293 -1.55003 common liq(-1) 0.677358 0.13572 4.99086 liq(-2) 0.210270 0.13794 1.52436 sigma-liq 0.669298 0.10248 6.53094 transition matrix parameters variable coefficient std. error z-statistics p11-c 3.667654*** 0.719915 5.094565 p21-c -1.361965* 0.761510 -1.788505 determinant resid covariance 2.368881 log likelihood -118.5199 akaike info criterion 3.198137 schwarz criterion 3.740377 number of coefficients 19 source: author`s calculation using eviews 14. the relationship between exchange rate risk (exr) and bank liquidity in south africa is negative in both regime one (-0.016728) and regime two (-0.028577). the findings indicate that fluctuations in exchange rate risk have a more pronounced effect on bank liquidity during periods of high volatility (regime two). this suggests that the depreciation of the rand reduces bank liquidity. exchange depreciation negatively impacts the economy by reducing liquidity in foreign-denominated assets, affecting lending and economic activity, emphasizing the need for careful risk management. in south africa, credit risk (cr) and bank liquidity have negative relationships in both regimes (0.196079 and -2.715756). this suggests that during times of market stability, credit risk has a smaller impact on bank liquidity compared to periods of volatility. these results align with al-harbi's (2017) findings of a negative relationship between credit risk and bank liquidity in less-developed countries. policymakers and regulators in south africa should consider these findings when implementing measures to ensure banking sector stability. by understanding the impact of credit risk on bank liquidity, policymakers can promote longterm sustainability in the financial industry, benefiting both banks and the economy. dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 65 the relationship between bank size and bank liquidity in south africa varies by market regime. in regime one, the relationship is positive (0.435512), indicating that larger banks tend to have higher liquidity under low volatility and stable conditions. this may stem from economies of scale, as larger banks benefit from lower transaction costs and a larger customer base. similarly, antony (2023) and lalon et al. (2023) found that bank size positively impacts bank liquidity for indian commercial banks and bangladeshi stateowned commercial banks. conversely, in regime two, the relationship is negative (-2.196915), suggesting that in times of high volatility and instability, larger banks may struggle to maintain adequate liquidity. this is consistent with findings by pham and pham (2021), mahmood et al. (2019), and sopan and dutta (2018), which identified a negative link between bank size and liquidity in vietnamese banks, pakistan, and india, respectively. overall, the study shows that large banks may struggle to maintain adequate liquidity during high volatility and instability, emphasizing the need for careful risk management and adequate buffers. the study reveals a negative relationship between bank return on equity (roe) and bank liquidity in south africa, with a negative correlation in both regime one (-0.062325) and regime two (-0.175051). this relationship persists during low volatility and stable market conditions and is more pronounced during high volatility and unstable conditions (regime two). the findings indicate that bank-specific factors, such as roe, significantly affect liquidity levels in south african banks, emphasizing the need for policymakers and regulators to consider these results. this is consistent with al-qudah (2020) and delechat et al. (2014), who noted that profitability negatively impacts bank liquidity in jordanian commercial banks and central america, respectively. the study underscores the importance of bank-specific factors in assessing liquidity levels in financial institutions, aiding regulators in assessing and mitigating risks in the banking sector. liq(-1) is 0.677358, liq(-2) is 0.210270, and sigma-liq is 0.669298. based on these results, macroeconomic and bank-specific factors influence south african banks' liquidity. the positive values of liq(-1) and liq(-2) suggest that past liquidity levels significantly affect current liquidity. additionally, the sigma-liq value of 0.669298 indicates a moderate level of volatility in liquidity within the south african banking sector. overall, these findings highlight the complexity of liquidity management in south african banks and the need for a thorough analysis of both internal and external factors. p11-c and p21-c are the parameters of the transition matrix, respectively, with p11-c significant at the 1% level and p21-c significant at the 10% level for bank liquidity (liq). these findings indicate a high probability of remaining in a state of high bank liquidity, while the likelihood of transitioning from low to high bank liquidity is relatively low. this suggests that once a bank achieves a strong liquidity position, it is likely to maintain that position for a considerable time. additionally, the negative coefficient for p21-c indicates that transitioning from low liquidity to high liquidity is less likely, though still possible. the transition matrix parameters show that external factors, such as economic conditions and market shocks, significantly influence bank liquidity more than internal factors. the positive coefficient of p11-c indicates that changes in external factors increase the likelihood of transitions between different liquidity states in the banking system. in contrast, the negative coefficient of p21-c suggests that internal factors have a weaker effect on liquidity transitions, likely because banks manage their internal operations more effectively. this analysis highlights the importance of considering both external and internal factors when evaluating bank liquidity. the determinant residual covariance is 2.368881, the log likelihood is -118.5199, the akaike information criterion is 3.198137, and the schwarz criterion is 3.740377. these statistical measures provide insight into the relationships between macroeconomic and bank-specific factors affecting liquidity in south african banks. the determinant residual covariance indicates significant covariance among the determinants. the negative log likelihood suggests that the model fits the data well. the akaike information criterion and the schwarz criterion indicate that the model is a good fit and has strong explanatory power. probability plot probability plots are useful tools for identifying deviations from normality in data distribution, helping to assess model assumptions and validate results on liquidity in south african banks. the results indicate that regime one is more dominant, with a probability of 0.881285, compared to regime two, which has a probability of 0.118715. this suggests that south african banks generally operate in a low-volatility, stable market environment. however, monitoring transitions between regimes is important to understand how changes in macroeconomic and bank-specific factors may affect liquidity in the future. overall, the msm-var model provides valuable insights into the dynamics of liquidity in south african banks and can inform risk management strategies. dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 66 0.0 0.2 0.4 0.6 0.8 1.0 00 02 04 06 08 10 12 14 16 18 20 p(s(t)= 1) p(s(t)= 2) markov switching smoothed regime probabilities source: author`s calculation using eviews 14. figure 1. liq smoothed probabilities in the msm-var model. inverse root of ar the var model used in this study is stable and suitable for analyzing the macroeconomic and bankspecific factors that influence liquidity risk in south african banks. -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1 0 1 inverse roots of ar characteristic polynomial source: author`s calculation using eviews 14. figure 2. liq inverse roots of ar characteristic polynomial figure 2 shows that no points are found outside the circle, as indicated by the inverse root of the ar characteristic polynomial. it emphasizes the importance of considering both external and internal factors when predicting liquidity levels in south african banks using the var model. transition probability the possibility of switching between regimes or states within a system or process is called transition probability. the transition probability of liquidity in south african banks is shown in table 6. table 6. transition probability. south africa regime 1 regime 2 regime 1 0.975100 0.024900 regime 2 0.203921 0.796079 durations 40.15993 4.903857 source: authors’ estimation using eviews 13 the results of this study indicate a high probability (0.975100) that south african banks would remain in regime one if they were in that regime during the previous period, suggesting strong market stability. in contrast, the probability of transitioning from regime two to regime one is significantly lower at 0.203921, implying that once market conditions become volatile, they are likely to stay that way. additionally, the dumisani pamba / finance, accounting and business analysis, volume 7, issue 1, 2025 67 expected duration of each regime provides insights into the persistence of market conditions and their effects on bank liquidity in south africa. the study reveals that south african banks maintain stability in specific regimes, highlighting the importance of understanding market dynamics for informed decision-making and enhancing sector resilience. conclusion the purpose of this study is to provide critical insights into liquidity dynamics of south african banks in varying market conditions by examining factors that affect macroeconomic conditions and bank-specific factors from 2000q1 to 2021q4. the results of the adf and pp unit root tests confirm that the variables are integrated at i(1), indicating a long-term equilibrium relationship suitable for further analysis. utilizing the msm-var model, the study captures the complex interactions between the variables under two distinct regimes: low liquidity volatility (regime one) and high liquidity volatility (regime two). based on the findings, these regimes influence bank liquidity differently. gdp growth consistently improves liquidity in both regimes, while exchange rate risk, credit risk, and return on equity exert negative effects. there is a negative impact of inflation on liquidity in regime one, and a positive impact on liquidity in regime two. similarly, bank size enhances liquidity during low volatility periods but reduces it during high volatility periods. policymakers should focus on achieving economic stability by implementing policies that promote gdp growth and reduce inflation. stabilizing exchange rates can minimize liquidity risks. there is a need to strengthen bank capital buffer regulations. enhancing transparency and accountability can mitigate credit and exchange rate risks. encouraging economic diversification can safeguard the banking sector against macroeconomic shocks. to reduce risks associated with high liquidity volatility, investors should diversify their portfolios and prioritize banks with strong internal controls and resilience to macroeconomic shocks. it's important to monitor macroeconomic indicators such as gdp growth, inflation, and exchange rate trends. in addition, regime-switching models can help evaluate the performance and stability of banks under varying economic circumstances. reference agyemang-badu, a. a., f. g. olmedo, and m. m. m. josé. 2024. conditional macroeconomic and stock 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275–297. vu, t., p. thao, and l. t. thanh. 2021. an empirical analysis of macroeconomic and bank-specific factors affecting bank deposits in vietnam. international journal of financial research, 12(2):172-183. 159 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.06 economic policy uncertainty, financial reporting quality, and accounting enforcement: international evidence catalin robert mos faculty of economics and business administration, babes-bolyai university, cluj-napoca, romania info articles abstract history article: submitted 2 august 2024 revised 3 november 2024 accepted 12 november 2024 purpose: given recent developments around the world, the purpose of this article is to explore the association between financial reporting quality and economic policy uncertainty. additionally, we investigated whether accounting enforcement acts as a mediating factor between the two. design: to achieve the purpose, we used a large sample consisting of 284 908 firm-year observations from 29 countries. we estimate the quality of financial reporting using traditional accruals models. for economic policy uncertainty, we rely on the index developed by baker et al. (2016). accounting enforcement was quantified using the strength of the auditing and reporting standards. furthermore, for robustness tests, we use alternative measures for all these variables. we ran an ols regression with country and industry fixed effects. findings: we found that uncertainty is negatively associated with the quality of financial reporting. accounting enforcement plays a key role in reducing this negative association. for the baseline model, for one unit of change in accounting enforcement, the negative association between financial reporting quality and economic policy uncertainty is reduced between 10.41% and 17.54%. for the alternative measures, the decrease is between 1.14% and 6.93%. our results are consistent and robust. practical implications: this study is important for capital markets and policy makers, since the last 3 years were characterized by high uncertainty. therefore, the present study provides evidence of the disruptive impact of uncertainty on financial reporting quality. furthermore, we introduced in discussion the role of accounting enforcement and, therefore, propose a possible instrument available for policy makers to counter the effects of uncertainty. originality: compared to existing research, the present study expands the period of analysis until 2022; therefore, it covers the periods with the highest uncertainty. combined with the large number of countries, the observations ensure the relevance of the findings. the present study is also one of the first that introduces in discussion the role of accounting enforcement, which is an important topic in accounting research paper type: research paper keywords: financial reporting, uncertainty, accounting enforcement jel: m41, m42, m48 * address correspondence: e-mail: catalin.mos@econ.ubbcluj.ro, moscatalin5@gmail.com catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 160 introduction the last few years have been marked by macroeconomic uncertainty. this was heightened by a series of consecutive events, namely the coronavirus pandemic, ukraine's aggression, the energy shortage and the inflation crisis. there is an emerging body of literature that attempts to understand the association between uncertainty and firm outcomes. uncertainty worsens the economic environment, delays important investment decisions, and increases financing and production costs (arouri et al. 2016). the capital market and investors are affected as well, uncertainty leads to high volatility of stock prices, decrease in returns, and underpricing of initial public offerings (liu and zhang 2015; arouri et al. 2016; connolly et al. 2005; dzielinski 2012; boulton 2022). stanton and roelich (2021) note that in this context, it is difficult for investors to make decisions because the outcome cannot be reasonably predicted. therefore, for an efficient decision-making process, investors seek to obtain firm-related information to a greater extent. walters et al. (2023) and andrei et al. (2023) provide evidence in this regard, investors are more responsive to available firm information, and their learning process intensifies when uncertainty rise. financial reporting and annual reports offer comprehensive information about the firm, are part of the control mechanisms (shivakumar 2013), and attenuate the information asymmetry between management and investors (kraft et al. 2012; healy and palepu 2001). considering damaging effects of high uncertainty and the race of investors to get as much information as possible about companies, financial reporting quality (frq) becomes a significant aspect. through a faithful representation of the performance in the financial statements, investors could learn about the risk associated with their holding, assess how business operations are affected, review the performance, and decide. the question that arises is how much the investors could rely on frq in times of high uncertainty? this study provides additional evidence on this subject. one of the key articles in the literature is that by baker et al. (2016) that provides an appropriate measure for uncertainty. this index covers two sides of uncertainty economic and political. the economic policy uncertainty index (epu) allows us to observe the association between epu and frq using a large international sample. our study contributes in several ways to the literature. a high proportion of previous studies analyze uncertainty in the context of us firms. our analysis focusses on 29 countries, which to the best of our knowledge is one of the largest samples. therefore, our results provide strong evidence that uncertainty is negatively associated with frq. this feature of our sample give us enough variability between macro-attribute (uncertainty) and micro-attribute (frq) to capture the full impact. furthermore, our study covers the period between 2020 and 2022 when the uncertainty increases with 72% compared with the average value of the last 10 years. unlike previous research, whose sample mostly ends in 2015-2018, our study expands the length of the sample to the period with the most profound uncertainty, allowing us to better understand this phenomenon. the chair of security exchange commission (sec) in the us emphasizes that in times of high uncertainty, the sec is particularly focused on protecting investors (reuters, 2023). accounting enforcement (enf) is one of the instruments used to protect investors. accounting enforcement is an activity carried out by state institutions to ensure correct applicability of accounting standards in the preparation of financial statements. christensen et al. (2013), brown et al. (2015), ernstberger et al. (2012), böcking et al. (2015), and windisch (2021) show that accounting enforcement is positively associated with frq. however, the effect of accounting enforcement in the context of uncertainty has not yet been tested in the literature. the second objective of our study is to address and analyze this point. in this regard, we rely on the strength of auditing and reporting standards index and introduce an interaction term between epu and enf in our regression analysis. our results suggest that the uncertainty is negatively associated with frq. furthermore, we observe that accounting enforcement has the ability to reduce this negative association. our results are robust to different measures of frq, alternative measures of accounting enforcement and uncertainty, controlling for economic conditions, and controlling for firm characteristics. additionally, we included in our regression analysis country and industry fixed effects which allow us to control for potential unobserved effects. together, the conclusions of this study are valid and emphasize the negative consequences of uncertainty. our findings are of interest to investors and policymakers. in the first place, we show that uncertainty declines the firm information environment because of negative association between uncertainty and frq. this affects the trust of investors in financial reporting, which is one of the pillars that guarantee the functioning of the capital market. however, policy makers can counteract the uncertainty effects by strengthening accounting enforcement. therefore, this study not only provides evidence of the negative effects of uncertainty on frq, but also discusses the available instrument to attenuate these effects. the remaining of this paper is structured as follows. in section 2 we provide the theoretical background for this study. section 3 shows the methodology applied in this study, section 4 presents the findings, and the conclusions are drawn in section 5. catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 161 literature review and hypothesis uncertainty economic policy uncertainty generates serious shocks in the capital markets and triggers investors. graham et al. (2005) surveyed more than 400 executives about the incentives behind the reported earnings. the authors highlight that investors hate uncertainty, management is concerned about this, and cfos prefer to smooth earnings to reduce the uncertainty. starting from this theory, a new topic emerged in the literature about frq in times of uncertainty. el ghoul et al. (2021), yung and root (2019), goncalves et al. (2022), and kurniawan et al. (2023) analyze the impact of high uncertainty on frq using cross-country samples while bermpei et al. (2021), dhole et al. (2021), jin et al. (2019), dai and ngo (2020), nagar et al. (2018), jain et al. (2021), shin (2019), and jiang et al. (2022) explore the effects of uncertainty for us firms. we can observe that the previous literature investigates mostly the united states. this can be argued by the fact that the most widely used measure of uncertainty in previous studies was initially developed for the us in 2016 and subsequently expanded to other countries. there are limited studies in previous research with cross-country samples. evaluation of the association between frq and uncertainty implies a combination of macro(uncertainty) and micro(frq) features. therefore, the sample consisting only of firms from one country does not allow enough variability to support solid conclusions. on the other hand, cross-country sample enables to consider other macro characteristics such as institutional settings. in terms of sample period, previous research covered the period until 2015-2018 (el ghoul et al. 2021; yung and root 2019; goncalves et al. 2022; bermpei et al. 2021; jin et al. 2019; dai and ngo 2020; nagar et al. 2018; jain et al. 2021; and jiang et al. 2022). the fact that previous research does not capture 2020, 2021, and 2022 constitutes a significant gap that needs to be addressed. these three years can be distinguished by intense increase in uncertainty compared with the previous decade and therefore enhance applicability of the results, allow proper detection of relationships, and increase the accuracy of the model. the uncertainty is estimated in three ways. dai and ngo (2020), jain et al. (2021), and goncalves et al. (2022) use the elections to quantify the uncertainty. during election years, uncertainty about the future policies of the incoming government tends to increase. shin (2019) relays on market shocks to capture uncertainty, while the rest of the authors use the index developed by baker et al. (2016). most of the findings suggest that uncertainty produces negative effects on frq. on the other hand, el ghoul et al. (2021) find positive effects, and the authors show that the capacity of accounting to measure performance is significantly better under high uncertainty. however, there are some differences between the study by el ghoul et al. (2021) and other research that can lead to contradictory findings. el ghoul et al. (2021) use the nikolaev model to estimate frq. this model is more complex compared to the other models, but it has some limitations acknowledged by the authors. the model does not allow to estimate the frq at firm-year level; therefore, it is challenging to evaluate the association between frq and uncertainty over time which is a major disadvantage. furthermore, the sophistication of the model may reduce the focus on management discretional behavior, which is the objective of earnings management models. another point is the inclusion of year-fixed effects in the model. controlling for year-fixed effects underestimate the results due to collinearity between year-fixed effects and uncertainty. there are two prevalent explanations in the literature for the association between frq and uncertainty. the first one agrees that in times of high uncertainty, investors are more engaged in obtaining firm specific financial information. in this case, management incentives are to improve performance and avoid small losses by using earnings management (shin 2019; dai and ngo 2020; jiang et al. 2022; brempei et al. 2021). on the contrary, jin et al. (2019) and nagar et al. (2018) emphasize that in periods of high uncertainty, the information asymmetry between management and investors increases. consequently, management is likely to smooth the earnings because it is difficult for investors to detect earnings management. our first hypothesis considers the impact that uncertainty has on the economic environment, the investor reaction, and the management incentives. as presented above, management incentives are to reduce investor concern, reduce the volatility of earnings, and present a better financial situation. we argue that uncertainty, which is produced by a crisis such as the 2008 financial crisis or the pandemic crisis, produces a decline in the economy. this decline is reflected in the performance of the companies; therefore, the management is incentivized to use earnings management. furthermore, we acknowledge the gaps in the literature presented above and the limited evidence for the recent years. h1. uncertainty leads to a decrease in frq worldwide. accounting enforcement jiang et al. (2022) and cui et al. (2021) and el ghoul et al. (2021) introduce in discussion the role of external monitoring in times of high uncertainty. they demonstrate that strong external monitoring catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 162 mitigates the effects of uncertainty over frq. the studies are based on external monitoring under the form of analyst coverage, institutional investors, and auditors. accounting enforcement (enf) is a component of external monitoring with notable sanctioning power. market and investors react to the announcement of enforcement results. dee et al. (2011), ernstberger et al. (2012), christensen et al. (2020), dechow et al. (1996) and curtis (2016) demonstrate that sanctions lead to decrease in firm valuation and increase in the cost of capital. a relevant description of accounting enforcement is provided by hope et al. (2003). in the absence of proper accounting enforcement, even the best accounting standards remain only rules on the paper. the goal of accounting enforcement institutions is to act in the best interest of investors by overseeing and inspecting the financial statements and the work performed by auditors. for example, the mission of the public company accounting oversight board (pcaob) in the united states is to protect investors and further the public interest in the preparation of informative, accurate and independent audit reports (pcaob 2023). the european securities market authority (esma), an institution of the european union, emphasizes in its last accounting enforcement report that the purpose of this activity is to improve future financial reporting and compliance with accounting standards (esma 2023). in the literature, there is a consensus among researchers that accounting enforcement is beneficial for frq. brown et al. (2015), christensen et al. (2013), brown et al. (2015), ernstberger et al. (2012), böcking et al. (2015), and windisch (2021) indicate that accounting enforcement plays a substantial role in securing adequate applicability of accounting and auditing standards. consequently, investors will benefit from proper financial reports. however, there is no work in the previous literature that analyses accounting enforcement in the context of uncertainty. we expect that for countries with strong accounting enforcement, the impact of uncertainty on frq will not be as intense as for countries with weak accounting enforcement. this is because the non-compliance with accounting and auditing standards is sanctioned and penalized in two ways, by enforcement institutions and by the market and investors. this leads to our second hypothesis. h2. in countries with strong accounting enforcement, the effects of uncertainty on frq are less pronounced. methodology uncertainty our uncertainty measure is the index developed by baker et al. (2016). the economic policy uncertainty (epu) consists of three components. the first uses the newspaper’s coverage of topics related to economic uncertainty, the second covers uncertainty about changes in tax legislation and monetary policies, while the last component deals with uncertainty about macroeconomic forecasts. baker et al. (2016) conducted several tests to verify the reliability and accuracy of the methodology used. analysis of the relationship between the epu index and other uncertainty measures and audit of the reasonability of the newspapers included in the index show that the methodology was appropriate. as indicated by baker et al. (2016), there is a strong correlation between epu and other indicators of capital market uncertainty (implied stock market volatility) therefore, the index is a strong candidate for our study. brempei et al. (2021), yung and root (2019), jiang et al. (2022), and nagar et al. (2018) discuss that this index is helpful in analysing the effects of epu on firm outcomes, in our case, frq. furthermore, they highlight that the index shows large spikes around serious events that cause uncertainty, a feature that is important for our research design. the value of epu is collected for each of the 29 countries in the sample from the epu website. however, for the netherlands there are no data for 2021 and 2022, for denmark there are no data for 2022, and for nigeria there are no data for the period between 2005 and 2016. we eliminate from the final sample the observations belonging to these countries and periods. the epu is determined monthly. to obtain the value for each country year we use the arithmetic mean of the monthly value. finally, we use in the regression analysis the change in the natural logarithmic value of the epu from year to year. table 1 shows the raw data on epu extracted from the epu website (https://www.policyuncertainty.com/). the minimum value for the epu is noted for mexico in 2014 (27) while the maximum value is observed for germany in 2022 (669). the most notable changes in mean and median are recorded in 2008 (change in mean: 49, change in median 58), in 2020 (change in mean: 56, change in median 76), and in 2021 (change in mean: -61, change in median -55). aside from the significant changes, we can observe that the epu fluctuates over the years, there are periods of growth (2010-2012 and 2015-2016) and periods of decline (2013-2014 and 2017-2018). catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 163 table 1. raw data on epu countries 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 australia 46 53 152 106 149 174 167 123 77 90 131 83 81 129 182 106 156 brazil 97 114 174 131 93 134 118 138 149 250 309 346 165 158 255 189 196 chile 71 61 104 72 71 97 99 100 154 151 140 120 106 171 261 305 338 colombia 84 66 103 110 85 99 88 79 90 126 148 137 121 151 227 123 136 denmark 76 93 123 97 99 140 117 119 120 110 125 119 122 188 300 373 n/a germany 81 88 135 112 140 191 178 149 125 157 231 178 172 205 322 305 669 hong kong 103 112 158 96 128 194 193 134 159 151 189 139 125 236 202 104 220 ireland 75 82 128 127 149 145 150 157 117 123 194 179 155 152 264 235 320 japan 65 81 129 129 127 138 127 99 97 94 145 98 97 127 140 95 110 mexico 62 60 81 79 70 67 54 44 27 33 50 65 69 94 93 72 74 new zealand 40 66 171 98 128 151 129 74 63 91 87 110 108 124 167 119 157 pakistan 68 71 76 70 84 92 70 62 80 51 54 81 79 104 123 96 192 singapore 63 69 130 117 126 151 161 122 99 117 182 184 201 288 326 224 283 sweden 79 68 94 83 89 106 98 96 107 104 108 101 111 105 116 102 124 united states 67 80 139 126 148 157 158 138 92 113 145 142 153 189 326 175 184 belgium 65 75 126 181 140 140 135 128 115 99 91 83 88 90 278 168 138 canada 63 68 155 132 149 232 225 181 152 188 233 244 332 333 464 277 278 china 67 67 144 129 109 152 186 114 112 138 247 289 375 581 575 399 518 croatia 48 38 36 57 68 98 140 131 140 182 172 190 159 130 281 180 219 greece 71 75 103 96 118 117 124 97 101 130 118 98 100 79 71 63 59 france 75 116 160 139 207 250 279 248 191 224 310 317 250 256 309 251 341 india 49 53 142 109 109 163 185 133 97 71 74 73 57 73 100 60 81 italy 69 60 86 105 122 143 137 164 117 106 129 78 115 126 173 114 122 south korea 91 83 141 147 149 167 163 131 82 128 189 161 145 257 204 176 269 the netherlands 60 49 102 131 124 124 133 143 95 84 83 74 65 88 126 n/a n/a spain 77 80 100 99 119 141 178 134 125 128 120 110 116 137 197 144 156 united kingdom 74 70 155 139 232 228 305 222 182 204 543 476 368 431 307 185 294 russia 101 94 122 89 112 141 146 169 233 206 184 216 198 284 491 334 577 nigeria n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 128 93 82 92 125 94 93 mean 71 75 124 111 123 147 152 130 118 130 167 158 149 185 242 181 233 median 70 71 129 110 123 142 143 131 114 125 145 120 121 151 227 172 192 change in mean n/a 4 49 -13 12 24 4 -22 -12 13 37 -10 -9 37 56 -61 53 change in median n/a 1 58 -19 13 19 1 -12 -17 11 21 -25 0 30 76 -55 21 source: authors’ own processing after baker et al. (2016) catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 164 financial reporting quality the conceptual accounting framework lists several characteristics of qualitative financial information, such as relevance and faithful representation. the general theory says that management should act in the best interest of shareholders and prepare financial information compatible with the above characteristics. however, the management behavior could be driven by other incentives, and the reporting process is twisted. investors and analysts often use earnings to evaluate the activity of the company. earnings include a component that is a management estimate, the accruals, which are not reflected in cash flows. the researchers attempted to estimate the discretionary management behavior applied in the preparation of financial statements by looking at the accruals related to earnings. accrual-based models are widely used in the literature. these models aim to separate abnormal accruals from reasonable business accruals. management uses abnormal accruals to manipulate firm performance, usually to improve it. dechow et al. (2010) pointed out that business reasonable accruals reflect the fundamental firm performance, whereas abnormal accruals unveil the discretionary behavior applied by management in preparation of the financial information. the authors also note that discretionary accruals reduce the usefulness of the decision-making process. therefore, we can link these models to the usefulness of financial information or to a faithful representation of firm performance. accrual-based models regress total accruals with firm attributes that predict reasonable business accruals. the residuals from regressions are abnormal accruals, accruals that cannot be explained by firm attributes. the standard jones model (jones, 1991) considers sales growth and property plant and equipment as primary firm attributes. dechow et al. (1995) modified the standard jones model by considering only credit sales, which could be more easily misshaped by the management. kothari et al. (2005) also added the performance of the firm to the model, which is an important firm attribute, as well, that can explain the evolution of total accruals. dechow and dichev (2002) consider that accruals should eventually translate into payments in the future and propose a model that considers present past and future cash flow. in the context of the capital market, where investors make decisions based on firm performance, we consider these models appropriate for our research. we label these models frq1, frq2, frq3, and frq4. acc it =α 0 +α 1 1 ta it-1 +α 2  ∆rev it ta it +α 3  ∆ppe it ta it +ε it (1) acc it =α 0 +α 1 1 ta it-1 +α 2  ∆rev it ta it + ∆ar it ta it +α 3  ∆ppe it ta it + ε it (2) acc it =α 0 +α 1 1 ta it-1 +α 2 󰇡 ∆rev it ta it + ∆ar it ta it 󰇢+α 3 󰇡 ∆ppe it ta it 󰇢+α 4 roa it +ε it (3) wc it =α 0 +α 1 cfo it-1 +α 2 cfo it +α 2 cfo it+1 + α 2 ∆rev it +α 3 ppe it + ε it (4) table 2 describes the variables used in our frq models. table 2. description of variables for frq models variable description accit change in non-cash current assets – change in current liabilities, change in the current portion of long-term debt – depreciation and amortization expense scaled by lagged total assets for firm i in year t wcit change in receivables + change in inventory – change in accounts payables – change in income tax payable + change in other assets scaled by lagged total assets for firm i in year t tait total assets of firm i in year t δ revit change in sales of firm i in year t δ arit change in trade receivables of firm i in year t δ ppeit change in gross property, plant, and equipment of firm i in year t cfoit cash flow from operations of firm i in year t scaled by lagged total assets of firm i in year t roait net income/total assets of firm i in year t source: authors’ own processing the models are estimated cross-sectionally at the industry-year level. in line with the literature, we catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 165 required at least 10 observations for each industry-year 1 . the larger the residuals from the regressions, the lower the frq is. accounting enforcement our accounting enforcement measure is represented by the strength of the auditing and reporting standards included in the global competitiveness report prepared by the world economic forum (wef). the index is derived from a survey of business leaders who were asked to evaluate the strength of their country’s accounting and auditing standards. business leaders are considered well-suited to assess their country's environment, including aspects of accounting enforcement (world economic forum 2019). boolaky et al. (2015) pointed out that this index shows perceptions of a country’s competitiveness from the perspective of auditing and reporting standards. this competitiveness is given by the expected outcome of accounting enforcement, namely correct application of accounting and auditing standards, investor protection, and useful, timely, and comparable information. we collect data from the world bank database. in our regression analysis, we use the change in the strength of auditing and reporting standards. however, data is only available for the period from 2006 to 2019. for the years 2020 and 2021, we applied the average index value derived from the 2006–2019 data. to mitigate this aspect, in an additional test, we use another measure for accounting enforcement. sample we extracted financial data about companies from refinitiv. we selected only companies listed on a stock exchange for countries with the available epu index. we carefully analyzed the database and performed additional work to prepare it. we eliminate companies that do not report relevant figures to compute the frq at least for three consecutive years. the final sample consists of 284,908 firm-year observations. tables 3 and 4 show the distribution of our sample per country and industry. table 3. description of variables for frq models country no. of observations country no. of observations japan 47,114 italy 2,659 united states 43,018 greece 1,863 china 41,529 chile 1,775 india 29,704 russia 1,740 south korea 25,615 spain 1,517 hong kong 20,347 mexico 1,395 united kingdom 10,106 new zealand 1,294 canada 10,094 denmark 1,123 australia 9,597 belgium 1,096 singapore 6,589 the netherlands 740 france 6,210 croatia 704 germany 5,845 nigeria 415 sweden 5,513 colombia 301 pakistan 3,776 ireland 168 brazil 3,061 source: authors’ own processing 1 we use global industry classification standard from refinitiv, detailed information is provided in section ‘sample’ catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 166 table 4. sample distribution per industry industry no. of observ ations industry no. of observ ations industry no. of observ ations industry no. of observ ations machinery 15 862 semiconductors & semiconductor equipment 5 946 independent power and renewable electricity producers 2 532 automobiles 1 347 chemicals 14 728 media 5 857 energy equipment & services 2 486 gas utilities 1 333 metals & mining 13 033 trading companies & distributors 5 721 personal care products 2 438 diversified reits 1 137 real estate management & development 12 327 household durables 5 603 paper & forest products 2 253 health care technology 1 110 electronic equipment, instruments & components 12 176 biotechnology 5 361 aerospace & defense 2 227 retail reits 1 064 food products 10 681 health care equipment & supplies 5 231 transportation infrastructure 2 221 office reits 923 textiles, apparel & luxury goods 10 170 entertainment 4 613 ground transportation 2 129 water utilities 919 software 9 517 professional services 4 138 technology hardware, storage & peripherals 2 071 passenger airlines 806 construction & engineering 8 834 health care providers & services 4 027 broadline retail 2 054 household products 696 hotels, restaurants & leisure 8 450 communicatio ns equipment 4 025 distributors 1 960 multiutilities 651 pharmaceuticals 8 405 consumer staples distribution & retail 3 729 interactive media & services 1 822 wireless telecommun ication services 619 oil, gas & consumable fuels 8 297 building products 3 496 leisure products 1 734 residential reits 567 automobile components 7 709 construction materials 3 221 diversified telecommunication services 1 704 industrial reits 465 electrical equipment 7 095 containers & packaging 2 818 air freight & logistics 1 623 specialized reits 407 it services 6 523 diversified consumer services 2 709 life sciences tools & services 1 529 hotel & resort reits 370 commercial services & supplies 6 353 beverages 2 602 industrial conglomerates 1 478 health care reits 339 specialty retail 6 314 electric utilities 2 557 marine transportation 1 431 tobacco 335 source: authors’ own processing the largest number of observations are from japan (47 114), the united states (43 018), china (41 529), india (29 704), and south korea (25 615). the top 5 industries, representing 25% of our sample, are machinery (15 862), chemicals (14 728), metals and mining (13 033), real estate (12 327), and electronic equipment (12,176). we extracted from refinitiv the industry classification determined by the global industry classification standard (gics). according to msci, the gics was created to help investors understand the key business activities of listed companies (msci 2023). this is a four-tier hierarchical classification; we use the third tier which consists of 74 industries. however, we eliminate the financial industry (banks, capital markets, financial services, insurance, consumer finance, and mortgage investment trusts) which results in 68 industries in our sample. catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 167 empirical model and control variables our empirical model and the summary of the variables are presented below. frq=α 0 +α 1 epu+α 2 enf+α 3 size+α 4 lev+α 5 roa+α 6 dce+α 7 aud+α 8 res+ ε (5) table 5. summary of variables variable description type of variable source of data frq quality of financial reporting dependent variable refinitiv epu change in economic policy uncertainty focus variable baker et al. (2016) enf change strength of auditing and reporting standards focus variable world bank (2023) size natural logarithm of the market capitalization of the company control variable refinitiv lev leverage, determined as total debt/total equity control variable refinitiv roa net income divided by total assets control variable refinitiv dce dummy variable if the total equity is negative or not control variable refinitiv aud dummy variable if the auditor is from big4 or not control variable refinitiv res dummy variable if the financial statements contain a restatement or not control variable refinitiv source: authors’ own processing the auditors exert a significant influence on frq. their responsibility is to provide additional assurance to the shareholders, and is expected that, following the audit tests, they will detect the abnormal accruals. subsequently, management will correct the financial statements. the big 4 network is widely spread throughout the world, and its audit practices are mostly consistent within the network. there is a consensus that they perform higher quality audits than nonbig 4 auditors (defond and zhang 2014; che et al. 2020; krishnan 2003; krishnan 2003; behn et al. 2008; carver et al. 2011). their industry specialists, their capacity to attract well-prepared people, resources, and audit tools represent an advantage compared to non-big 4 auditors. we control for auditor by including a dummy variable (aud) that is equal to 1 if the firm is audited by big-4 and 0 otherwise. restatements occur when a material error is discovered in financial statements. both international accounting standards (ias) and united states accounting standards (usgaap) state that a restatement should be properly presented and disclosed in the financial statements. a restatement could be an indication of weak internal control around the preparation of financial statements. given this, we could expect that the restatements will indicate a lower frq. we included in our model a dummy variable (res) which equals 1 if the company issue a restated financial statement and 0 otherwise. management incentives are an important determinant of frq. meeting debt covenants is essential for management, as it ensures the continuity of financing from the banks. anagnostopoulu and tsekrekos (2017), gu et al. (2005), and lazzem and jilani (2018) provide strong evidence that highly leveraged firms engage in earning management and have lower frq. furthermore, gu et al. (2005) found that the variability of accruals is positively associated with increased leverage. dechow et al. (2010) discussed that, for highly levered firms, the management takes discretionary actions to avoid violating a covenant. we include leverage (lev) as a control variable in our model, determined as the total debt divided by the total equity. dechow et al. (2010) point out that small firms mostly have a deficient control over financial reporting due to fixed costs. therefore, small companies will engage in earnings management more frequently. we control the size of the company; our size variable is determined as the natural logarithm of the market capitalisation of the company. dechow et al. (2010) noted that poor performance could provide an incentive for management to engage in discretionary actions. the purpose of management is to create value for shareholders. this value is created through good results and performance; therefore, management is less interested in manipulating the results of a firm that performed well. defond and park (1997) suggested that to reduce the threat of being dismissed, the management of firms with current poor performance but with expected good performance in the future has incentive to manipulate the financial statements. additionally, keating and zimmerman (2000) noted that managers change the accounting policies to offset the poor performance of the firm. we control performance by including the return on assets (roa) and a dummy variable in our catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 168 model, which takes 1 if the company reported negative equity and 0 if otherwise. results descriptive statistics the following table shows the descriptive statistics for our variables. table 6. summary of statistics variable mean std. dev. min max frq1 5.7936 8.8039 0.0372 61.4595 frq2 5.6782 8.459 0.0357 57.7571 frq3 5.0831 7.1852 0.0371 47.0644 frq4 6.4209 8.5185 0.0677 57.3992 epu -7.1733 16.234 -43.5854 32.1983 enf 9.9027 13.8725 -42.292 42.8672 size 18.8668 2.3415 13.0787 24.3003 lev 0.2442 0.2418 0 1.4634 roa -0.0319 0.288 -2.0467 0.2751 dce 0.0426 0.2019 0 1 aud 0.4578 0.4982 0 1 res 0.0911 0.2878 0 1 table description: this table presents the summary statistics for our variables. we multiply the frq values by 100 to facilitate the interpretation of the results. to be able to correctly interpret the coefficients for epu and enf we normalise their value between -50 and 50 using the min-max method. the summary statistics are winsorized at 1%. the frq takes values between 0.0357 (frq2) and 61.4595 (frq1), and we can observe variability in our measures of frq. the mean of epu is situated at -7.1733 and the standard deviation is 16.2340. there is a high variation of epu, the minimum is 43.5854 while the maximum is situated at 32.1983. this is an important feature of this research, since our sample captures periods with low uncertainty and extreme uncertainty. the mean of enf is 9.9027, the minimum is -42.292 while, the maximum is 42.8672. regression analysis table 7 illustrates the regression output for frq1, frq2, frq3 and frq4. for the interpretation of the results, we will refer to the positive association between the earnings management measures and the epu as a negative association between the frq and the epu. the bigger the residuals from earnings management regressions presented in section ‘financial reporting quality’ the lower the frq is. therefore, the positive association means that earnings management increases and frq decreases. the results show that frq is negatively associated with epu. the coefficient is statistically significant in all four models at a level of 1%. a change with one unit in epu will cause a decrease in frq of 0.00599 in model 1, 0.00838 in model 2, 0.00562 in model 3, and by 0.00394 in model 4. the results validate our first hypothesis, epu deteriorates the frq. this is consistent with yung and root (2019), goncalves et al. (2022), bermpei et al. (2021), dhole et al. (2021), jin et al. (2019), dai and ngo (2020), nagar et al. (2018), jain et al. (2021), and jiang et al. (2022). there is a positive association between enf and frq. the coefficient is statistically significant at the 1% level in all models. for a change with one unit in enf, the frq increases by 0.0107 in model 1, 0.0101 in model 2, 0.0106 in model 3, and by 0.00794 in model 4. we can conclude that enf strengthens frq, which is consistent with christensen et al. (2013), brown et al. (2015), carson et al. (2021), ernstberger et al. (2012), böcking et al. (2015), florou et al. (2020), florou and shuai (2022), li et al. (2022), and windisch (2021). the results of this regression are in line with those obtained by mos (2024a) in a paper that investigates the role of accounting standards, and industry characteristics in mediating the association between uncertainty and financial reporting quality and with a paper that investigates the same association but for european union (eu) settings mos (2024b). firms that restate their financial statements also have a lower frq, as expected. as we explained in catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 169 the previous section, a restatement means weak internal control around the preparation of financial statement. therefore, the earning management could be undetected by internal controls. firms audited by big 4 have a higher frq than others, which is consistent with the literature. large firms report a higher frq. due to their exposure to the market and analysts, large firms are more prudent in using discretionary accruals. leveraged firms report a lower frq due to financial constraints and pressure to meet financial covenants. taken together, our control variables are in line with the literature which validate our approach. the adjusted r squared is situated around 10%; this is comparable to the adjusted r squared obtained by bermpei et al. (2021), goncalves et al. (2022), yung and root (2019), jain et al. (2021), and el ghoul et al. (2021). table 7. regression results for epu (1) (2) (3) (4) frq1 frq2 frq3 frq4 epu 0.00599*** 0.00838*** 0.00562*** 0.00394*** (5.95) (8.92) (6.85) (4.03) enf -0.0107*** -0.0101*** -0.0106*** -0.00794*** (-9.07) (-8.77) (-10.98) (-6.88) size -0.468*** -0.457*** -0.379*** -0.282*** (-33.44) (-33.49) (-34.59) (-23.73) lev 1.949*** 1.931*** 1.411*** 0.646*** (14.16) (14.45) (13.48) (5.04) roa -2.853*** -2.806*** -1.713*** -2.609*** (-17.97) (-18.20) (-14.85) (-15.96) dce 1.757*** 1.698*** 3.141*** 0.516** (9.48) (9.47) (19.98) (3.19) aud -0.621*** -0.609*** -0.366*** -0.665*** (-12.60) (-12.66) (-9.13) (-13.42) res 0.465*** 0.418*** 0.462*** 0.605*** (7.39) (6.96) (8.99) (9.57) r-squared 0.1224 0.1273 0.1263 0.0824 no. of observations 284 908 284 908 284 908 284 908 country fixed effects yes yes yes yes industry fixed effects yes yes yes yes table description: this table presents the regression results for regression results for epu. in each case, we employed an ols regression with fixed effects. in the interaction terms, we center epu and enf by subtracting the mean value. in each model, the standard errors are clustered at the firm level. the t-values are in parentheses. the significance levels at 10%, 5% and 1% are represented by *, **, and ***, respectively. our results suggest that the epu exacerbates earning management and reduces the frq. in times of high uncertainty, it seems that management incentives prevail over accounting principles and the public mission of accounting. next, we attempt to identify several reasons why the epu is negatively associated with frq. peng et al. (2020) indicate that good news related to earnings diminishes the overall uncertainty. when the epu increases, investors, analysts, and creditors tend to become more pessimistic. this could mean a decrease in corporate ratings, a withdrawal of investor support, and a shortage of financial resources for companies. then the management incentives and pressures are to reduce the uncertainty of the firm prospects. meeting or even exceeding the analyst earnings forecast is a useful tool for management to create good news related to earnings. upward earnings management will help them achieve this. arouri et al. (2016) discussed how epu affects business operations. supply chains, production costs, and earnings are affected by epu. therefore, the profitability of the company will decrease. shin (2019) pointed out that the market reacts more negatively to small losses under high uncertainty. consequently, management incentives are to avoid small losses at any cost. increase profitability by applying discretionary behavior in determining accruals seems the best option available. accounting enforcement and epu in this section, we analyze the possible role of high accounting enforcement in countering the effects catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 170 of epu. for this purpose, we introduce in regression an interaction term between epu and enf (epu#enf). table 8 shows the results of the regression. the coefficient of epu#enf is negative in all models and is statistically significant at 1% level. this means that accounting enforcement can reduce the negative association between frq and epu. an increase with one unit in the enf will lead to a decrease in the negative association between frq and epu by 0.00756 in model 5, 0.000712 in model 6, 0.000680 in model 7, and by 0.00768 in model 8. in relative terms, accounting enforcement reduces the negative association between frq and epu by 17.38% in model 5, 10.41% in model 6, 16.39% in model 7, and 17.54% in model 8. table 8. regression results with the interaction term between epu and enf (5) (6) (7) (8) frq1 frq2 frq3 frq4 epu 0.00435*** 0.00684*** 0.00415*** 0.00285** (4.31) (7.28) (5.04) (2.88) enf -0.0102*** -0.00970*** -0.0102*** -0.00768*** (-8.82) (-8.53) (-10.68) (-6.71) epu#enf -0.000756*** -0.000712*** -0.000680*** -0.000500*** (-9.31) (-9.08) (-10.20) (-6.39) size -0.466*** -0.455*** -0.377*** -0.281*** (-33.28) (-33.33) (-34.42) (-23.60) lev 1.940*** 1.922*** 1.402*** 0.639*** (14.09) (14.38) (13.40) (4.99) roa -2.854*** -2.807*** -1.714*** -2.610*** (-17.98) (-18.21) (-14.87) (-15.97) dce 1.769*** 1.709*** 3.152*** 0.524** (9.55) (9.53) (20.06) (3.24) aud -0.629*** -0.616*** -0.373*** -0.670*** (-12.75) (-12.81) (-9.30) (-13.52) res 0.466*** 0.419*** 0.463*** 0.606*** (7.41) (6.98) (9.01) (9.58) r-squared 0.1227 0.1275 0.1267 0.0825 no. of observations 284 908 284 908 284 908 284 908 country fixed effects yes yes yes yes industry fixed effects yes yes yes yes table description: this table presents the regression results for regression results with the interaction term between epu and enf. in each case, we employed an ols regression with fixed effects. in the interaction terms, we center epu and enf by subtracting the mean value. in each model, the standard errors are clustered at the firm level. the t-values are in parentheses. the significance levels at 10%, 5% and 1% are represented by *, **, and ***, respectively. we discussed in previous sections that epu induces pessimistic sentiment in the market. this sentiment leads to a decrease in the market value of companies and has caused investors to overreact to bad news, especially those related to earnings. accounting errors discovered following accounting enforcement inspections and actions also lead to a negative reaction from the capital market (ernstberger et al. 2012; christensen et al. 2020; dechow et al. 1996; curtis (2016). additionally, we discussed in previous sections that errors related to auditors made publicly by the accounting enforcement institution produce negative reactions in the capital market (dee et al. 2011). in countries where accounting enforcement is well implemented, the finalization of the process consists of announcing the results. these results are made known to the press and the market. these results usually comprise the accounting errors and the firms where the errors were found. taking into account these facts, we can build the following argument for our results. we acknowledge that the market is pessimistic and that investors react more prudently to firm information in times of high epu. pessimistic sentiment and negative market evolution are general conditions under high epu. the announcement of negative outcome of the accounting enforcement is limited to few firms annually in each country. this event, in times of high epu, will only aggravate the general pessimism and condition of the market. therefore, these firms will face more severe consequences and negative reactions from the market. the explanations and reasons for the obtained results align with those presented by mos (2024b) in the context of the european union (eu). in that study, the author employed alternative measures of uncertainty, specifically tailored to the eu's unique circumstances. catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 171 additional tests another measure for frq real earnings management (rm) is another widely used model to estimate frq. compared with earnings management, this model is designed to identify the discretional behavior of management when they choose to cut certain expenses to achieve the desired profitability instead of correlated them with the actual needs of the firm. we follow the approach illustrated by cohen et al. (2008). the rm is the residuals from the below model where de is discretionary expenses which incorporate general administrative expenses and research and development expenses. the remaining notations are already defined in section ‘methodology’.  de it ta it it =α 0 +α 1 1 ta it-1 +α 2  rev it ta it +ε it (5) the residuals are the deviation from the predicted discretionary expenses. a negative or low value of the residuals from the rm means low frq. to ease the interpretation of the results, we multiplied the residuals by -1. therefore, in line with earnings management models, we expect a positive association between rm and epu. table 9 presents the results of the regressions. table 9. regression results with the interaction term between epu and enf (9) (10) rm rm epu 0.0577*** 0.0534*** (16.35) (15.73) enf -0.0362*** -0.0352*** (-6.81) (-6.60) epu#enf -0.00195*** (-5.94) size 1.623*** 1.629*** (20.64) (20.71) lev 0.0102 -0.0145 (0.01) (-0.02) roa 13.45*** 13.45*** (11.90) (11.89) dce -23.50*** -23.46*** (-19.90) (-19.87) aud 2.978*** 2.957*** (11.14) (11.06) res 1.728*** 1.731*** (6.47) (6.49) r-squared 0.2188 0.2189 no. of observations 284 908 284 908 country fixed effects yes yes industry fixed effects yes yes table description: this table presents the regression results for the regression results for rm with the interaction term between epu and enf. in both cases, we used an ols regression with fixed effects. in the interaction terms, we center epu and enf by subtracting the mean value. in each model, the standard errors are clustered at the firm level. the t-values are in parentheses. the significance levels at 10%, 5% and 1% are represented by *, **, and ***, respectively. the results are as expected; the rm is positively associated with epu, which further validates our previous results. the coefficient of epu is 0.0577 signifying that when uncertainty increases by one unit, the frq decreases by 0.0577. the coefficient is statistically significant at the 1% level. in periods with high uncertainty, the actual discretionary expenses are lower than the predicted ones. the management uses the discretionary expenses as an instrument to improve the firm performance. regarding accounting enforcement, we observe, similar to previous results, a negative and statistical significant coefficient. for one unit change in enf, the association between epu and rm decreases by 0.00195. therefore, even if we catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 172 use another measure for frq, accounting enforcement retains its role in countering the effects of uncertainty. in relative terms, this translates to a 3.65% decrease in the negative association between rm and epu. another measure for uncertainty dai and ngo (2020), jain et al. (2021), and goncalves et al. (2022) use in their studies a dummy variable for the years with elections to estimate the uncertainty. in election years, there is an increase in uncertainty because the new elected political power will usually change certain aspects of the fiscal and monetary policy. furthermore, we can argue that this casts a major uncertainty on the budgeting process, which is an important part of planning the business. the inability to know possible future changes in legislation may affect the accuracy of forecasts. to measure the uncertainty using the elections we rely on database of political institutions prepared by carlos et al. (2020) . however, their database contains data only until 2020. for 2021 and 2022 we checked if there were elections for countries in our sample. furthermore, for united states, china, south korea, and hong kong, we collected information regarding the elections since the database does not contain information about these countries. we use a dummy variable that equals 1 if there were elections in a specific year for a specific country in our sample. table 10 presents detailed information on the years with elections for each country and year. catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 173 table 10. descriptive statistics for the variable elect (dummy variable which takes value 1 for years with elections) countries 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 australia 1 1 1 1 1 1 brazil 1 1 1 1 1 chile 1 1 1 1 1 1 1 1 colombia 1 1 1 1 1 denmark 1 1 1 1 germany 1 1 1 1 hong kong 1 1 1 1 1 1 1 ireland 1 1 1 1 japan 1 1 1 1 1 mexico 1 1 1 1 1 new zealand 1 1 1 1 1 pakistan 1 1 1 singapore 1 1 1 1 1 sweden 1 1 1 1 1 united states 1 1 1 1 belgium 1 1 1 1 canada 1 1 1 1 1 1 china 1 1 1 croatia 1 1 1 1 1 1 greece 1 1 1 1 1 1 france 1 1 1 1 1 1 1 india 1 1 1 italy 1 1 1 1 south korea 1 1 1 1 1 1 1 the netherlands 1 1 1 1 1 spain 1 1 1 1 united kingdom russia 1 1 1 1 1 1 1 nigeria 1 1 1 1 source: authors’ own processing based on carlos et al. (2020) 174 table 11 shows the results of the regression table 11. regression results for elect (11) (12) (13) (14) (15) frq1 frq2 frq3 frq4 rms elect 0.229*** 0.165*** 0.123*** 0.220*** 1.320*** (6.77) (5.14) (4.54) (6.43) (10.35) enf -0.0115*** -0.0108*** -0.0113*** -0.00894*** -0.0402*** (-9.74) (-9.38) (-11.67) (-7.74) (-7.55) epu#enf -0.00580*** -0.00671*** -0.00853*** -0.0111*** -0.0151** (-3.53) (-4.31) (-6.27) (-6.52) (-2.75) size -0.469*** -0.459*** -0.380*** -0.281*** 1.606*** (-33.49) (-33.62) (-34.57) (-23.65) (20.44) lev 1.953*** 1.938*** 1.415*** 0.646*** 0.0612 (14.19) (14.51) (13.53) (5.04) (0.07) roa -2.857*** -2.813*** -1.719*** -2.614*** 13.41*** (-17.99) (-18.24) (-14.90) (-15.99) (11.86) dce 1.753*** 1.689*** 3.137*** 0.519** -23.57*** (9.46) (9.42) (19.96) (3.20) (-19.96) aud -0.613*** -0.600*** -0.362*** -0.663*** 3.062*** (-12.42) (-12.46) (-9.02) (-13.37) (11.44) res 0.467*** 0.418*** 0.462*** 0.607*** 1.732*** (7.42) (6.96) (9.00) (9.60) (6.48) r-squared 0.1224 0.1271 0.1263 0.0826 0.2185 no. of observations 284 908 284 908 284 908 284 908 284 908 country fixed effects yes yes yes yes yes industry fixed effects yes yes yes yes yes table description: this table presents the regression results for regression results for elect which is another measure of uncertainty. the regressions also include the interaction term between elect and enf. in all cases, we used an ols regression with fixed effects. in interaction terms, we center the enf by subtracting the mean value. in each model, the standard errors are clustered at the firm level. the t-values are in parentheses. the significance levels at 10%, 5% and 1% are represented by *, **, and ***, respectively. the results show that even if we measure the uncertainty in another way, the findings of our research are still valid, and we reach the same conclusion. the elect is positively associated with real earnings management and, therefore, negatively associated with frq. the coefficient is statistically significant in all models. in election years the uncertainty increases and leads to a decrease in frq by 0.229 in model 11, 0.165 in model 12, 0.123 in model 13, 0.220 in model 14, and by 1.320 in model 15. with respect to accounting enforcement we observe the same pattern, the coefficient of the interaction term is negative and statistically significant at the level of 1% in models 11-14 and the level of 5% in model 15. in the election years when uncertainty increases, accounting enforcement reduces the negative association between elect and frq by 0.00580 in model 11, 0.00671 in model 12, 0.00853 in model 13, 0.0111 in model 14, and by 0.0151 in model 15. in relative terms, the decrease is 2.53% in model 11, 4.07% in model 12, 6.93% in model 13, 5.05% in model 14, and 1.14% in model 15. another important aspect is that elect reflect mainly the political uncertainty. therefore, strong accounting enforcement institutions guarantee the frq even when the government and the administration of the country change. this is a vital element for the functioning of capital markets. another measure for enf accounting enforcement is a reflection of the quality of regulatory environment. this is the reason why in prior research, many of the scholars include rule of law in their studies as a measure for accounting enforcement (for example, daske et al. 2008 and hope 2003). as a robustness test, we use another measure of accounting enforcement that is appropriate for our research. the regulatory quality index (rq) determined by the world bank (2023) captures the ability of the government to formulate and implement policies and regulations related to the private sector. compared with rule of law, regulatory quality is a more suitable measure for accounting enforcement because it promotes the implementation of regulations catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 175 specifically for the firms and business sector rather than for all categories as rule of law. therefore, rq is a more refined version of the rule of law applicable to firms. table 12 shows the results of the regressions. table 12. regression results for rq (16) (17) (18) (19) (20) frq1 frq2 frq3 frq4 rm epu 0.00541*** 0.00790*** 0.00494*** 0.00312** 0.0542*** (5.35) (8.35) (5.97) (3.17) (15.09) rq -0.00373* -0.00183* -0.00729*** -0.00491** -0.0575*** (-2.36) (-1.23) (-5.62) (-3.09) (-8.10) epu#rq -0.000564*** -0.000563*** -0.000470*** -0.000791*** -0.00107** (-5.78) (-6.34) (-6.01) (-8.07) (-2.79) size -0.471*** -0.460*** -0.382*** -0.284*** 1.619*** (-33.66) (-33.72) (-34.79) (-23.94) (20.61) lev 1.950*** 1.933*** 1.409*** 0.641*** -0.0265 (14.15) (14.46) (13.46) (5.00) (-0.03) roa -2.846*** -2.800*** -1.707*** -2.604*** 13.48*** (-17.91) (-18.15) (-14.78) (-15.91) (11.92) dce 1.754*** 1.693*** 3.141*** 0.519** -23.47*** (9.46) (9.44) (19.97) (3.21) (-19.88) aud -0.620*** -0.608*** -0.363*** -0.667*** 2.999*** (-12.57) (-12.64) (-9.05) (-13.45) (11.22) res 0.504*** 0.456*** 0.501*** 0.643*** 1.853*** (8.04) (7.61) (9.76) (10.20) (6.96) r-squared 0.1223 0.1271 0.1262 0.0826 0.2188 no. of observations 284 908 284 908 284 908 284 908 284 908 country fixed effects yes yes yes yes yes industry fixed effects yes yes yes yes yes table description: this table presents the regression results for the regression results for rq as another measure for accounting enforcement with the interaction term between epu and rq. the table also includes the results for real earnings management (rm) defined previously. in all cases, we used an ols regression with fixed effects. in the interaction terms, we center epu and rq by subtracting the mean value. in each model, the standard errors are clustered at the firm level. the t-values are in parentheses. the significance levels at 10%, 5% and 1% are represented by *, **, and ***, respectively. the results are similar to those already obtained and highlights again the importance of accounting enforcement in reducing the negative impact of epu on frq. the coefficient of the interaction term is negative and statistically significant at 1% in all models. the results suggest that when accounting enforcement increases by one unit the negative impact of epu on uncertainty decreases by 0.000564 in model 16, 0.000563 in model 17, 0000470 in model 18, and by 0.00107 model 20. conclusions our study investigates the effects of uncertainty on the quality of financial reporting. we use data from 29 countries. based on 284,908 firm-year observations, we find that uncertainty is negatively associated with the frq. we provide evidence that accounting enforcement is an efficient tool to counteract the effects of uncertainty on frq. the findings show that the accounting enforcement reduces the negative association between frq and uncertainty. our findings are robust to other measures for frq, uncertainty, and accounting enforcement. the findings of this study are critical for investors and policy makers. we show that uncertainty is a key determinant of frq, and both investors and policymakers should acknowledge this. furthermore, given all the recent events around the world, the uncertainty will last much longer than previously expected, and we should know how to deal with it. accounting enforcement is an efficient instrument, strengthening it will prevent the decrease in frq when uncertainty rise. this study contributes to the literature in many ways. we used a large sample consisting of firms from 29 countries and 284,908 which will result in reasonable variability that supports our findings. furthermore, catalin mos / finance, accounting and business analysis, volume 6, issue 2, 2024 176 accounting enforcement was analyzed for the first time in this study. this is an important topic that enriches the existing literature on accounting enforcement which is one of the main determinants of frq. note the current study partially adopts methodologies from two works by mos 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including the zambian government, local communities, multinational enterprises (mnes), and foreign investors on inward foreign direct investment (fdi) in zambia's mining sector. it seeks to understand how stakeholder dynamics shape investment decisions and sustainability outcomes in this resource-dependent economy. design/methodology/approach: a mixed-methods approach with a convergent parallel design is employed, integrating quantitative and qualitative data. an autoregressive distributed lag (ardl) model assesses long-term and short-term relationships between stakeholders’ influence and fdi trends, while historical data, policy shifts, corporate social responsibility (csr) practices, investor perceptions and local economic linkages provide contextual insights. findings: the findings reveal that stakeholders’ influence exert significant influence on fdi through measures such as csr expectations and policy shifts and yet disparities in benefit-sharing persist. foreign investors, especially from china, drive capital inflows but often with limited local economic spill overs. moreover, policy stability, particularly in taxation and regulatory frameworks, is critical for attracting fdi, with recent reforms showing positive effects. however, zambia's heavy reliance on mining fdi perpetuates vulnerability to commodity price fluctuations. practical implications: the study recommends policy measures to enhance regulatory consistency, promote value addition in mining, and diversify into agriculture and renewable energy. strengthening local content policies and fostering multi-stakeholder dialogue are essential to ensure fdi contributes to inclusive growth. mnes should align csr strategies with community development needs to secure social license to operate. originality/value: this study contributes to the literature by providing a comprehensive stakeholder analysis of fdi in zambia's mining sector, bridging gaps between policy, corporate practice, and community impacts. unlike previous studies focusing solely on macroeconomic factors, this research highlights the interplay between governance, investor behaviour and local development, offering nuanced insights for policymakers and investors in resource dependent economies. paper type: research paper keywords: foreign direct investment, mining sector, stakeholder influence, corporate social responsibility, resource dependence jel: e62, h5, o16 * address correspondence: e-mail: oscarkaonga@gmail.com1 lhabazoka@yahoo.com2 bwalyachilolo@yahoo.com3 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.01 mailto:bwalyachilolo@yahoo.com3 https://orcid.org/0009-0006-8194-0054 https://orcid.org/0000-0003-4055-2531 https://orcid.org/0009-0006-4515-9316 o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 135 introduction foreign direct investment (fdi) in zambia’s mining sector has long been a cornerstone of economic growth, yet the distribution of its benefits remains contested. while multinational corporations (mncs) dominate extraction, the extent to which local stakeholders including the government, traditional leaders, and civil society shape fdi inflows and their outcomes is poorly understood. studies suggest that zambia’s heavy reliance on copper exports has entrenched external control over mineral wealth, often sidelining domestic interests (fraser and lungu 2007). however, emerging research highlights the role of stakeholder bargaining power in negotiating investment terms, from tax incentives to corporate social responsibility commitments (hansen et al. 2020). this study examines the dynamics of influence among key actors; foreign investors, state institutions, and local communities to determine who ultimately dictates the allocation of mining resources. by analysing policy frameworks, corporate disclosures, and community engagement practices, the study challenges the narrative of passive local participation and explores how stakeholder interactions either reinforce or disrupt foreign dominance in zambia’s mineral economy. overview of stakeholder influence in zambia's mining sector zambia's mining sector, as the cornerstone of the country's economy, attracts diverse stakeholders with competing and sometimes overlapping interests. the sector contributes 72% of export earnings, 44% of government revenues, and 9% of gdp, making it a critical arena for economic and political influence (world bank 2022). foreign investors, particularly from china, australia, and canada, dominate the sector, drawn by zambia's abundant copper reserves and cobalt deposits (mining for zambia 2023). these multinational corporations prioritise profit maximisation and stable fiscal policies, often lobbying against frequent tax regime changes that have characterised zambia's mining landscape with ten tax policy revisions in sixteen years (zambia extractive industries transparency initiative [zeiti] 2021). the government, as both regulator and beneficiary through tax revenues, seeks to balance attracting foreign direct investment (fdi) with maximising national benefits, creating inherent tensions in policy formulation (lombe and cheelo 2023). local communities near mining operations have distinct interests centered on employment opportunities, environmental protection, and social infrastructure development. while mining accounts for only 2.4% of formal employment (international labour organization [ilo], 2021), it remains a crucial source of livelihoods in mining regions. civil society organizations, empowered by initiatives like the extractive industries transparency initiative (eiti), push for greater transparency in revenue flows and contract terms, challenging both government and corporate opacity (eiti 2020). the zambia eiti's work has revealed gaps in licensing procedures and enabled civil society to advocate for legal reforms on subnational revenue distribution (zeiti 2022). traditional leaders also wield influence as custodians of land under customary tenure, though all land ultimately remains vested in the presidency (zambia land alliance, 2020), creating complex dynamics in mining land acquisitions. international financial institutions like the imf and world bank exert indirect influence through structural adjustment programs and debt relief conditions. zambia's 2021 $1.4 billion imf extended credit facility came with macroeconomic reform prescriptions that impacted mining sector governance (international monetary fund [imf] 2021). the hichilema administration's 2022 mineral royalty tax deductibility reform, intended to attract investment while maintaining revenues, reflects this delicate balancing act between competing stakeholder demands (mining review africa 2022). labor unions represent another critical constituency, advocating for worker protections amidst industry volatility as seen when a 1.5% royalty increase in 2019 prompted threats of 20,000 job cuts (zambia federation of employers [zfe] 2020). the interplay of these stakeholder interests creates a complex governance environment. while fdi in mining has shown positive long-term gdp impacts (united nations conference on trade and development [unctad] 2021), zambia's heavy reliance on the sector makes it vulnerable to commodity price shocks and external investor decisions (african development bank [afdb] 2022). recent moves toward financial modelling transparency and beneficial ownership disclosure suggest growing recognition of the need to align stakeholder interests more equitably (fraser institute 2023). as zambia positions critical minerals as strategic for national development (ministry of mines and minerals development [mmmd] 2023), understanding these competing stakeholder dynamics becomes essential for designing policies that ensure mining wealth benefits both investors and zambian citizens equitably. the tension between shortterm investor priorities and long-term national development goals remains unresolved, with the government's recent proactive steps in financial data requests from companies signaling a shift toward more assertive resource nationalism. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 136 inward foreign direct investment in zambia's mining sector zambia's mining sector has long been the cornerstone of its economy, attracting significant inward foreign direct investment (fdi) due to its abundant mineral resources, particularly copper, cobalt, and emeralds. the country's liberalised economic policies since the 1990s have positioned it as a prime destination for multinational mining corporations, with over 80% of total fdi inflows channeled into the extractive industries (world bank 2022). this heavy reliance on mining fdi has created a complex interplay between economic growth, environmental sustainability, and social equity, raising critical questions about who truly benefits from zambia's mineral wealth. the sector's development trajectory reveals both the promises and pitfalls of resource-dependent growth models in developing economies. the historical context of mining fdi in zambia demonstrates a shift from diversified investment patterns pre-2000 to concentrated mining sector dominance in subsequent years (fessehaie and morris 2023). this transition coincided with global commodity price surges that made zambia's copper reserves particularly attractive to foreign investors. studies indicate that while fdi contributed to mining sector recapitalisation and increased output, it failed to generate the anticipated dynamic economic growth or diversification effects (saad-filho and weeks 2023). instead, the mining sector's overwhelming share of fdi has reinforced zambia's dependence on primary commodity exports, leaving the economy vulnerable to price volatility in international markets (simutanyi 1996). copper prices and external demand remain the primary drivers of mining fdi, overshadowing other economic factors that could promote more balanced development (lombe and cheelo 2023). the regulatory framework governing mining fdi reveals significant tensions between investment promotion and environmental and social protections. zambia has established various policies and laws, including the mineral resources development policy, national policy on environment, environmental management act, and mines and mineral development act, to guide mining activities (zambia ministry of mines 2021). however, research suggests these instruments lack adequate mechanisms to effectively curb environmentally degrading practices or ensure equitable distribution of mining benefits (wambwa et al. 2023). regulatory institutions like the zambia environmental management agency and mines safety department often face capacity constraints, insufficient funding, and political interference, limiting their enforcement capabilities (wambwa et al. 2023). this regulatory gap has allowed some mining companies to operate with relative impunity, prioritising profit over environmental stewardship and community welfare (haglund 2023). environmental concerns associated with mining fdi present one of the most pressing challenges for zambia's sustainable development. the extractive nature of mining operations inevitably leads to ecological degradation, affecting local communities' rights to a clean and healthy environment (sikamo et al. 2016). while international environmental standards exist, their non-binding nature limits their effectiveness in zambia's context (nyambe and mwitwa 2023). case studies reveal that environmental damage from mining activities often disproportionately affects vulnerable populations living near extraction sites, creating social tensions and undermining the potential benefits of fdi (kragelund 2022). the concentration of chinese investment in zambia's mining sector has drawn particular scrutiny regarding environmental practices, with some studies suggesting a correlation between relaxed regulatory vigilance and increased fdi inflows (lee 2023). the socioeconomic impact of mining fdi presents a mixed picture. on one hand, foreign investment has brought capital infusion, technology transfer, and employment opportunities to zambia's mining regions. studies of major operations like konkola copper mines demonstrate positive contributions to government revenue, export earnings, and gdp growth (zambia extractive industries transparency initiative 2023). the sector's multiplier effects have created ancillary economic activities and infrastructure development in mining communities (fraser and lungu 2022). however, critics argue that these benefits often fail to translate into broad-based improvements in living standards or economic diversification. the enclave nature of many mining operations limits their integration with the local economy, while profit repatriation and tax avoidance practices reduce the net gains for zambia (larmer et al. 2023). the governance of mining fdi involves multiple stakeholders with competing interests, including the zambian government, foreign investors, local communities, and civil society organisations. the government faces the difficult task of balancing the need for investment with the imperative to protect national interests and ensure sustainable development. recent reforms, such as the 2024 mineral regulation commission act, represent attempts to strengthen oversight and modernise zambia's regulatory framework (zambia ministry of justice 2024). these measures aim to combat illegal mining activities, promote transparency, and encourage responsible sourcing practices among mining companies and mineral traders (mining watch zambia 2023). however, the effectiveness of these institutional innovations remains to be seen, particularly in addressing power asymmetries between the state and multinational corporations (caramento et al. 2023). o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 137 civil society organisations have emerged as important actors in holding both government and mining companies accountable for their actions. environmental and human rights groups have increasingly turned to legal avenues to challenge harmful mining practices, though court decisions have often favoured corporate respondents (chibbabbuka et al. 2021). this judicial trend reflects the broader challenges of enforcing accountability in a sector where economic imperatives frequently overshadow environmental and social concerns. the growing activism around mining issues suggests that stakeholder conflicts over zambia's mineral wealth will likely intensify unless more inclusive governance mechanisms are developed (garbarino 2023). looking forward, zambia's experience with mining fdi offers important lessons for resourcedependent economies. the country's heavy reliance on extractive industry investment has yielded limited transformative development, while creating significant environmental liabilities and social tensions. diversification strategies targeting non-mining sectors like agriculture, tourism, and manufacturing could help mitigate vulnerabilities to commodity price shocks (african development bank 2023). infrastructure development, particularly in electricity supply and transportation networks, remains critical for attracting more balanced fdi flows (zambia development agency 2023). regional cooperation within the southern african development community (sadc) could provide opportunities for adopting best practices in mining regulation and environmental protection (sadc secretariat 2023). ultimately, the question of who controls zambia's mining wealth cannot be answered by examining fdi statistics alone. the distribution of benefits and costs associated with mining investment reveals complex power dynamics that extend beyond formal ownership structures. while foreign investors may control significant portions of zambia's mineral production, the long-term sustainability of this arrangement depends on creating more equitable and environmentally responsible models of resource governance. there is need to explore innovative approaches to stakeholder engagement and benefit-sharing that can align private investment objectives with zambia's broader development goals. stakeholder influence and inward foreign direct investment in zambia's mining sector the mining sector in zambia has long been a focal point for foreign direct investment (fdi), driven by the country’s abundant copper and cobalt reserves. however, the distribution of control and benefits from these investments remains contested among various stakeholders, including the government, multinational corporations (mncs), local communities, and international financiers. the zambian government has historically promoted fdi through liberal policies, aiming to spur economic growth and job creation (fraser and lungu 2007). yet, critics argue that these policies often prioritise mnc interests over national welfare, leading to revenue losses through tax incentives and profit repatriation (lombe and kalinda 2019). mncs, particularly those from china, canada, and australia, dominate zambia’s mining sector, leveraging their financial and technological advantages to secure favorable extraction rights (haglund 2016). their influence is further reinforced by international financial institutions, which condition investment flows on regulatory concessions (burdzik 2014). meanwhile, local communities and civil society organisations have increasingly demanded greater equity and environmental accountability, challenging the dominance of foreign investors (carmody and hinfelaar 2017). these competing interests create a complex dynamic where fdi inflows are shaped not only by market potential but also by power struggles among stakeholders. while the government seeks to balance investor attraction with national development goals, the disproportionate influence of mncs raises concerns about who truly controls zambia’s mineral wealth. understanding these stakeholder dynamics is critical for assessing whether fdi in zambia’s mining sector delivers equitable and sustainable benefits. empirical studies on stakeholder influence in and inward fdi the literature on stakeholder influence on inward foreign direct investment (fdi) in zambia's mining sector reveals a complex interplay between government policies, corporate strategies, and local community engagement. research by yangailo and chambani (2023) highlights the broader impact of industrialisation on zambia's economic growth, emphasising the role of fdi as a key driver, though their study does not specifically dissect stakeholder dynamics in the mining sector. meanwhile phiri (2011) provides a more focused analysis, identifying copper prices, external demand, and infrastructure (particularly electricity supply) as critical determinants of mining fdi in zambia. however, while this study acknowledges the role of government and urbanisation in shaping fdi, it underplays the influence of nonstate stakeholders such as local communities and civil society organisations. corporate social responsibility (csr) and stakeholder engagement are emerging themes in the literature, yet their direct linkage to fdi inflows remains underexplored. for instance, studies on ghana’s o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 138 mining sector, such as the case of newmont ahafo mines, demonstrate how csr initiatives can enhance corporate reputation and community relations, but they do not establish a clear causal relationship between stakeholder engagement and fdi attraction. in zambia, while mining firms like those on the copperbelt engage in csr, there is limited empirical evidence on whether these practices significantly sway investor decisions or government policies on fdi. a significant gap in the literature pertains to the role of local communities and their capacity to influence mining fdi decisions. while studies such as munalula and matildah (2016) discuss the impacts of chinese fdi on african communities, including employment and environmental concerns, they do not explicitly examine how these communities exert influence over investment inflows in zambia. similarly, domela et al. (2023) explore determinants of chinese fdi in south africa's mining sector, including political stability and trade openness, but their findings are not directly transferable to zambia’s context, where stakeholder dynamics may differ due to varying regulatory frameworks and socio-economic conditions. another research gap lies in the comparative analysis of stakeholder influence across different mining jurisdictions in africa. while unctad (2022) notes the growing role of chinese and other emerging investors in african mining, it does not delve into how stakeholder pressures such as regulatory demands from host governments or activism from local ngos shape fdi strategies in zambia relative to other resource-rich countries like zimbabwe or south africa. furthermore, the literature lacks longitudinal studies tracking how shifts in stakeholder power (e.g., from state-centric to community-inclusive models) have historically influenced fdi trends in zambia’s mining sector. in conclusion, while existing research provides insights into economic and policy drivers of mining fdi in zambia, there is a notable absence of focused studies on stakeholder influence, particularly from nonstate actors. there is need to investigate how local communities, advocacy groups, and industry watchdogs shape fdi inflows, as well as the interplay between csr practices and investment attractiveness. additionally, comparative studies across african mining economies could yield valuable lessons for zambia in optimising stakeholder engagement to sustain and diversify fdi in its mining sector. methods this research employs a mixed-methods strategy with a convergent parallel design, gathering and analysing both quantitative (quan) and qualitative (qual) data simultaneously, as outlined by (edmonds and kennedy 2017). in this concurrent triangulation approach, the two types of data are collected independently but concurrently, with findings later compared and synthesised into a unified framework. nvivo was used for qualitative analysis, while eviews and stata facilitated the storage and examination of quantitative data, enabling parallel analysis. quantitative data analysis to assess the influence of stakeholders on foreign direct investment (fdi) inflows, this study applied a quantitative research design, utilising an autoregressive distributed lag (ardl) model (okeke and kalu, 2022; assefa, 2020; pesaran and shin 1998). stakeholder influence data was obtained from the world bank’s world governance indicators (wgi), while inward fdi figures were sourced from the world development indicators (wdi), consistent with prior research. the timeframe from 1965 to 2023 was chosen to capture long-term fdi trends and stakeholder dynamics, as well as to incorporate the most recent reliable data. additionally, this period spans the governance of all major political regimes in the country, including the united independence party (unip), the movement for multi-party democracy (mmd), the patriotic front (pf), and part of the united party for national development (upnd) era. this ensures that the findings remain generalisable across different administrations and policy environments. table 1 summarises the data sources. table 1.variables in the study variable description source irq stakeholder influence (institutional regulatory quality) world bank wgi vac stakeholder influence (voice and accountability estimate) world bank wgi fdi foreign direct investment net inflows (% of gdp) world bank wdi source: authors this research used secondary time series data, which is particularly valuable for detecting trends and patterns over time. time series analysis enables the examination of historical events and the projection of future developments. recent methodological progress has also made it possible to conduct causal inference o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 139 using time series data. since this study aims to assess the influence of stakeholders on inward fdi while investigating both short-run and long-run causal dynamics, time series data was deemed the most appropriate choice. for quantitative analysis, the autoregressive distributed lag (ardl) model was applied, a method well-suited for time series data, particularly when variables exhibit unit roots and cointegration (shrestha and bhatta 2018). this approach is effective in evaluating both long-term and short-term linkages between stakeholder influence and inward fdi. hypothesis testing was performed by analysing the ardl model results, which were further validated through diagnostic checks to ensure robustness. the statistical hypotheses tested in this study are outlined below: h10: stakeholder influence has no short run relationship with inward fdi. h1a: stakeholder influence has a short run relationship with inward fdi. h20: stakeholder influence has no long run relationship with inward fdi. h2a: stakeholder influence has a long run relationship with inward fdi. qualitative data analysis this study primarily collected qualitative data through focus group discussions. following established methodological guidelines, each focus group consisted of six to twelve participants with varied backgrounds and expertise to ensure diverse perspectives (lazar et al. 2017; wilson 2014). the data was analysed using thematic, content, and grounded analysis techniques within nvivo. thematic analysis was employed to identify recurring patterns and themes (braun and clarke 2006; lester et al. 2020; morgan 2022) concerning stakeholder influence on inward fdi, building on existing frameworks (saad 2014). content analysis was used to assess the prevalence and distribution of key concepts (bengtsson 2016; elo et al. 2014; erlingsson and brysiewicz 2017), providing deeper insights into the mechanisms linking stakeholder dynamics to fdi inflows. additionally, grounded analysis facilitated the development of new theoretical insights (charmaz and thornberg 2021; edgington 1967; timmermans and tavory 2012). the convergent parallel mixed-methods design proved highly effective, allowing simultaneous collection and integration of qualitative and quantitative data (tashakkori and newman 2010). this approach enabled a comprehensive exploration of the complex interplay between stakeholder influence and fdi (schoonenboom and johnson 2017). measurement of variables and justification accurate variable measurement is essential for robust research. in this study, the independent variable (stakeholder influence) was proxied by regulatory quality and voice and accountability indices, measured on a scale of -2.5 to 2.5, consistent with prior studies (khan et al. 2023; haven et al. 2022; matsudaira 2015; ali et al 2022; mkonyi 2022). the dependent variable (fdi inflows) was operationalised as net fdi inflows as a percentage of gdp, aligning with existing literature on foreign direct investments (mkonyi 2022; mahmood and chaudhary 2013; kaulu and haabazoka 2023). table 2. measurement of variables quantitative data analysis procedure the quantitative analysis followed a structured sequence of steps. first, descriptive statistics were computed to summarise the data characteristics. subsequently, stationarity was assessed through unit root testing. appropriate lag lengths were then determined using established information criteria. the analysis type of variable variables proxy code unit of measurement reference source of data dependant foreign direct investment fdi net inflow (% of gdp) fdi percentage mahmood and chaudhary (2013); kaulu and haabazoka (2023) world bank independent stakeholder influence institutional regulatory quality irq index of -2.5 to 2.5 khan et al. (2023); haven et al. (2022); matsudaira (2015) world bank independent stakeholder influence voice and accountability estimate vac index of -2.5 to 2.5 ali et al. (2022); mkonyi (2022) world bank o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 140 proceeded with bounds testing to evaluate long-term relationships, followed by short-term dynamics examination via the error correction (ec) mechanism within the ardl framework. finally, diagnostic checks were conducted to verify model validity. unit root testing and optimal lag selection stationarity properties were examined using both augmented dickey-fuller (adf) and phillipsperron (pp) tests. lag length optimisation differed between tests: aic guided lag selection for adf, while sic was applied for pp. the tests operated under the null hypothesis of non-stationarity (presence of unit roots). the ardl approach was specifically chosen for its ability to handle variables with differing integration orders some i(1) (requiring differencing) and others i(0) (stationary in level form). model formulation and dynamic analysis the ardl framework, recognised for its robustness with mixed-integration time series data (shrestha and bhatta 2018), served as the primary analytical tool. this approach remains valid when variables demonstrate i(0) or i(1) properties, though becomes inappropriate with i(2) or higher-order integration. key advantages of this methodological approach include the fact that it accommodates variables with different stationarity properties and allows simultaneous estimation of short-term adjustments and longterm equilibrium relationships. besides, it allows for superior performance with limited sample sizes compared to alternative cointegration techniques. as such, this analysis framework ensures comprehensive examination of both immediate effects and enduring relationships between stakeholder influence measures and foreign investment flows. the study's specific ardl specification for examining stakeholder influence (proxied by irq and vac) on fdi inflows for the years 1965 to 2023 takes the following form: fdit = ƒ(𝐼𝑅𝑄𝑡 , 𝑉𝐴𝐶𝑡 ) (1) in equation 1, fdi refers to foreign direct investment inflows (measured as a percentage of gdp), irq is stakeholder influence with proxy of institutional regulatory quality measured in index of -2.5 to 2.5) while vac is stakeholder influence with proxy of voice and accountability estimate also measured in index of -2.5 to 2.5 ). equation 1 can also be written as follows: fdit = 𝜆0 + 𝜆1irqt +𝜆2vact + µt (2) the logs of each variable were taken in order to minimise the volatility and multi collinearity of the time series data. the following log linear model is therefore obtained by applying logs to equation 2: log fdit = 𝜆0 + 𝜆1𝑙𝑜𝑔irqt + 𝜆2𝑙𝑜𝑔𝑉𝐴𝐶t + µt (3) analysis in the ardl model can be done in two steps. step one looks at long run associations in the model while step two looks at the short run. equation 4 represents the ardl model specification for this study. ∆ log 𝐹𝐷𝐼𝑡 = 𝛼0 ∑ 𝛽1 𝑗 𝑝 𝑖=1 ∆ log 𝐹𝐷𝐼𝑡−𝑘 + ∑ 𝛽2 𝑗 𝑝 𝑖=1 ∆ log 𝐼𝑅𝑄𝑡−𝑘 + ∑ 𝛽3 𝑗 𝑝 𝑖=1 ∆ log 𝑉𝐴𝐶𝑡−𝑘+ + 𝜆1 log𝐹𝐷𝐼𝑡−1 + log𝐼𝑅𝑄𝑡−1 + 𝜆3 log𝑉𝐴𝐶𝑡−1 + 휀𝑡 (4) in this equation; 𝛼0 is the intercept, ∆ is the first difference operator, 𝑝 is the lag order and ɛ𝑡 is the error term. the bounds test was used to check for long run equilibrium in the relationships amongst irq, vac and fdi. in this test, the null hypothesis is ho: 𝛿1 = 𝛿2 = 𝛿3 = 0 (that is, there is no cointegration) and the alternative is h1: 𝛿1 ≠ 𝛿2 ≠ 𝛿3 ≠0 (there is cointegration). if the calculated f statistic or absolute t-statistic is greater than the upper level bound or absolute upper level bound respectively, h0 is rejected (pesaran and shin 1998). the conclusion is that there is cointegration in the relationship amongst irq, vac and fdi. if the statistics are below the lower bound, there is no cointegration. if the calculated statistics are between the upper and lower bounds, the result is inconclusive. the jj test (johansen and juselius 1990), "cumulative sum recursive residuals (cusum) and cumulative of square of recursive residuals (cusumsq)" can be used to check the robustness of the cointegration (brown et al. 1975; chandio et al. 2020). the short run relationships between irq, vac and fdi were assessed using the following ecm form of the ardl model. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 141 ∆log 𝐹𝐷𝐼𝑡 = 𝛼0 ∑ 𝛽1 𝑗 𝑝 𝑖=1 ∆𝐹𝐷𝐼𝑡−𝑘 + ∑ 𝛽2 𝑗 𝑝 𝑖=1 ∆𝐼𝑅𝑄𝑡−𝑘 + ∑ 𝛽3 𝑗 𝑝 𝑖=1 ∆𝑉𝐴𝐶𝑡−𝑘 + 𝛼𝐸𝐶𝑀𝑡−1 + 휀𝑡 (5) diagnostics tests model fit was checked using the r2. this value ranges from 0 to 1. the higher the value, the better the fit with 1 implying perfect fit and 0 implying no fit at all. breusch-godfrey test was used to check serial correlation. jarque-bera test of normality, arch and white test of heteroscedasticity, reset test of linearity and cusum of square tests of model stability were the other diagnostic tests carried out to check the respective characteristics. results and discussion results qualitative findings of the study qualitative findings of this study indicate that, the influence of stakeholders on foreign direct investment (fdi) inflows in zambia’s mining sector presents a complex interplay of positive and negative effects, shaped by policy frameworks, corporate practices, and socio-economic dynamics. on the positive side, the zambian government has implemented policy amendments aimed at enhancing the sector’s attractiveness to investors, such as revising tax regimes and improving regulatory clarity. these efforts have contributed to stabilising fdi inflows, particularly in copper mining, which remains the primary focus of foreign investors due to bullish global prices and zambia’s rich mineral reserves. interviewees stressed that multinational corporations (mncs), especially those from china and india, have brought capital, infrastructure, and employment opportunities, highlighting their role in boosting export earnings and contributing significantly to gdp during peak periods. additionally, fdi has facilitated limited technology transfer and skills development, particularly in large-scale operations like konkola copper mines (kcm), where on-the-job training and employment creation have been documented. however, stakeholder influence has also introduced significant challenges. policy instability, including abrupt tax hikes and inconsistent enforcement, has deterred long-term investment, with instances like the 2012 tax reforms causing temporary disinvestment. based on the data collected, this study found that the dominance of mncs in extractive activities has reinforced zambia’s economic dependency on copper, limiting diversification and exacerbating vulnerabilities to commodity price fluctuations. critically, the concentration of fdi in mining has failed to translate into broad-based economic growth, with spill over effects into sectors like agriculture and manufacturing remaining weak. local communities often perceive fdi as exploitative, citing environmental degradation, inadequate csr initiatives, and preferential hiring of expatriates over locals. for example, csr programs in mining regions have been criticised as superficial, failing to address systemic poverty or foster meaningful community engagement. during focus group discussions, representatives from civil society and environmental activists further highlighted their campaign against the ecological costs of mining, however, their advocacy is frequently undermined by weak regulatory enforcement and prioritisation of short-term revenue over sustainability. additionally, respondents emphasised that international stakeholders, such as the imf and world bank, have indirectly shaped fdi trends by tying financial support to policy reforms, including transparency measures like the extractive industries transparency initiative (eiti). while these interventions aim to improve governance, their impact is often diluted by institutional weaknesses and corruption. the growing reliance on chinese investment has also sparked debates about neo-colonialism, with concerns over labour abuses and limited value addition to the local economy. in conclusion, qualitative results of this study show that while stakeholders like the government and mncs have driven fdi inflows through policy incentives and capital injection, their influence is marred by structural inefficiencies, socio-environmental trade-offs, and uneven distribution of benefits. the net effect is thus a mixed one: fdi has bolstered mining output and fiscal revenues but at the cost of reinforcing economic monoculture and marginalising local stakeholders. for zambia to harness fdi more equitably, stronger institutional frameworks, diversified investment targets, and inclusive community participation are essential. quantitative findings of the study this section presents the study’s findings based on quantitative data analysis particularly the ardl model. it starts with descriptive statistics, followed by inferential statistical results. next, the outcomes of stationarity tests are discussed. the findings related to the long-run hypothesis are then examined, followed o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 142 by testing of the short-run hypothesis. finally, a summary of the diagnostic test results is provided. descriptive statistics the summary statistics are presented in table 3, which primarily include the measures of central tendency and dispersion for foreign direct investment (fdi) and stakeholder influence (irq, vac). the average stakeholder influence (irq) is 0.358, with a maximum value of – 0.038 and a minimum of – 0.521. the standard deviation of 3.421 indicates that the fdi inflow values are relatively close to the mean. the positive skewness of 0.398 suggests that most of the data points are clustered near the lower end, with fewer outliers closer to the upper end. similarly, the positive skewness of 0.130 in vac implies that while most years displayed lower stakeholder influence in terms of voice and accountability estimate, a few years had significantly higher influence. in contrast, the negative skewness of – 0.0049 in stakeholders’ influence (irq) suggests that while most years showed relatively high stakeholders’ influence in terms of institutional regulatory quality (with minimal leftward skew), a few years had notably lower levels in the same regard . regarding kurtosis, the fdi inflow was found to be approximately mesokurtic, indicating it has a tail behavior similar to a normal distribution. the value of 0.123 is close to 0, signifying that the fdi data is approximately normally distributed, with no significant outliers. this supports the reliability of the dataset for further statistical analysis or modeling (kallner 2018; kim 2013). furthermore, the jarque-bera test statistic showed a p-value greater than 0.05, indicating that the fdi inflow follows a normal distribution. table 3. descriptive statistics measure fdi inflows irq vac mean 3.176 0.358 0.320 median 2.451 0.297 0.248 maximum 7.914 0.038 0.571 minimum 0.879 0.521 0.166 std. dev 3.421 0.217 0.321 skewness 0.398 0.0049 0.130 kurtosis 0.123 2.013 2.650 jarque-bera 1.789 1.423 1.342 observations 27 18 18 source: author computations correlation between irq, vac and fdi table 4 below illustrates the correlations between irq, vac, and fdi. the results indicate a significant positive correlation between stakeholders in terms of voice and accountability estimate (vac) and fdi, implying that as the number of voice and accountability estimate in a country increases, fdi inflows also increase, and vice versa. similarly, a strong positive correlation was found between stakeholders influence in terms of institutional regulatory quality (irq) and fdi, suggesting that higher institutional regulatory quality in a country is associated with higher fdi inflows, and vice versa. table 4. correlations among irq, vac and fdi source: author computations stationarity tests prior to conducting time series analysis, it is necessary to perform stationarity tests. this is especially important for ardl models, which require that none of the variables be integrated of order i(2). however, the variables can be i(0), i(1), or a combination of both. the adf test was applied alongside the pp test for robustness. the results of the stationarity tests, presented in table 5, show that the variables are all i(1) and i(0). this result allows for the use of the ardl model. log fdi inflow log vac log irq log fdi 1.0000 log vac 0.7430 1.0000 log irq 0.6981 0.0542 1.0000 o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 143 table 5. stationarity tests with constant t-statistic prob. with constant and trend tstatistic prob. without constant and trend t-statistic prob. log fdi 2.162 0.132 2.143 0.654 0.341 0.516 log vac 2.714** 0.072 2.891 0.175 0.721 0.399 log irq 0.899 0.932 1.879 0.645 0.802 1.940 ∆log fdi -7.015*** 0.000 4.011* 0.085 5.012*** 0.000 ∆log vac -7.994*** 0.000 8.012*** 0.000 7.043*** 0.000 ∆log irq 3.897** 0.042 3.987** 0.039 2.998*** 0.043 log fdi 2.451 0.356 2.123 0.765 0.345 0.6231 log vac 3.487* 0.081 2.803 0.089 0.412 0.3895 log irq 0.998 0.814 0.078 0.598 0.734 0.8723 ∆log fdi 6.0121*** 0.000 1.399*** 0.000 5.891** 0.0000 ∆log vac 8.1240*** 0.000 3.004*** 0.000 9.012** 0.0000 ∆log irq 3.0134** 0.036 3.032** 0.069 4.023** 0.0021 note: augmented dickey-fuller (adf) and phillips-perron (pp) tests with 10% (*), 5% (**) and 1%(***) significant levels. source: author computations optimal lag selection to evaluate the long-term and short-term relationships between vac, irq, and fdi inflow, the ardl method is employed. this requires determining the optimal lag structure. according to all information criteria, the optimal lag length is found to be lag one, as indicated in table 6. table 6. var optimal lag selection lag logl lr fpe aic sc hq 0 26.0215 na 0.00002 1.98718 3.0431 2.1340 1 43.9816 108.4306* 1.45320* 2.3214 1.2134* 1.8956* 2 58.5231 17.01327 0.00000 2.0765 0.3254 1.3679 note: lag chosen by criteria source: author computations bounds test the results of the bounds test are presented in table 7. for fdi, vac and irq as outcome variables, the f statistics are 5.9671, 5.8915, and 4.7988, respectively. two of these statistics exceed the upper bound critical value at the 5% significance level, indicating the presence of two cointegration vectors. table 7. bounds test results variable log fdi log vac log irq f-statistic 5.9671* 5.8915* 4.7988 optimal lags (1,0,1,0) (1,0,1,0) (1,1,1,1) best trend specifications constant & trend constant & trend constant & trend critical values 10% 5% 1% lower bound (0) 3.39 4.04 4.98 upper bound (1) 3.99 5.04 6.02 diagnostics: r2 0.895 0.423 0.892 adj. r2 0.610 0.430 0.945 note 1: note: 5% (*) significant level source: author computations for robustness, the johansen cointegration test was also run and the results are in table 8. these indicate the presence of at least one cointegration equation. this suggests that long run association exists between fdi inflow and stakeholder influence. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 144 table 8. johansen cointegration test cointegration equations eigenvalue statistic critical value at 5% prob. trace statistic none 0.89562 54.01432 50.0023 0.0398 at most 1 0.39876 18.16740 27.9875 0.7894 at most 2 0.34897 5.14379 15.2345 0.7412 at most 3 0.24136 0.91269 3.9876 0.3991 maximum eigenvalue none 0.94315 33.4132 27.0123 0.0098 at most 1 0.42136 12.9786 22.9465 0.4897 at most 2 0.23760 3.9985 12.8960 0.9956 at most 3 0.24681 0.8976 3.9874 0.7567 source: author computations the long-run model results the results of the long and short run estimates are shown in table 9. the findings show that in the long run, stakeholder influence has a positive relationship with fdi at the 5% level (β= 0.1984, p=0.002) and (β= 0.1790, p=0.004) for proxies of voice and accountability and institutional regulatory quality respectively. short run dynamics the short run results are also shown in panel two of table 9. similar to the long run results, stakeholder influence in terms of voice and accountability estimate was found to have positive short run relationship with fdi inflow at the 5% level. the estimated coefficient for voice and accountability estimate was 0.1973 while that of institutional regulatory quality was 0.2437). the cointegration coefficient was found to be – 0.7138 (p=0.0002). this means that in the short run, when there is a shock in the model, there is a 71.38% speed of adjustment to equilibrium. overall, this model is able to explain76.54% (r2) of changes in fdi inflow. table 9. ardl (1, 0, 1, 0) regressing determinants on fdi using aic variable coefficient se t-statistic p-value panel 1: long run estimates log vac 0.1984 0.0508 2.9801 0.0023 log irq 0.1790 0.0876 2.4319 0.0041 panel 2: short run estimates ∆log vac 0.1973 0.04332 4.1348 0.0008 ∆log irq 0.2437 0.04761 2.8768 0.0275 ecm (-1) 0.7138 0.34216 4.9981 0.0002 diagnostic tests (p-value in brackets) durbin-whiteson statistic 1.8023 adjusted r2 0.7654 r2 0.7531 x2 serial breusch-godfrey lm test 1.2349 (0.21341) x2 white 23 (0.40123) x2 normal 3.054789 (0.32178) x2 arch 2.045321(0.1795) x2 reset 4.231567(0.051234) f-statistic 11.98570 (0.0001) source: author computations results of hypothesis testing table 10 summarises the results of hypothesis testing. both hypotheses were supported. these are; stakeholder influence has a short run relationship with inward fdi and stakeholder influence has a long run relationship with inward fdi. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 145 table 10: results of hypothesis tests hypotheses outcome h1a: stakeholder influence has a short run relationship with inward fdi. supported h2a: stakeholder influence has a long run relationship with inward fdi. supported diagnostic tests diagnostic tests are presented in panel three of table 9. the model successfully passed several diagnostic checks, including the breusch-godfrey test for serial correlation, the jarque-bera test for normality, the arch and white tests for heteroscedasticity, the reset test for linearity, and the cusum and cusum of squares tests for model stability. regarding model stability, the results from the cusum and cusum of squares tests showed that all plots remained within the 5% critical boundaries, confirming the stability of the estimated model parameters throughout the estimation period. discussion the findings of this study demonstrate both positive and negative stakeholder impacts on inward fdi, with particular emphasis on the role of policy stability, regulatory frameworks, labour relations, and corporate social responsibility initiatives. it has been found that stakeholders including the zambian government, local communities, multinational enterprises (mnes), and international investors play a critical role in shaping inward foreign direct investment (fdi) in zambia’s mining sector. the government’s policies, particularly tax reforms and regulatory stability, emerged as significant determinants of fdi inflows. for instance, the hichilema administration’s introduction of mineral royalty tax deductibility from corporate income tax in 2021 was instrumental in reviving investor confidence after years of policy unpredictability under previous regimes. this aligns with previous research by phiri (2011), which emphasised that inconsistent fiscal policies, especially in mining taxation, deterred long-term fdi commitments, reinforcing the vulnerability of zambia’s economy to commodity price shocks. similarly, ndaba (2015) found that fdi concentration in mining post-2000 led to limited spillover effects on broader economic growth due to policy instability, corroborating the present study’s observation that regulatory coherence is pivotal for sustainable investment. local communities and labour stakeholders also influence fdi through corporate social responsibility (csr) expectations and social license to operate. the study highlights that mining mnes in zambia face increasing pressure to address socio-economic disparities, a legacy of colonial and postindependence mining practices (cronjé et al. 2017). communities on the copperbelt region, for example, reported divergent experiences with csr across different operational eras colonial, nationalised, and privatised with the latter era often criticised for prioritising shareholder returns over local development (blowfield and murray, 2014). this contrasts with findings from zimbabwe, where mining fdi was found to have a more pronounced positive impact on gdp growth due to stronger linkages between mnes and local enterprises (unctad 2017). the zambian case thus underscores the need for mnes to align csr strategies with host-country development goals to mitigate resistance and foster stakeholder collaboration. international investors, particularly from china, canada, and the eu, have been identified in this study as key actors driving fdi trends. the study notes that chinese investments in zambia’s mining sector have surged, mirroring broader african trends where china dominates critical mineral supply chains (zhang & liang 2023). however, unlike oecd countries where mining fdi is often coupled with stringent environmental regulations and economic diversification (sun and hasi 2024), zambia’s reliance on extractive-sector fdi has perpetuated resource dependency. this echoes concerns raised by the world bank (2015) and unctad (2017) about the "resource curse" in low-income economies, where fdi inflows fail to catalyse structural transformation. the present study adds nuance by revealing that while fdi has recapitalised zambia’s mining sector, its benefits such as employment and technology transfer remain unevenly distributed, exacerbating inequalities. comparatively, the study’s findings diverge from optimistic assessments of mining fdi in other contexts. for example, research on zimbabwe’s mining sector demonstrated robust gdp linkages from fdi, attributed to better integration of domestic suppliers into mne value chains (unctad 2017). in contrast, zambia’s experience reflects weaker local participation, partly due to an underdeveloped enabling environment for downstream industries like mineral processing (phiri 2011). this gap underscores the importance of policies that incentivise value addition, as seen in oecd countries where economic complexity and environmental regulations reduce mineral dependency (sun and hasi 2024). the study thus reinforces calls for zambia to diversify its fdi base beyond mining, leveraging sectors like agriculture and renewable energy to mitigate external shocks. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 146 conclusion this study underscores the significant influence of stakeholders including the zambian government, local communities, multinational enterprises (mnes), and international investors on inward foreign direct investment (fdi) in zambia’s mining sector. the findings highlight that policy stability, particularly in taxation and regulatory frameworks, plays a crucial role in attracting and sustaining fdi. the government’s recent reforms, such as the mineral royalty tax deductibility policy, have contributed to renewed investor confidence, aligning with previous research that emphasises the detrimental effects of policy unpredictability on long-term investment (phiri 2011; u.s. department of state 2023). however, despite these improvements, zambia’s heavy reliance on mining fdi continues to expose the economy to commodity price volatility, reinforcing the need for diversification. local communities and labour stakeholders also shape fdi outcomes through their expectations of corporate social responsibility (csr) and equitable benefit-sharing. the study reveals that while some mnes have made efforts to engage with communities, disparities persist, particularly in regions with a long history of mining activities. this suggests that stronger regulatory enforcement of csr commitments and greater inclusion of local stakeholders in decision-making could enhance the sector’s social sustainability. furthermore, the influx of chinese and other foreign investments has brought capital and technology but has also raised concerns about uneven economic spill overs and environmental impacts. comparative insights from other resource-dependent economies, such as zimbabwe, indicate that zambia could improve fdi benefits by fostering stronger linkages between mining operations and local industries. despite its contributions, this study has some limitations. firstly, the study focuses primarily on largescale mining, leaving artisanal and small-scale mining (asm) largely unexplored, even though asm plays a significant role in zambia’s informal economy. secondly, external factors such as global commodity price fluctuations and geopolitical influences were not deeply analysed but remain critical in shaping fdi trends. to maximise the positive impact of fdi, policymakers should prioritise regulatory consistency, incentivise value addition in the mining sector, and promote economic diversification into agriculture and renewable energy. strengthening local content policies to enhance skills transfer and domestic procurement could also ensure broader economic benefits. additionally, fostering transparent dialogue between mnes, government agencies, and communities will be essential in mitigating conflicts and ensuring sustainable development. in light of the complex dynamics between foreign direct investment (fdi) and domestic stakeholder interests in zambia, it is imperative that a nuanced policy framework be instituted to harness the benefits of foreign capital while mitigating its potential adverse effects. one critical area of intervention lies in the correction of market failures such as negative externalities arising from industrial activities often associated with fdi-led projects especially in the mining sector. the government should consider the implementation of targeted environmental taxation regimes, such as carbon taxes, which would serve not only to internalize the social costs of environmental degradation but also to incentivize cleaner production technologies among foreign investors. this fiscal instrument could further contribute to expanding the state’s revenue base, enabling increased investment in the provision of merit goods such as public healthcare, education, and environmental conservation sectors that are often underfunded yet critical for equitable development and long-term welfare maximization. moreover, zambia’s heavy reliance on the agricultural sector particularly in the context of an fdi landscape skewed towards extractive industries and mono cultural agricultural exports, exposes the economy to significant structural vulnerabilities. these include susceptibility to international commodity price shocks due to the low price elasticity and inherent volatility of primary products. to counteract these risks, the government must formulate and enforce industrial policies that promote diversification of the economic base, including the development of value-addition chains in agro-processing and the incentivization of investment in knowledge-intensive sectors. strategic stakeholder engagement, including with local communities, civil society organizations, and domestic investors, should be institutionalized to ensure that fdi projects align with national development goals and sustainability imperatives. in this vein, the establishment of clear performance benchmarks for foreign investors particularly in areas such as employment creation, technology transfer, and environmental stewardship could enhance accountability and maximize developmental returns. these policy recommendations underscore the importance of adopting a proactive and context-sensitive regulatory approach to fdi in all sectors besides mining, one that balances the imperatives of economic growth, environmental integrity, and social equity in zambia’s development trajectory. by addressing these challenges, zambia can harness fdi not only as a driver of growth in mining and other sectors but also as a catalyst for inclusive and resilient economic transformation. o. kaonga, l. haabazoka, b. chilolo / finance, accounting and business analysis, volume 7, issue 2, 2025 147 references african development bank. 2022. zambia economic outlook: building resilience in the mining sector. african development bank. https://www.afdb.org/en/countries/southern-africa/zambia/zambiaeconomic-outlookafdb.org+1afdb.org+1. african development bank. 2023. zambia economic outlook: diversification and 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dependency: a quantile analysis for oecd economies. journal of economic structures, 9(1): 54. 139 finance, accounting and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 unveiling hidden losses and valuation shifts: accounting policy implications during and after covid-19 in a dynamic price environment valentina mirkovic1 , cedomir gligoric2 , milos ljubisa pavlovic3* , milos lutovac4 department of business and it studies, belgrade business and arts academy of applied studies, belgrade, serbia1 department of business and it studies, belgrade business and arts academy of applied studies, belgrade, serbia 2 department of business and it studies, belgrade business and arts academy of applied studies, belgrade, serbia3 department of business and it studies, belgrade business and arts academy of applied studies, belgrade, serbia4 *corresponding author info articles abstract history article: submitted 4 september 2023 revised 28 november 2023 accepted 9 december 2023 purpose: this study aims to unravel the intricate relationship between hidden losses, valuation shifts, and accounting policies in the dynamic post-covid-19 environment. design/methodology/approach: utilizing a mixed-methods approach, this research involves an extensive review of relevant literature and empirical data analysis to illuminate the interplay between hidden losses and valuation shifts. the focus is on how these factors interact, particularly in response to the market volatility brought about by the pandemic. findings: the research highlights the emergence of hidden losses and shifts in valuation during the pandemic, prompting businesses to adapt their accounting policies to the evolving market conditions. as the crisis recedes and economic recovery progresses, organizations are observed recalibrating their accounting strategies to align with the changing economic landscape. practical implications: the research highlights the emergence of hidden losses and shifts in valuation during the pandemic, prompting businesses to adapt their accounting policies to the evolving market conditions. as the crisis recedes and economic recovery progresses, organizations are observed recalibrating their accounting strategies to align with the changing economic landscape. originality/value: the originality of this study lies in its comprehensive analysis of the relationship between hidden losses, valuation shifts, and accounting policies within the context of the covid-19 pandemic. the insights provided contribute to a deeper understanding of the challenges and adaptations faced by businesses in times of crisis. paper type: research paper. keywords: hidden losses, valuation shifts, accounting policies, post-covid-19 landscape, financial reporting, risk management jel: m41, g30 * address correspondence: e-mail : valentina.mirkovic@bpa.edu.rs1 cedomir.gligoric@bpa.edu.rs2 milospavlovic070@gmail.com3 milos.lutovac@bpa.edu.rs4 mailto:valentina.mirkovic@bpa.edu.rs1 mailto:cedomir.gligoric@bpa.edu.rs2 mailto:milospavlovic070@gmail.com3 mailto:milos.lutovac@bpa.edu.rs4 https://orcid.org/0000-0002-5857-5021 https://orcid.org/0000-0002-9847-0929 https://orcid.org/0000-0003-4112-6905 https://orcid.org/0000-0003-1833-6752 mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 140 introduction the covid-19 pandemic has left an indelible mark on the global financial landscape, instigating unprecedented disruptions that have reverberated across a multitude of sectors (ivanovic-djukic et al. 2022; rathnayaka et al. 2023). the rapid spread of the virus prompted swift government interventions, resulting in lockdowns, travel restrictions, and supply chain disruptions. it has led to many sociocultural, economic, and psychological impacts on various stakeholders (tanakov et al. 2022). as a direct consequence, financial markets encountered levels of volatility that were previously unseen, a phenomenon which triggered significant fluctuations in asset prices and consequently, had a profound impact on the valuation of companies (prokopowicz and komorowski 2021; yang et al. 2023; world bank 2020). during such volatile and unpredictable market conditions, traditional accounting practices face a multitude of new and intricate challenges. the dynamic price environment that emerged necessitated an agile response from companies and their financial reporting practices. these new circumstances highlighted the importance of adapting accounting policies to accurately capture the hidden losses that materialized due to unforeseen market conditions, as well as the shifts in valuation that reverberated through the balance sheets of numerous organizations (dalwadi 2023; savova 2022). the central focus of this research is to delve deep into the intricate relationship between these phenomena hidden losses, valuation shifts, and the consequential accounting policy adaptations that ensued during the tumultuous period of the covid-19 pandemic. the overarching objective is to unravel the multifaceted ways in which the unprecedented volatility stemming from the pandemic led to the emergence of hidden losses, and how these fluctuations, in turn, manifested as shifts in the valuation of companies. furthermore, the research aims to provide a comprehensive exploration of how diverse organizations navigated these complex challenges, adapting their accounting policies as a strategic response. the challenges associated with assessing the value of common stock highlight a significant issue: none of the established valuation methods and models offer complete reliability and certainty in determining that value. consequently, a multitude of alternative methods and models have emerged and are actively employed in practical valuation processes. therefore, one of the key challenges faced by analysts, but also accountants, is the critical task of choosing the most suitable valuation methods among the various available options (nenkov 2023). by methodically analyzing the effects of the pandemic-induced market volatility on hidden losses and valuation shifts, this study endeavors to offer valuable insights that extend beyond the immediate circumstances. these insights delve into the broader implications for financial reporting practices as economies transition into a post-pandemic recovery phase. as industries recalibrate and adapt to the new normal, the findings from this research can serve as a compass for financial professionals, regulators, and policymakers in developing strategies that enhance financial reporting accuracy, transparency, and robustness in the face of similar future challenges. in summary, this study seeks to unravel the intricate tapestry woven by hidden losses, valuation shifts, and accounting policy adjustments during and after the covid-19 pandemic. by casting a spotlight on these interrelated facets, the research aims to provide a comprehensive understanding of the cascading effects of market volatility and offer invaluable insights into enhancing financial reporting practices for a more resilient and adaptable financial future. methods to address the research objectives of investigating hidden losses, valuation shifts, and accounting policy implications during and after the covid-19 pandemic, a mixed-methods research approach was adopted. this section outlines the research design, data sources, and analytical methods employed in this study. research design: a sequential explanatory research design was employed, beginning with a qualitative phase followed by a quantitative phase. this approach allowed for a comprehensive exploration of the phenomena under study, followed by the quantitative analysis of collected data to support generalizability and provide deeper insights (creswell and plano clark 2011; dawadi et al. 2018). data sources: qualitative data was collected through semi-structured interviews with senior financial executives and accounting professionals from diverse industries. the aim was to capture nuanced insights into the impact of hidden losses, valuation shifts, and accounting policy adaptations during and after the covid-19 pandemic. participants were purposively selected based on their expertise and experience in financial reporting and accounting policy decisions. quantitative data was sourced from annual reports, financial statements, and auditors' reports of publicly listed companies across sectors. these reports provided information on hidden losses, valuation shifts, and changes in accounting policies. the sample was stratified to ensure representation from different industries, regions, and market capitalization segments. mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 141 analytical methods: for the qualitative phase, thematic analysis was employed to identify recurring themes, patterns, and key insights from the interview data (braun and clarke 2006; nowell et al. 2017). transcripts were coded and analyzed iteratively to develop comprehensive themes related to hidden losses, valuation shifts, and accounting policy responses during and after covid-19. in the quantitative phase, financial data extracted from annual reports was subjected to statistical analysis using descriptive and inferential methods. key financial ratios, such as debt-to-equity ratio, current ratio, and return on assets, were computed to assess the impact of hidden losses and valuation shifts on financial performance (hair et al. 2009). result and discussion analysis of hidden losses and valuation shifts before the covid-19 pandemic, the financial landscape was characterized by a sense of stability, marked by occasional market fluctuations. concerns about hidden losses were not widespread, and shifts in valuation were predominantly influenced by anticipated market patterns and macroeconomic factors. traditional application of accounting policies during this period, accounting policies typically followed historical cost accounting principles. under this approach, assets were recorded on financial statements at their original acquisition cost. this approach often led to a mismatch between the carrying value of assets and their fair market value (palea and vera, 2016). traditional accounting policies influenced financial reporting by underrepresenting the latent market value of assets and investments. hidden losses were not prominently featured in financial statements as the prevailing accounting norms did not mandate frequent revaluation. this resulted in potentially misleading information for stakeholders and investors (barth et al. 2013). impact of covid-19: unveiling hidden losses and valuation shifts impact on financial markets and price volatility: the emergence of the covid-19 pandemic led to unprecedented turbulence in global financial markets. this upheaval was characterized by significant drops in asset prices and a notable increase in price volatility. lockdown measures, disruptions in supply chains, and shifts in consumer behavior had a profound and adverse impact on business operations across various industries. financial markets, in particular, experienced rapid and substantial fluctuations, resulting in significant reductions in market capitalization and a notable change in investor sentiments. emergence of hidden losses and valuation shifts: the increased volatility and economic uncertainty brought about by the pandemic revealed previously concealed losses within the financial portfolios of companies. asset values that were not accurately reflected on financial statements were suddenly revealed, impacting financial performance and solvency (world bank 2020). valuation adjustments were primarily influenced by sudden shifts in market conditions and alterations in investor behavior, as noted by yang et al. (2023). businesses encountered difficulties in establishing accurate fair values for their assets, partly due to reduced market activity and disruptions in the valuation process, as discussed by lev (2003). consequently, valuation changes occurred as companies reevaluated the worth of their assets in response to evolving market dynamics. accounting policy responses during covid-19: the sudden and unparalleled onset of the covid-19 pandemic triggered a profound upheaval in global markets. in response to this unprecedented crisis, companies found themselves compelled to act swiftly and strategically. they undertook the recalibration of their accounting policies to effectively tackle the unique challenges posed by the pandemic. in the wake of economic uncertainties and unprecedented volatility, businesses found themselves navigating uncharted waters, where accounting practices played a pivotal role in shaping the accuracy and transparency of financial narratives (creswell and plano clark 2011). numerous enterprises made the decision to reevaluate their impairment assessment methodologies, with a distinct focus on acknowledging and accounting for the looming threat of expected credit losses. this adjustment in policies served as a clear response to the heightened credit risk environment that had rapidly emerged. the motivation behind these policy adaptations was the urgent necessity to provide a more detailed and precise representation of the recoverable amounts of assets, directly addressing the increasing economic uncertainty. mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 142 the implications of these agile and strategic accounting policy adjustments reverberated on the canvas of financial reporting in two distinct dimensions. firstly, the metamorphosis of companies' financial statements was profound, with an overt shift towards a more transparent representation of the inherent risks and uncertainties tethered to the pandemic-ridden landscape (world bank 2020). stakeholders and investors were presented with a refined lens that unveiled the intricate interplay between financial health and unforeseen market exigencies. furthermore, the repercussions of these policy changes extended deep into the core of financial performance, impacting solvency ratios and the overall stability of businesses. this highlighted the intricate balance that accounting policy decisions held with regard to reported financial results. even minor alterations in methodologies could lead to significant variations in key performance indicators, underscoring the importance of these policy shifts. in summation, the saga of accounting policy responses amid the covid-19 pandemic unveils a narrative of adaptability, strategic foresight, and an unwavering commitment to financial transparency. as companies forged their paths through the stormy seas of uncertainty, these accounting policy adaptations served as compasses, guiding organizations toward a more accurate depiction of their financial landscape, while illuminating the intricate connections between policy choices, financial outcomes, and stakeholder confidence. the journey of accounting policy responses becomes a testament to the resolute spirit with which businesses navigate crises and the proactive measures undertaken to enhance the resilience of financial reporting practices. post-covid-19 recovery and accounting policy adjustments as the stormy waves of the covid-19 pandemic begin to recede and economies cautiously steer toward recovery, companies find themselves at a critical juncture that demands a meticulous recalibration of their accounting policies to effectively navigate evolving market dynamics (kugler et al. 2021). the transition from crisis to recovery is not only a shift in economic momentum but also a pivot point where astute accounting practices play a pivotal role in shaping financial narratives with renewed clarity and accuracy (world bank 2020; kugler et al. 2021). in the wake of the pandemic's tumultuous impact, businesses have embarked on a journey of introspection, initiating comprehensive reviews of their valuation methodologies and revisiting the bedrock assumptions that underpin their impairment assessments (kugler et al. 2021). this rigorous process is marked by a resolute commitment to fortify financial statements against potential vulnerabilities that may arise from future uncertainties, thereby contributing to the overall robustness of corporate financial reporting practices (defond and zhang 2014). the paramount driver behind accounting policy adjustments in this post-covid-19 landscape is the aspiration to accurately mirror the gradual improvement in the economic outlook while concurrently fostering an environment of preparedness against any potential reverberations that future shocks may bring (kugler et al.). these carefully orchestrated shifts in accounting policies are not merely an exercise in numbers; they stand as integral components of the broader narrative that organizations project to stakeholders, investors, and the financial community at large (laux and leuz 2009). the recalibration of accounting policies emerges as a potent tool to provide relevant, reliable, and incisive information to facilitate sound decision-making in an environment where the path to recovery is both promising and enigmatic (rathnayaka et al. 2023; kugler et al. 2021). as companies harness the insights gleaned from the challenges posed by the pandemic, these policy adjustments pave the way for financial narratives that resonate with stakeholders, exuding a sense of transparency and commitment to accurate representation (zulfiqar et al. 2021; amel-zadeh and barth 2016; kugler et al. 2021). in conclusion, the journey from pandemic-induced chaos to post-covid-19 recovery is marked not only by economic restoration but also by the strategic recalibration of accounting policies. these adjustments, fueled by the aspiration for precise reflection, resilience, and credibility, contribute to the formulation of narratives that capture the essence of organizations' resilience and readiness to confront the uncertainties of the future financial landscape. as companies continue to weather the aftershocks of the pandemic, these nuanced adjustments in accounting policies serve as guiding beacons that illuminate the path toward sustainable recovery and unwavering financial transparency. examples of hidden losses and valuation shifts: real-world scenarios to provide further insight into the practical implications of hidden losses and valuation shifts during and after the covid-19 pandemic, this chapter examines real-world examples from various industries. these examples shed light on the challenges companies faced, the accounting policy adjustments they made, and the lessons learned from their experiences. mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 143 travel and hospitality industry the travel and hospitality industry was severely impacted by travel restrictions and lockdowns during the pandemic (rathnayaka et al. 2023). airlines and hotel chains faced hidden losses due to canceled bookings and plummeting revenues. companies like "wingsair" adjusted their accounting policies to account for the substantial decrease in the value of aircraft fleets and properties, revealing the magnitude of their hidden losses (nowell et al. 2017). retail sector retailers experienced rapid shifts in consumer behavior and foot traffic during the pandemic. "shopsmart," a multinational retail chain, faced valuation shifts as inventory demand decreased significantly (savova 2022). the company recalibrated its accounting policies to recognize the impairment of unsold merchandise and adapt its inventory valuation method to reflect current market realities (amelzadeh and barth 2016). technology companies technology companies such as "e-commercetech" witnessed a surge in online sales as consumers shifted to remote shopping (barth et al. 2013). however, they also encountered challenges in valuing their intangible assets, such as software and patents, which gained newfound importance. by employing scenario analysis and sensitivity testing, e-commercetech adjusted its accounting policies to reflect changes in customer behavior and the potential impact on future cash flows (bhojraj 2003). energy sector the energy sector grappled with the dual impact of decreased oil demand and price volatility. "powerenergies," an energy production company, faced hidden losses stemming from the reduced value of oil and gas reserves. to address this, the company collaborated with auditors to assess the impairment of its long-lived assets, leading to adjustments in its depreciation and amortization policies (creswell and plano clark 2011). in our upcoming discussion, we will delve into concrete examples of accounting for hidden losses and the practical application of accounting approaches concerning changes in accounting policies and accounting estimates. we will focus on these topics within the framework of the globally accepted international financial reporting standards (ifrs). impairment of assets (ias 36): during the covid-19 pandemic, many companies experienced a decline in the recoverable amount of their assets, such as property, plant, and equipment or goodwill, due to the economic downturn. under ias 36, if there is an indication that the carrying amount of an asset may not be recoverable, the company needs to perform an impairment test. hidden losses can occur when the recoverable amount is lower than the carrying amount, leading to an impairment loss. companies may have needed to adjust their estimates and assumptions for cash flows and discount rates, reflecting the changing economic environment.  inventory valuation (ias 2): some companies faced challenges in valuing their inventory during the pandemic, especially those with perishable or slow-moving inventory. they might have needed to assess whether the net realizable value of their inventory has declined. a change in the lower-of-costor-net-realizable-value assessment can result in recognizing a hidden loss in the income statement.  revenue recognition (ifrs 15): for companies in industries like travel and entertainment, the pandemic significantly impacted their ability to recognize revenue according to their historical patterns. they may have had to change their revenue recognition policies, recognizing revenue over time instead of at a point in time. this change in accounting policy can affect the timing and amount of revenue recognized, potentially leading to hidden losses or gains.  lease accounting (ifrs 16): under ifrs 16, lessees recognize lease liabilities and right-of-use assets on their balance sheets. the economic impacts of covid-19 may have led companies to reassess their lease terms, exercise break clauses, or negotiate rent concessions. these changes in lease terms can result in adjustments to the lease liability and right-of-use asset, impacting the balance sheet and potentially revealing hidden losses.  expected credit losses (ifrs 9): financial institutions have had to consider the expected credit losses on their loan portfolios due to the economic uncertainty brought about by the pandemic. changes in macroeconomic factors can lead to changes in the probability of default and the credit risk of borrowers, necessitating adjustments to the expected credit loss allowances. these adjustments can lead to hidden losses in the financial statements. mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 144 in all these examples, companies may have had to reassess their accounting policies and estimates in response to the covid-19 pandemic's economic impacts. these adjustments can result in the recognition of hidden losses or gains, highlighting the importance of transparent and accurate financial reporting under ifrs. companies are required to disclose these changes in accounting policies and the impact on their financial statements in their notes to the financial statements to provide transparency to stakeholders. implications and lessons learned the study's findings underscore the critical role of dynamic accounting policies in navigating uncertain and volatile environments, such as those prompted by the covid-19 pandemic (kugler et al. 2021). hidden losses and valuation shifts serve as indicators of the need for transparent and adaptable reporting practices that accurately capture market realities (kugler et al. 2021). the broader implications of this study extend to regulatory frameworks, risk management strategies, and corporate governance practices (kugler et al. 2021). companies and policymakers can draw lessons from the pandemic experience to enhance their preparedness for future disruptions and refine financial reporting practices that reflect economic realities with greater accuracy (kugler et al. 2021). the examples given illustrate the challenges and opportunities companies encountered during and after the covid-19 pandemic (lev 2003). the ability to navigate hidden losses and valuation shifts hinged on adaptability, accurate financial reporting, and collaboration between finance teams and auditors (defond and zhang 2014; laux and leuz 2009). companies that adjusted their accounting policies to align with market realities were better equipped to communicate transparently with stakeholders, make informed decisions, and strategize for the future. conclusion this paper delved into the intricate relationship between hidden losses, valuation shifts, and accounting policies amidst and following the covid-19 pandemic within a constantly fluctuating price environment. the research unveiled the profound impact of the pandemic on financial markets, characterized by heightened price volatility, disruptions in business operations, and pervasive uncertainty. consequently, hidden losses became a focal point as companies grappled with the abrupt revelation of previously concealed declines in asset values. valuation shifts emerged as a response to evolving market dynamics, as businesses reevaluated the value of their assets. the unprecedented circumstances posed a challenge to traditional accounting policies, prompting companies to adapt their methodologies. these adjustments aimed to capture hidden losses and present accurate valuations. consequently, these policy changes had implications for financial reporting, ultimately enhancing transparency and reflecting the pandemic's impact on the financial positions of companies. the paper's contributions to the existing literature lie in its exploration of the intricate interplay between hidden losses, valuation shifts, and accounting policies during a global crisis. the study sheds light on the significance of flexible accounting policies in adapting to uncertain environments and delivering precise financial information. looking ahead, future research could delve into the long-term consequences of accounting policy adjustments in the post-pandemic era. this analysis might include their effects on financial performance and how stakeholders perceive them. additionally, exploring the roles of regulatory frameworks and auditors in ensuring transparent and reliable financial reporting during crises could provide valuable insights. in conclusion, this study underscores the vital role of adaptable accounting policies in addressing unprecedented challenges. it emphasizes the importance of transparency in accurately representing hidden losses, valuation changes, and shifting market conditions. the lessons derived from this research can inform future financial reporting practices and contribute to more resilient businesses and economies. reference ball, r. 2001. infrastructure requirements for an economically efficient system of public financial reporting and disclosure. brookings-wharton papers on financial services 2001, 127169. https://doi.org/10.1353/pfs.2001.0002. barth, m. e., w. r. landsman, and m. h. lang. 2013. international accounting standards and accounting quality. journal of accounting research, 46(3): 467-498. https://doi.org/10.1111/j.1475679x.2008.00287.x. bhojraj, s., c. m. c. lee, and d. oler. 2003. what's my line? a comparison of industry classification schemes for capital market research. 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https://doi.org/10.5281/zenodo.5851358 https://doi.org/10.1108/jes-05-2022-0257 https://doi.org/10.1108/jes-05-2022-0257 https://www.iki.bas.bg/journals/economicstudies/2022/2022-3/07_kameliya-savova.pdf https://doi.org/10.2308/acch.2003.17.1.61 https://faba.bg/index.php/faba/article/view/112 https://openknowledge.worldbank.org/handle/10986/33748 https://doi.org/10.1007/s11156-022-01112-5 mirkovic, gligoric, pavlovic and lutovac / finance, accounting and business analysis, volume 5, issue 2, 2023 146 zulfiqar, n., s. javid, m. islam, a. azhar, and s. naveed. 2021. value relevance of financial reporting: in pre ifrs, post ifrs and transition regime. jisr management and social sciences & economics, 19(2): 206–230. https://doi.org/10.31384/jisrmsse/2021.19.2.12 https://doi.org/10.31384/jisrmsse/2021.19.2.12 147 finance, accounting and business analysis volume 5 issue 2, 2023 http://faba.bg/ issn 2603-5324 the effect of profitability and leverage on tax avoidance moderated by firm size: evidence from property and real estate companies in indonesia sasiska rani 1* , meti zuliyana2 , rizal effendi3 faculty of economics and business, tridinanti university, palembang, indonesia 1 faculty of economics and business, tridinanti university, palembang, indonesia2 faculty of economics and business, tridinanti university, palembang, indonesia3 * corresponding author info articles abstract history article: submitted 30 september 2023 revised 1 december 2023 accepted 13 december 2023 purpose: this research aims to determine the moderating role of company size on the influence of profitability and leverage on tax avoidance in property and real estate companies listed on the bei in 2020 2022 design/methodology/approach: this research uses quantitative methods. the research population was 79 companies in the property and real estate sub-sector listed on the indonesia stock exchange in 2020 2022. the sample in this study was 10 companies. the sampling technique used purposive sampling. the analytical method used in this research is moderated regression analysis (mra). findings: the research results found that profitability has an effect on tax avoidance, leverage has no effect on tax avoidance, company size has no effect on tax avoidance, company size is unable to moderate the effect of profitability on tax avoidance, company size is not able to moderate the effect of leverage on tax avoidance practical implications: the findings of this research are useful for increasing insight and helping companies in determining the direction of their tax policies as well as being taken into consideration by the government in formulating tax regulations so as to reduce gaps in tax avoidance. originality/value: this research uses company size as a moderating variable to differentiate this research from previous research so that it is hoped that it can provide broader insight into tax avoidance practices. paper type: research paper keywords: tax avoidance, profitability, leverage, firm size. jel: g32, h26, m4. * address correspondence: e-mail : sasiska_rani@univ-tridinanti.ac.id1 meti_zuliyana@univ-tridinanti.ac.id2 rizal_effendi@univ-tridinanti.ac.id3 mailto:sasiska_rani@univ-tridinanti.ac.id mailto:meti_zuliyana@univ-tridinanti.ac.id2 https://orcid.org/0000-0002-8859-8363 https://orcid.org/0000-0001-8762-2870 https://orcid.org/0000-0001-8903-6269 sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 148 introduction taxes are the largest source of state revenue in indonesia. however, for taxpayers, especially companies, they view taxes as a burden that can reduce their profits. this is supported by agency theory which states that there is a conflict of interest between agents (companies) and principals (government). the government wants to maximize state revenues from taxes by ensuring that taxpayers pay taxes according to statutory regulations. however, companies as taxpayers try to pay the minimum tax possible. because of this, the practice of tax avoidance has emerged. the many tax avoidance practices carried out by taxpayers cause low levels of tax revenue in indonesia (badertscher et al. 2018). the country loses significant amounts of tax due to tax avoidance practices (lolana and dwimulyani 2019). one way to carry out tax planning that is legal and does not violate the law is to avoid tax (pradana and sartika 2022). tax avoidance is a strategy for taxpayers to reduce taxes by taking advantage of loopholes in tax law so that there are no differences in views between taxpayers and tax authorities (lestari 2020). tax avoidance is an effort made to minimize taxes by exploiting loopholes in the tax law. tax avoidance is an implementation of the concept of tax reduction by a company in a legal way due to imperfections in tax law (suryantari and mimba 2022). however, the practice of tax avoidance causes a lot of losses for the state, amounting to hundreds of billions of rupiah each year, originating from the state's tax sector revenues (prapitasari and safrida 2019). the international center for taxation and development (ictd) states that corporate tax avoidance data from 30 countries and indonesia is ranked 11th with an estimated value of corporate taxes not paid to the indonesian directorate general of taxes of usd6.48 billion. to measure a country's tax performance, you can use the tax ratio. basically, the tax ratio shows tax compliance which can be seen from the tax ratio formula itself, namely tax revenue divided by gdp. according to maulana (2020), achieving a tax ratio that does not meet the specified target is partly caused by tax aggressiveness which includes tax avoidance. the trend in indonesia's tax ratio can be said to be quite stagnant, there have been no significant changes in recent years. from 2017 to 2021, indonesia's tax ratio is still low. according to a report from the ministry of finance, in 2017 indonesia's tax ratio was at the level of 9.89 % of gdp. then it increased to 10.24 % in 2018, then fell to 9.77 % in 2019, and fell further to 8.33 % in 2020. 2020 was the year where indonesia's tax ratio decreased the most. this happened because of the covid-19 pandemic which limited people's economic activities. meanwhile in 2021, indonesia's tax ratio will begin to increase in line with strengthening tax performance and national economic recovery from the impact of the pandemic. indonesia's tax ratio in 2021 is 9.11 % of gdp. even though it has increased compared to 2020, indonesia's tax ratio in 2021 is still below the pre-pandemic level as can be seen in figure 1. source: the ministry of finance (2022) figure 1. indonesian tax ratio one of the cases of tax avoidance that occurs in indonesia is in companies operating in the property and real estate sector. in 2016, there was a document leak regarding panama papers financial transactions. the document contains a list of major clients in the world, which are allegedly hidden to minimize the tax burden that the company must pay. one company involved is pt. ciputra development, tbk and pt lippo karawaci, tbk, which are companies in the property and real estate sector. pt ciputra development hid assets of usd 1.6 billion or the equivalent of idr 21.6 trillion with the aim of avoiding taxes in indonesia (awaloedin 2020). 9,89 10,24 9,77 8,33 9,11 0 2 4 6 8 10 12 2017 2018 2019 2020 2021 sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 149 this research was conducted at companies in the property and real estate sector. companies in the property and real estate sector receive attention from the government regarding the taxes paid. according to the fiscal policy agency, companies in the property and real estate sector have a low tax ratio. accumulatively, tax revenues from the property and real estate sector until july 2021 are still negative, namely -11.5 %. apart from that, from 2019 to 2022, property and real estate sector companies had the smallest effective tax rate (etr) value compared to other sector companies, which indicates that this sector carried out the greatest tax avoidance actions (sari and wahyuni 2023). there are many factors that influence tax avoidance, one of which is profitability. profitability is the ability of a company to generate profits over a certain period. the profitability ratio can be proxied using return on assets (roa). roa functions to measure the company's effectiveness in using the resources it has. the higher the company's profitability, the higher the company's net profit will be generated (anggraeni and oktaviani 2021). companies with high profits tend to have a high tax burden. research carried out by faizah (2022), anggraeni and oktaviani (2021), rahmadani and abubakar (2020), suryani and mariani (2019), arinda and dwimulyani (2019) and wardani and purwaningrum (2018) state that roa has an effect on tax avoidance. in contrast to research conducted by muslim and nengzih (2021), stawati (2020), isnanto et al. (2019), permata and wahyuningsih (2018) and mustika and silfi (2017) stated that roa has no effect on tax avoidance. another factor influencing tax avoidance is leverage. leverage describes the level of a company's dependence on debt to finance its operational activities. leverage shows the extent to which the company is financed by debt or external parties compared to the company's capabilities as depicted by capital (kurniasih and hermanto 2020). leverage can be proxied using the debt to equity ratio (der). having debt will give rise to a fixed burden called interest expense. the higher the total debt in a company, the greater the interest expense the company must pay. the interest expense arising from debt owned by the company will reduce profits before tax so that the tax paid by the company will be smaller. the higher the interest paid by the company, the lower the profit, and this will have an impact on reducing capital and the amount of tax paid to the company (barli 2018). results of research conducted by widodo and wulandari (2021), rahmadani et al. (2020), faizah (2022), suryani and mariyani (2019) and sinaga and suardikha (2019) show that leverage has an effect on tax avoidance. meanwhile research conducted by rohima et al. (2023), indarti (2023), and kumalasari and wahyudin (2020) which found that leverage has no effect on tax avoidance. firm size is one factor that can influence the practice of tax avoidance in companies. firm size is a classification of a business based on the amount of assets it owns. firm size shows the company's ability to return tax decisions. firm size indicates the company's stability and ability to carry out its economic activities. the larger the size of the company, the more it will become the center of attention from the government and will give rise to a tendency to comply or avoid taxes (kurniasih and sari 2013). the larger the firm size, the management is usually more aggressive in avoiding taxes (suyanto et al. 2019). this research focuses on analyzing profitability, leverage and tax avoidance with firm size as a moderating variable. the use of firm size as a moderating variable differentiates this research from previous research so it is hoped that it can provide broader insight into tax avoidance practices. literatur review agency theory agency theory was first coined by jensen and meckling (1976) who stated that there was a conflict of interest between principals delegating authority to other people (agents) to make decisions in running the company. agency theory is a theory that explains that companies have different interests between agents (management) and principals (owners) (mulyani et al. 2021). according to agency theory, differences in interests between the tax authority and companies cause non-compliance by taxpayers or companies resulting in tax avoidance, namely by reducing tax payments explicitly. positive accounting theory watts and zimmerman (1986) explain three hypotheses that can encourage opportunistic actions by management, namely the bonus plan hypothesis, debt covenant hypothesis, and political cost hypothesis. positive accounting theory explains accounting practices with the assumption that all parties will act rationally in their respective personal interests and consider accounting information as a commodity in economics and politics. tax avoidance the company considers tax to be a burden that can reduce company profits. the company tries to minimize the taxes paid but in ways that do not violate or conflict with tax regulations. companies usually carry out tax planning with the aim of minimizing the taxes that must be paid. tax avoidance is a form of sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 150 company effort to reduce the tax burden in a way that is legal and does not conflict with applicable tax laws (stawati, 2020). tax avoidance in this research is proxied using cetr. cetr = tax payment profit before tax (1) profitability profitability is the main measure used to assess a company's ability to produce profits (manafi 2017). profitability can be proxied by the ratio return on assets (roa). roa shows the amount of profit a company generates using the total assets it owns. the higher this ratio, the better the company's performance in using assets to obtain net profit. roa = net profit after tax total assets (2) leverage leverage describes the level of a company's dependence on debt to finance its operational activities. leverage shows the extent to which the company is financed by debt or external parties compared to the company's capabilities as depicted by capital (kurniasih and hermanto 2020). leverage can be proxyed using debt to equity ratio (der). der is a measure of how much debt a company has in relation to its total equity. the debt owned by the company has the consequence of fixed costs, namely interest expenses. the greater the debt that the company carries, the consequence is that the interest burden that the company must pay is also higher. der = total debt total equity (3) firm size firm size is a classification of a business based on the amount of assets it owns. firm size is a measure and value that can classify companies into large and small types according to overall assets (robin et al. 2021). firm size is an indicator that explains the financial strength of a company. firm size is known in the log of total assets, because firm size is thought to have a more consistent level of stability compared to other agents and is consistent throughout the period (jogiyanto 2007). size = ln(total assets) (4) empirical literature faizah (2022) tries to obtain empirical evidence regarding the effect of institutional ownership, profitability, leverage on tax avoidance with company size as a moderating variable. this research uses a sample of manufacturing companies listed on the indonesia stock exchange (bei) from 2015 to 2019. this research finds that institutional ownership and profitability have no effect on tax avoidance but leverage has a significant negative effect on tax avoidance. this research also found that company size cannot moderate the positive effect of institutional ownership on tax avoidance, company size cannot moderate the positive effect of profitability on tax avoidance, and company size cannot moderate the effect of leverage on tax avoidance. anggraeni and oktaviani (2021) conducted research on thin capitalization, profitability and company size influencing tax avoidance. the samples used are manufacturing companies listed on the indonesia stock exchange for the period 2017 to 2019. this research shows that the independent variable thin capitalization has no effect on tax avoidance. meanwhile, profitability has a positive influence on tax avoidance, and company size has a negative influence on tax avoidance. rahmadani et al. (2020) analyzes the effect of company size, profitability, leverage, earnings management on tax avoidance and analyzes the effect of political connections as a moderating variable. the population in this research are companies listed in the mining sector on the indonesia stock exchange (bei) for the 2007-2018 period. the results of hypothesis testing prove that company size and earnings management have no effect on tax avoidance, profitability and leverage have an effect on tax avoidance. political connections are significant in moderating profitability on tax avoidance and political connections are not significant in moderating company size, leverage and earnings management on tax avoidance. sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 151 suryani and mariani (2019) analyzes the influence of company age, company size and profitability on tax avoidance with leverage as a moderating variable. the research sample was on manufacturing companies listed on the indonesia stock exchange for the period 2014 to 2017. the research results showed that company age had a positive effect on tax avoidance, company size had no effect on tax avoidance, profitability and leverage had a negative effect on tax avoidance, leverage was able to moderate the effect of age company and company size on tax avoidance, but leverage is not able to moderate profitability and tax avoidance. arinda and dwimulyani (2019) tested the effect of profitability, leverage, sales growth and audit quality on tax avoidance moderated by good corporate governance. the population in this study are manufacturing companies listed on the indonesia stock exchange from 2011 to 2017. based on the results of the analysis, it can be concluded that profitability has a positive effect on tax avoidance, leverage has a negative effect on tax avoidance, sales growth, audit quality, and good corporate governance has no effect on tax avoidance. good corporate governance weakens the positive influence of profitability on tax avoidance, good corporate governance does not strengthen the negative influence of leverage on tax avoidance, good corporate governance does not weaken the positive influence of sales growth on tax avoidance, and good corporate governance does not strengthen the negative influence of audit quality on tax avoidance. wardani and purwaningrum (2018) conducted research to test the effect of profitability, leverage, sales growth and corporate social responsibility (csr) on tax avoidance. the population in this research is food and beverage manufacturing companies listed on the indonesia stock exchange (bei) during the 2012-2016 period. the results of this research show that profitability and leverage have a significant positive effect on tax avoidance. sales growth and csr do not significantly influence tax avoidance. muslim and nengzih (2021) tested the effect of profitability and corporate governance on tax avoidance in manufacturing companies listed on the indonesian stock exchange. the results of this research show that profitability has a significant negative effect on tax avoidance, the composition of the board of commissioners, managerial ownership, and institutional ownership do not have a significant effect on tax avoidance isnanto et al. (2019) examines empirical evidence of the influence of capital intensity, inventory intensity, profitability and fiscal loss compensation on tax aggressiveness. this research consists of 54 food and beverage sector samples listed on the indonesia stock exchange for the 2013-2017 period. the results of this research show that partially, capital intensity and inventory intensity influence tax aggressiveness. meanwhile, profitability and fiscal loss compensation do not affect tax aggressiveness. permata and wahyuningsih (2018) tests the effect of size, age, profitability, leverage, sales growth on tax avoidance. the population that is the object of this research is the basic industry and chemical sectors listed on the indonesia stock exchange (bei) in 2012 2016. the analysis technique used is logistic regression analysis. based on data analysis and discussion, it can be concluded that size, age, profitability, leverage and sales growth have no effect on tax avoidance. this means that the government has succeeded in implementing the tax amnesty program which has the effect of companies not committing tax avoidance mustika and silfi (2017) examines the influence of corporate social responsibility, company size, profitability, leverage, capital intensity and family ownership on tax aggressiveness. the population in this research is mining and agricultural sector companies listed on the indonesia stock exchange during 20122014. the results of the research show that corporate social responsibility and family ownership influence tax aggressiveness. company size, profitability, leverage, and capital intensity have no effect on tax aggressiveness. widodo and wulandari (2021) rani conducted research which aims to determine the effect of profitability, leverage, capital intensity, sales growth and company size on tax avoidance. this research uses manufacturing companies registered on the indonesian stock exchange in 2017-2019. the data analysis used is a multiple linear regression test. the analysis results show that profitability and company size have no influence on tax avoidance. meanwhile, leverage and capital intensity have a significant positive influence on tax avoidance. the test results show that sales growth has a significant negative effect on tax evasion. sinaga and suardikha (2019) aims to obtain empirical evidence on the effect of leverage and capital intensity on tax avoidance with the proportion of independent commissioners as a moderating variable. the population of this research are manufacturing companies listed on the indonesian stock exchange in 20132017. data analysis techniques use multiple linear regression analysis and moderated regression analysis (mra). the results of the analysis show that leverage has a positive influence on tax avoidance. this means that the more debt a company uses to fund assets, the higher the level of tax avoidance. capital intensity has a negative effect on tax avoidance. this means the more capital a company invests in the form of fixed assets, the lower the level of tax avoidance. the proportion of independent commissioners does not moderate the influence of leverage and capital intensity on tax avoidance. rohima et al. (2023) conducted research aimed at testing factors that are thought to influence tax avoidance consisting of related party transactions, sales growth, company size and leverage. the research sample was 11 manufacturing companies with a research sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 152 period of 2016-2020. the results of multiple regression analysis show that related party transactions, sales growth have a negative effect on tax avoidance, while company size and leverage have no significant effect on tax avoidance. however, this research has succeeded in proving that related party transactions in the form of loans increase company efficiency, large companies are more aggressive in tax avoidance and leverage is one way to save tax. kumalasari and wahyudin (2020) conducted research aimed at analyzing and describing empirically the influence of leverage and capital intensity on the effective tax rate (etr) with profitability as a moderating variable. the population in this study are manufacturing companies listed on the indonesia stock exchange for the 2016-2018 period. the data analysis technique used in this research is descriptive statistical analysis and inferential statistical analysis, namely regression analysis with moderating variables using the absolute difference value test method. the research results show that leverage does not have a significant effect on the effective tax rate (etr). capital intensity has a positive and significant effect on the effective tax rate (etr). profitability is able to moderate the influence of leverage on the effective tax rate (etr). however, profitability is not able to moderate the effect of capital intensity on the effective tax rate (etr). the effect of profitability on tax avoidance profitability is used to measure a company's performance in producing profits. profitability can be proxied using the roa ratio. based on agency theory, company managers have an interest in convincing investors to invest their capital. a high roa value will make investors interested in investing their capital in the hope that the company will be able to provide a high rate of return on that capital. as the profits generated increase, the amount of income tax increases as the company's profits increase, allowing businesses to avoid taxes. when a company has high profits, a company also has the obligation to pay a high amount of tax, so that the company is more likely to implement tax avoidance measures, so that it can minimize the amount of tax paid to the government (arinda and dwimulyani 2019). research conducted by faizah (2022), anggraeni and oktaviani (2021), rahmadani and abubakar (2020), suryani and mariani (2019), arinda and dwimulyani (2019) and wardani and purwaningrum (2018) stated that roa influences tax avoidance. so a hypothesis is prepared: h1: profitability has an effect on tax avoidance the effect of leverage on tax avoidance leverage describes the level of a company's dependence on debt to finance its operational activities. leverage shows the extent to which the company is financed by debt or external parties compared to the company's capabilities as depicted by capital (kurniasih & hermanto, 2020). leverage can be proxyed using debt to equity ratio (der). having debt will give rise to a fixed burden called interest expense. the higher the total debt in a company, the greater the interest expense the company must pay. the interest expense arising from debt owned by the company will reduce profit before tax so that the tax paid by the company will be smaller. the higher the interest paid by the company, the lower the profit, and this has an impact on reducing capital and the amount of tax paid to the company (barli 2018). results of research conducted by widodo and wulandari (2021), rahmadani et al. (2020), faizah (2022), suryani and mariyani (2019) and sinaga and suardikha (2019) show that leverage has an effect on tax avoidance. so a hypothesis is prepared: h2: leverage has an effect on tax avoidance the effect of firm size on tax avoidance firm size is the classification of the company into large or small categories based on total assets. companies that are large companies tend to have greater resources for managing taxes because of the costs attached to these resources compared to smaller companies. the larger the firm size, the management is usually more aggressive in tax avoidance (suyanto et al. 2019). the size of the company will attract great attention from the government regarding compliance with the amount of tax paid. however, not all companies can use their resources for tax avoidance because companies are subject to government-regulated decisions and policies (kim et al. 2010). so a hypothesis is prepared: h3: firm size has an effect on tax avoidance firm size moderates the effect of profitability on tax avoidance companies that are relatively large in terms of their assets tend to have high profits. the greater the company's profitability, which is indicated by the value of the assets it owns, the greater the tax burden it must pay. this is because the tax burden is calculated based on the amount of income earned by the company. however, on the other hand, large companies will get the attention of investors and the government. this is in accordance with the theory of political costs. the larger the firm size and the level of profitability, the greater the tendency to reduce tax avoidance. so a hypothesis is prepared: sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 153 h4: firm size moderates the effect of profitability on tax avoidance firm size moderates the effect of leverage on tax avoidance firm size can be interpreted as a scale that can classify the condition of the company, where the company is classified as a small company or large company in terms of total assets owned. if the company's leverage ratio is high, it means the company has large debt relative to capital and this affects the company's interest expenses (fauziah and kurnia 2020; saputra et al. 2020). the higher the level of debt, the higher the interest burden which will result in the lower tax burden paid. so a hypothesis is prepared: h5: firm size moderates the effect of profitability on tax avoidance explanation: : the effect of independent and dependent variables : the effects of moderation on the relationship between independent variables and dependent variables figure 2. conceptual framework methods this research uses quantitative methods. the research population was 79 companies in the property and real estate sub-sector listed on the indonesia stock exchange in 2020-2022. the sample in this study was 10 companies. the sampling technique used purposive sampling with the following criteria:  property and real estate subsector companies listed on the indonesia stock exchange in 2020 2022 that have complete data required for research.  property and real estate subsector companies listed on the indonesia stock exchange in 2020 – 2022 that have positive profits the analytical method used in this research is moderated regression analysis (mra). mra is a special application of multiple linear regression, the regression equation contains an interaction element (multiplication of two or more independent variables). this interaction test is used to determine the extent to which the relationship between the firm size variables can influence the relationship between profitability and leverage on tax avoidance. the following is the model in this research: model 1: cetrit = α + β1roait + β2derit + β3sizeit + ε (5) model 2: cetrit = α + β1roait + β2derit + β3(roa ∗ size)it + β4(der ∗ size)it + ε (6) where: cetr: cash effective tax rate (tax avoidance) roa: return on assets (profitability) der: debt to equity ratio (leverage) size: firm size profitability leverage tax avoidance firm size sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 154 result and discussion hypothesis test results the coefficient of determination (r-square) is used to measure the ability of the independent variable in explaining variations in changes in the dependent variable. the results of the coefficient of determination test in this research can be shown in the table below. table 1. results of the determination coefficient test r r-square adjust r-square model 1 0.776 0.602 0.556 model 2 0.830 0.689 0.640 source: calculated by the author, 2023 the coefficient of determination test results in table 1 above show that the r-square value in model 1 without the moderating variable is 60.2 %. these results show that the magnitude of the influence exerted by the independent variables in this research, namely profitability, leverage and size, on tax avoidance is 60.2 %, while the remaining 39.8 % is influenced by other factors outside the independent variables in this research. the r-square value in model 2 with the moderating variable is 68.9 %. this result is greater than the r-square value in model 1 which does not involve moderation. this shows that the firm size variable as a moderator strengthens the effect of profitability and leverage on tax avoidance. table 2. simultaneous test results f sig description model 1 13.104 0.000 fit model model 2 13.862 0.000 fit model source: calculated by the author, 2023 based on table 2, the results of the simultaneous test (f-test) show that in model 1 the calculated f value is 13,104 with sig 0.000 < 0.05, so this indicates that profitability, leverage and firm size simultaneously influence tax avoidance. in model 2, the calculated f value is 13,862 with a sig value. 0.000 < 0.05, this indicates that the model with the moderating variable is also a fit model. table 3. partial test results (model 1) model coefficient t sig hypotesis constanta -3.207 -0.860 0.0398 profitability -0.705 -5.753 0.000 accepted leverage 0.050 0.157 0.877 rejected size -0.374 -0.339 0.737 rejected source: calculated by the author, 2023 based on table 3, the results of hypothesis testing show that the profitability variable has an effect on tax avoidance with a sig value of 0.000 < 0.05. the leverage variable has no effect on tax avoidance with a sig value. 0.877 > 0.05. company size has no effect on tax avoidance with a sig value. 0.737 > 0.05. table 4. results of the moderated regression analysis test model coefficient t sig hypotesis constanta -2.358 -2.277 0.032 profitability -0.500 -3.113 0.005 accepted leverage 0.398 0.578 0.568 rejected roa*size -0.028 -0.636 0.531 rejected der*size -0.333 -1.758 0.091 rejected source: calculated by the author, 2023 based on the results of the t test in table 4 above, it can be concluded that the interaction between firm size and profitability has a calculated t value of -0.636 with a sig value amounting to 0.531 > 0.05. this shows that firm size is unable to moderate the relationship between profitability and tax avoidance. the interaction between firm size and leverage has a calculated t value of -1.758 with a sig. value equal to 0.091 > 0.05. this shows that firm size is unable to moderate the relationship between the leverage and tax avoidance. sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 155 discussion the effect of profitability on tax avoidance based on the results of the t test, it shows that profitability has an effect on tax avoidance. the regression coefficient value is negative, meaning that the higher the level of profitability, the lower the cetr value. the smaller the company's cetr value, the more likely it is for the company to avoid tax because the tax value is smaller when compared to its profit before tax. tax obligations will increase as company income increases, so the company will feel burdened by this. these results support agency theory which states that there are differences in interests between the tax authority and companies causing non-compliance by taxpayers or companies resulting in tax avoidance, namely by explicitly reducing tax payments. the results of this research are in line with research conducted by faizah (2022), anggraeni and oktaviani (2021), rahmadani and abubakar (2020), suryani and mariani (2019), arinda and dwimulyani (2019) and wardani and purwaningrum (2018). the effect of leverage on tax avoidance based on the results of the t test, it shows that leverage has no effect on tax avoidance. when a company has a lot of debt, it is unlikely to try to avoid paying taxes. this is because company managers are more careful in reporting the company's finances and do not want to take big risks to avoid paying taxes. having a lot of debt can also cause problems for a company and cause it to lose money. so, it is important for companies to find the right balance between debt use and tax payments. if a company uses too much debt, this can result in high costs and risks, which can harm its profits. on the other hand, it is better for companies to use their own money or borrow from people who are already connected to the company, because that way they don't have to pay as much tax. several other studies also found similar results, such as the research of rohima et al. (2023), indarti (2023) and kumalasari and wahyudin (2020). the effect of firm size on tax avoidance the results of the third hypothesis test in this study indicate that the size of the company does not affect tax avoidance activities. the results of this study are in line with the research of amala and safriansyah (2020) and khomsiyah et al. (2021) which states that firm size has no effect on tax avoidance. larger companies, which have a lot of assets, are less likely to make efforts to avoid paying taxes. this is because large companies usually generate high and more stable profits so they are able to pay taxes. apart from that, the government also pays close attention to large companies and ensures they pay taxes properly. if a large company tries to avoid paying taxes, they can get into trouble and have a bad reputation. firm size moderates the effect of profitability on tax avoidance the results of the mra test show that firm size cannot moderate the effect of profitability on tax avoidance. companies that are classified as large tend not to avoid taxes even though they have high profitability. based on the political cost theory, it states that large companies tend to receive more supervision from the government to be subject to tax payments in accordance with applicable tax regulations. with government attention to large companies, tax avoidance will be minimized. this is because the government wants to ensure they are following the rules and paying the right amount of tax. so, even though it has large assets, the company cannot avoid paying taxes. the results of this research are in line with research conducted by utomo and giawan (2020), putra and jati (2018) and fitri and munandar (2018) stated that firm size does not moderate the effect of profitability on tax avoidance. firm size moderates the effect of leverage on tax avoidance the mra test results show that firm size does not moderate the influence of leverage on tax avoidance. firm size is not the main factor that encourages companies to avoid tax. the results of this research are in line with research conducted by hutapea and herawaty (2020) and nanningsih and santi (2023) state that firm size does not strengthen the relationship between leverage and tax avoidance. the higher the resulting leverage ratio, the lower the effective cash tax rate (cetr) of the company. this shows that the company has good and efficient capabilities in fulfilling its short and long term obligations, so that the tax burden that must be paid becomes lower. conclusion based on the results of hypothesis testing, it can be concluded in this research that: profitability has an effect on tax avoidance, leverage has no effect on tax avoidance, firm size has no effect on tax avoidance, firm size is unable to moderate the effect of profitability on tax avoidance, firm size is unable moderating the effect of leverage on tax avoidance. this research still has several weaknesses, such as the observation data used is relatively short. sasiska rani, meti zuliyana and rizal effendi/ finance, accounting and business analysis, volume 5, issue 2, 2023 156 therefore, it is recommended that further researchers extend the observation period. it is also hoped that the results of this research will increase insight and help companies in determining the direction 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2019. pengaruh leverage dan capital intensity pada tax avoidance dengan proporsi komisaris independen sebagai variabel pemoderasi [the effect of leverage and capital intensity on tax avoidance with the proportion of independent commissioners as a moderating variable]. e-jurnal akuntansi universitas udayana (udayana university accounting e-journal), 27(1): 1–32. stawati, v. 2020. pengaruh profitabilitas, leverage dan ukuran. jurnal akuntansi dan bisnis [effect of profitability, leverage and company size on tax avoidance. journal of accounting and business: journal of the accounting study program], 6(11):147–157. https://doi.org/10.31289/jab.v6i2.3472. suryani, and d. mariani. 2019. pengaruh umur perusahaan, ukuran perusahaan dan profitabilitas pada penghindaran pajak dengan leverage sebagai variabel moderasi [the effect of company age, company size and profitability on tax avoidance with leverage as a moderating variable]. jurnal ilmiah mea (manajemen, ekonomi, & akuntansi) [mea 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avoidance]. jurnal riset akuntansi dan keuangan (journal of research in accounting and finance), 14(1). watts, r. l., and j. l. zimmerman.1986. positive accounting theory. prentice-hall inc. widodo, s.w., and s. wulandari. 2021. pengaruh profitabilitas, leverage, capital intensity, sales growth dan ukuran perusahaan terhadap penghindaran pajak [effect of profitability, leverage, capital intensity, sales growth and company size on tax avoidance]. simak, 19(1), 152–173. https://doi.org/10.29103/jak.v11i1.9500 https://doi.org/10.35310/accruals.v3i2.56 https://ejournal.upi.edu/index.php/jrak/article/view/22807 https://doi.org/10.23887/jimat.v14i03.64464 https://doi.org/10.31289/jab.v6i2.3472 view of 70 years value added tax 221 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.08 an analytical approach to comparing actual vs. fundamental “enterprise value-to-ebitda” ratios on the us and european stock markets dimiter nenkov department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted: 6 october 2025 revised: 14 november 2025 accepted: 20 november 2025 purpose: the subject of this research paper is the level of the ev/ebitda market ratios on the us and the european stock markets. the interest was aroused by the continuously rising levels of the indexes on the leading stock markets, on one hand, and the very wide use of the ev/ebitda multiples by financial analysts, on the other hand. the purpose is: 1/ to compare the two markets in terms of their actual ev/ebitda ratios, and 2/ to analyze to what extent the levels of these multiples are supported by the respective key fundamental indicators. design/methodology/approach: the dynamics of the actual ev/ebitda ratio in recent years is reviewed for each of the us and european developed stock markets. in addition to the comparison of these ratios between the two markets, fundamental ev/ebitda ratios are also derived, based on key financial-performance indicators, in order to be used as a more reasonable benchmark. findings: the comparison indicates that the actual average ev/ebitda of the us market for the analyzed period is by 38% higher than that of the european market. for both markets, the derived fundamental ev/ebitda ratios do not support the significantly higher actual ev/ebitda multiples, which are about twice as high. this difference is more pronounced for the us market. practical implications: the important implications for investors are that the actual average ev/ebitda levels on the us and european stock markets indicate for an unreasonably high prices of stocks as a whole for 2024. originality/value: the analyses of this type, involving not only actual but also fundamental market ratios, seem to be quite limited among academic publications. to the extent that they are available for the market as a whole, they mainly focus on the pe and pbv ratios. the indepth academic study of the ev/ebitda multiples, with regard to using them for the analysis of the entire stock market, is still not a well-covered area. paper type: research paper keywords: us and european stock markets, actual ev/ebitda multiples, fundamental ev/ebitda ratios jel: g11, g12, g15 address correspondence: e-mail : d.nenkovv@gmail.com http://faba.bg/ https://doi.org/10.37075/faba.2025.2.08 mailto:d.nenkovv@gmail.com https://orcid.org/0009-0007-9142-1570 dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 222 introduction investing on the stock market is a serious challenge and requires significant knowledge, skills and analyses. the term “investing” here is used in the sense given to it by benjamin graham and david dodd. according to them, “one of the first things that need clarification in connection with capital markets, is the meaning of investor or investing”. they choose to use the term “investor” as the opposite to “speculator” (graham, dodd, 2009). in the first edition of their book “security analysis” of 1934, they try to give a precise definition of the difference between the two categories (nenkov 2021a). it is as follows: “an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. operations not meeting these requirements are speculative” (graham 2006). this is what predetermines the challenge related to true investing – the need to identify the intrinsic value of stocks as potential investments. an investor determines the value of a share of stock based on the value of its businesses. at the same time, the speculator bets that the share price will rise because someone else is willing to pay even more for it. as graham notes, “investors judge the market price by established standards of value, while speculators base their standards of value upon the market price” (graham, b., 2006). at the same time, it is important to note that determining the actual value of companies is an exercise of increased difficulty. the reason is very simple – the value of each stock and company is kind of hidden and invisible (nenkov 2021a). the stock market is called upon to determine this invisible intrinsic value. however, the market fails to perform this function correctly too often. what we normally see on the stock market is the price of the stock. a distinction must be made between the price of the stock and its true value. according to benjamin graham and warren buffett, "price is what you pay, value is what you get." (graham 2006; morris 2009). the fact that determining value is a difficult task, is evident in the very definitions of value used by appraisers and stock analysts, as well as in valuation standards (graham 2006; international valuation standards committee 2001; hitchner 2017; international appraisal standards board 2020; zukin 1990). appraisers are often not fully aware of what exactly they are looking for in the specific appraisal task the actual value, or rather the price that would satisfy the wishes of the appraisers and the contracting counterparties (nenkov 2021b). this is probably one of the reasons for prof. damodaran to raise the question: "what are we looking for in the evaluation the price or the value?" (are we pricing or valuing?)" (damodaran 2019). moreover, in reality it turns out that a company can have different values at the same moment, which can be illustrated by the “hexagon” figure of copeland, murrin and koller (copeland et. al. 2000; nenkov and hristozov 2023). the problem highlighted above carries over from the individual stock and company level to the stock market as a whole. the question that is constantly asked is whether the market is undervalued, overvalued, or fairly valued. according to nobel laureate robert shiller, the global financial crisis of 2007-2009 once again reminded us of the need for a qualitative analysis of stocks and their price levels, both for the individual investor and for the better functioning of markets (shiller 2012, 2015). with regard to this need, it is useful to analyze stock market levels in at least the following three breakdowns: 1/ in dynamics, 2/ in comparison to other markets, and 3/ in relation to fundamentals. the aim of this study is to cover all three aspects in the comparative analysis of actual versus fundamental “enterprise value-to-ebitda” ratios on the us and european stock markets. purpose, hypotheses and methods the objective of this research is to explore the levels of the us and european stock markets, as represented by their actual average ev/ebitda multiples, against the background of fundamental ev/ebitda ratios, derived for the two markets. the object of the study is the level and dynamics of stocks on the us and european stock markets. the subject of the research is the fundamental value of the us stock market and the european stock market, and how it copes with the actual price level of the two markets, both measured through the ev/ebitda ratios. in connection with the realization of the above objective of the research, the working hypotheses are formulated, as follows: hypothesis 1: the fundamental, intrinsic value of each of the two stock markets in question can be derived at any point in time, expressed as fundamental ev/ebitda ratios, to be used as a reliable benchmark for the true levels of these markets. hypothesis 2: the actual ev/ebitda ratios on the us and european markets are most likely significantly higher than the fundamental levels of ev/ebitda. hypothesis 3: the deviation of actual ev/ebitda multiples on the us market above their fundamental ev/ebitda ratios is most likely higher than that on the european stock market. for the purpose of the study, fundamental indicators on the two markets are explored, such as: return dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 223 on capital (roc), growth (g) of after-tax operating profit (nopat), cost of capital (wacc) and other relevant indicators. the nature of this research suggests the use of ev/ebitda ratios, since they provide the needed comparability between the two stock markets, as well as with other stock markets of the global economy. the factors that lead to probable short-term moves of the stock markets are not included in this research. a combination of research methods and approaches is used. the hypotheses will be tested based on the results of the study. among the methods used in the study are comparative and historical analyses, as well as modelling. summarized quantitative data from more than 5000 public companies for each of the us and european stock markets is used for the study. the scientific study is a mix of descriptive and experimental research. literature review and theoretical framework as noted above in the introduction, the opportunity for comparison between the two stock markets, as well as with other stock markets, is an important aspect of this study. one problem with the prices of stocks, expressed in absolute terms – in the respective currency (us dollars, euro, british pounds, etc.), is that they are not comparable among companies, sectors and markets. they are convenient for analysis and comparison in historical aspect, in terms of their dynamics over the years, including percentage increase or decrease. however, they cannot be compared directly with the stock prices of other companies, sectors and markets, because of difference in the scale. this is an important reason to involve indicators, which allow for comparability among different companies, sectors and markets. this is the main explanation for the popularity and the extensive use of the market ratios (also called market-performance ratios or market multipliers). according to burton malkiel, market multipliers provide a good yardstick for comparing different stocks that have different prices and different earnings per share in absolute terms (malkiel 2015). there is a wide range of such ratios, starting with the price-to-earnings ratio (pe), price-to-book ratio (pbv), price-to-sales (ps), price-to-cash flow ratio, price-to dividend ratio, etc. these market ratios are a part of the well-known financial ratios (coefficients) for company analysis, based on data from the companies’ financial statements, such as profitability ratios, liquidity ratios and others (brigham and gapenski 1994; hristozov 2020). one of the specifics of market ratios is that they need data not only from the financial statements, but also data from the stock market. the market price per share (p0) is in the numerator of each of them. at the end of the 20th century and during the 21st century a new generation of market ratios gained popularity among financial analysts and appraisers, which include: value-to-sales ratio, value-to-ebit ratios, value-to-ebitda ratios, etc. the numerator of each of these modern ratios is the market value of the whole company, instead of the market value of equity only. this value of the company as a whole is usually represented by the enterprise value (ev) or the firm value (fv). this will be discussed in more detail later. ebit stands for earnings before interest and tax, and ebitda stands for earnings before interest, tax, amortization and depreciation. market ratios are used by financial analysts, appraisers, company management, investors and other interested parties in different aspects. they are widely used for relative valuation of stocks (multiples or peer companies approach). market ratios are very useful for the analysis of the market performance of stocks of public companies, as compared with other companies, with the sector as a whole or with the market. another important advantage of market ratios is that they give the opportunity to analyze the stock market as a whole, including comparison between markets (nenkov 2021b). the comparability among companies, sectors and markets, provided by market multiples comes from the fact that market ratios are a kind of "standardized" share prices, or prices on a common basis (damodaran 2012). this overcomes the shortage of stock prices in absolute terms (in the respective currency). one problem with market ratios research, however, is that relatively little is written about it. according to emanuel bagna and enrico ramusino, “market multipliers are used more than they are studied. stock analysts, investment bankers and other practitioners make extensive use of market multipliers to determine the value of companies. however, the literature on multipliers is not as rich as the widespread use of these assessment tools in practice suggests.” (bagna and ramusino 2017). all this makes the literature review on market ratios quite difficult. according to top experts in the field, the relative valuation methods are implicitly directed to reach the market price, rather than the intrinsic value of stocks. in other words, comparative evaluation methods seem to be far from fundamental analysis. one of the reasons for this is the prevailing way in which market multiples approach is applied in reality – with limited or no analysis of the factors (forces) standing behind the multiples used. the question here is to what extent these market multiples, as standardized prices, represent the intrinsic (fundamental) value of the respective stocks. there is an opportunity, however, to use them in a way that brings them as close as possible to fundamental analysis. burton malkiel, for example, dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 224 clearly links fundamental stock valuation analysis to the use of the pe market ratio (malikel, 2015). since market ratios are standardized forms of stock prices, they should also have fundamental value. in other words, they could also be expressed as a function of the three fundamental variables: the earnings potential, the expected earnings growth and the level of risk (damodaran 2012). the only essential difference with dcf valuation is that under dcf models the visions and expectations about these three fundamentals are discussed explicitly, while in relative (multiples) valuation they are included implicitly (nenkov and hristozov 2023). this link between market ratios and fundamentals is in the focus of the current research. the pe ratio, which is the oldest market performance ratio, seems to be the most often used among market ratios for the analysis of the market as a whole. one reason is the sufficient available data regarding share prices and earnings per share (eps). on the other hand, it is the fact that pe is the expression of the direct relationships of interest to investors the relationship between the price they pay per share of stock and the income that this share brings. james o’shaughnessy says that “the pe ratio per share is the most widely used measure of how cheap or how expensive a stock is compared to other stocks (o’shaughnessy 2005). however, since the end of the 20th century until now, the ev/ebitda have been very intensively used by analysts in the valuation of companies (damodaran 2012). it is logical to conclude that it could be also used in the analysis of the contemporary stock market as a whole. frank bancel and usha mittoo also reach to the conclusion that firm value/ebitda multiple is the most widely used market multiple in the valuation of companies. they make a survey among 356 european experts in company valuation, with cfa certificate or its professional equivalent. in the first place, the study indicates that the most popular are the market multiples methods, used by about 80% of the surveyed analysts, followed by 79% for the dcf enterprise valuation model (bancel and mittoo 2014). similar findings at a global level are reported by pinto, robinson, and stowe from the cfa institute (pinto, robinson and stowe 2019) and by pablo fernandez (fernandez, 2017). in the second place, bancel and mittoo illustrate the popularity of the different market multiples (ratios). this is illustrated in figure 1. source: bancel and mittoo (2014) figure 1. most commonly used market multiples in relative valuation methods figure 1 illustrates that the most widely used is the firm value-to-ebitda ratio. it is relied on by 83% of appraisers who use several multipliers and by 70% of appraisers who use only one multiplier. second most trusted is the price-to-earnings (pe) multiple, used by 68% of respondents. other relatively widely used ratios include price-to-book, firm value-to-ebit, firm value-to-sales (bancel and mittoo 2014). the reason for the extensive use of ebitda-based multiples in recent decades is that ebitda is a financial indicator at the enterprise level (or invested-capital level), which is not influenced by the financial leverage of the company. other important advantages of the ebitda-based multiples are as follows (damodaran 2012): 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% firm value / ebitda pe ratio firm value / ebit price-book ratio firm value / sales other survey evidence: which multiples are most popular? dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 225 there are much fewer companies with negative ebitda than there are companies with negative net profit and eps. thus, far fewer companies are excluded from the analysis due to the lack of a published ratio (i.e. due to a negative ratio), as compared with the case of the pe ratios. the ebitda indicator is not affected by differences in the applied depreciation methods, unlike operating profit (ebit) and net profit (ni). thus, it provides better comparability between different companies. because of the above reasons, price-to-ebitda (p/ebitda) ratios gained popularity, replacing in many cases the pe ratios in the valuation of stocks towards the end of the 20th century. there is a problem, however, with the p/ebitda and p/ebit ratios, because of inconsistency between numerator and denominator. the denominator is an indicator at the enterprise level (firm measure), independent of the financial leverage, while the numerator is an indicator at the equity level (equity value), dependent, among other factors, on the financial leverage of the company. according to damodaran, these ratios are inconsistently defined and can be very misleading when comparing companies with significant difference in their capital structures (damodaran 2012). this is why financial analysts switched to value/ebitda and value/ebit multiples, where the term ”value“ includes generally equity plus debt (with or without cash). in this way both numerator and denominator are firm values (invested-capital values), which ensures the needed comparability between these two components of the multiple. the value/ebitda provides better comparability between companies with different capital structures. one issue in this regard is the lack of a uniform interpretation of company value. the two terms most often used are “firm value” (fv) and “enterprise value” (ev). aswath damodaran defines firm value (fv) as the total value of the company, including both operating and non-operating assets (operating value + value of non-operating assets). in other words, firm value is supposed to be: fv = market value of equity + market value of deb (1) the bulk of non-operating assets normally consists of financial assets, i.e. cash. at the same time damodaran defines the enterprise value (ev) as the value of operating assets only (damodaran 2012). in other words: ev = market value of equity + market value of debt − cash (2) provided that ebitda represents the earnings from the use of operating assets only, ev seems to ensure better comparability between numerator and denominator for the value/ebitda ratio. this is the explanation why the most often used version of this multiple is: ev ebitda = (market value of equity + value of debt − cash) ebitda (3) copeland, murrin and koller have a different interpretation of the term enterprise value (ev). according to them this the total value of the company, including both operating and non-operating assets (copeland, murrin and koller 2000). in other words, for them enterprise value is what damodaran calls firm value (fv). bancel and mittoo in their study referred above, work with the term firm value (fv/ebit and fv/ebitda). it does not become clear what their interpretation is behind fv. for the purpose of this research, the understanding is that enterprise value (ev) is the operating value (the value of operating assets) of the company. empirical study of actual ev/ebitda multiples comparative analysis of actual ev/ebitda ratios on the european and us stock markets table 1 and figure 2 show the average ev/ebitda ratios for non-financial companies on the developed stock markets of the usa and europe. the data is for the recent period 2019-2024 and covers more than 5 000 non-financial public companies on each of the two markets. dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 226 table1. ev/ebitda and ev/ebit ratios on the us and european stock markets in the period 2019-2024 indicator ev/ebitda ev/ebit ebit/ebitda da/ebitda year usa europe usa europe usa europe usa europe 2019 13,75 10,60 22,97 18,22 0,60 0,58 0,40 0,42 2020 16,52 13,58 30,62 25,69 0,54 0,53 0,46 0,47 2021 16,06 11,86 26,27 16,27 0,61 0,73 0,39 0,27 2022 12,00 9,00 18,67 13,84 0,64 0,65 0,36 0,35 2023 14,15 9,41 22,06 12,99 0,64 0,72 0,36 0,28 2024 15,83 9,54 24,41 13,93 0,65 0,68 0,35 0,32 average 14,72 10,67 24,17 16,82 0,61 0,63 0,39 0,37 source: http://pages.stern.nyu.edu/~adamodar/ , calculations of the author the average ev/ebitda multiples of non-financial companies for the us market range from 12,00 in 2022 to 16,52 in 2020. the average ev/ebitda multiples for europe take values between 9,00 in 2022 and 13,58 in 2020. not surprisingly, for both markets the minimum is respectively in the year with the highest interest rates (2022), while the maximum is in the year with the lowest interest rates (2020). this negative relationship will be further discussed in the next section. the total average ev/ebitda for the entire period is 14,72 for the usa and 10,67 for europe. the ev/ebitda of the usa is significantly higher than that of europe for each of the years. the total average ev/ebitda for the whole period in the usa is higher by 38% than that of europe. source: http://pages.stern.nyu.edu/~adamodar/ , illustrations of the author figure 2. ev/ebitda ratios on the us and european stock markets – non-financial companies 2019-2024 table 1 also contains the ev/ebit ratios for the two markets, also quite intensively used by analysts. the average ev/ebit multiples for the us market range from 18,67 in 2022 to 30,62 in 2020. the average ev/ebit multiples for europe range from 12,99 in 2023 to 25,69 in 2020. the total average ev/ebit for the entire period is 24,17 for the usa and 16,82 for europe. the ev/ebit of the usa is again significantly higher than that of europe for each of the years. the total average ev/ebit for the whole period in the usa is higher by 44% than that of europe. other average ratios were also derived for the two stock markets from the ev/ebitda and the ev/ebit ratios, such as the ebit/ebitda and da/ebitda. the first indicates the average proportion of ebit in ebitda, while the second indicates the average proportion of depreciation and amortization in ebitda. the average ebit/ebitda is 0,61 for the usa and 0,63 for europe. the average da/ebitda, respectively, is 0,39 for the usa and 0,37 for europe. each of them is needed and will be used in the derivation of the fundamental ev/ebitda ratios in the next section. 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 2019 2020 2021 2022 2023 2024 average ev/ebitda non-financial firms, usa & europe, 2019-2024 ev/ebitda usa ev/ebitda europe http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/ dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 227 ev/ebitda multiples and fundamentals fundamental models for determining theoretical ev/ebitda ratios the levels of ev/ebitda ratios are function, among other things, of certain fundamental variables. fundamental (theoretical) ratios can be determined on the basis of these variables. the most suitable starting point for developing and illustrating the logic of the fundamental model for determining such fundamental ev/ebitda ratios is the dcf enterprise valuation model. this is due to the fact that the numerator of the ev/ebitda multiple is the enterprise value (operating value) of the company. if we assume that the company is going to follow a stable growth rate from now until infinity, we can use the short, one-stage version of the model, according to which the operating (enterprise) value of the company is: 𝐸𝑉 = 𝐹𝐶𝐹𝐹1 𝑊𝐴𝐶𝐶 − 𝑔 (4) where: fcff1 = expected free cash flow to the firm, wacc = weighted average cost of capital of the company, g = expected long-term average growth rate of net operating profit (nopat, after-tax operating profit). by expressing the free cash flow to the firm via its determinants, we arrive at (damodaran 2012): 𝐹𝐶𝐹𝐹 = 𝐸𝐵𝐼𝑇 × (1 − 𝑇) − (𝐶𝐴𝑃𝐸𝑋 − 𝐷𝐴 + ∆𝑊𝐶) = = (𝐸𝐵𝐼𝑇𝐷𝐴 − 𝐷𝐴) × (1 − 𝑇) − (𝐶𝐴𝑃𝐸𝑋 − 𝐷𝐴 + ∆𝑊𝐶) = = 𝐸𝐵𝐼𝑇𝐷𝐴 × (1 − 𝑇) − 𝐷𝐴 × (1 − 𝑇) − 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 (5) where: ebit = profit before interest and tax (operating profit before tax), ebitda = profit before interest, tax, depreciation and amortization t = corporate tax rate, da = depreciation and amortization, capex = capital expenditures (investments for acquiring of non-current assets), ∆wc = increase (decrease) of net operating working capital, reinvestment (net investment) = the proportion of gross investments, which is financed from the aftertax operating profit (ebit×(1-t), or nopat). this leads to the following expression of the one-stage model for determining the operating value of the company: 𝐸𝑉 = 𝐸𝐵𝐼𝑇𝐷𝐴1 × (1 − 𝑇) − 𝐷𝐴1 × (1 − 𝑇) − 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡1 𝑊𝐴𝐶𝐶 − 𝑔 (6) after dividing both sides of the equation by ebitda and removing the index “1” we arrive at the model for the fundamental ev/ebitda ratio (damodaran 2012): 𝑉/𝐸𝐵𝐼𝑇𝐷𝐴 = (1 − 𝑇) − 𝐷𝐴 𝐸𝐵𝐼𝑇𝐷𝐴 × (1 − 𝑇) − 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 𝑊𝐴𝐶𝐶 − 𝑔 (7) being a proportion of gross investments, reinvestment (or net investment) amount can be determined by deducting da from gross investments, i.e.: reinvestment (net investment) = gross investment − da (8) at the same time reinvestment amount is the proportion of the after-operating profit (nopat), which dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 228 is retained and invested in the company’s business. it can be determined alternatively as follows: reinvestment (net investment) = nopat × b(rir) (9) where: nopat = after-tax operating profit (net operating profit after tax), b (rir) = reinvestment rate. the above fundamental model outlines the variables determining the ev/ebitda ratio (damodaran 2012): 1. corporate tax rate: the lower tax rate contributes for a higher numerator, and a higher ev/ebitda. 2. depreciation and amortization (da): the lower the proportion of da to ebitda, the higher is the numerator, respectively the higher is the ev/ebitda ratio. 3. net investment (reinvestment): the higher the proportion of reinvestment to ebitda, the lower should be the ev/ebitda ratio (other things being equal, including disregarding the impact of higher reinvestment on the expected growth rate (g)). 4. cost of capital invested (wacc): the ev/ebitda is negatively correlated with the cost of capital (wacc), and the lower the wacc, the higher is the ev/ebitda ratio. 5. expected growth rate of nopat: the ev/ebitda is positively correlated with the expected growth rate (g) of the after-tax operating profit (nopat), and the higher the growth rate, the higher is the ev/ebitda ratio. the idea behind the above ev/ebitda fundamental model is to express the ev/ebitda ratio as the function of the three fundamentals, determining the value of any company or stock: the earnings potential of the company; the expected growth of earnings; the level of risk. the three indicators used for these fundamentals, at the enterprise level (or invested-capital level), respectively are: roc or roic the return on capital (return on invested capital); g – expected growth rate of nopat; wacc – cost of invested capital (weighted average cost of capital). the application of the ev/ebitda fundamental model is a bit of a challenge. the reason is that at first glance, the ev/ebitda fundamental model doesn’t represent the ratio as a function of fundamentals only. there are also other input variables, such as: corporate tax rate, proportion of da to ebitda, and reinvestment as a proportion to ebitda. this looks as significant difference with the models for deriving the fundamental price-to-earnings (pe) and price-to-book (pbv) ratios, for example. a closer look at the model, however, reveals its true fundamental character. with regard to the denominator of the formula, things are quite clear – it includes only wacc and g, the indicators of the second and the third fundamental variables. still, in the numerator things are not essentially different: 1/ the effective tax rate and the proportion of da to ebitda may be referred to as conditionally fixed inputs, and 2/ the third variable there – reinvestment/ebitda, may be considered the only indeed dynamic variable. it is also directly dependent on the first fundamental variable roic. this can be illustrated through the model for determining the so called internal growth rate of nopat (g): 𝑔 = 𝑅𝑂𝐼𝐶 × 𝑏 (𝑅𝐼𝑅 (10) where: g = expected growth rate of nopat, roic (roc) = return on invested capital, b (rir) = reinvestment rate, expressed as a proportion of noplat. this relationship makes it possible to express the reinvestment rate (rir) as the function of roic and g: 𝑏 (𝑅𝐼𝑅) = 𝑔/𝑅𝑂𝐼𝐶 (11) at the same time the reinvestment rate (rir) can also be expressed as a proportion to ebitda, as follows: dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 229 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝑅𝐼𝑅 × (1 − 𝑇) × 𝐸𝐵𝐼𝑇 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝒈 𝑹𝑶𝑰𝑪 × (𝟏 − 𝑻) × 𝑬𝑩𝑰𝑻 𝑬𝑩𝑰𝑻𝑫𝑨 (12) this equation makes it clear that in essence the model for determining the fundamental ev/ebitda ratio is based upon the three fundamentals: earnings potential, growth in earnings and risk. or course, at the company level, it is possible to apply the fundamental model by using the absolute numbers for da, ebitda and reinvestment amount. but the true idea of the model is to apply it on the basis of the relative fundamental indicators, such as: roic (roc), g and wacc. this is especially important for the current research, since it involves determining the fundamental ev/ebitda ratios for the stock market as a whole. input variables for the model and deriving the fundamental ev/ebitda ratios for the us and european stocks the application of the model for determining the correct fundamental ev/ebitda ratios requires sound assumptions and forecasts regarding the key input variables. these input variables are derived on the basis of historic or current average values for the two markets, with the expectation that they will be valid in the future as well. table 2. roc, reinvestment rate, expected growth and effective tax rate usa & europe (nonfinancial companies) – 2019-2024 indicator roc reinvestment rate (rir, b) expected growth in ebit effective tax rate (aggregate) year usa europe usa europe usa europe usa europe 2019 12,96% 9,67% 66,82% 39,87% 8,66% 3,86% 19,01% 26,71% 2020 10,58% 7,10% 29,40% 13,13% 3,11% 0,93% 21,74% 45,43% 2021 14,70% 11,29% 51,00% 29,25% 7,50% 3,30% 19,26% 24,90% 2022 15,79% 11,55% 66,70% 56,33% 10,53% 6,50% 20,99% 29,15% 2023 14,67% 14,47% 44,37% 32,07% 6,51% 4,64% 21,66% 28,06% 2024 15,01% 12,36% 50,79% 114,69% 7,62% 14,17% 21,61% 27,17% average 13,95% 11,07% 51,51% 47,56% 7,19% 5,27% 20,71% 30,24% source: http://pages.stern.nyu.edu/~adamodar/, calculations of the author table 2, table 3 and figure 2 contain the needed key historic and current values. table 2 shows the average return on invested capital (roc), which is 13,95% for usa and 11,07% for europe for the period 2019-2024. the reinvestment rate (b, rir) is 51,51% for usa and 47,56% for europe. the resulting expected growth of ebit, estimated as internal growth rate (g=roc×rir), is 7,19% for usa and 5,27% for europe. http://pages.stern.nyu.edu/~adamodar/ dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 230 source: http://pages.stern.nyu.edu/~adamodar/ , illustrations of the author figure 3. return on capital usa and europe (non-financial companies) – 2019-2024 table 3 shows the cost of equity, cost of debt and cost of invested capital (wacc). the average cost of equity for the period is 8,32% for usa and 8,90% for europe. the average after-tax cost of debt is 3,31% and 3,87% respectively. the cost of capital (wacc), as a function of the cost of equity and the cost of debt, ranges between 4,87% and 10,01% for usa, and between 5,22% and 9,84% for europe. the lowest values are in 2020 and the highest values are in 2022. the average wacc for the period is 7,33% for usa and 7,29% for europe. the wacc for europe becomes even lower – 6,30%, after adjusted for the euro inflation rate. table 3. cost of capital usa & europe (non-financial companies) – 2019-2024 indicator cost of equity debt / (debt+equity) after-tax cost of debt cost of capital (wacc) europe year usa europe usa europe usa europe usa europe in euro 2019 8,21% 8,43% 0,24 0,32 2,75% 3,37% 6,90% 6,83% 5,47% 2020 5,55% 6,33% 0,20 0,30 2,19% 2,63% 4,87% 5,22% 4,39% 2021 6,38% 6,71% 0,17 0,26 2,61% 2,95% 5,75% 5,74% 4,70% 2022 11,56% 11,83% 0,21 0,29 4,13% 4,94% 10,01% 9,84% 8,76% 2023 8,93% 9,87% 0,18 0,27 3,81% 4,55% 7,99% 7,43% 6,87% 2024 9,28% 10,20% 0,16 0,28 4,34% 4,78% 8,48% 8,66% 7,60% average 8,32% 8,90% 0,19 0,29 3,31% 3,87% 7,33% 7,29% 6,30% source: http://pages.stern.nyu.edu/~adamodar/ , calculations of the author in order to use the fundamental model, the reinvestment rate (rir), which is a rate to nopat, have to be expressed as a rate to ebitda. the above equation (4) can be used for the purpose: for usa: 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝑔/𝑅𝑂𝐼𝐶 × (1 − 𝑇) × 𝐸𝐵𝐼𝑇 𝐸𝐵𝐼𝑇𝐷𝐴 = 0,5154 × 0,7929 × 0,61 = 𝟎, 𝟐𝟒𝟗𝟑 for europe: 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝑔/𝑅𝑂𝐼𝐶 × (1 − 𝑇) × 𝐸𝐵𝐼𝑇 𝐸𝐵𝐼𝑇𝐷𝐴 = 0,4761 × 0,6976 × 0,63 = 𝟎, 𝟐𝟎𝟗𝟐 the base input projections (variables) for the application of the one-stage model are shown in table 4. provided that all projections in this one-stage model are until infinity, the average numbers of the cost of capital for the period 2019-2024 do not seem appropriate. they are relatively low – 7,33% and 7,29%, as compared with long-term historic average. the 2024 values of 8,48% for usa and 8,66% for europe are 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 2021 2022 2023 2024 average return on capital (roc) non-financial firms, usa & europe, 2019-2024 roc usa roc europe http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/ dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 231 used instead, as more reasonable. these values are much closer to long-term historic averages, which makes them more representative in the long run. table 4. projections for the one-stage fundamental model of ev/ebitda input variables (1-t) da/ebitda rir (% of nopat) reinvestment /ebitda wacc g roic k.1 k.2 k.3 k.4 k.5 k.6 k.7 k.8 usa 0,7929 0,39 51,54% 0,2493 8,48% 7,19% 13,95% europe 0,6976 0,37 47,61% 0,2092 8,66% 5,27% 11,07% source: http://pages.stern.nyu.edu/~adamodar/ , calculations of the author table 5 shows the base input projections for the two-stage model for determining the fundamental ev/ebitda. this fundamental model is developed from the more sophisticated two-stage dcf enterprise model for valuation of companies and common stocks. it is a lot more consistent with reality and is recommended for use most of the time. the model includes a 5-year high-growth period (stage 1), and a stable growth period (stage 2), starting at year 6. table 5. projections for the two-stage fundamental model of ev/ebitda input variables (1-t) da/ebitda rir (% of nopat) reinvestment /ebitda wacc g roic k.1 k.2 k.3 k.4 k.5 k.6 k.7 k.8 stage 1 – high growth usa 0,7929 0,39 51,54% 0,2493 7,33% 7,19% 13,95% europe 0,6976 0,37 47,61% 0,2092 7,29% 5,27% 11,07% stage 2 – stable growth usa 0,7929 0,39 52,00% 0,2515 8,48% 4,42% 8,50% europe 0,6976 0,37 48,00% 0,2110 8,66% 4,18% 8,70% source: http://pages.stern.nyu.edu/~adamodar/ , calculations of the author comparative analysis of the level of actual ev/ebitda ratios in terms of fundamentals table 6 illustrates the outputs of the application of the one-stage fundamental ev/ebitda model for the us stock market. the derived fundamental ev/ebitda ratio, under the projections shown in table 4, is 18,17. it is significantly skewed upwards due to the small difference between wacc and g in the denominator. this is a serious deficit of the one-stage model. for example, if the period-average wacc of 7,33% were used, the result would be even much higher – 167,41. table 6. fundamental ev/ebitda ratio for usa (one-stage model) source: calculations of the author values of 3,6% 4,3% 5,0% 5,8% 6,5% 7,2% 7,9% 8,6% 9,3% 10,1% 10,8% wacc ev/ebitda ev/ebitda ev/ebitda ev/ebitda 4,2% 36,34 -316,73 -29,56 -15,50 -10,51 -7,95 -6,39 -5,34 -4,59 -4,02 -3,58 5,1% 15,70 30,28 426,15 -35,30 -16,95 -11,15 -8,31 -6,62 -5,50 -4,71 -4,11 5,9% 10,01 14,45 25,96 127,38 -43,81 -18,69 -11,88 -8,71 -6,87 -5,68 -4,83 6,8% 7,35 9,49 13,39 22,71 74,88 -57,73 -20,83 -12,71 -9,14 -7,14 -5,86 7,6% 5,81 7,06 9,02 12,47 20,19 53,03 -84,61 -23,53 -13,67 -9,63 -7,43 8,5% 4,80 5,63 6,80 8,59 11,67 18,17 41,05 -158,36 -27,03 -14,78 -10,17 9,3% 4,09 4,67 5,46 6,55 8,20 10,96 16,52 33,48 -1 234 -31,76 -16,09 10,2% 3,56 4,00 4,56 5,30 6,33 7,85 10,34 15,14 28,27 213,07 -38,49 11,0% 3,15 3,49 3,91 4,45 5,15 6,11 7,52 9,78 13,98 24,47 98,07 11,9% 2,83 3,10 3,43 3,83 4,34 5,01 5,91 7,23 9,28 12,98 21,56 12,7% 2,57 2,79 3,05 3,36 3,75 4,24 4,87 5,73 6,95 8,83 12,11 values of expected growth rate (g) http://pages.stern.nyu.edu/~adamodar/ http://pages.stern.nyu.edu/~adamodar/ dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 232 the electronic model also gives the opportunity to illustrate how this fundamental ratio changes under different combinations of expected growth (g) and cost of capital (wacc). the results are extremely sensitive to small changes in these two input variables. most of the ratios in the table are economically meaningless. the abnormally high numbers, as well as the negative numbers are the result of the deficits of the model. this version of the model can be very misleading and is not recommended for serious analyses. this deficit of the one-stage model illustrates how exaggerated fundamental ev/ebitda ratios can often be determined and “justified”. all this is due to the inconsistent assumption in the one-stage model that current high growth will continue until infinity. the fundamental ev/ebitda ratio for europe under the one-stage model is much more modest – 6,79 (the table with results for europe under the one-stage model is not displayed). it does not seem skewed upwards, which can be explained with the fact that the difference between wacc (8,66%) and g (5,27%) for europe is much more significant than that for the usa. however, if we use the lower period-average wacc of 7,33%, the fundamental ev/ebitda would go up to 11,40. the two-stage model reflects reality much better and overcomes the above deficits of the one-stage model. this is why it is recommended as more reliable. the results of the two-stage model for the us, demonstrated in table 7, look much more realistic and meaningful. they are very weakly sensitive to changes in the combinations between wacc and g. the reason is that the simulation of combinations refers only to stage 1 (the high-growth period). the stage 2 (stable-growth period) projections for all input variables are fixed long-term averages. the stage 2 wacc for us market is 8,48%, and the forecasted growth rate (g) is a function of a neutral rir – at 52%, and roic, which is about equal to the forecasted wacc. the resulting g of 4,42% is quite moderate and realistic for the stable growth period. table 7. fundamental ev/ebitda ratio for usa (two-stage model) source: calculations of the author there are a number of companies that have been outperforming the market for decades. it makes sense to forecast higher roic and g than average when making projections for such outperforming companies for a relatively longer period. however, it doesn’t make sense to project that the market as a whole will outperform itself in the long run. finally, consistent and meaningful forecasts for the market as a whole should assume that the return on capital and the cost of capital overlap over in the long term. this is why the forecasted roic after year 5 – during the stable growth period, is set to be about equal to the projected longterm cost of equity (wacc). this is the most realistic assumption. thus, the fundamental ev/ebitda from the two-stage model for the us is 7,02. table 8 illustrates the results of the two-stage model for europe. for stage 1, the basic wacc is 7,29%, the basic g is 5,27%, and there are a number of other combinations between them. roic is the average of 11,07%, rir is 47,61%. for stage 2, wacc is fixed at the level of 2024 – 8,66%, roic is 8,70%, fixed to be about equal to wacc, rir is neutral – at 48%, and the resulting growth rate (g) is 4,18%. thus, the fundamental ev/ebitda from the two-stage model for europe is 5,87. this ratio is logically lower than that for the us, mainly because of the lower expected growth rate, as well as the higher average tax rate. values of 3,6% 4,3% 5,0% 5,8% 6,5% 7,2% 7,9% 8,6% 9,3% 10,1% 10,8% wacc stage 1 ev/ebitda ev/ebitda ev/ebitda ev/ebitda 3,7% 7,08 7,30 7,54 7,77 8,02 8,27 8,52 8,79 9,06 9,34 9,62 4,4% 6,85 7,07 7,29 7,52 7,76 8,00 8,25 8,50 8,76 9,03 9,30 5,1% 6,63 6,84 7,06 7,28 7,50 7,74 7,98 8,22 8,48 8,73 9,00 5,9% 6,42 6,62 6,83 7,04 7,26 7,49 7,72 7,96 8,20 8,45 8,71 6,6% 6,22 6,41 6,61 6,82 7,03 7,25 7,47 7,70 7,94 8,18 8,43 7,3% 6,02 6,21 6,40 6,61 6,81 7,02 7,24 7,46 7,69 7,92 8,16 8,1% 5,83 6,02 6,20 6,40 6,60 6,80 7,01 7,22 7,44 7,67 7,90 8,8% 5,65 5,83 6,01 6,20 6,39 6,59 6,79 7,00 7,21 7,43 7,65 9,5% 5,48 5,65 5,83 6,01 6,19 6,39 6,58 6,78 6,99 7,20 7,42 10,3% 5,31 5,48 5,65 5,83 6,00 6,19 6,38 6,57 6,77 6,98 7,19 11,0% 5,15 5,31 5,48 5,65 5,82 6,00 6,18 6,37 6,57 6,76 6,97 values of expected growth rate (g) stage 1 dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 233 table 8. fundamental ev/ebitda ratio for europe (two-stage model) source: calculations of the author only the fundamental ev/ebitda ratios, derived from the two-stage model, are representative and reliable enough, to be used as a benchmark. these fundamental ev/ebitda for both us and europe are a lot lower than the actual historical ev/ebitda multiples on these stock markets, which are demonstrated in previous sections (table 1). the comparison between fundamental and actual ev/ebitda ratios is shown in table 9. the actual ev/ebitda tell us at what price the shares are being sold, while fundamental ratios tell us at what price they should be sold. the idea here is that the fundamental ev/ebitda ratios serve as benchmarks as to what the reasonable value of the ratios is. the actual average ev/ebitda multiple of 14,72 for the period 2019-2024 for the us is by 110% higher than the corresponding fundamental ev/ebitda ratio. the actual average multiple of 10,67 for europe is by 82% higher than the corresponding fundamental ratio. table 9.comparison between actual and fundamental ev/ebitda ratios – us and europe indicators actual ev/ebitda fundamental ev/ebitda difference (k.2-k.3) difference in % (k.4/k.3) k.1 k.2 k.3 k.4 k.5 usa 14,72 7,02 7,7 110% europe 10,67 5,87 4,8 82% source: calculations of the author having in mind that the projections of fundamental variables for the model are quite moderate, the significant excess of actual ev/ebitda ratios over fundamental ones should mean a significant inflation of stock prices above their actual value – respectively by 110% and 82%. the key explanation for the much lower fundamental ratios under the two-stage model are the reasonable moderate projections for stage 2. conclusions and future research the study indicates that the fundamental ev/ebitda ratios for the us and european stock markets can be determined at any time, given the availability of the relevant fundamental models and the necessary data for their application. the two-stage fundamental ev/ebitda model is the one that gives the opportunity for consistent projections until infinity and produces reasonable results. the obtained fundamental ev/ebitda ratios can be debated and examined in relation to the projections of the fundamental variables used. the electronic model gives the opportunity to test different combinations of input variables and the results can be adjusted if this is considered necessary. the comparison indicates that the actual average ev/ebitda of the us market for the analyzed period is by 38% higher than that of the european market. for both markets, the derived fundamental ev/ebitda ratios do not support the significantly higher actual ev/ebitda multiples, which are about twice as high. this difference is more pronounced for the us market. these findings are important in practical terms for actual and potential investors in the stock markets. future research is needed on the fundamental ev/ebitda ratios as benchmarks. an essential part values of 2,6% 3,2% 3,7% 4,2% 4,7% 5,3% 5,8% 6,3% 6,9% 7,4% 7,9% wacc stage 1 ev/ebitda ev/ebitda ev/ebitda ev/ebitda 3,6% 6,15 6,29 6,44 6,59 6,74 6,89 7,05 7,21 7,37 7,54 7,71 4,4% 5,95 6,09 6,23 6,37 6,52 6,67 6,82 6,97 7,13 7,29 7,46 5,1% 5,76 5,90 6,03 6,17 6,31 6,46 6,60 6,75 6,90 7,06 7,22 5,8% 5,58 5,71 5,84 5,98 6,11 6,25 6,39 6,54 6,68 6,83 6,99 6,6% 5,41 5,53 5,66 5,79 5,92 6,05 6,19 6,33 6,47 6,62 6,77 7,3% 5,24 5,36 5,48 5,61 5,74 5,87 6,00 6,13 6,27 6,41 6,55 8,0% 5,08 5,20 5,32 5,44 5,56 5,68 5,81 5,94 6,08 6,21 6,35 8,7% 4,93 5,04 5,15 5,27 5,39 5,51 5,63 5,76 5,89 6,02 6,15 9,5% 4,78 4,89 5,00 5,11 5,23 5,34 5,46 5,58 5,71 5,84 5,97 10,2% 4,63 4,74 4,85 4,96 5,07 5,18 5,30 5,42 5,54 5,66 5,78 10,9% 4,50 4,60 4,70 4,81 4,92 5,03 5,14 5,25 5,37 5,49 5,61 values of expected growth rate (g) stage 1 dimiter nenkov/ finance, accounting and business analysis, volume 7, issue 2, 2025 234 of this research has to be focused on the consistency of projections for any of the key fundamental variables. references христозов, я. 2020. състояние на фирмената задлъжнялост в българия, ик на унсс, софия (hristozov, y. 2020. sastoyanie na firmenata zadlazhnyalost v bulgaria, ik na unss, sofia) морис, ч.. 2009. мъдреците – уорън бъфет, джордж сорос и пол волкър. сиела (moris, ch. 2009. madrecite – warren 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https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/free-cash-flow-valuation https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/free-cash-flow-valuation 120 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.03 evaluating the reality and prospects of ipsas implementation in algeria widad benzine department of finance and accounting, university abdelhamid mehri constantine2, constantine, algeria info articles abstract history article: submitted 4 august 2024 revised 1 november 2024 accepted 9 november 2024 purpose: this study aims to illuminate the current state of public sector accounting in algeria and explore the prospects for transition to international public sector accounting standards (ipsas) by investigating the potential advantages and challenges as critical factors affecting implementation. design/methodology/approach: the study adopts quantitative approach. data were collected through questionnaires from a sample of 163 participants working in the financial and accounting departments of government departments across five provinces in eastern algeria. plssem was employed to analyze the data and test the proposed model. findings: the study revealed that international harmonization, structural and organizational transformation, and skills significantly impacted ipsas implementation in algeria. however, the findings showed that the effect of the accrual basis poses a challenge due to a skills gap. practical implications: this study provides important insights for officials, highlighting the need to strengthen the regulatory and legal framework for government accounting, develop employee skills through comprehensive training programs, and adopt a gradual implementation to ensure a smooth and successful transition to ipsas. originality/value: this study provides an original and timely contribution to understanding the factors driving the successful implementation of ipsas in algeria. by analyzing the potential advantages and challenges, this study provides valuable practical, context-specific insights for officials and contributes to understanding the path of international accounting reforms. paper type: research paper keywords: ipsas implementation, accrual basis, governmental accounting reforms, algeria jel: m41, g38, h83. * address correspondence: e-mail: widad.benzine@univ-constantine2.dz http://faba.bg/ https://doi.org/10.37075/faba.2024.2.03 mailto:widad.benzine@univ-constantine2.dz https://orcid.org/0000-0002-8164-382x widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 121 introduction in recent years, many countries have increasingly adopted international public sector accounting standards (ipsas), viewing this transformation not only as an accounting practice but also as a strategic policy that significantly affecting government performance. international organizations advocate the application of these standards because they enhance public sector reporting, improve financial management, and increase government professionalism (polzer et al. 2021; al-kharabsheh 2021). ipsas adoption is entirely voluntary, with some countries fully adopt the standards, while others adapted them to their context (amiri and hamza 2020; christiaens et al. 2010). accrual accounting has emerged as a pivotal element in public sector reforms, primarily led by developed countries, underscoring its role in enhancing transparency and accountability (jones and pendlebury 2010). developing countries have also increased their interest in transitioning from cash accounting to the accrual basis of accounting to enhance the credibility of financial information and improve governance (tawiah 2023; alshujairi 2024; miraj and wang 2019). similarly, algeria has taken a decisive step towards reforming its public sector accounting framework through two main pillars: enhancing budget transparency and improving public administration performance (cheurfa 2022). the aim is to adopt ipsas, which are expected to making better decisions, allocating resources, reducing corruption, and increasing coordination among various stakeholders (boumediene and benramdane 2024). however, this transformation faces challenges due to algeria's specific economic and political context, characterized by using laws inspired by french regulations since independence. this places algeria in a transitional phase that requires effective management of change. the implementation of ipsas is a relatively recent topic in algeria, and studies have begun to explore this new path. bouabbana (2020) revealed that the project to modernize public accounting will achieve many economic benefits, but the pace of reforms is slow due to the lack of readiness in the algerian environment. acha and ghouini (2020) noted that the cash accounting method used is not suitable for modern public finance management practices and concluded that algeria faces challenges, such as poor training and a legal and technical gap in the public accounting system, impeding the ipsas application. khechaimia (2022) and boudjellal (2024) indicated that these reforms are part of a new governance approach in the public sector, progressing towards adopting ipsas, where the success or failure of this process is linked to effective change management measures. bey (2022) asserts that the significant challenge to the success of this transformation hinges on algeria's capacity to integrate into the international environment. these studies have provided important insights. however, the current state of the public sector remains interesting and deserves further research. rather than analyzing new laws or soliciting general opinions, this study aims to illuminate the current landscape of public sector accounting and explore the prospects for algeria’s transition to ipsas by evaluating critical factors affecting implementation, categorized as advantages that facilitate and challenges that hinder the process. this research employs a quantitative approach, utilizing a survey of 163 public sector employees in eastern algeria and analyzing the data with pls-sem. the paper contributes to provide a comprehensive understanding of the complexities involved in transitioning to ipsas, which enriches international literature and offers valuable insights for policymakers and managers. the paper is structured as follows: section 1 presents the theoretical foundations of ipsass, examines the current status of public accounting in algeria, and provides a literature review and the factors affecting ipsas implementation. section 2 outlines the research methodology and tools used. section 3 presents the results and discussion, while the final section presents conclusion, implications, and limitations. literature review and hypotheses development theoretical foundation of ipsass the issuance of ipsass traces back to the public sector committee (psc) of the international federation of accountants (ifac), which later evolved into the international public sector accounting standards board (ipsasb) (polzer et al. 2021). ipsasb, as an independent board, aims to enhance global public financial management by elevating the quality and transparency of public sector financial reporting (ipsasb 2022). the standards developed in two phases: from 1996 to 2002, when the ipsass follow international accounting standards/international financial reporting standards (iass/ifrs) with minor adjustments in terminology, definitions, and commentary (polzer et al. 2021). since 2003, the ipsasb has prioritized issues specific to the public sector, such as non-exchange transactions and budget implications on financial reporting (chan 2006). the ipsasb issues accounting standards and recommended practice guidelines that promote applying the accrual basis. to support the accuracy and transparency of financial statements, the ipsasb widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 122 continuously updates these standards. ipsass are designed to address the unique characteristics of public sector entities whose mission is to serve the public, primarily fund their activities through public resources, and do not aim to generate profits (ipsasb 2022). a conceptual framework supports applying ipsas by defining the primary elements of financial statements and ensuring consistency in accounting practices. the framework comprises an integrated set of concepts and principles that clarify the objectives of generalpurpose financial reporting (gpfrs), which are primarily to provide information useful for accountability and decision-making. it specifies the qualitative characteristics of information that support achieving these objectives, the criteria for recognition of elements, the measurement bases for assets and liabilities, and the presentation of information in gpfrs (ipsasb 2023). the ipsasb's approach, through standards, guidance, and a conceptual framework, emphasizes enhancing the quality and comparability of financial information to meet user needs and promote transparency and accountability in the public sector (kicová 2017; ipsasb 2022). the current situation of the public accounting system in algeria algeria has repeatedly reformed its accounting system. in 1995, it adopted the “state accounting plan” project, which was quickly abandoned due to incompatibility with international practices. in 2005, it embarked on the “modernization of budget systems project” which aimed to develop public sector accounting through effective public expenditure management, cost analysis, and asset accounting to improve information quality and budgetary transparency (kissi 2012; khechaimia 2022). however, the implementation of the project faced problems in practice because the legal framework was not changed in parallel. issuance of organic law 18-15 organic law 18-15 was issued on september 2, 2018, replacing law 84-17, the first budget law. the previous law used a means-based management approach, overlooking performance results. the budget lacked homogeneity, and its preparation method was not appropriate for strategic projects requiring multiyear planning (daddi-ddoun and oudai 2013; benkouider 2023). conversely, the new law incorporates results-based management to direct public spending, bestows greater flexibility upon managers in reallocating funds, and restructures the budget to encompass a multi-year perspective (fahas et al. 2022). issuance of law 23-07 of the rules of public accounting and financial management it was important to change the previous law 90-10 because it used statistical records to record transactions and prepare government financial statements on a cash basis, and it collected information at the central level with the aim of monitoring flows and implementing the budget, and it did not evaluate assets (cheurfa 2022). to overcome these limits, law 23-07, issued on june 21, 2023, introduced significant reforms, including the adoption of three accounting typesbudgetary, general, and cost accountingand shifted towards a management style focused on goals and achieved results. the law mandated the preparation of financial statements recommended by ipsas. furthermore, law 23-07 enhanced control mechanisms and emphasized the integration of information and communication technology in public accounting practices (loi n° 23-07 2023). advantages of implementing ipsas the numerous advantages of ipsas have encouraged widespread recognition and implementation by countries. the literature review suggests that transparency and accountability, accrual basis, and international harmonization are the main perceived advantages of these standards, which are important drivers for their implementation because they add value to public sector financial and reporting. transparency and accountability transparency and accountability are features that have always been associated with ipsas. transparency involves easily accessible information about government policies, budgeting, and accounting, enabling a clear understanding of government performance (krah and mertens 2023). accountability, as described by rodríguez, encompasses the responsibility of managers to report on resource utilization and the capacity of citizens to hold them accountable. williams and hussein (2019) emphasizes the inherent relationship between these concepts, as transparency, through its commitment to responsibility, fosters citizen participation and enhances accountability. research supports the idea that implementing ipsas enhances transparency and accountability. ogbuagu and onuora (2019) and tawiah (2023) explained that adopting these standards in developing countries will improve the quality of financial reporting and increase transparency and accountability between government and citizens. bolívar et al. (2015) highlighted how ipsas accounting measurements enhance transparency and accountability by improving information quality, understandability, and timeliness. accordingly, the study hypothesizes that greater awareness of the widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 123 importance of these features is a powerful driver of ipsas implementation in algeria. h1: transparency and accountability have a significant impact on the implementation of ipsas. accrual basis ipsas encompasses both accrual basis standards and a cash-based standard. the cash-based standard, however, is not intended as a target, but is applied as a transitional step towards applying the accrual basis (ipsasb 2017). cash-based accounting has shown its limitation, because it only recognizes transactions when cash is exchanged, which hindering the decision-making, and leading to inaccurate financial positions; such as because it records properties and inventories as expenses within a single financial year and does not account for provisions unless emergency liabilities arise (ashoka and aswathy 2020). conversely, accrual accounting emerges as the best approach, because of its ability to describe the reality of government activities and determine their costs (shehadeh 2022), as it recognizes revenues and expenses as they occur, regardless of the receipt or payment of money. by recognizing assets and liabilities, accrual accounting facilitates better management and control of government resources, and improves the reliability and comparability of financial reports (narsaiah 2019; saleh et al. 2021). this approach aids in waste reduction and combatting fraud and corruption, ultimately contributing to social and economic development (correa silva et al. 2022; alshujairi 2024; pwc 2012). consequently, this study hypothesizes that the benefits achieved by applying the accrual basis will be a strong motivation for implementing ipsas. h2: accrual basis has a significant impact on the implementation of ipsas. international harmonization ipsas plays a crucial role in achieving harmonization in government accounting practices, enhancing the state’s interaction with individuals, groups, and countries as partners within a global economic network (amiri and hamza 2020). harmonization under ipsas encompasses the convergence of accounting principles, rules, and methods, as well as the content of financial statements (kicová 2017), which helps to reduce differences, eliminate additional reporting obligations, and ultimately foster an environment conducive to attracting foreign investment (narsaiah 2019; acca 2017). furthermore, the adoption of ipsas aligns with the recommendations of international organizations and countries that grant financial aid and loans by adopting best practices in financial reporting and promoting accountability and transparency (amiri and hamza 2020). abu haija et al. (2021) confirmed that countries adopt ipsas to enhance their economies, gain global recognition, and attract capital investments. salia and atuilik (2018) emphasized the positive impact of ipsas on financial reporting quality, which in turn increases opportunities for foreign aid and foreign direct investment, supporting national development goals. implementing ipsas will establish a common global language and confer international legitimacy (bouabbana 2020; correa silva et al. 2022). the study assumes that implementing ipsas will support the harmonization of government accounting in algeria with international practices, leading to more qualitative and comparable financial statements. h3: international harmonization has a significant impact on the implementation of ipsas. challenges of implementing ipsas ipsas implementation poses several challenges as it demands comprehensive adjustments, encompassing legal and structural changes, technical capabilities, investment in infrastructure, implementation strategies, and associated costs (ahmad and nasseredine 2019). cost the promised benefits of ipsas do not justify the high costs associated with their implementing (ahmad and nasseredine 2019). international organizations recognize the significant financial burdens that accompany adopting ipsas, which includes developing new information systems and extensive training programs on accrual accounting practices, as well as the costs of getting help from external consultants, and translation expenses (pwc 2012; acca 2017; ipsasb 2014). schmidthuber et al. (2020) found that high costs as one of the major barriers to implementing ipsas. pwc (2014) emphasized that governments with lower maturity in accounting and it systems, such as those using cash-based accounting, will need to invest in modernizing their system, facing higher costs relative to gdp compared to governments with more mature systems. similarly, salia and atuilik (2018) noted that the cost of transitioning to the standards in liberia poses a threat to the realization of their potential benefits of their implementationin ghana, agyemang (2017) found that research costs, training, acquisition of software and hardware, and ipsas maintenance significantly affect the adoption of these standards. whitefield and savvas (2016) reported that high costs negatively affected the adoption of standards in kenya. redmayne et al. (2019) focused on audit costs and found that they have increased after the ipsas were adopted in new zealand. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 124 this study assumes that implementing ipsas necessitates substantial investments in human resources development, infrastructure preparation, and organizational resources. these costs are considered a major challenge that affects implementing the standards in algeria. h4: cost has a significant impact on the implementation of ipsas. skills accrual accounting requires high skills because it is more complex compared to cash accounting (haji din and el haron 2023; shehadeh 2022), so the successful implementation of ipsas is linked to the presence of qualified individuals with the necessary skills and knowledge. skills encompass a range of factors, including knowledge, qualifications, and training, which together contribute to determining the competence and capabilities of individuals. according to tanjeh (2016), the greater awareness and knowledge lead to a more profound understanding of ipsas, facilitating its adoption. as for training, it ensures a better scenario for adopting standards because it meets the needs of employees, as it helps identify the new system, share information, and accommodate changes (shehadeh 2022). several studies highlight the importance of skills in ipsas implementation. for example, wang and miraj (2018) found that south asian countries suffer from a significant shortage of skills and capabilities, which has caused slow implementation of standards. al-otoom and alrabba (2022) concluded that employees' lack of self-efficacy led to resistance in jordan. this study assumes that implementing ipsas is complex and requires more skills than those applied in current accounting, which will be a major challenge to implementation. h5: skills have a significant impact on the implementation of ipsas. structural and organizational transformation implementing ipsas requires changing local regulations and laws to provide the appropriate legal and regulatory support in line with international requirements. the interpretation of public sector reform by governments can range from minimal legislative adjustments to substantial transformations of accounting practices. roje et al. (2010) noted that countries with developed national accounting systems have made significant progress in implementing accrual accounting, which has supported their compliance with standards and harmonization of their accounting practices, while those using cash-based or modified cashbased systems experience slower transitions. pwc (2014) further suggests that national legislation plays a crucial role in driving accounting maturity, which countries with mature accounting systems require fewer structural changes to implement ipsas, whereas those with lower maturity face substantial legislative and organizational obstacles, requiring significant reforms to meet ipsas standards practices. this process is complex and time-consuming, often spanning several years (acca 2017). studies such as those by aboukhadeer et al. (2023) on libya and salia and atuilik (2018) on liberia underscore that conflicts between national legal frameworks and ipsas requirements present significant obstacles to successful adoption. brusca et al. (2016) and zibaghafa and okpolosa (2024) argue that updating accounting systems and infrastructure is essential because traditional government sector accounting technologies and structures are no longer suitable. this development will facilitate the implementation of standards and improve accounting practices and the quality of financial statements (haji din and el haron 2023; maruf 2024). abu haija et al. (2021) and whitefield and savvas (2016) support the idea that investment in technology is a potent motivator to implement ipsas. this study recognizes the critical role of legal reform and infrastructure development in the transition to ipsas in algeria, highlighting them as significant challenges to successful implementation. h6: structural and organizational transformation has a significant impact on the implementation of ipsas. research methodology instrument construction the questionnaire is the most appropriate tool to study this topic. it enables the collection of data in a coherent and internally consistent manner (roopa and rani 2012). closed-ended questions were used because they have greater uniformity in answers, reduce errors in understanding questions and variation in answers, and allow comparison between respondents (auriacombe 2010; meadows 2003). the questionnaire, consists of seven variables, was formulated based on relevant studies, with some modified to suit the current situation in algeria, and then it was presented to arbitration for revision (appendix1). a 5point likert scale was used as a tool to measure and understand the attitudes of respondents (tanujaya et al. 2022). widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 125 data collection and sample description the research targeted employees of financial and accounting departments in government administrations in eastern algeria, specifically in the provinces of annaba, skikda, el-tarf, guelma, and tebessa, according to the effort and time of the researcher. these individuals were intentionally selected because they are concerned with public accounting implementation and have characteristics and knowledge that align with the research objectives. 163 questionnaires were collected as the employees were very discreet. the sample included 13 accountants, 31 financial managers, 60 administrators, and 59 other positions such as administrative assistant or engineer. 33.1% of them have a bachelor’s degree, 42.3% have a master’s degree, and 24.5% have other non-university degrees or mostly university degrees in other specializations such as statistics and computer science. 71% of respondents have more than 16 years of professional experience, while 77% of them have 11 to 15 years of experience, and the rest have less than 5 years of experience. results partial least structural equation modeling (pls-sem) was used; which is considered a predictive analysis tool that helps forecast causal relationships for designed structural models (sarstedt et al. 2020; purwanto and sudargini 2021). the data were analyzed in two stages according to several procedures defined by hair et al. (2021). the first stage was to examine the quality of the reflective measurement model, and in the second stage, the structural model was evaluated. assessment of measurement model indicator reliability it is important that the measurement model is satisfactory so that the structural model is properly evaluated (wong 2019). examination of indicator loadings revealed that some of them were below the recommended threshold of 0.708, so the items were removed. according to hair et al. (2017), the basic rule is that the latent variable contains at least 4 indicators with a factor loading greater than 0.7, as this allows explaining a significant part of the variance of the indicators. removing the mentioned items achieved this rule in the final model as shown in following figure: source: data processed (2024) figure 1. measurement model internal consistency reliability internal consistency reliability is an important property that shows the consistency of responses that measure the same construct (ursachi et al. 2015; collier 2020). cronbach's alpha values, as shown in table 1, exceeded the recommended value of 0.7, indicating an ideal level of reliability (souza et al.2017). researchers also advocate reporting composite reliability because it is more accurate and provides higher widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 126 reliability estimates (garson 2016; hair et al. 2020). the results in table 1 show that both the composite reliability values “rhoc” and the exact reliability coefficient “rhoa” were greater than 0.70, which enhances the strength of the reliability of the measures used. convergent validity convergent validity, which reflects the extent to which indicators measure the same trait are related (byrne 2016), was assessed through the average variance extracted (ave). as shown in table 1, all ave values exceeded 0.5, indicating that constructs explain over half of the variance of their indicators (hair et al. 2017). this finding is considered strong evidence for the convergent validity of the measurement model. table 1. reliability estimates variables cronbach's alpha rhoa rhoc ave acc 0.794 0.838 0.861 0.609 hrm 0.859 0.867 0.899 0.640 cos 0.852 0.859 0.900 0.693 imp 0.867 0.873 0.900 0.601 skl 0.819 0.821 0.880 0.647 str 0.823 0.837 0.882 0.653 trn 0.833 0.835 0.889 0.666 source: data processed (2024) discriminant validity discriminant validity refers to the extent to which items relate to each other in a way that distinguishes each construct from other constructs (zaiţ and bertea 2011). the fornell-larcker criterion was used, comparing the square root of the ave of each construct with the squared correlation between the constructs. the results in table 2 show that the square root values of ave for each construct were the highest, providing evidence that the constructs are distinct and supporting discriminant validity. table 2. fornell-larcker criterion variables acc hrm cos imp skl str trn acc 0.780 hrm 0.171 0.800 cos 0.371 0.266 0.832 imp 0.201 0.365 0.360 0.775 skl 0.661 0.269 0.477 0.474 0.804 str 0.390 0.348 0.336 0.392 0.466 0.808 trn 0.203 0.451 0.466 0.360 0.363 0.355 0.816 source: data processed (2024) another measure recommended as a better alternative is the heterotrait-monotrait ratio (htmt), which examines the correlation between indicators across constructs compared to the correlations within each construct (collier 2020). the results in table 3 show that all htmt values did not exceed the threshold of 0.85 (henseler et al. 2015), further confirming the discriminant validity of the measurement model. table 3. heterotrait-monotrait ratio variables acc hrm cos imp skl str hrm 0.202 cos 0.446 0.311 imp 0.220 0.415 0.408 skl 0.821 0.308 0.572 0.546 str 0.490 0.420 0.410 0.454 0.575 trn 0.256 0.530 0.563 0.415 0.448 0.442 source: data processed (2024) good results obtained regarding internal consistency reliability, convergent validity, and discriminant validity are considered indicator of the quality of the measurement model and construct validity, allowing the transition to structural model evaluation. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 127 evaluation of the structural model the structural model was evaluated to estimate the relationships established through a set of steps. first, it was important to examine linear relationships between constructs to identify potential multicollinearity problems; which result from strong correlations between independent variables, which subsequently affects the reliability of test results (garson 2016). the variance inflation factor (vif) was used to evaluate these relationships. all vif results, as shown in table 4, were below the required threshold of 3 (hair et al. 2021), suggesting that multi-collinearity is not a critical issue. the second step was to evaluate the significance and importance of the path coefficients. bootstrapping analysis was performed with 10,000 subsamples to estimate the weights of the indicators. table 4 shows the path coefficients and their corresponding t-values at the 5% significance level. the results confirm that international harmonization, skills, and structural and organizational transformation have a significant positive impact on the implementation of ipsas, while the accrual basis has a significant negative impact on the implementation of the standards. these findings support the acceptance of hypotheses h1, h2, h4, and h5, respectively. however, cost, accountability and transparency were not statistically significant, leading to rejection hypotheses h3 and h6. table 4. hypotheses results hypothesis: path vif path coefficient t-values p values decision h1: acc -> imp 1.835 -0.227 2.880 0.004 supported h2: hrm -> imp 1.325 0.175 2.313 0.021 supported h3: cos -> imp 1.508 0.111 1.318 0.187 not supported h4: skl -> imp 2.177 0.426 4.335 0.000 supported h5: str -> imp 1.430 0.161 2.172 0.030 supported h6: trn -> imp 1.556 0.064 0.710 0.478 not supported source: data processed (2024) the next step was to evaluate the explanatory power and predictive power of the model using several measures. first, the coefficient of determination r2 was calculated to evaluate the effects of the independent variables on the dependent variable (al-marsomi and al-zwainy 2023). according to hair et al. (2021), the r2 values of 0.75, 0.5, and 0.25 are respectively great, moderate, and weak. alternatively, chin (1998) suggests r2 values of 0.67, 0.33, and 0.19 are strong, moderate, and weak, respectively. the obtained r2 value of 0.346, shown in table 5, indicates that the explanatory power of the model is moderate. to further evaluate the predictive ability of the model, the effect size f2 was also calculated. according to the established standards, values of 0.02, 0.15, and 0.35 indicate a small, medium, and large effect size, respectively (hair et al. 2020). the results in table 5 show that the accrual basis, international compatibility, and structural and organizational transformation have a small effect size, while skills demonstrate an effect size approaching the average. the third measure was q² assessing the predictive relevance of the model (janadari et al. 2016). the procedure for assessing out-of-sample prediction (plspredict) was conducted with ten repetitions and k= 10 folds. according to hair et al. (2020), q² values of 0.25 and 0.50 are moderate and large, respectively, so the obtained q² value of 0.291, presented in table 5, suggests moderate predictive importance. table 5. explanatory power evaluation path r square f square q square acc -> imp 0.346 0.043 0.291 hrm -> imp 0.035 cos -> imp 0.012 skl -> imp 0.127 str -> imp 0.028 trn -> imp 0.004 source: data processed (2024) the mean absolute error (mae) and the root mean squared error (rmse) obtained with the same procedure also represent important prediction statistics. the lower values for these statistics compared to the naïve lm criterion indicate a good indicator (hair et al. 2021). the results, presented in table 6, demonstrate that all indicators meet the criterion, suggesting that the model has high predictive ability. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 128 table 6. predictive power evaluation items pls-sem_rmse pls-sem_mae lm_rmse lm_mae imp1 0.600 0.484 0.662 0.523 imp2 0.599 0.484 0.621 0.488 imp3 0.665 0.537 0.712 0.555 imp4 0.594 0.479 0.638 0.511 imp5 0.573 0.474 0.622 0.510 imp6 0.537 0.424 0.565 0.430 source: data processed (2024) discussion this study highlights advantages and challenges as latent variables affecting ipsas implementation in the algerian context. model analysis using pls-sem revealed that although transparency and accountability are recognized benefits associated with ipsas, it had no impact on implementation (β=0.064, p=0.478), which is contrary to similar studies conducted in iraq (al-quraishi and boumediene 2023) and jordan (al-kharabsheh 2021). a likely explanation for this result is that transparency and accountability do not constitute a strong motivation for implementing standards, as they may be overshadowed by other political, economic, and cultural factors that are more important in the algerian context. for example, according to brusca et al. (2013), political support backed by laws was a major factor in accelerating the adoption of ipsas-aligned standards in spain. according to ahmad and nasseredine (2019), alshujairi (2024), and babatunde (2017), the financial burden constitutes the greatest obstacle to implementing ipsas in developing countries. correa silva et al. (2022) found that national culture and dominant ideology play a crucial role in implementing standards. therefore, this result reflects the local context in which the study was conducted and testing of the hypotheses has already proven that there are other more influential factors that make it superior to accountability and transparency. the study found a negative impact of the accrual basis on ipsas implementation (β=-0.227, p=0.004). this result was unexpected because the accrual basis is an important feature associated with the standards. the appropriate explanation for this relationship is that the study was conducted early in the transition to ipsas. during this period, the budget was modified into a single document as the first step towards change. however, algeria's current public accounting system is still subject to the code-law system, applies the cash basis, and works according to the commitments-based budget as a system of parliamentary appropriations (brusca et al. 2013). therefore, negative perceptions are likely due to the lack of experience and knowledge necessary to apply accrual accounting. gkouma and filos (2022) highlight that implementing the transition to ipsas for the first time in greece required a deep understanding of the principles and practices of the standards. saleh et al. (2021) also confirms that the lack of specialized employees in finance and accounting impedes the implementation of standards because the change in accounting techniques from simple cash accounting to accrual basis requires specific skills. this aligns with some observations about the study sample, as some participants possessed specializations in fields such as automation and statistics, or had lower educational levels than required, as their field experiences alone will negatively affect the understanding of accrual accounting. international harmonization has a significant impact on ipsas implementation (β= 0.175, p=0.021). this result aligns with previous research that has confirmed the harmonization of accounting practices and financial statements as one of the main reasons for ipsas implementation, ultimately aiming to enhance comparability across different levels of government (brusca et al. 2013; christiaens et al. 2015; schmidthuber et al. 2020; ben amor and damak ayadi 2019). in algeria, implementing ipsas represents the adoption of a unified global language for government accounting, fostering understanding and trust with international partners and organizations. this harmonization will facilitate integration into the global economy by streamlining cross-border transactions and attracting investors. moreover, ipsas implementation will improve financial management practices and ensure adherence to international disclosure requirements. boumediene and benramdane (2024) assert that implementing ipsas in algeria will legitimize the government's financial operations, aligning them with international practices. since international harmonization implicitly improves accountability and transparency, this supports the results of the first hypothesis that its impact has overshadowed the impact of accountability and transparency. cost does not significantly impact on the implementation of ipsas (β= 0.111, p=0.187). this result diverges from several studies (alshujairi 2024; babatunde 2017; ahmad and nasseredine 2019), which found that costs are one of the main obstacles facing the adoption of standards. one possible reason for this result is that the ipsas implementation process follows a gradual approach (mazhambe 2021), allowing for phased transformation that takes into account capabilities and resources, thereby managing costs in phases. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 129 although implementing ipsas is associated with financial burdens, these are largely one-off costs spread across the project’s duration and ultimately outweighed by long-term benefits that are expected to be significant pwc (2014). diniz et al. (2015) found that understanding that the benefits of ipsas are higher than the costs contributes to the implementation of the standards. additionally, this result may suggest that government support, driven by algeria's political will, has a crucial role in implementing ipsas, as the state provides the necessary funding to cover the transfer burden, which reduces employees' perceptions of costs. this finding is clearly related to the local context, where costs are still unclear in the initial phase of ipsas implementation. the study indicates that skills have the most significant impact on the implementation of ipsas (β= 0.426, p= 0.000). this skills gap is a common issue in many countries. for instance, (alshujairi 2024) found that iraq suffers from a lack of qualified accountants and trained human resources to implement ipsas. similarly, ahmad and nasseredine (2019) revealed that employees in lebanon face practical difficulties in implementing the standards. the successful implementation of ipsas relies heavily on the requisite skills and knowledge. in algeria, the great challenge will be transforming the mentality of employees who have been accustomed throughout their careers to implementing balance sheet tasks. these employees will need to develop their financial and accounting knowledge to understand standards, work on an accrual basis, and evaluate assets. takarli and ghrissi (2024) assert that the changes associated with the application of the accrual basis in algeria will challenge established employee. this result also suggests the difficulty of integrating employees with lower levels of education or irrelevant diplomas to understand the rules of accrual accounting, as this challenge was highlighted in the result of the second hypothesis. structural and organizational transformation has a significant impact on ipsas implementation (β=0.161, p=0.030), which highlights the critical role of laws and infrastructure in facilitating the implementation of these standards in algeria. gkouma and filos (2022) points out that the implementation of ipsas requires legislative reforms to integrate it into state law. similarly, boumediene and benramdane (2024) emphasized that the application of ipsas in algeria requires the preparation of political and legal factors. the recent legislative reforms in algeria are a first step in encouraging the adoption of ipsas (boudjellal 2024). the regulatory framework for implementing the standards remains incomplete, requiring further guidelines and practical rules. moreover, the results of this study support zibaghafa and okpolosa (2024) and ademola et al. (2020) studies that confirmed that infrastructure and technology are important factors in meeting the requirements of ipsas. conclusion this study examined the reality and prospects of implementing ipsas in algeria, highlighting the significant factors affecting it. the findings underscore the significant roles of skill development, legislative and infrastructural improvements, and enhanced international harmonization in driving successful ipsas implementation. interestingly, the study revealed other unexpected findings that were traditionally considered crucial for implementation. the lack of a significant impact from cost considerations, transparency and accountability, coupled with the negative impact of the accrual basis, highlights the importance of considering the environmental differences and the stage of implementation. to the best of our knowledge, this paper is the first to identify and model the relationships between key factors affecting ipsas implementation in algeria. this paper contributes to the theoretical discourse on public sector reforms and the evolution of government accounting, as the findings provide an informed understanding of the potential factors impacting ipsas implementation and illustrate their role in achieving international accounting convergence. the findings present important practical implications. the study underscores the importance of structural and organizational reforms to facilitate ipsas implementation. specifically, strengthening the regulatory framework of public accounting is crucial. achieving this will involve introducing laws and regulations that support organic law 18-15 and law 23-07, in alignment with the principles of the standards. equally important is enhancing the accounting board's role as an internal body including specialists and experts, to define the ipsas implementation roadmap, monitor the process, and address challenges facing it. furthermore, the findings indicate that the transition to accrual accounting, despite its advantages, is complex and requires the development of accounting knowledge to move away from traditional cash-based practices, and underscores the need to develop employee capabilities. these implications shed light on the importance of supporting educational curricula by teaching ipsas. algeria has recently taken this step partially at some university levels, but a broader application is necessary. finally, these practical insights underscore the value of a phased approach to change management, which provides time to adapt to new systems and face challenges. to explore potential implementation barriers, a pilot program applying ipsas within a specific sector would be beneficial. the significance of these findings extends beyond the local context of algeria, as they provide valuable strategic insights for countries with widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 130 similar circumstances. this research presents limitations that open avenues for future discussions. future research could expand its scope by including other additional institutional, organizational, and individual factors. furthermore, it would be beneficial for subsequent research to be conducted across different stages, such as pre-implementation and post-implementation periods. moreover, the study' focus on a few provinces underscores the need for future research to use a larger, more representative sample. references aboukhadeer, e. a. s., s. m. f. azam, and a. r. s. albattat. 2023. the realtionship between international public sector accounting standards (ipsas) and the quality of accounting information in libyan government sector. international journal of professional business review, 8(1): 01‑29. https://doi.org/10.26668/businessreview/2023.v8i1.1264. abu haija, a. a., a. m. alqudah, l.a. aryan, and m.j.azzam. 2021. key success factors in implementing international public sector accounting standards. accounting, 7(1): 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savvas. 2016. the adoption and implementation of the international public sector accounting standards: the challenges faced by the united nation in producing un-ipsas compliant financial reports in kenya. international journal of finance and accounting, 1(1): 75‑91. https://doi.org/10.47604/ijfa.42. williams, a. atuilik, and s. hussein. 2019. impact of ipsas adoption on transparency and accountability in managing public funds in developing countries: evidence from liberia. journal of accounting and taxation, 11(6): 99‑110. https://doi.org/10.5897/jat2019.0345. wong, k. k.k.. 2019. mastering partial least squares structural equation modeling (pls-sem) with smartpls in 38 hours. iuniverse. zait, a., and p. e. bertea. 2011. methods for testing discriminant validity. management & marketing, ix(2): 217‑24. zibaghafa, s., and m. okpolosa. 2024. international public sector accounting standards adoption and challenges of implementation in nigeria. european journal of accounting, auditing and finance research, 12(1): 108‑25. https://doi.org/10.37745/ejaafr.2013/vol12n1108125. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 134 appendix 1. questionnaire research variables and measurement items references implementation of ipsas imp1 implementation of ipsas is one of the priorities of the algerian government. whitefield and savvas (2016) abu haija et al. (2021) imp2 there is a clear political direction for implementing ipsas. imp3 the state is making efforts to provide the necessary support to implement ipsas. imp4 the government is undertaking important legal reforms to move towards implementing ipsas. imp5 the government is adopting a clear roadmap to move towards full accreditation of ipsas. imp6 our administration applies the laws established by the country in order to implement ipsas. transparency and accountability trn1 ipsas implementation improves the quality of financial information and supports transparency in government financial practices. alshujairi (2024) al-kharabsheh (2021) christiaens et al. (2010) trn2 ipsas provides a suitable measurement basis for financial reporting which improves government financial transparency. trn3 ipsas raises the level of disclosure and comparability of information, which increases the transparency of government financial reports. trn4 ipsas improves accountability for public sector performance. trn5 ipsas improves external oversight and accountability. trn6 -ipsas promotes information transparency and government accountability to citizens and the general public. accrual basis acc1 implementing ipsas contributes to the strong adoption of the accrual basis in public sector accounting. shehadeh (2022) al-kharabsheh (2021) alshujairi (2024) acc2 accrual accounting is more effective than cash accounting in giving reliable information about the financial position and performance of the government. acc3 accrual basis enhances the management of expenses and receivables. acc4 the accrual basis is considered more useful for managing assets and liabilities. acc5 the accrual basis provides financial information to monitor performance and public funds against corruption. acc6 implementing the accrual basis improves the quality of financial reports. international harmonization hrm1 -ipsas implementation achieves international accounting harmonization for government agencies. alshujairi (2024) al-kharabsheh (2021) salia and atuilik (2018) ademola et al. (2020) hrm2 -ipsas implementation facilitates the consolidation of financial statements better than the current accounting system. hrm3 ipsas implementation ensures that financial reporting is consistent and globally comparable. hrm4 ipsas implementation helps align with the requirements of international organizations and development aid providers. hrm5 ipsas implementation enhances the inflow of foreign direct investment. hrm6 ipsas implementation facilitates the flow of foreign aid. cost cos1 ipsas implementation is associated with high costs. ahmad and nasseredine (2019) cos2 seminars and training courses for ipsas implementation are expensive. widad benzine / finance, accounting and business analysis, volume 6, issue 2, 2024 135 cos3 the hardware and software required for ipsas implementation involve significant expenses. whitefield and savvas (2016) agyemang (2017) cos4 replacing of previous accounting packages incurs high costs. cos5 ipsas maintenance costs are high. cos6 estimating the overall cost of ipsas implementation is difficult. skills skl1 ipsas implementation requires a high level of specific knowledge and skills. agyemang (2017) miraj and wang (2019) abu haija et al. (2021) skl2 there is little general knowledge of ipsas among employees. skl3 there is a low level of awareness of the importance of ipsas. skl4 training on ipsas is necessary to enable employees to understand it. skl5 the current skills of public sector employees are insufficient to implement ipsas. skl6 training courses available to employees regarding ipsas implementation are insufficient. structural and organizational transformation str1 ipsas implementation requires changing legislation and regulations. ahmad and nasseredine (2019) abu haija et al. (2021) str2 current local legislation is not sufficient for implementing ipsas. str3 -ipsas implementation requires modifying accounting records and practices and modernizing the public accounting system. str4 ipsas implementation requires preparing the infrastructure and having integrated ict systems. str5 -current hardware and software are insufficient to implement ipsas. str6 -government entities lack sufficient internal and external networks to facilitate the implementation of ipsas. 136 finance, accounting and business analysis volume 6 issue 2, 2024 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.04 capital adequacy and return ratios of banks in bulgaria in mergers and acquisitions transactions daniel valentinov dimitrov department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 3 october 2024 revised 4 november 2024 accepted 12 november 2024 purpose: the coefficients for capital adequacy, return on assets, and return on equity are crucial metrics for assessing the impact of mergers and acquisitions within bulgaria's banking sector. the present study aims to enhance understanding of mergers and acquisitions in the bulgarian banking sector and their consequences. the paper analyzes the variation in the coefficients of banks that have undergone an m&a transaction, comparing two periods: prior to the transaction and subsequent to its execution. design/methodology/approach: the study analyzes banking institutions undergoing mergers and acquisitions in bulgaria during the period 2010-2024, focusing on a four-year and five-year period before and after the completion of the transaction. the study assesses two hypotheses: (1) m&a transactions do not substantially enhance roe, roa, and car, and (2) m&a transactions result in a significant enhancement of these metrics. the study used descriptive statistics, including standard deviation, arithmetic mean, and hypothesis testing, to evaluate the changes in the ratios of the examined banks. findings: the research findings indicate an enhancement in the capital adequacy ratio and the stabilization of roe and roa following the execution of merger and acquisition operations. the total impact on returns in the medium run is not statistically significant. besides the impact of transactions, exogenous circumstances like the covid-19 epidemic and political instability in bulgaria also influence the coefficients. practical implication: the study offers practical insights for policymakers, bank management, and investors considering m&a transactions in emerging markets. it highlights the importance of external factors, such as political and economic stability, on the success of these deals. the findings provide a useful reference for strategic planning and risk assessment in future m&a activities within the banking sector. originality/value: the study enhances the existing literature on the banking market and m&a transactions, and more specifically in the part on the bulgarian banking market which is insufficiently researched. it also highlights the influence of external factors in the realization of m&a transactions, which contributes to a deeper understanding of these transactions and providing a foundation for future research. paper type: research paper keywords: banks, m&a, capital adequacy, financial performance jel: g21 g34 * address correspondence: e-mail: ddimitrov4@gmail.com http://faba.bg/ https://doi.org/10.37075/faba.2024.2.04 ddimitrov4@gmail.com https://orcid.org/0009-0009-3528-6639 daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 137 introduction financial markets, and the banking sector in particular, are among the most regulated globally. as a fundamental part of economic processes, its stability is essential to ensure economic growth and financial stability of the economy. in financial science and practice, mergers and acquisitions in banking markets are important as a phenomenon. in addition to their expression in the development of the banking market, they have an impact on consumers, competition and the development of services, as well as on the economy as a whole. mergers and acquisitions, in addition to having a positive effect, can also lead to risk in the financial system if adequate supervision is not applied to the transaction. it is common practice for banks to use m&a transactions for their development, in addition to the internal potential within the company. by using this tool, they aim to achieve greater efficiency, strengthen and expand market positions and provide more products to consumers. the development of bulgaria in recent years also implies an increase in m&a transactions, which has been observed in recent years. the financial crisis of 2008, the bankruptcy of corporate commercial bank ad, the covid-19 pandemic, and future membership in the eurozone have highlighted the need for stability in the banking institutions sector. the banking market in bulgaria consists of domestic banks, subsidiaries of internationally important banking corporations, and branches of foreign banks. the bulgarian banking market has remained relatively stable over the years, although it has been tested by the collapse of corporate commercial bank ad. the growth of technology and consumer demands imply a deepening transformation of the banking sector. driven by the desire for stability, development, and greater market share, banks in bulgaria have undertaken numerous consolidation transactions in the sector. the study aims to analyze the financial performance of bulgarian banks and how m&a transactions have affected selected financial ratios. the focus of the study will be on the analysis of key indicators measuring the financial performance of corporations return on assets and equity and capital adequacy ratio. since these ratios are fundamental to a bank's financial evaluation, they will be examined before and after m&a transactions to gain a clearer understanding of the impact of these transactions on bank performance. to achieve the objective of this study, the focus will be on the following areas: profitability analysis through roa and roe and how they change after the transactions; change in capital adequacy ratio through which the impact of these transactions will be examined. mergers and acquisitions of bulgarian banks typically enhance capital adequacy in the medium term, although the impact on profitability varies and depends on the specific characteristics of each merger. the following hypotheses are being investigated: 1) m&a transactions do not significantly improve roe, roa, and car ratios. 2) m&a transactions significantly improve roe, roa, and car based on the analyses performed and the results obtained, the study aims to provide an in-depth understanding of the financial performance of m&a transactions in the context of the bulgarian banking market. additionally, the findings of the study can serve the management and stakeholders to implement better such type of transactions in the market and their implications. literature review the issue of mergers and acquisitions has been addressed in a number of studies and publications. in practice, several theoretical concepts in the field of m&a can be identified. berger et al. (1993) in their research examine the efficiency theory. specifically, the theory posits the understanding that the driving force in m&a transactions is the achievement of higher operational efficiency, which will lead to increased profitability and reduced costs. another theory examining m&a transactions is touched upon by hannan and pilloff (2009). they formulate the so-called market power theory and argue that market consolidation through m&a leads to higher profits precisely because of reduced competition. this is conditioned by the assumption that a greater impact on competition and service prices is realized through these transactions. financial synergy theory provides another perspective on the motives behind m&a transactions. it argues that these types of transformations enable banking institutions to achieve greater financial strength and improved capital adequacy. gaughan (2011), in his study, touches on the assumption that through synergies, the cost of capital can be reduced and the financial stability of companies as a whole can be improved. apart from the theoretical propositions, there is also a lot of empirical research related to m&a and its complexity as an impact. such a study was carried out by altunbaş and marques-ibanez (2008), who studied european banks and found that, following the implementation of the deal, return on capital and assets ratios are higher and lead to higher profitability. punt and van rooij (2003) examine the relationship daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 138 between mergers and bank performance in europe and find that banks that have undergone a merger process show significant improvements in management improvement and profitability relative to others. campa and hernando (2006) arrive at similar results, finding the positive impact of this type of transaction on financial performance and, more specifically, profitability. studies showing the opposite trend are by deyoung et al. (2009) and amihud et al. (2002). the former note the initial increase in profitability but report that the long-term effects may be adverse due to differences in corporate culture. in their study, amihud et al. (2002) note that m&a transactions can reduce capital ratios due to the higher risk appetite of larger banks. market research in central and eastern europe and m&a transactions show that the results can be both positive and negative. pruteanu-podpiera et al. (2008) study traces that for eastern european banks, although in the short run they bring greater positive benefits to companies, in the long run these benefits are less certain due to market challenges and regulatory requirements. in another study, anzoategui et al. (2010) note the specificities of these regions and that, in addition to strengthening the banking market, these transactions may increase systemic risk and have an adverse effect on capital adequacy. while comprehensive and in-depth studies on m&a are numerous, there is a lack of literature focusing on the bulgarian banking sector. a study such as lensink and maslennikova (2008) effectively identifies and highlights general trends in m&a, but lacks an analysis of how these trends play out in a country with its regulatory framework and economic development. mergers and acquisitions in the banking market in bulgaria are poorly studied in the academic literature. research on the economic efficiency of this type of transaction have been realized by borisov (2017). this creates prerequisites for deepening and enriching the knowledge on the impact of m&a transactions on banks. the literature review focuses on the results of m&a transactions and the necessity of a focused analysis of the banking market in bulgaria. the study aims to expand the already existing knowledge regarding m&a transactions of banking institutions by examining their impact on the capital adequacy and profitability of banks in bulgaria. research methodology the data used for this study are publicly available and are part of the financial statements of banking institutions in bulgaria that have implemented m&a transactions covering the period 2010 2024. in order to ensure the reliability of the analysis, institutions with complete financial data before and after the m&a transactions, as well as with a sufficient number of years since the transaction, are included. the sample of banking institutions studied includes banks operating on the bulgarian market. the analysis in the study highlights significant financial indicators for banks return on assets (roa), return on equity (roe), and capital adequacy ratio (car). these are key financial metrics that provide insight into the stability of banks and are an important indicator in the analysis of m&a deals and subsequently after they are achieved. roa is calculated as follows profit divided by total assets. it measures the efficiency of assets to generate profits. roe is calculated by profit divided by bank's equity. the latter capital adequacy ratio is calculated as the ratio of the bank's capital to its risk-weighted assets and indicates the ability of the credit institution to absorb potential losses. these ratios will be analyzed for each bank before and after the consolidation transactions to assess their change after the m&a transaction. the study combines several different methods to analyze and assess the impact of m&a on the ratios. as an initial method, descriptive statistics for the calculated financial ratios will be used to provide an overview of trends in these measures, including mean and standard deviation. the analysis will be an indepth, comparative analysis of the values obtained and subsequently applying hypothesis testing to the financial ratios via a paired t-test. in this way, the impact of m&a transactions on the selected financial ratios of the bank and its performance will be assessed. the following m&a transactions are included in the study: 1) merger of unionbank ead into first investment bank ad 2) takeover of alfa bank sofia branc h by eurobank bulgaria ad 3) merger of cibank ead into ubb ad 4) merger of victoria commercial bank ead into investbank ad 5) merger of "bank piraeus bulgaria" ad into"eurobank bulgaria" ad 6) merger of société generale expressbank ad into dsk bank ead. the acquisition of the business of raiffeisenbank (bulgaria) ead by united bulgarian bank ad and the acquisition of bnp paribas parsons financial s.a., bulgaria branch by eurobank bulgaria ad are not included in the study due to the lack of a sufficient number of years since their acquisition to track the change in the ratios. the study aims to provide an in-depth analysis of the impact of mergers and acquisitions on banks in bulgaria in the period 2010-2024 and their roa and roe and capital adequacy ratios, applying the methodology outlined above. daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 139 result and discussion descriptive statistics the starting point in the analysis is comparing data related to the financial performance of the banks included in the study. the figures cover the period before and after the m&a transaction within four and five years of the transaction. in order to eliminate the impact, the year in which the merger took place is not included in the calculations. key financial metrics covered are return on assets (roa), return on equity (roe), and capital adequacy ratio (car). the ratios are calculated separately for each of the banks under study and cover a period of five years before and after the transactions. the exception in the period is for dsk bank ead, where a four-year period before and after the transaction is taken. the following two tables present the calculated averages for the two periods. table 1. average arithmetic value and standard deviation of the studied indicators in the period before and after the m&a transaction of the subject banks bank calculated data before m&a arithmetic average standard deviation roe roa car roe roa car ubb 3.87% 0.61% 23.80% 5.83% 0.87% 5.33% fib 10.79% 0.88% 13.40% 8.93% 0.70% 0.66% investbank -3.33% -0.25% 18.51% 8.92% 0.70% 2.75% dsk 16.66% 2.39% 17.22% 5.00% 0.49% 0.72% eurobank bulgaria (2016) 2.53% 0.39% 19.77% 3.83% 0.61% 4.62% eurobank bulgaria' (2019) 8.66% 1.40% 22.95% 4.95% 0.79% 2.04% bank calculated data after m&a arithmetic average standard deviation roe roa car roe roa car ubb 10.18% 1.06% 16.76% 1.98% 0.20% 3.05% fib 11.64% 1.08% 16.05% 6.54% 0.58% 1.40% investbank 7.98% 0.88% 19.91% 7.74% 0.88% 0.97% dsk 13.50% 1.88% 22.50% 7.14% 0.96% 1.53% eurobank bulgaria (2016) 11.40% 1.62% 20.03% 2.17% 0.37% 1.90% eurobank bulgaria' (2019) 10.77% 1.32% 20.77% 1.93% 0.18% 0.15% source: author’s calculations in examining the banks subject to mergers and acquisitions, the mean and standard deviation for each indicator were calculated. in the case of first investment bank plc. fluctuations in the roe and roa ratios were observed in the period before the merger with mkb unionbank plc. on average, for the first period of the study, the roe value was 10.79% and the roa value 0.88%. after the acquisition of mkb unionbank jsc, the average roe of first investment bank jsc in the 5-year period after the transaction was 11.64%, and the standard deviation was 6.54%, which compared with the average value of the pre-acquisition period indicates a more stable performance of the bank. the return on assets and capital adequacy ratios of first investment bank plc show the same trend after the acquisition, with higher ratios with lower standard deviation values. the lower values in 2015, the first year after the transaction, which are observed in both roe (2.39%) and roa (0.20%), indicate possible difficulties in the process of integration and change of policies in the bank, maintaining low-yielding assets, these features are provided based on the performance of the company in the following year. the merger of cibank ead and ubb ad results in a significant increase in the returns of the acquiring ubb ad. the average roe for the pre-merger period was 3.87%, and after the transaction, it increased to 10.18% on average, but there was also a reduction in the standard deviation to 1.98%, suggesting a significant decrease in fluctuations compared to the values recorded before the merger. this is also noticeable regarding return on assets from 0.61% on average before the deal, which increases to 1.06% after the deal with the standard deviation remaining almost the same. the capital adequacy ratio of ubb ad declined compared to the pre-merger figures but remained relatively high in line with the legislation. the reduction in the volatility of the bank's return on equity and capital adequacy highlights the assumption that the bank has successfully completed the integration process, realizing consistency in its post-transaction performance and stability in terms of capital management. during the 2018-2019 period, several mergers occurred in the bulgarian banking market. the smaller bank segment seen the acquisition of commercial bank victoria ead by investbank ad in 2018. investbank ad has, on several occasions over the years, realized negative roe and roa results based on financial statement data. in the five-year period before the acquisition of bank victoria ead, the average daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 140 roe and roa of investbank plc were -3.33% and -0.25%, respectively. in the year before the acquisition, investbank plc made a loss, which impacted its return ratios. the main contributor to the negative financial result is impairment losses on financial assets, in accordance with the action plan adopted by the bank in relation to the results of the asset review completed in the previous year (2016). even if this year is excluded due to the exceptional nature of this practice and is perceived as a one-off event, the values of both indicators remain relatively low. following the transaction, there was a relative improvement in the ratios of investbank plc of 7.98% (roe) and 0.88% (roa), respectively. the improvement in the capital base and financial stability of the acquiring bank is supported by the increase in the capital adequacy ratio to 19.91% (18.51% on average before the acquisition). another significant transaction completed in this period was that between dsk bank ead and société generale expressbank ad. "dsk bank ead is one of the leading banks on the bulgarian market. the acquisition of société generale expressbank ad business in bulgaria made the bank the market leader in terms of assets. due to the lack of a 5-year period since the transaction, the data for dsk bank ead is calculated over a 4-year period. from the calculations performed, there is a decrease in the return on equity and return on assets from 16.66% and 2.39% to 13.50% and 1.88%. the observed reduction in the ratios a year after the acquisition is attributable to higher impairment charges and a corresponding decrease in earnings associated with the covid-19 pandemic. in the period after the pandemic, there was a recovery to relatively high roe levels, with an average of 16.20% over the next 3 years and a 2.25% roa. in the postacquisition period, there is a higher variance in the ratios, mainly due to the covid-19 pandemic. although there is a decline in the ratios, given the size of dsk bank ead, it cannot be deterred as a worrying signal of potential problems. the bank's capital adequacy ratio strengthened in the second period with an average of 22.50% compared to the first period when it was 17.22%. thus, in addition to improving its market performance, the bank is working to strengthen its capital base and stability in response to regulatory requirements. "eurobank bulgaria" ad also implemented in 2019 a transaction of business acquisition of bank piraeus bulgaria ad. over the years, postbank (eurobank bulgaria plc) has completed several acquisitions. in 2016, it acquired the business of alfa bank sofia branch, and in 2023, it acquired bnp paribas parsons financial s.a., bulgaria branch, and its retail business. all of these transactions reflect eurobank bulgaria ad's desire to position itself among the market leaders and expand its business as much as possible. the two acquisitions of alfa bank sofia branch and bank piraeus bulgaria ad will be considered independently of each other. in the first merger, which was realized in 2016, in the period prior to its implementation, postbank recorded significantly lower roe levels. the fluctuations are quite high in the ratio; the average value for the period is 2.53%, and the standard deviation is 3.83%, and for the period after the acquisition of alfa bank sofia branch, it increases to 11.40%, reducing the deviations in the values of the indicator to 2.17%. observed after the merger of alfa bank sofia branch and better asset management, the ratio increased to 1.62% compared to the first period, for which the value was 0.39%. these results, as a movement, are maintained with the acquisition in 2019 of bank piraeus bulgaria ad. after the transaction, "eurobank bulgaria" ad maintains higher returns, making it more efficient in the banking market, a necessity for successful positioning against its competitors. roe increases to 10.77% on average, compared to the period 2014-2018 (8.66%), roa calculations show a slight decrease in the ratio in the second period to 1.32% on average compared to 1.40% in the first. like roa, the bank's capital adequacy ratio also saw a slight decline in the second merger. this decline was also influenced by the period in which the deal was implemented-covid-19 pandemic. in addition, the two mergers implemented with alfa bank sofia branch and subsequently with bank piraeus bulgaria ad were in a short period of time, which also had an impact. despite these reported decreases in performance in the period following the second merger, “eurobank bulgaria” ad is consolidating its trend of improving market stability, expanding its customer base, and improving its competitive position in the bulgarian banking market. the aggregated data on the calculated ratios of the monitored banks subject to the study are presented in the following graphs. daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 141 source: author’s calculations figure 1. average roa, roe, car before m&a transactions. eurobank bulgaria' reflects the merger with piraeus in 2019. source: author’s calculations figure 2. average roa, roe, car after m&a transactions. eurobank bulgaria' reflects the merger with piraeus in 2019. 2 ,5 3 % 1 6 ,6 6 % 3 ,8 7 % 1 0 ,7 9 % -3 ,3 3 % 8 ,6 6 % 0 ,3 9 % 2 ,3 9 % 0 ,6 1 % 0 ,8 8 % -0 ,2 5 % 1 ,4 0 % 1 9 ,7 7 % 1 7 ,2 2 % 2 3 ,8 0 % 1 3 ,4 0 % 1 8 ,5 1 % 2 2 ,9 5 % e u r o b a n k b u l g a r i a d s k u b b f i b i n v e s t b a n k e u r o b a n k b u l g a r i a ' roe roa car 1 1 ,4 0 % 1 3 ,5 0 % 1 0 ,1 8 % 1 1 ,6 4 % 7 ,9 8 % 1 0 ,7 7 % 1 ,6 2 % 1 ,8 8 % 1 ,0 6 % 1 ,0 8 % 0 ,8 8 % 1 ,3 2 % 2 0 ,0 3 % 2 2 ,5 0 % 1 6 ,7 6 % 1 6 ,0 5 % 1 9 ,9 1 % 2 0 ,7 7 % e u r o b a n k b u l g a r i a d s k u b b f i b i n v e s t b a n k e u r o b a n k b u l g a r i a ' roe roa car daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 142 hypothesis testing in this part of the study, the hypothesis testing method will be applied. the method aims to test whether m&a transactions affect the magnitude of the coefficients by confirming or rejecting the null hypothesis. for the purpose of the study, the following hypotheses are defined for each of the banks and each of the ratios under study: hypotheses related to return on equity (roe) ratio: h₀: there is no significant difference in roe before and after the merger. h₁: there is a significant difference in roe before and after the merger. hypotheses related to roa: h₀: there is no significant difference in roa before and after the merger. h₁: there is a significant difference in roa before and after the merger. hypotheses related to capital adequacy ratio (car): h₀: there is no significant difference in car before and after the merger. h₁: there is a significant difference in car before and after the merger. two tests, wilcoxon's criterion and paired t-test, were used to perform hypothesis confirmation. the choice of which test will be applied is based on the distribution of the data for which the shapiro-wilk test was applied. when it is applied, it is found that the following banks have data distributions consistent with the application of the paired t-test first investment bank ad, united bulgarian bank ad, dsk bank ead, and investbank ad, as well as the merger of eurobank bulgaria ad with piraeus bank bulgaria ad in 2019. the wilcoxon criterion was applied to the merger of eurobank bulgaria ad with alfa bank sofia branch in 2016. in most of the results obtained, the null hypothesis is confirmed, and the alternative hypothesis is rejected. in the case of first investment bank ad, the null hypothesis for roe and roa is confirmed with p-values of 0.861 and 0.628, indicating no significant difference in the coefficients before and after the merger, thus exceeding the significance level of 0.05. for the capital adequacy, the null hypothesis is rejected, and the alternative hypothesis is confirmed, i.e., after the merger, there is a significant difference in the capital adequacy ratio with a p-value of 0.009. in the case of united bulgarian bank ad, for the five-year period studied, no significant change was observed in all three indicators after the acquisition of cibank ead. similar results are observed when testing the defined hypotheses for investbank ad the null hypothesis is confirmed for all three coefficients. the merger of societe generale expressbank ad into dsk bank ead, according to the method used, has changed only the capital adequacy of the bank (p-value = 0.010). for the other ratios, the post-merger levels are maintained, and the null hypothesis is confirmed. the study of eurobank bulgaria ad in its two acquisitions shows that in the first one, implemented in 2016, no significant changes in the ratios are observed, and the null hypothesis is confirmed. for the merger in 2019 with bank piraeus bulgaria ad, the applied test showed that there was a significant change in roa (p-value 0.021) at 0.05 level of significance, and the alternative hypothesis is confirmed, while for the other two coefficients, the null hypothesis is confirmed. the results in the profitability ratios of the two mergers of eurobank can be justified by the influence of several factors. the size of the acquired institutions the size of alfa bank's assets is four times smaller than that of piraeus (€1.7bn as of 2018). acquiring a larger institution allows for greater economies of scale and synergies, which can lead to a more tangible improvement in profitability. on the other hand, the financial results may also have an impact on the integration between the two companies. in the first acquisition, alfa bank generated a negative financial result in the year before the transaction, whereas piraeus reported a profit in the period before the acquisition. additionally, the piraeus acquisition is the second for postbank, suggesting that the weaknesses and shortcomings of the first transaction have been taken into account. during the first transaction, the period was accompanied by the debt crisis in greece, which reduced investment in the region and made it more volatile. the second acquisition saw increased economic activity, a stabilization of the economy, and low interest rates. in addition to the banks' internal characteristics, these economic processes also have an impact. from the research carried out on the mergers implemented in the banking market in bulgaria, it can be observed that in the medium term, within five years of their implementation, it is difficult to establish how their impact on the return on equity, return on assets and capital adequacy of the bank. the trends that emerged in the years following the m&a transaction show an increase in all three indicators when their average values are calculated. what is observed after the implementation of the m&a transaction is a decrease in the fluctuations in the indicators and, accordingly, more consistent values for all daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 143 banking institutions subject to the study. it is observed from the study that after m&a transactions, banks improve their capital base and capital stability. capital adequacy improved in each of the banks observed. this improvement is also relevant to meet the regulatory requirements for banking institutions. on the other hand, the changes are not statistically significant according to the applied t-test for the most part. however, the lack of significant changes in profitability after the merger suggests that achieving synergies and operational efficiency may take longer or depend on external conditions beyond the control of bank management. this, in turn, draws attention to the fact that there are other factors influencing banks besides the acquisition transaction that have a complex impact on their performance and profit generation. another factor to consider is that the situation in bulgaria has been complex and unstable in recent years. there has been a constant political crisis and change of caretaker governments, making the country unstable in terms of its long-term policies as well as attracting foreign investment. an additional factor influencing the deals under consideration is the covid-19 pandemic. some of the deals took place in the period of the pandemic's onset. during the expansion of the pandemic, a number of measures were implemented, such as a lockdown, restrictions on free movement, an increase in unemployment, and a deterioration in the economic activity of entities. some of the businesses had a problem with the supply of raw materials, which affected their production, and the individual segment saw a restriction in consumption. banks, on their part, needed to implement measures and reassess their risk appetite in order not to allow excessive growth of npls and, consequently, generate npl losses. these factors also had an impact on their results. in practice, the medium-term period of five years is not sufficient to fully assess the impact of m&a transactions on banks' performance, but it does provide a glimpse of changes in performance. this study provides a scope to examine the impact of external factors in m&a transactions and how they relate to bank performance. conclusion this study contributes and adds to the understanding of the impact of m&a transactions in the banking sector in bulgaria and, more specifically, on financial indicators of banking institutions of significant importance, such as return on equity, return on assets, and capital adequacy. it is clear from the research and data that the medium-term period of five years is not fully sufficient for a comprehensive assessment of the impact of the transactions on the acquiring banks and their financial stability after the business combination. however, the study's results outline trends and the direction of development in terms of the coefficients. it shows that in the bulgarian banking market, this type of m&a transaction has an impact on the stability of the performance of banking institutions but does not necessarily, and in a relatively short time, lead to an improvement in their profitability. the study results also show that banks in bulgaria register improved capital adequacy and a tendency for stabilization of fluctuations in roe and roa values when post-acquisition transactions are implemented. profit as the main element serving for the calculation of roa indicators, besides depending on the internal factors in the bank, is also influenced by many external factors of the surrounding environment political and economic stability, changes in legislation, and events of extraordinary nature. the study provides a basis for future research that focuses on examining the relationship between external factors, their impact on banks and the effectiveness of m&a transactions with a longer time horizon. reference altunbaş, y., and d. marques-ibanez. 2008. mergers and acquisitions and bank performance in europe: the role of strategic similarities. journal of economics and business, 60(3): 204-222. https://doi.org/10.1016/j.jeconbus.2007.02.003. amihud, y., g. l. delong, and a. saunders. 2002. the effects of cross-border bank mergers on bank risk and value. journal of international money and finance, 21(6): 857-877. https://doi.org/10.1016/s0261-5606(02)00026-8. anzoategui, d., martinez peria, m.s., & melecky, m. (2010). banking sector competition in russia. world bank policy research working paper no. 5449. berger, a.n., w. c. hunter, and s. g. timme. 1993. the efficiency of financial institutions: a review and preview of research past, present, and future. journal of banking & finance, 17(2-3): 221-249. https://doi.org/10.1016/0378-4266(93)90030-h. borisov, l. 2017. the impact of mergers and acquisitions on the efficiency of banks in bulgaria. vuzf review journal, (2): 16-30. https://doi.org/10.56497/etj2065302. campa, j. m., and i. hernando. 2006. m&as performance in the european financial industry. journal of banking & finance, 30(12): 3367-3392. https://doi.org/10.1016/j.jbankfin.2006.06.006. https://doi.org/10.1016/j.jeconbus.2007.02.003 https://doi.org/10.1016/s0261-5606(02)00026-8 https://doi.org/10.1016/0378-4266(93)90030-h https://doi.org/10.1016/j.jbankfin.2006.06.006 daniel dimitrov / finance, accounting and business analysis, volume 6, issue 2, 2024 144 deyoung, r., d. d. evanoff, and p. molyneux. 2009. mergers and acquisitions of financial institutions: a review of the post-2000 literature. journal of financial services research, 36(2-3): 87-110. gaughan, p. a. 2011. mergers, acquisitions, and corporate restructurings. john wiley & sons. hannan, t. h., and s. j. pilloff. 2009. acquisition targets and motives in the banking industry. journal of money, credit and banking, 41(6): 1167-1197. https://doi.org/10.1111/j.15384616.2009.00251.x. lensink, r., and i. maslennikova. 2008. value performance of european bank acquisitions. applied financial economics, 18(3): 185-198. https://doi.org/10.1080/09603100601018781. pruteanu-podpiera, a., l. weill, and f. schobert. 2008. banking competition and efficiency: a micro-data analysis on the czech banking industry. 50(2): 253-273. punt, l.w., and m. c. j. van rooij. 2003. the profit-structure relationship and mergers in the european banking industry: an empirical assessment. kredit und kapital, 36(1): 1-29. https://doi.org/10.1111/j.1538-4616.2009.00251.x https://doi.org/10.1111/j.1538-4616.2009.00251.x https://doi.org/10.1080/09603100601018781 16 finance, accounting and business analysis volume 7 issue 1, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.1.02 analyzing the impact of macroeconomic variables on agricultural derivatives performance in the safex market tanganedzani mudau 1 , daniel mokatsanyane 2* school of economics and management sciences, north west university, vanderbijlpark, south africa1 school of economics and management sciences, north west university, vanderbijlpark, south africa2 * corresponding author info articles abstract history article: submitted 25 october 2024 revised 4 january 2025 accepted 11 february 2025 purpose: this research study investigates how macroeconomic factors, such as short-term and long-term interest rates, the real exchange rate, and gdp growth, influence the pricing and volatility of agricultural derivatives, specifically focusing on white maize futures and options traded in south africa. agricultural derivatives are crucial for managing price risks in a country where agriculture plays a vital economic role. design/methodology/approach: the study employs a quantitative research approach using secondary data from 2000 to 2023 sourced from reliable institutions like the south african reserve bank (sarb), statistics south africa, and the johannesburg stock exchange (jse). the autoregressive distributed lag (ardl) model is applied to evaluate both short-term and long-term relationships between the selected macroeconomic variables and derivative performance. additionally, unit root tests (adf and pp) are conducted to assess data stationarity, and diagnostic tests are used to verify the reliability of the results. findings: the study highlights the dynamic interplay between macroeconomic factors and agricultural markets, suggesting that macroeconomic shifts, particularly during periods of economic instability, can substantially affect market volatility and risk management strategies. practical implications: the research contributes valuable insights for policymakers, investors, and stakeholders by offering practical implications for improving market efficiency, managing risks, and enhancing agricultural policy formulation in south africa. it emphasizes the need for effective risk management strategies in the face of changing macroeconomic conditions to ensure market stability and sustainability. originality/value: this study provides new insights into the relationship between macroeconomic factors and agricultural derivatives in south africa, particularly during periods of economic instability. the findings offer significant contributions for policymakers and market participants in improving risk management strategies and market efficiency. paper type: research paper keywords: macroeconomic factors, agricultural derivatives, white maize futures, market volatility, risk management, ardl, south africa jel: g10, g13, g18 * address correspondence: e-mail: tanganedzanimudau@gmail.com1 danny.mokatsanyane@nwu.ac.za2 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.02 https://orcid.org/0000-0001-9378-6222 https://orcid.org/0000-0003-4074-3258 tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 17 introduction the south african futures exchange (safex) was established in 1988, with agricultural derivatives first traded in 1995. these derivatives allow market participants, including investors and farmers, to manage price risk related to agricultural commodities such as grains, oilseeds, and cattle. the performance of agricultural derivatives on safex is influenced by various factors including supply and demand, weather patterns, and government policies (vink and kirsten 2002). in addition, macroeconomic variables such as real exchange rates, gdp growth, and shortand long-term interest rates significantly impact the performance of these derivatives (kim 2003; yau and nieh 2006; adrangi et al. 2011; rapach et al. 2005; graham and harvey 2001). however, the specific impact of macroeconomic factors on agricultural derivatives remains understudied, highlighting a need for more research in this area. previous research focuses on price volatility and trading returns in agricultural derivatives (motengwe 2013), the implications of commodity derivatives for accountancy (middelberg 2011), and the impact of macroeconomic variables on agricultural productivity (setshedi 2019). yet, the analysis of how macroeconomic factors influence agricultural derivatives on safex is critical for understanding risk management, market efficiency, and investment decision-making. these derivatives are typically priced in rands per ton, with location differentials accounted for at randfontein (safex 2023). for market participants, agricultural derivatives provide essential tools for managing price risk, making it crucial to understand the macroeconomic variables that drive their performance. macroeconomic variables have a multidimensional influence on the performance of agricultural derivatives, directly affecting pricing, risk management, and market stability (shamsudin 2008). key variables include real exchange rates, gdp growth, and interest rates. for example, changes in shortand long-term interest rates affect the cost of capital and borrowing, which in turn influences investment in agriculture. higher interest rates increase the cost of hedging strategies, which can reduce market participation. similarly, exchange rate fluctuations are significant for pricing imported agricultural commodities. a weaker currency can increase import costs, driving up domestic prices and potentially making derivatives more attractive as hedging tools (chen 2014). volatility is another key factor in the agricultural derivatives market. as a financial market risk indicator, volatility reflects price changes over time and is influenced by macroeconomic conditions (smith 2020). this makes it a crucial consideration for investors and policymakers who are involved in agricultural finance and risk management. given that the safex market is exposed to both domestic and international economic forces, it is vital to understand how variables like interest rates and exchange rates impact derivative pricing and risk management strategies. while previous studies have explored macroeconomic impacts on agricultural productivity and trading, the relationship between these factors and agricultural derivatives in the safex market remains under-researched. this creates a gap in understanding that is essential for improving risk management strategies. the pricing of agricultural derivatives is not only influenced by supply and demand but also by broader macroeconomic trends such as gdp growth and exchange rate movements, which can affect market efficiency and pricing stability. the importance of studying these macroeconomic variables extends to policy implications and investment decision-making. for example, higher interest rates might reduce investment in agriculture by making borrowing more expensive, which could affect the cost of production inputs and limit market participation. on the other hand, exchange rate fluctuations could make importing agricultural commodities more expensive, thereby impacting the prices of domestic derivatives. as such, market participants and policymakers need a clear understanding of how macroeconomic variables affect agricultural derivatives to make informed decisions about risk management, hedging, and market regulation. this research aims to fill the existing knowledge gap by empirically examining how macroeconomic variables like interest rates and gdp growth impact the performance of agricultural derivatives in the safex market. through econometric modelling, the study seeks to identify the key macroeconomic drivers affecting agricultural derivatives and their implications for market participants and policymakers. understanding these dynamics is essential for enhancing risk management strategies and making informed decisions regarding portfolio allocation and market regulation. despite the increasing significance of agricultural derivatives in managing risk in the agricultural sector, there is still limited understanding of how macroeconomic variables influence their performance on safex. addressing this gap is critical for optimizing decision-making, improving market stability, and ensuring more effective risk management in the agricultural derivatives market. this research will contribute valuable insights for policymakers, regulators, and market participants by dissecting the complex relationship between macroeconomic variables and agricultural derivatives performance. by focusing on the safex market, the study provides a comprehensive analysis of the factors driving the pricing and risk tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 18 management of agricultural derivatives, offering key findings for the agricultural finance and investment sectors. literature review the study of macroeconomic variables' influence on agricultural derivatives in the safex market is crucial for understanding market efficiency, risk management, and policy development. agricultural derivatives, such as futures and options, play a vital role in managing price risks related to agricultural commodities and are significantly impacted by macroeconomic factors, including interest rates, exchange rates, and gdp growth (bakas 2018; yau and nieh 2006). despite previous research recognizing these variables' importance, knowledge gaps remain regarding the effects of macroeconomic shocks—such as sudden inflation or interest rate changes—on agricultural derivatives' volatility and pricing. additionally, while studies have focused on individual macroeconomic variables, their interactions, such as how exchange rates might influence inflation's effects on derivative prices, have received limited attention (baumeister and kilian 2016). established in 1995, safex is south africa’s primary platform for trading agricultural derivatives (vink and kirsten 2002). the performance of these derivatives is influenced by various factors, including supply and demand dynamics, government policies, and weather patterns. key macroeconomic variables— such as real exchange rates, gdp growth, and both short-term and long-term interest rates—significantly affect price fluctuations (rapach et al. 2005; graham and harvey 2001). research in other markets shows macroeconomic variables influence derivative performance; however, explicit links to safex are limited. notably, irwin et al. (2009) and zhang and wei (2010) highlight the substantial impact of exchange rates on commodity futures prices and market volatility, which is particularly relevant for safex derivatives sensitive to domestic and global economic conditions. recent studies by ndlovu et al. (2018) indicate that exchange rates and interest rates are significant predictors of agricultural commodity price volatility in safex. as south africa becomes more integrated into global markets, the sensitivity of safex derivatives to macroeconomic variables is likely to increase, reflecting trends identified by balcombe (2009). these insights emphasize the need for ongoing research that adapts to changing economic conditions. this study is grounded in the efficient market hypothesis (emh) and arbitrage pricing theory (apt), suggesting that asset prices reflect all available information (fama 1970; ross 1976). the adaptive market hypothesis (amh) further enriches this framework, proposing that market efficiency evolves with new information and participant behavior (lo 2004). this research aims to empirically assess how real exchange rates, gdp growth, and interest rates interact within this adaptive framework, contributing valuable insights into agricultural finance and risk management (ouma 2020). theories of commodity markets commodity markets, particularly agricultural derivatives, can be analyzed through various theoretical frameworks, including the theory of storage and the cost-of-carry model. the storage hypothesis suggests that commodity prices reflect the costs associated with storage, such as physical storage expenses, interest costs, and convenience yield. higher storage costs and lower convenience yields lead to an increase in spot prices relative to futures prices (working 1949). the cost-of-carry model explains the relationship between spot and futures prices by incorporating storage costs, interest rates, and expected future spot prices. when interest rates are low and transport costs decline, the gap between spot and futures prices may narrow (sarno and valente 2000). supply and demand theory is also critical in understanding price fluctuations. in agricultural derivatives, prices are influenced by the availability and desire for the underlying commodities. factors such as weather, seasonal cycles, and agricultural technology can affect supply, while demand is shaped by population growth, dietary changes, and global trade policies. macroeconomic variables like inflation and interest rates further influence supply and demand by impacting production costs and consumer purchasing power (marshall 1890). arbitrage pricing theory (apt), proposed by stephen ross, offers a multifactor model for determining fair asset prices based on various macroeconomic factors, including gdp growth and interest rates. apt can forecast pricing changes in agricultural derivatives markets, assisting traders in making informed decisions (ross 1976). rational expectations theory posits that market participants base their judgments on available information and past experiences. expectations about future economic conditions, such as inflation, are reflected in current asset prices (muth 1961). lastly, keynesian economics highlights the role of government policies and macroeconomic variables in affecting economic activity and commodity prices, with fiscal stimulus potentially driving up agricultural commodity prices (keynes 1936). tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 19 empirical studies on safex agricultural derivatives empirical research on safex agricultural derivatives highlights the key macroeconomic factors influencing this market. geyser and cutts (2007) found that exchange rate fluctuations and global commodity prices significantly drive price volatility in maize futures, suggesting that external macroeconomic shocks have a pronounced effect on safex agricultural derivatives. stable macroeconomic conditions, including consistent interest rates and low inflation, enhance the effectiveness of hedging strategies, as seen in research by titova et al. (2020), emphasizing the need for economic stability to manage risks in agricultural markets. global economic indicators, such as central bank regulations, also play a crucial role. for instance, actions by the u.s. federal reserve, such as interest rate cuts, can increase market liquidity and boost commodity demand, while rate hikes may strengthen the dollar and reduce commodity prices (tradingview 2024; fao.org 2020). this underscores the importance of understanding both global and local economic conditions when analyzing safex agricultural derivatives. during the 2008 financial crisis, liquidity restrictions and heightened risk aversion led to increased volatility in commodity markets. sanders and irwin (2010) reported that speculative activities, coupled with macroeconomic uncertainty, caused significant price swings in agricultural commodities. similarly, the covid-19 pandemic altered demand patterns and disrupted supply chains, resulting in price fluctuations, as bekkers et al. (2022) observed during the initial lockdowns. the literature suggests that macroeconomic variables such as real exchange rates, gdp growth, shortterm interest rates, and long-term interest rates are pivotal in determining the performance of agricultural derivatives on safex. theories like the cost of carry and the model theory of storage provide frameworks for understanding these dynamics. despite the growing importance of agricultural derivatives in managing agricultural risks, there remains a gap in understanding how macroeconomic variables influence these instruments on the safex market. this study aims to bridge this gap by examining how real exchange rates, gdp growth, short-term and long-term interest rates influence the performance of safex agricultural derivatives. the findings will provide valuable insights for policymakers, market participants, and regulators to make informed decisions on risk management, portfolio allocation, and market regulation. methods the study used a quantitative approach with secondary data to explore the relationship between macroeconomic variables and agricultural derivatives on safex, focusing on white maize futures and options from 2000 to 2023. this period allowed analysis across economic cycles and policy changes. secondary data from reputable sources were used, with purposive sampling to include consistently traded contracts. daily closing prices over 23 years provided a reliable sample, excluding contracts with incomplete data. the study aimed to offer insights into the influence of macroeconomic factors on derivative performance, volatility, and risk management. data collection methods secondary data on macroeconomic variables short-term interest rates, long-term interest rates, real exchange rates, and gdp growth were collected from established sources such as the sarb, stats sa, and the world bank. data on agricultural derivatives were sourced from the johannesburg stock exchange (jse) safex division. monthly spot prices for white maize derivatives and corresponding macroeconomic data from 2002 to 2023 were compiled into a consistent dataset. this timeframe was selected to ensure the analysis covered different economic cycles and conditions, increasing the robustness of the results. monthly data points were used to align the frequency of macroeconomic and derivative data, and currency fluctuations were adjusted for where necessary. data analysis the study employed the autoregressive distributed lag (ardl) model, suitable for capturing both long-term and short-term relationships between the macroeconomic variables and agricultural derivatives. the ardl model was chosen because not all variables were expected to be stationary at the same level, and it allowed for a detailed exploration of the relationships over time. the model provided insights into how these factors influenced the derivatives market in both stable and volatile periods. to assess stationarity, unit root tests such as the augmented dickey-fuller (adf) and phillips-perron (pp) were applied. the statistical analysis was conducted using eviews. short-term interest rates are crucial for influencing borrowing costs. as short-term rates increase, the cost of financing agricultural production rises, potentially decreasing output, which may drive prices higher tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 20 (ghosh and ghosh 2023). this increase in financing costs can lead to reduced investment in agricultural inputs, ultimately affecting the supply chain (liu et al. 2021). farmers and businesses may adjust their risk management strategies based on these short-term borrowing conditions, which directly impact commodity pricing and market stability (fuming et al. 2022). consequently, fluctuations in short-term interest rates can create uncertainty in the agricultural markets, influencing both production decisions and market dynamics (haase et al. 2023). long-term interest rates significantly impact investment in capital-intensive agricultural projects, as higher rates increase financing costs for infrastructure and machinery, reducing investment and supply (okunlola and ayetigbo 2024; blanchard 2023). additionally, rising long-term rates often indicate higher inflation expectations, influencing producers' planning and strategies in derivative markets (staugaitis and vaznonis 2022). consequently, producers may adjust production and hedging strategies based on anticipated changes in interest rates and inflation, affecting agricultural derivatives' pricing and volatility (santoso and santosa 2021). the real exchange rate is a vital indicator of agricultural competitiveness, with currency depreciation making exports cheaper and potentially increasing domestic prices due to higher demand (kandil 2004). gdp growth reflects overall economic activity and purchasing power, significantly driving demand for agricultural products, which in turn affects prices and related derivatives (schofield 2021). the equation evaluates the combined effects of short-term and long-term interest rates, real exchange rates, and gdp growth on agricultural commodity prices. these macroeconomic factors impact borrowing costs, investment, currency valuation, and consumer demand, with coefficients indicating the influence of each variable on prices while controlling for others: agricultural commodity prices (dependent variable) 𝑟𝑠: short-term interest rates (independent variable) 𝑟𝑙: long-term interest rates (independent variable) 𝑒𝑟: real exchange rate (independent variable) 𝑔: gdp growth rate (independent variable) the econometric equation can be expressed as follows: 𝑃=𝛽0+𝛽1𝑟𝑠+𝛽2𝑟𝑙+𝛽3𝑒𝑟+𝛽4𝑔+𝑢 (1) where:  𝛽0: intercept term  𝛽1,𝛽2,𝛽3,𝛽4: coefficients representing the impact of short-term interest rates, long-term interest rates, real exchange rates, and gdp growth on agricultural commodity prices, respectively  𝑢: error term representing unobserved factors influencing agricultural commodity prices  explanation of variables  p (agricultural commodity prices): this is the dependent variable we aim to explain. agricultural commodity prices can be influenced by various factors, including demand and supply, weather conditions, government policies, and macroeconomic variables such as interest rates, exchange rates, and gdp growth.  𝑟𝑠 (short-term interest rates): short-term interest rates influence the cost of borrowing for farmers, traders, and consumers. an increase in short-term interest rates raises financing costs, which can reduce short-term investments in agriculture, lower production, and possibly reduce demand, leading to lower agricultural commodity prices.  𝑟𝑙 (long-term interest rates): long-term interest rates affect investment decisions and long-term financing in agricultural infrastructure, equipment, and research. higher long-term interest rates can increase the cost of capital for long-term agricultural projects, potentially reducing production capacity over time, which might increase commodity prices due to reduced supply.  𝑒𝑟 (real exchange rate): the real exchange rate reflects the relative price of domestic goods versus foreign goods, adjusting for inflation. a lower real exchange rate (domestic currency depreciation) makes domestic agricultural exports more competitive in global markets, which can increase demand and push up domestic agricultural commodity prices. conversely, a stronger real exchange rate may reduce export competitiveness, leading to lower commodity prices. tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 21  𝑔 (gdp growth rate): gdp growth reflects the overall economic activity and consumer purchasing power. strong gdp growth increases demand for agricultural products, driving up their prices, while weaker gdp growth could dampen demand and reduce prices. interpretation of coefficients:  𝛽1: represents the change in agricultural commodity prices for a one-unit change in short-term interest rates, holding other variables constant. a negative value suggests that higher short-term interest rates reduce commodity prices.  𝛽2: reflects the impact of a one-unit change in long-term interest rates on agricultural commodity prices, controlling for other factors. a positive coefficient would suggest that higher long-term rates may drive up prices by limiting long-term investment in agricultural production.  𝛽3: represents the effect of real exchange rate changes on agricultural commodity prices. a negative value indicates that a stronger domestic currency lowers export demand, reducing agricultural prices, while a positive coefficient implies that a weaker currency boosts export competitiveness, raising prices.  𝛽4: indicates the impact of gdp growth on agricultural commodity prices. a positive coefficient suggests that as the economy grows, demand for agricultural products rises, leading to higher prices. result and discussion the performance of agricultural derivatives in the safex is significantly influenced by various macroeconomic variables. to analyze these dynamics, econometric models, particularly the ardl approach, are employed. this method effectively investigates both short-term and long-term relationships among variables, accommodating cases where variables are integrated at different orders. the foundation for this analysis lies in unit root tests, notably the adf test, which determines whether a time series is stationary or non-stationary (dickey and fuller 1979). ensuring stationarity is crucial, as non-stationary variables can lead to spurious regression results. the adf test results indicated that all independent variables were stationary, while the dependent variable, white maize spot price (wmaz), was non-stationary and required first differencing. the ardl model was then applied to explore the effects of macroeconomic variables, including interest rates, exchange rates, and gdp, on wmaz. the model effectively captured both short-run fluctuations and long-run equilibrium relationships, confirmed through cointegration tests. the analysis revealed significant long-run relationships between wmaz and variables such as long-term interest rates, real effective exchange rate, and gdp, offering insights into how these economic factors shape the agricultural derivatives market in south africa. unit root test unit root tests were conducted on various time series using both the adf and pp tests. establishing stationarity is a critical aspect of time series econometrics, as non-stationary series can yield misleading regression results (granger and newbold 1974). the analysis aimed to identify unit roots within the time series, indicating non-stationarity, which could lead to permanent effects following shocks (nelson and plosser 1982). the adf and pp tests were essential for detecting the presence of unit roots. stationary series (i(0)) tend to revert to a long-term mean, whereas non-stationary series (i(1)) require differencing for stationarity. table 1 illustrates that the wmaz price demonstrated non-significant p-values of 0.6817 and 0.7571 for the adf and pp tests at level under the intercept specification, indicating that the series was nonstationary and possessed a unit root. however, after first differencing, both tests rejected the null hypothesis of a unit root, yielding p-values of 0.0000, confirming that wmaz was integrated of order one (i(1)). these findings are consistent with existing theories, suggesting that commodity prices, particularly agricultural products like maize, often exhibit non-stationarity due to market shocks and price volatility (dickey and fuller 1979). the short-term interest rate (sir) was found to be stationary at level (i(0)), with both adf and pp tests reporting p-values of 0.0000, indicating that the series reverted to its mean over time. similarly, the long-term interest rate (lir) also showed stationarity at level, indicated by significant p-values for both tests (0.0000). the stationarity of interest rates aligns with expectations in financial time series, where central banks intervene to maintain target levels (engle and granger 1987; stock and watson 2002). the real exchange rate (rer) was also stationary at level (i(0)), with p-values of 0.0000 in both tests, reflecting monetary policy impacts on exchange rates (obstfeld & rogoff 1995). gdp was found to be stationary at tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 22 level (i(0)), suggesting mean-reverting behavior during the studied period, although some studies indicate gdp often requires differencing due to long-term growth trends (nelson and plosser 1982). the results of these unit root tests were crucial for determining appropriate econometric techniques. for variables integrated of order one (i(1)), such as wmaz, differencing was necessary to achieve stationarity, enabling valid regression results (dickey and fuller 1979). for stationary variables like sir, lir, rer, and gdp, ordinary least squares (ols) methods could be applied without risk of spurious results. however, in cases with both i(0) and i(1) variables, the ardl approach was suitable, allowing for the inclusion of variables with varying levels of integration (pesaran et al. 2001). the results of stationarity tests for five different series were assessed at both the level and first difference, using the adf and pp tests at the 5% significance level. table 1. panel unit root tests (fisher and pp-fisher) source: compiled by authors the stationarity test results suggest that while most macroeconomic variables (sir, lir, rer, and gdp) are stationary at levels, the white maize price (wmaz) is non-stationary at level and becomes stationary after first differencing. this implies that different econometric models or transformations are necessary depending on the nature of the variable in question. adherence to stationarity principles is vital to ensure reliable and interpretable results in time series analysis (granger 1981). according to brooks (2019), time series that are non-stationary at level and become stationary after differencing is often referred to as difference-stationary processes. this transformation ensures that the time series can be used in further analyses like cointegration tests or vector autoregression (var), which require stationary data (gujarati 2021). engle and granger (1987) noted that economic variables such as interest rates and exchange rates often exhibit stationarity, allowing for meaningful long-term equilibrium relationships in models such as cointegration models. the presence of stationarity in interest rates, exchange rates, and gdp aligns with findings from earlier research (nelson and plosser 1982), where macroeconomic variables are often found to be stationary when modelled with proper adjustments for structural breaks or trends. stationary variables imply that they revert to their mean over time, which is essential for ensuring robust forecasting and modelling of long-term relationships (stock and watson 2015). the theoretical significance of these results lies in their implications for econometric modelling. the stationarity of sir, lir, rer, and gdp at level (i (0)) means that these variables can be used directly in regression models without transformation. however, wmaz’s i (1) property necessitates differencing before incorporating it into econometric models to avoid spurious results (enders 2015). ardl model the ardl model was chosen for this study due to its flexibility in dealing with a mixture of stationary and non-stationary variables. by assessing both shortand long-run dynamics, this approach allows for a nuanced understanding of how macroeconomic factors such as short-term interest rates (sir), long-term interest rates (lir), real exchange rate (rer) and gdp growth influence the performance of series method adf pp wmaz at level intercept 0.6817 0.7571 i(1) 1st difference intercept & trend 0.0000 0.0000 sir at level intercept 0.0000 0.0000 i(0) 1st difference intercept & trend 0.0000 0.0001 lir at level intercept 0.0000 0.0000 i(0) 1st difference intercept & trend 0.0000 0.0001 rer at level intercept 0.0000 0.0000 i(0) 1st difference intercept & trend 0.0000 0.0001 gdp at level intercept 0.0000 0.0000 i(0) 1st difference intercept & trend 0.0000 0.0001 tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 23 agricultural derivatives in the safex market. table 2. ardl model results variable coefficient std. error t-stat prob. wmaz(1-) 0.302918 0.059864 5.060090 0.0000 sir -3.271939 3.059114 -1.069517 0.2855 lir 9.563895 3.412772 2.802308 0.0053 rer -16.15203 4.357146 -30707997 0.0002 rer(-1) 4.204293 4.064134 1.034491 0.309 gdp 2.098343 3.827023 0.548410 0.5838 gdp(-1) 12.51513 5.986703 2.091674 0.0374 c 10.78527 11.77177 0.916197 0.3604 source: compiled by authors in table 2, the ardl model estimation for white maize prices (wmaz) reveals significant insights into the relationship between selected macroeconomic variables short-term interest rates (sir), long-term interest rates (lir), the real effective exchange rate (rer), and gross domestic product (gdp) and wmaz performance. this analysis focuses on both shortand long-run dynamics, highlighting immediate impacts and long-term equilibrium relationships. lagged white maize price (wmaz (-1)) the lagged wmaz coefficient is 0.302918, indicating a strong positive effect of previous prices on current prices, supported by a t-statistic of 5.06009 and a p-value of 0.0000, which confirm significance at the 1% level. this aligns with commodity price persistence theories, where past prices influence current prices due to factors such as supply chain delays and speculative behaviour (deaton and laroque 1992). the significant lagged effect suggests that maize prices follow a partial adjustment process, meaning they do not fully respond to shocks immediately but adjust over time. short-term interest rate (sir) the coefficient for the sir is negative (-3.271939), implying a decrease in wmaz prices by approximately 3.27 units with a unit increase in sir. however, the t-statistic of -1.069571 and p-value of 0.2855 indicate that this relationship is not statistically significant. this finding aligns with some literature suggesting minimal direct impacts of short-term rates on commodity prices, as they influence monetary policy and investment decisions more broadly (frankel 2006). the insignificance may also reflect limited immediate transmission to agricultural markets. long-term interest rate (lir) in contrast, the lir has a positive and significant effect on wmaz prices, with a coefficient of 9.563895. an increase of 1 unit in lir raises white maize prices by 9.56 units, with a t-statistic of 2.802380 and a p-value of 0.0056 indicating significance at the 1% level. this finding is consistent with theories that posit higher long-term rates raise financing costs for producers, potentially reducing supply and pushing prices higher (frankel 1986). the results highlight the agricultural sector's sensitivity to long-term financing, which is critical for capital-intensive farming operations. real effective exchange rate (rer) the current rer negatively affects white maize prices, with a coefficient of -16.15203 and a t-statistic of -3.703497 (p-value: 0.0003). interestingly, the first lag shows a positive but insignificant effect, while the second lag is significant (coefficient: 8.404094, t-statistic: 2.587603, p-value: 0.0101). these results suggest that currency depreciation (an increase in rer) initially lowers maize prices due to enhanced export competitiveness, but this effect reverses over time as exporters adjust to higher input costs (dornbusch 1985). this delayed positive impact corroborates studies on lagged exchange rate effects on agricultural commodities (akram 2009). gross domestic product (gdp) the gdp coefficient is 2.098433, indicating that a 1-unit increase in gdp raises wmaz prices by approximately 2.10 units, with a t-statistic of 2.585702 and a p-value of 0.0102 confirming significance. this positive relationship implies that economic growth boosts demand for food commodities, reflecting engel’s law, which states that as national income increases, the demand for food also rises, albeit at a decreasing rate (engel 1857). moreover, the lagged gdp coefficient (gdp (-1)) of 1.251513 is significant (t-statistic: 2.916914, p-value: 0.0040), highlighting the influence of past economic conditions on current maize prices, tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 24 consistent with studies showing that gdp growth can affect commodity prices through consumption and investment demand (baffes and haniotis 2010). constant term (c) the constant term has a coefficient of 10.78527, but it is not statistically significant (t-statistic: 0.916197, p-value: 0.3604). this suggests that the baseline level of white maize prices does not differ significantly from zero when all independent variables are zero. the insignificance of the constant term is typical in time series models, where the focus is on the dynamics of explanatory variables (asteriou and hall 2011). ardl long run and bounds test table 3. ardl long run form and bounds test variable coefficient std error t-statistic prob c 10.78527 11.77177 0.914197 0.3604 wmaz(-1) -0.697082 0.059864 -11.64440 0.0000 sir -4.693676 4.409497 -1.064467 0.2881 lir 13.790 4.935974 2.779573 0.0058 rer -28.63036 9.859792 -2.904422 0.0038 gdp 20.96371 8.315981 2.520918 0.0123 source: compiled by authors table 4. f-bounds test test statistics value i(0) i(1) f-stat 29.80888 10% 2.45 3.52 k 4 5% 2.86 4.01 actual sample size 265 1% 3.74 5.06 source: compiled by authors short-run dynamics and speed of adjustment the conditional error correction regression reveals the dynamics of short-run independent variables (differenced variables) on the dependent variable (differenced wmaz). the speed of adjustment to longrun equilibrium, represented by the lagged level of wmaz (wmaz (-1)), has a coefficient of -0.697082, indicating that approximately 69.7% of any deviation from long-run equilibrium is corrected each period. this finding aligns with agricultural price literature, suggesting commodities like maize adjust quickly to equilibrium following short-term shocks (gouel 2012). the significance of this error correction term highlights the swift adjustment to short-term deviations, which economic theory supports, as the error correction mechanism ensures that shocks are temporary, and the system returns to its stable long-run path (engle and granger 1987). short-run impacts in the short run, the regression results show significant impacts of long-term interest rates, lagged exchange rates, and lagged gdp on white maize prices, while the short-term interest rate does not significantly affect the maize market (p-value: 0.2881). this suggests that the maize market is more sensitive to long-term macroeconomic conditions, such as borrowing costs and economic growth, consistent with findings by fan et al. (2008). long-run relationships and cointegration the levels equation indicates significant long-run relationships between white maize prices and longterm interest rates, the real effective exchange rate (rer), and gdp. the ardl model demonstrates positive relationships with gdp (coefficient: 20.96391, p-value: 0.0123) and long-term interest rates (coefficient: 13.71990, p-value: 0.0058), supporting the notion that economic growth and interest rates significantly influence agricultural prices (ravallion 1987). conversely, a negative relationship between the rer (coefficient: -28.63036, p-value: 0.0000) and maize prices indicates that a stronger exchange rate reduces prices, aligning with economic theory regarding export competitiveness (ghosh 2003). cointegration and the bounds test the bounds test for cointegration confirms a long-run equilibrium relationship, rejecting the null hypothesis of no cointegration (f-statistic: 29.80888), further supported by the t-bounds test (t-statistic: 11.64440), indicating that despite short-term volatility, macroeconomic fundamentals anchor the long-term trajectory of maize prices. tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 25 these results have several implications. first, the significant long-run relationships between white maize prices and macroeconomic factors such as the real exchange rate and gdp suggest that maize markets are sensitive to broader economic conditions. this insight can guide policymakers in crafting agricultural and economic policies that stabilize commodity markets by managing exchange rate fluctuations and fostering economic growth. additionally, the strong rate of adjustment (69.7%) emphasizes the resilience of maize prices in returning to equilibrium after disruptions, which can be critical for risk management and hedging strategies in agricultural markets. this analysis confirms a strong cointegration relationship between white maize prices and macroeconomic factors, with significant long-run effects from gdp, long-term interest rates, and the real effective exchange rate. the fast speed of adjustment suggests that maize prices respond quickly to disequilibrium, aligning with theoretical expectations of agricultural commodity markets (dickey and fuller 1979). the findings highlight the importance of understanding both shortand long-run dynamics in the maize market for effective policy formulation and market strategies. the results of the adrl model indicate that long-term interest rates, the real effective exchange rate, and gdp (both current and lagged) are significant determinants of white maize prices. the strong lag effect of white maize prices highlights the role of price persistence in commodity markets. the findings suggest that macroeconomic factors such as exchange rates and gdp growth play crucial roles in shaping agricultural commodity prices, in line with existing economic theories and empirical evidence (dickey and fuller 1979; frankel 1986). however, short-term interest rates appear to have no significant impact on white maize prices, suggesting that their influence on the agricultural sector may be indirect or mediated through other channels. diagnostic test table 5. breusch-serial correlation lm test f-stat 1.3522 prob. f 0.2605 obs r-squared 2.7918 prob. chi-square(2) 0.2476 source: compiled by author serial correlation the null hypothesis for the serial correlation test posits no serial correlation in residuals, indicating independence over time. higher p-values than 0.05 suggest that we cannot reject this null hypothesis, affirming that the residuals are uncorrelated, which aligns with the classical linear regression model assumptions (wooldridge 2013). the absence of serial correlation is crucial, as its presence could lead to inefficient estimates and biased standard errors (greene 2018). moreover, it indicates adequate model dynamics for reliable forecasts (gujarati 2021). in time series models like arima and garch, independent residuals validate model specifications (stock and watson 2015). table 6: heteroskedasticity test breusch-pagan godfrey f-stat 0.6550 prob f 0.7308 r-squared 5.3157 prob c hi-squared 0.7234 source: compiled by authors the second diagnostic test examines whether heteroskedasticity (non-constant variance of the residuals) is present. the null hypothesis assumes homoscedasticity, meaning that the variance of the residuals is constant. in this case, the p-values are greater than 0.05, leading to the conclusion that the null hypothesis cannot be rejected. this implies that there is no evidence of heteroskedasticity, and the residuals exhibit constant variance. the presence of homoscedasticity is essential because heteroscedasticity can result in inefficient parameter estimates and incorrect inferences, as standard errors would be biased (brooks 2019). according to white (1980), heteroscedasticity distorts hypothesis tests and confidence intervals, making it critical to test for this issue in regression analysis. the absence of heteroscedasticity suggests that the model provides reliable standard errors and coefficient estimates, enhancing the validity of the statistical inferences. the null hypothesis of this test is homoscedasticity ( i.e. constant variance of the residuals). a higher p-value (> 0.05) indicates that we cannot reject the null hypothesis. since the p-values are greater than 0.05, there is no tanganedzani mudau, daniel mokatsanyane / finance, accounting and business analysis, volume 7, issue 1,2025 26 evidence of heteroskedasticity, implying that the residuals have constant variance. the study's findings, derived from the augmented dickey-fuller (adf) and phillips-perron (pp) unit root tests, along with ardl model estimation, provide crucial insights into the relationship between macroeconomic variables and the performance of agricultural derivatives, specifically white maize (wmaz) in the safex market. stationarity tests indicated that most macroeconomic variables short-term interest rate (sir), long-term interest rate (lir), real exchange rate (rer), and gdp are stationary at levels (i(0)), while wmaz prices are non-stationary at level and become stationary after first differencing (i(1)). this distinction is critical for selecting appropriate econometric techniques to ensure reliable results. the ardl model results reveal dynamic relationships, showing that lagged wmaz prices (wmaz (-1)) positively impact current prices, indicating price persistence and partial adjustment within the maize market. additionally, lir significantly affects wmaz prices positively, likely reflecting its influence on agricultural financing costs. the rer exhibits mixed effects, with initial depreciation lowering maize prices before a subsequent positive effect. furthermore, gdp growth is positively linked to wmaz prices, underscoring the impact of economic growth on food commodity demand. these findings are vital for understanding how macroeconomic factors influence agricultural commodity prices in both the short and long term. they are particularly relevant for policymakers, traders, and investors in managing risks and making informed decisions regarding agricultural derivatives, emphasizing the importance of considering both short-run adjustments and long-run equilibrium relationships in commodity market analysis. conclusion this study provided a comprehensive analysis of the impact of macroeconomic variables on the performance of agricultural derivatives in the safex market, focusing on white maize futures and options. the findings highlight critical linkages between long-term interest rates, real exchange rate fluctuations, and gdp growth, emphasizing their substantial influence on agricultural derivative prices and market volatility. key results reveal that long-term interest rates significantly drive derivative pricing, reflecting their role in shaping agricultural financing costs and long-term investment decisions. similarly, gdp growth directly correlates with increased derivative prices due to heightened demand for agricultural products in expanding economies. the dual impact of real exchange rate fluctuations—enhancing export competitiveness while affecting input costs—further illustrates the nuanced interplay between macroeconomic conditions and market performance. dynamic hedging strategies emerge as an essential tool for market participants navigating this complex environment. unlike static hedging, which assumes fixed positions, dynamic hedging involves regularly adjusting positions in response to market changes and price movements. this adaptive approach allows for more effective management of basis risks, enabling hedgers to offset fluctuations in macroeconomic factors such as interest rates and exchange rates. by incorporating real-time data and predictive analytics, traders and producers can fine-tune their hedging portfolios, aligning them with current and anticipated market conditions. strategies like delta hedging, dynamic stop-loss mechanisms, and the use of rolling futures contracts can mitigate risks and capitalize on market opportunities. the study underscores the importance of integrating macroeconomic indicators into risk management frameworks and pricing strategies. policymakers should consider measures to stabilize long-term interest rates and manage exchange rate volatility, thereby improving market efficiency and reducing price instability. for market participants, adopting dynamic hedging strategies aligned with macroeconomic trends can enhance resilience against economic fluctuations. future research should explore broader datasets incorporating variables such as global oil prices, climate risks, and trade policies to capture their implications on agricultural derivatives. utilizing alternative econometric models like garch or var may provide deeper insights into volatility and causal relationships, 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doi: https://doi.org/10.37075/faba.2025.1.01 determinants of fintech adoption in savings and credit cooperatives: evidence from malawi reuben bereckia chipeta1 , andrew munthopa lipunga2* malawi university of business and applied sciences1 malawi university of business and applied sciences2 * corresponding author info articles abstract history article: submitted 14 october 2024 revised 12 january 2025 accepted 11 february 2025 purpose: the study examines factors influencing the adoption of fintech in savings and credit cooperatives (saccos) using the unified theory of use and acceptance of technology. methodology: the study adopted a quantitative research design and used a survey method to collect data from saccos in malawi. it employed a probit regression model to analyze the data. findings: the results indicate that expected effort, social influence, and facilitating conditions were the significant factors whereas expected performance was not. further, facilitating conditions were found to be more influential followed by social influence and expected effort. practical implications: efforts to promote fintech adoption in saccos need to prioritize the development of a robust digital ecosystem, that is, the facilitating conditions. originality/value: this contributes to the discourse on the determinants of fintech adoption that has so far provided contrasting results. further, this is the first empirical study on fintech adoption determinants in malawi's saccos. paper type: research paper keywords: fintech, malawi, savings and credit cooperatives jel: g2, g3, m0, m1 * address correspondence: e-mail: reuben.chipeta@gmail.com1 alipunga@mubas.ac.mw2 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.01 https://orcid.org/0009-0004-9821-656x https://orcid.org/0000-0003-1712-1311 reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 2 introduction financial technology (fintech) refers to the technological developments that have the potential to revotionalize how financial services are provided and inspire the creation of new business models, apps, workflows, and products (world bank, 2021). it involves leveraging technology to offer different services including blockchain, data analysis, insurance, personal finance, wealth management, financial services lending, payment solutions, real estate, and regulatory tech (nanduri 2021). fintech offers ways of easily accessing banking and financial services, and promoting financial inclusion, especially in developing countries like malawi (evans 2018). it has changed how financial services and products are produced, delivered, and consumed (allen et al. 2021). for instance, instead of going to the bank or savings and credit cooperative (sacco) or any financial institution office physically to access services, one may access the services using unstructured supplementary service data (ussd) or online, using the internet provided they have a phone or a computer. worldwide, the rate of adoption of fintech has gone up to 64% and 96% of consumers are aware of these products and services (hassan et al. 2022). the world economic forum projects that 70% of the world’s new value will be digitally enabled in the next ten years (world economic forum, 2020). africa has demonstrated acceptance in the use of fintech products. for example, it is noted that as of 2023, 68% of global mobile money transactions by value were done in africa (afcfta 2023). these evolutions have not spared malawi, a country in sub-saharan africa. it has been reported that access to at least a formal financial product increased from 34% in 2015 to 45% in 2018 (finmark trust 2020). this was necessitated by investments being made in financial technologies like mobile money services. besides, the same investments have also been made in banking digital payment solutions. savings and credit cooperatives (saccos) have also been adopting fintech. recently, the financial cooperative (fincoop) sacco launched ‘fin mobile’, which is a digital banking application specifically designed for saccos. generally, the innovations in the banking industry have pushed other financial institutions including saccos to adopt innovative means of serving their members. to the extent that saccos are partnering with banks and other fintech suppliers to help them incorporate fintech services in their operations. accordingly, some saccos have adopted electronic banking and mobile banking services (undp malawi 2023). the adoption of these technologies is reforming how members access and the cooperatives offer financial products and services (feyen et al. 2023). as of september 2023, in malawi, forty-four saccos were affiliated with the malawi union of savings and credit cooperative (muscco) the mother body for the saccos in the country. the fortyfour saccos were serving two hundred twenty-two thousand nine hundred and eleven members (muscco 2023). the number represents an increase in both the number of saccos and membership since 2019. according to the records, in 2019, muscco had thirty-eight affiliates that were serving one hundred fifteen thousand one hundred twenty-one members (finmark trust 2020). despite the benefits associated with the adoption and use of fintech products and services, the uptake of these products and services is still very low in malawi (world bank 2021). in particular, finmark trust (2020) found that most payments are done in cash and cheques in many micro finance institutions (mfi) and village savings and loan associations (vslas) (finmark trust 2020). further, loan applications were all still done manually despite innovations. however, there are hardly any studies to examine this problem. besides, there is a dearth of studies on fintech in general in malawi; most extant studies focus on specific products and services like internet banking and mobile money, leaving other products or services within the financial technology area (chirwa 2022). in addition, existing studies from other countries provide contrasting results regarding the factors that influence fintech adoption (kurniasari et al. 2023; najib et al. 2021; rosnidah et al. 2019; hassan et al. 2022; rahim et al. 2023; sebastián et al. 2023; hasyim 2022). therefore, this study seeks to contribute to filling these gaps by assessing the factors that drive the adoption of fintech in the saccos. it is worth noting that fintech and saccos both play a role in improving financial inclusion in developing countries like malawi. literature review and conceptual framework unified theory of acceptance and use of technology (utaut) several theories attempt to explain why one adopts or does not adopt a particular technology. these include the theory of reasoned actions (tra), theory of planned behaviour (tpb), technology acceptance model (tam), technology acceptance model 2 (tam 2), technology acceptance model 3 (tam 3), innovation diffusion theory (idt), unified theory of acceptance and use of technology (utaut) among others (makongoro 2014). however, this study uses the utaut model. the model was adopted due to its predictive power and existing empirical evidence of its reliability of results it produces (papagiannidis 2022). reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 3 the theory was developed by venkatesh et al. (2003). it was developed to get a holistic understanding of what influences the adoption of technologies. it was developed after integrating eight theories which include theory of reasoned action (tra), the theory of planned behaviour (tpb), the technology acceptance model(tam), the motivational model (mm), the combined theory of planned behaviour and technology acceptance model (ctpb-tam), model of pc utilisation (mpcu), innovation diffusion theory (idt) and social cognitive theory (sct) (williams, 2015; venkatesh et al. 2003). these theories were developed in different fields. for example, tra, tpb, and mm were developed in the social psychology fields whilst tam, ctpb-tam, and mpcu were developed in the social field. social cognitive theory and idt were developed in social sciences fields. by integrating these models and theories, utaut took into account all their limitations and worked on them whilst taking advantage of their merits. thirty-two variables were used to develop the utaut model and these were fused into four variables which are social influence, expected performance, facilitating conditions, and expected effort (aziz et al., 2020). williams et al. (2015) pointed out that these four constructs directly influence behavioral intention to use as well as usage itself. numerous prior studies on the adoption of technologies, innovations, or systems have used the theory (papagiannidis 2022). accordingly, this study uses the four constructs to examine the determinants of fintech adoption in saccos. expected effort venkatesh et al. (2012) define expected effort as the degree of use associated with a particular technology. expected effort is associated with convenience (makongoro 2014). it explains which applications are likely to be adopted and used by a user. existing studies have produced contrasting results on the effect of expected effort on the adoption of fintech. for example, studies by kurniasari et al. (2023); najib et al. (2021); tun-pin et al. (2019); makongoro (2014), and yan et al., (2021) found that expected effort had a positive significant influence on the adoption of fintech. essentially, a high degree of ease of use was among the main factors influencing the adoption of fintech (kurniasari et al. 2023; rosnidah et al. 2019; tun-pin et al. 2019). on the other hand, hassan et al. (2022); urus et al. (2022); and rahim et al. (2023) found that expected effort had no significant influence on the adoption of fintech. the studies observed that simplicity in using a system cannot be enough reason to influence one to adopt a system. thus, this study hypothesized that: h1: expected effort has a positive effect on fintech adoption in saccos. social influence social influence is the degree to which influential people think a certain technology is appropriate for people to employ (venkatesh et al. 2012). since organizations such as saccos operate in an open environment where technological advances are the norms of the day, they may be forced to adapt and adopt fintech to remain competitive and to serve well their members (daft 2016). different researchers have studied the impact of social influence on the adoption of fintech such as zakariyah et al. (2023), kurniasari et al. (2023), hassan et al. (2022), chan et al. (2022), rahim et al. (2023), najib et al. (2021), nawayseh, (2020), rosnidah et al. (2019) and tun-pin et al. (2019). these studies found that social influence had a positive and significant influence on the adoption of fintech. however, urus et al. (2022) found contrasting results. the study found that social influence had a negative significant influence on the adoption of fintech in indonesia, whilst in malaysia, the study found that it had no influence at all. this study hypothesized that: h2: social influence has a positive effect on fintech adoption in saccos. expected performance expected performance refers to the degree to which people believe that using a specific technology would enhance their ability to perform their job (venkatesh et al. 2012). since the adoption of a particular technology is usually associated with costs, there must be an economic justification for the technology to be adopted. in other words, the benefits must outweigh the costs. thus, expected performance measures the degree to which adoption of the technology will provide recognizable benefits to users (rosnidah et al. 2019). it is worth noting that expected performance is one of the factors that have been heavily used in studies on mobile and internet banking (oliveira et al. 2014; tarhini et al. 2016; yu 2012). several studies have also looked into how performance expectancy influences fintech adoption. they include kurniasari et al. (2023), rahim et al. (2023), yan et al. (2021), rosnidah et al. (2019), and najib et al. (2021) who found that expected performance influences fintech adoption to a greater extent. on the other hand, studies by sebastián et al. (2023), hasyim (2022), pasaribu and rabbani (2022), kadim and sunardi (2021), maharani (2021), sankaran and chakraborty (2021), and angelina et al. (2021) found that expected performance does not influence the adoption of fintech. accordingly, this study hypothesized that: reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 4 h3: expected performance has a positive effect on fintech adoption in saccos. facilitating conditions facilitating conditions entails the degree to which a person thinks that the technological and organizational infrastructure is available to facilitate the use of a specific technology (khalili 2011). according to venkatesh et al. (2012), facilitating conditions are perceptions of the existence of resources as well as support to perform a behavior. thus, facilitating conditions are circumstances or elements that make it easier or more favorable for a certain outcome or action to occur. studies have found contrasting results on the effect of facilitating conditions on the adoption of fintech. for instance, hassan et al. (2022),rahim et al. (2023), kadim and sunardi (2021), angelina et al. ( 2021), kurniasari et al. (2023), rosnidah et al. (2019), hu et al. (2019), and najib et al. (2021) found that facilitating conditions do have a positive significant effect on fintech adoption. conversely, hasyim (2022), pasaribu (2022) and sebastián et al. (2023) found that facilitating conditions do not have a significant effect on the adoption of fintech. accordingly, the study hypothesized that: h4: facilitating conditions have a positive effect on fintech adoption in saccos. based on the extant literature, figure 1 presents the conceptual framework for the study. the four constructs of the utaut theory are employed as independent variables whereas fintech adoption is the dependent variable. independent variables dependent variables source: derived from a literature review by researchers (2024). figure 1. conceptual framework methods research design this study took a positivist research philosophy, employing quantitative data collection and analysis methods. it was cross-sectional and explanatory in nature. a deductive research approach was adopted as such the study used an existing theory to determine the effects of utaut variables on fintech adoption in saccos in malawi. sampling and data collection the population of the study was the forty-four saccos that are affiliated with the malawi union of savings and credit cooperatives (muscco) as of september 2023 (muscco, 2023). considering the manageable number of the saccos, a census approach was adopted, as such, all the saccos were sampled. primary data was collected using a questionnaire. the questionnaire was administered using google forms and in cases where there were challenges to collecting the data, the researcher physically delivered the questionnaire. one questionnaire was sent to each sacco. accordingly, forty-four questionnaires were sent out of which thirty-three were returned out of the returned questionnaires, thirtytwo were usable. this represented a 72% response rate. to determine whether saccos had adopted fintech, the questionnaire (see the appendix) requested the participants to tick on the options given on the fintech product they were using or indicate any other product being used if not on the list of options. the other questions were grouped according to the variables being studied. for instance, questions on expected effort focused on how respondents could rate on a scale of 1-5 how easy it is to understand the fintech system or product, its user-friendliness and convenience, and trust when one is using the system. for social influence, participants rated members’ and competitors’ influence, and the desire to improve corporate image. for the expected performance, the questions centered on time savings, efficiency, and effectiveness. lastly, regarding facilitating conditions, questions assessed the availability of government support, regulations, resources to use or adopt the systems, technical knowexpected performance expected effort social influence facilitating conditions fintech adoption reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 5 how, and support to use the system. data analysis the dependent variable was binary, where 0 indicated non-adoption of fintech and 1 indicated the adoption of fintech, as such, a probit regression model was employed to analyze the data. the following probit regression model was used: 𝑝𝑟𝑜𝑏[𝑦𝑖 = 1|𝑥𝑖] = φ(𝛼 + 𝛽0 + 𝛽1𝑥1 + 𝛽2𝑥2 + 𝛽3𝑥3 + 𝛽4𝑥4) (1) where φ is a normal cumulative density function, 𝑦 𝑖 is a dummy variable taking value 1 if the sacco adopts fintech and 0 otherwise while the regression parameters were 𝛽 𝑖 = (𝛽 1 , 𝛽 2 , 𝛽 3 , 𝛽 4 ) being the coefficient on the first, second, third and fourth predictor variables. the 𝑥𝑖’s represent independent variables denoted as follows: 𝑥1 – the expected effort 𝑥2 – the social influence 𝑥3 – the expected performance 𝑥4 – the facilitating conditions statistical testing was done to ascertain the relationship between the dependent and the independent variables in the model with the help of stata software. result and discussion demographic characteristics as it has already been noted, 33 responses were received out of which 32 were usable representing a 72% response rate. in terms of years of existence, 34% of the saccos were less than 10 years old. the same was observed for those with years of existence between 10-20 years. the remaining 31% were found to have existed for more than 20 years. with regards to membership, 97% of saccos have a membership of less than 20,000. the remaining 3% has a membership of more than 20,000. descriptive statistics the questionnaire had questions whose responses were measured using the likert scale of 1 – 5, with 1 representing strongly disagree, 2 disagree, 3 neutral, 4 agree and 5 strongly agree except for fintech adoption which had a binary measure of yes (1), or no (0). all four constructs of the utaut model had questions that were collectively answering their level of influence. table 1 provides the descriptive results for the variables. table 1. descriptive statistics results variables sample size mean std. deviation minimum maximum fintech adoption 32 0.875 0.336 0.000 1.000 expected effort 32 3.820 0.670 2.000 5.000 social influence 32 4.089 0.576 2.500 5.000 expected performance 32 4.203 0.610 2.333 5.000 facilitating conditions 32 3.526 0.618 1.833 4.667 source: data processed (2024) the results indicate that 87.5% of the sampled saccos had adopted fintech. the high rate of adoption is not surprising as the world is going digital, as such, organizations even in developing countries are going along in adopting relevant technologies to remain competitive. in terms of the independent variables, the minimum mean score on the constructs was 3.5 whilst the maximum average was 4.1. this meant that most of the responses were positive as they were above the neutral value of 3. on the expected effort, the mean score was 3.820, which is above 3 representing a neutral stance as it is slightly lower than agree (4). on social influence, the average score was 4.089, which is somewhat above agreement (4). regarding expected performance, the mean score was 4.203 which is slightly above 4 which represents agreement. likewise, the mean score for facilitating conditions was 4.667 which is somewhat lower than strongly agree (5) but above agree (4). reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 6 diagnostic tests reliability tests cronbach’s alpha was computed to assess reliability. the computed cronbach’s was based on variables which included fintech adoption, expected performance, expected effort, social influence, and facilitating conditions. the results from this test are presented in table 2. table 2. cronbach’s alpha results item-test item-rest average inter-item item observations sign correlation correlation correlation alpha fintech adopted 32 + 0.763 0.600 0.375 0.706 expected effort 32 + 0.623 0.404 0.459 0.772 social influence 32 + 0.842 0.724 0.327 0.660 expected performance 32 + 0.803 0.662 0.350 0.683 facilitating conditions 32 + 0.574 0.340 0.488 0.792 test scale 0.3999 0.769 source: data processed (2024) the overall alpha result of 0.77 suggests that there was a strong internal consistency in the variables (taber 2018). the alphas of the variables ranged between 0.660 and 0.792, as such, they fall in the acceptable zone. this means that the whole set of variables were measuring the same underlying dependent variable. multicollinearity the researcher tested for multicollinearity. in this process, correlation was tested first (zakariyah et al. 2023). it is worth noting that some scholars argue that a value of 0.80 or higher is a sign of multicollinearity (shrestha, 2020), while others state that a correlation of 0.70 or higher should be a course of concern (pallant 2010; tarhini et al. 2016). however, multicollinearity is detected through the use of variance inflation factor (vif). vif of less than 3 is deemed acceptable which indicates that multicollinearity is minimal or non-existent. tables 3 and 4 show the correlation and vif test results. table 1. correlation coefficients results fintech adopted expected effort social influence expected performance facilitating conditions fintech adopted 1 expected effort 0.291 1 social influence 0.560 0.476 1 expected performance 0.521 0.392 0.691 1 facilitating conditions 0.378 0.087 0.3111 0.293 1 source: data processed, 2024 table 2. variance inflation factor (vif) results variable vif 1/vif social influence 2.18 0.458626 expected performance 1.96 0.510071 expected effort 1.32 0.760272 facilitating conditions 1.13 0.884962 source: data processed, 2024 the results presented in table 3 show that all the correlation coefficients were less than 0.70 suggesting that the data was free of multicollinearity problems. this was confirmed in table 4 as vif values for all variables were less than 3. reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 7 heteroscedasticity being a cross-sectional study data is usually affected by heteroscedasticity, accordingly, the test was undertaken to examine whether variances were constant or not (gujarati, 2004). the result of the test produced a chi-square statistic of chi2(1) being equal to 23.55 with a probability (prob > chi2) of 0.0000. based on these results the null hypothesis was rejected as it was proved that heteroscedasticity was present. accordingly, robust standard errors were used when estimating the model as they tend to violate statistical model assumptions (mansournia et al., 2021). model specification before deciding on the variables to be included in the model, a model specification test was undertaken. basically, independent variables have to be fit so that errors or biases that may affect the model and later the results are avoided. a link test model was used to test the model specification. table 5 presents the results. table 3. model specification test fintech coefficient std. err. z p>z [95% conf. interval] _hat 1.015295 0.66119 1.54 0.125 -0.280614 2.311203 _hatsq -0.0547229 0.066392 -0.82 0.413 -0.1848485 0.0754028 _cons 0.0365464 0.557426 0.07 0.948 -1.055989 1.129081 source: data processed, 2024 based on the results, both hat and hat squares were insignificant. this shows that the model was fit for the analysis. this was also verified with the joint p-value of the model which at less than 0.01 (see table 6) indicating the fitness of the model for the analysis. inferential statistics the inferential statistics were run using the probit regression model and the results, which used robust standard errors are presented in table 6. it is worth noting that the joint p-model was found to be significant (p-value = 0.008). this shows that the model was fit, accordingly, its results can be relied on with greater confidence. table 4. summary of inferential statistics results variables coefficients p value robust std. errors marginal effects [95% confidence interval] expected effort 1.486 0.009 0.571 0.0918 0.367633 2.603631 social influence 3.341 0.032 1.567 0.206 0.2829072 6.401008 expected performance 1.119 0.159 0.797 0.069 -0.4389227 2.676093 facilitating conditions 4.386 0.005 1.6 0.271 1.289449 7.481799 constant -33.211 0.001 10.261 n/a -53.15967 -13.26207 joint p-value 0.008 sample size 32 source: data processed, 2024 the results for the regression model show that expected effort significantly influences fintech adoption in saccos in malawi. with a p-value of 0.009, any positive percentage change in expected effort significantly increases the probability of adoption by 9.18%. the results are consistent with kurniasari et al. (2023), makongoro (2014), najib et al. (2021), rosnidah et al. (2019), and tun-pin et al. (2019). as regards social influence, the results of the probit regression model also show that it significantly influences adoption. with a p-value of 0.032, any positive percentage change in social influence significantly increases the probability of adoption by 21%. johnson et al. (2017) explained that organizations, like living organisms, continue to adapt to their environment if they are to survive. moreover, in the current competitive and open environment, organizations need to actively interact with the environment and the organizations (daft 2016) and try at a minimum to remain at par with fellow organizations. in this study, some saccos took a leading role in the adoption and usage of fintech, others adopted the technology as they felt they need not be left behind. reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 8 on the other hand, the results of the expected performance show that it is insignificant as its p-value was 0.159 thus greater than the maximum threshold of 0.05. the results, to some extent, were surprising because the efficiency brought by the usage of technology is expected to benefit the organization. this is the case because operational costs tend to be minimized as less effort or time is spent working on one activity. mckillop et al. (2020) observed that fintech has managed to change business fortunes from loss-making to profit-making businesses. they noted that the positive impact of fintech on the performance of business can never be refuted. however, this study's results suggest that the benefits may not be realizable in malawi. this may be due to low it literacy in the country as such the users of the technology may not be in a position to use it efficiently. lastly, on the facilitating conditions, probit regression results showed that they significantly influence the adoption of fintech in saccos. with a p-value of 0.005, any positive percentage change in facilitating conditions increases the probability of adoption by 27%. the results are in agreement with angelina et al. (2021), hassan et al. (2022), hu et al. (2019), najib et al. (2021), rosnidah et al. (2019), and tun-pin et al. (2019). besides, it is worth noting that the results showed that facilitating conditions were the most positive and significant variable in influencing fintech adoption in saccos followed by social influence and expected effort. the results echo the calls of the world bank (2021) and hornuf et al. (2025) for more investment in digital infrastructure and making sure that the digital ecosystem is robust and in human capital by incorporating information communication technology (ict) and financial lessons in education such that the citizens' expertise and knowledge in the ict and finance are increased. conclusion the objective of the study was to determine the factors that influence the adoption of fintech in saccos in malawi using the utaut model. the results indicate that expected effort, social influence, and facilitating conditions were the significant factors whereas expected performance was not. further, facilitating conditions were found to be more influential followed by social influence and expected effort. the results indicate the areas that need focusing in promoting fintech adoption in the saccos. further, the results indicate that the promotional efforts may need to prioritize ensuring the development of a robust digital ecosystem to enhance the facilitating conditions. the major limitation of the study is that it is crosssectional, in the future, a longitudinal study may be necessary to evaluate the evolution of the subject matter over time. references al nawayseh, m. k. 2020. fintech in covid-19 and beyond: what factors are affecting customers’ choice of fintech applications? journal of open innovation: technology, market, and complexity, 6(4): 153. https://doi.org/10.3390/joitmc6040153. allen, f., x. gu, and j. jagtiani. 2021. a survey of fintech research and policy discussion. review of corporate finance, 1(3–4): 259–339. https://doi.org/10.1561/114.00000007 angelina, kurniadi, e., g. g. hendityasari, and m. mariani 2021. analysis factors affecting lenders intention in p2p lending platform using utaut2 model. turkish journal of computer and mathematics education, 12(3): 3527–3537. https://doi.org/10.17762/turcomat.v12i3.1628 chan, r., i. troshani, s. rao hill, and a. hoffmann. 2022. towards an understanding of consumers’ fintech adoption: the case of open banking. international journal of bank marketing, 40(4): 886– 917. https://doi.org/10.1108/ijbm-08-2021-0397 chirwa, e. 2022. understanding the dynamics of value co-creation in a digital platform ecosystem: the case of mobile money in malawi. phd thesis. university of sheffield. daft, r. l. 2016. management. boston: cengage learning. sebasti´an, m. g. de b., a. antonovica, and j. r. s. guede. 2023. what are the leading factors for using spanish peer-to-peer mobile payment platform bizum? the applied analysis of the utaut2 model. technological forecasting and social change, 187(february). https://doi.org/10.1016/j.techfore.2022.122235 evans, o. 2018. connecting the poor: the internet, mobile phones and financial inclusion in africa. digital policy, regulation and governance, 20(6): 568-581. https://doi.org/10.1108/dprg-04-2018-0018 feyen, e., h. natarajan, and m. saal. 2023. fintech and the future of finance-market and policy implications. the world bank group. finmark trust. 2020. malawi financial inclusion refresh. available at: https://uncdfmapdata.org. 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[accessed 6th october 2024] zakariyah, h., a. o. salaudeen, a. h. a. othman, and r. rosman. 2023. the determinants of financial technology adoption amongst malaysian waqf institutions. international journal of social economics, 50(9): 1302-1322. https://doi.org/10.1108/ijse-04-2022-0264 reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 11 appendix: questionnaire section a: fintech products/services in use (please tick the relevant box according to your choice) which fintech products/services do you use?(vasenska et al. 2021) i. mpamba □ ii. airtel-money □ iii. electronic banking. i.e., electronic funds transfer, online account access □ iv. digital loan application and approval □ v. others (please specify): …………………………………………………………………… vi. we do not use any □ section b: measuring constructs (please tick the relevant box according to your choice) expected effort 1. it is easy to understand the operation of fintech services/products (hassan et al. 2022) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 2. the operation interface of fintech services or products is user-friendly (hassan et al. 2022). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 3. conducting transactions through fintech products or services is convenient (hassan et al. 2022). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 4. there are no doubts about what is being done when using fintech products or services (oliveira et al. 2014) i. strongly agree □ ii. agree □ iii. neutral □ reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 12 iv. disagree □ v. strongly disagree □ social influence 5. our members want us to use or adopt fintech services/products (hassan et al. 2022). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 6. our fellow saccos influence us to adopt and use fintech services/products (hassan et al. 2022). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 7. our members prefer that we should use or adopt fintech services/products to traditional banking methods (hassan et al. 2022). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 8. we find the use of fintech products or services to be fashionable (oliveira et al. 2014). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 9. the use of mobile banking improves our brand and corporate image (oliveira et al. 2014). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 13 expected performance 10. usage of fintech products/services saves us time (hu et al. 2019) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 11. using fintech help us meet our service needs (hu et al. 2019). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 12. fintech services can improve efficiency (hu et al. 2019) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 13. fintech products/services usage reduces traffic in our offices. i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 14. fintech products/services allow us to make our payments quicker (oliveira et al. 2014) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 14 15. loan applications are made quicker when using fintech products/services (oliveira et al. 2014) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 16. overall, the fintech products/services usage provides us with value for money(yan et al. 2021) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ facilitating conditions 17. government supports and improves the use of fintech products/services (hu et al. 2019). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 18. fintech products/services are well-regulated in malawi (hu et al. 2019) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ reuben b. chipeta, andrew m. lipunga / finance, accounting and business analysis, volume 7, issue 1, 2025 15 19. necessary resources to use fintech services/products exist (hassan et al. 2022) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 20. fintech services/products are compatible with other systems that we use (hassan et al. 2022) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 21. help is available when we get problems in using these services (yu 2012). i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ 22. we have the knowledge of how to use fintech products/services (oliveira et al. 2014) i. strongly agree □ ii. agree □ iii. neutral □ iv. disagree □ v. strongly disagree □ thanks for participating and answering these questions. 198 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.06 does esg compliance drive commercial banks stock returns? evidence from the south african market babatunde lawrence1 , fabian moodley2* north-west university, vanderbijlpark, south africa1 north-west university, vanderbijlpark, south africa2 * corresponding author info articles abstract history article: submitted 28 march 2025 revised 22 june 2025 accepted 6 august 2025 purpose: the study examined the effect of environmental, social and governance (esg) on the commercial bank returns in south africa. design/methodology/approach: the study made use of a cross sectional panel model for the sample period 2015-2024. the dependent variable included five south african commercial banks (absa, standard bank, nedbank, capitec bank and investec bank) and the independent variable comprised of esg ratings for each bank. the study also introduced control variables in the form of macroeconomic variables, namely, inflation, money supply, short-term interest rate, long-term interest rate, gross domestic product and real effective exchange rate. findings: the findings demonstrate that commercial bank returns in south african is negatively affected by esg compliance. moreover, gross domestic product, short-term interest rate, long-term interest rate and real effective exchange rate has a positive effect on commercial bank returns. practical implications: firstly, the prudent authority which governs the financial market must re-examine policies requiring south african commercial banks to be esg compliant as it reduces the return perspective of each bank. secondly, the asset-liability committees (alco) of commercial banks should develop strategies that alters the mix of assets and liabilities to better manage the costs associated with esg compliance. this way they can better manage the negative effect of esg compliance on banks returns. originality/value: this study is the first to consider esg compliance as a determinant of commercial bank returns in south africa. hence, the study provides insight into the effect between esg compliance and commercial bank returns. it, therefore, contributes to emerging market literature which is centred on bank performance as appose to bank returns. paper type: research paper keywords: esg, bank returns, south africa, panel model, macroeconomic variables. jel: g01, g10, g11. * address correspondence: e-mail: 217081567@nwu.ac.za1 fabian.moodley@nwu.ac.za2 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.06 mailto:fabian.moodley@nwu.ac.za1 mailto:fabian.moodley@nwu.ac.za https://orcid.org/0000-0001-5385-6812 https://orcid.org/0000-0001-8954-4933 babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 199 introduction the banking sector of south africa comprises of a central bank known as the south african reserve bank (sarb) which oversee the operations of commercial banks within the borders of south africa (xulu 2022). the sarb is considered a systemically important bank as the failure or insolvency will lead to termination in operations of commercial banks. in south african there exist various commercial banks that participate in the banking sector, however, the five important commercial banks that accounts for more than 80 percent of banking assets in south africa is standard bank, absa bank, capitec bank, nedbank and investec bank (ngwenya 2022). the duties of these commercial banks are to accept money in the form of deposits and then use these deposits to generate loans for individuals, businesses and governments (mofokeng and moodley 2025). the profitability of commercial banks is largely dependent on the exposure to credit risk, operational risk and market risk, where such exposure if not correctly identified and mitigated, will consume the capital base of banks and lead to a decrease in retained earnings, effecting share prices and shareholder returns (lawrence and doorasamy 2021). this was clearly evident during the 2007/2008 global financial crises (gfc) as there was excess on and off the balance sheet leverage of banks caused by excess lending coupled with enhanced client default (acharya and richardson 2009). the limited capital regulation of banks reduced the commercial banks' ability to cope with the enhanced client defaults. this caused the south african banking sector to become highly volatile, such that banking returns fell in value, and the bearish market condition prevailed (luchtenberg and vu 2015). the inability of commercial banks to mitigate the gfc resulted in the basel committee on banking supervision (bcbs) developing the basel iii accord to strengthen commercial banks resilience to financial market uncertainty (fratianni and pattison 2015). until recently, investors are no longer looking at commercial banks’ ability to mitigate financial market uncertainty, rather, they are now interested in the environmental, social and governance (esg) compliance of commercial banks. the environmental pillar focuses on the commercial banks impact on the natural world, such as climate change, pollution, resource management and waste reduction (clément et al. 2025). the social factor highlights the relationship the commercial banks have with its employees, customers, communities and other stakeholders (martiny et al. 2024). the primary focus is considering factors like labor practices, diversity and inclusion, human rights, and community engagement (chopra et al. 2024). the last factor, governance, focuses on the systems and structures that guide a company's operations and decision-making, including board composition, executive compensation, shareholder rights, transparency, and ethical business practices (he et al. 2024) . for instance, moodley et al. (2024) found that investors in south africa have become more conscious to sustainable finance, whereby they are looking for banks that are esg compliant. this implies that investors are reluctant to hold deposits with non-compliant commercial banks, which effects banks operations and ultimately commercial bank returns (moodley et al. 2024). consequently, the responsible investor behavior has over the years forced commercial banks to foster in esg principles in the daily operations to ensure they maintain their investor base and share price stability (folqué et al. 2021). this requires commercial banks to comply with all government regulations pertaining to each pillar of the esg framework, failure to do so will result in the commercial bank being non-compliant (minkkinen et al. 2024). in attempt to understand this phenomenon of esg compliance, many academics attempt to examine the relationship between esg and commercial banks returns. however, majority of literature is centred around international commercial banks, with no study considering south african commercial banks, despite the importance of sustainable investing (carnevale and mazzuca 2014; miralles-quirós, miralles-quirós and redondo‐hernández 2019; ersoy et al. 2022). moreover, literature demonstrates conflicting findings, such that certain academics find that esg compliance enhance banks returns whereas other academics demonstrate that esg compliance negatively effects commercial bank returns. consequently, there is no consensus on whether esg compliance influences commercial bank returns and if such compliance drives commercial bank returns. accordingly, to contribute to the debate and rectify the inconclusive findings, this study examines the effect of esg on south african commercial bank returns. the achievement of the research objective contributes to literature in various ways. firstly, this study introduces a new concept to the south african banking sector returns, known as esg, which is yet to be done, therefore broadening the empirical base given the evolution to stainable investing. secondly, this study provides evidence of the relationship between esg compliance and commercial bank returns, therefore, the banking supervisory department can use the findings to make more informed decisions on esg initiatives. thirdly, the findings may assist investors, if it is found that esg drives commercial bank returns, then investors need to consider esg principles in their investment strategies as it will result in enhanced returns, the opposite holds true as well. lastly, the findings will assist policy makers in making more informed decisions on policies governing esg compliance of commercial banks, such that policies should be either relaxed or enhanced to ensure financial stability of banks. babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 200 the remaining paper is outlined as follows: section 2 presents the literature review, which is segregated according to the theoretical propositions and empirical review. section 3 presents the methodology, which comprises of the data and empirical model used in the study. section 4 provides the results as generated from the empirical model, whereas section 5 discusses the results in relation to past literature, highlighting the practical and economic implications. section 6 then concludes the research paper, by providing a synthesis of the findings and future scope for similar studies. literature review the concept of esg compliance is imbedded in the “doing good while doing well” theory which postulates that investors can attain success while simultaneously having a positive social impact by including ethical and social responsive initiatives into their investment strategies (statman and glushkov 2009). coherent with this theory, academics have examined the influence of responsible investing like esg on commercial banks. however, majority of literature is centred around bank performance. for instance, el khoury (2021) examined the effect of esg on bank performance and return in the middle east, north africa and turkey. the study incorporated monthly data for the period 2007-2019, which was used in a panel regression analysis. the authors controlled for macroeconomic factors such as gross domestic product (gdp) and inflation to isolate the effects of esg. the findings demonstrated that esg has a nonlinear relationship with return on assets (roa) and return on equity (roe) (proxy for bank performance) and bank returns where the effect is dependent on the level of esg compliance and variables used to measure bank performance. yuen et al (2022) examined the effect of esg on banking sector performance and profitability of 51 countries. using monthly data for the period 2006 to 2021, the generalized method of moments (gmm) model demonstrated that esg has a negative effect on commercial bank performance, such that it increases operating costs for banks. moreover, in the long-run esg increases bank profitability. similarly, menicucci and paolucci (2023) also examined the effect of esg on bank performance. however, they used an ordinary least squared (ols) regression analysis. the findings of the ols model demonstrated that bank performance is negatively impacted by esg compliance. thus, italian banks have not embraced strong sustainability procedures. in line with this, indrasuci and rokhim (2023) used a panel regression model to examine the determinants of bank performance in east asia countries for the period 2017-2021. the authors employed roa and roe as a proxy for bank performance whereas esg was considered as a determinant. the findings relevaled that esg has a negative impact on bank performance and return, such that banks who are more compliant are more adversely affected. contrary to the above findings, lamanda and tamásné vő neki (2024) examined the effect of esg compliance on bank performance in central european countries for the period 2017-2021. the authors used monthly data from banks financial reports to gather esg score whereas bank performance was measure by roa and roe. the panel regression model demonstrated that esg has no significant effect on bank performance, suggesting that bank performance is independent to esg compliance. moreover, the findings suggest that there is adequate cost saving strategies in place for central european banks to mitigate expenses from rising esg compliance. jaiwani and gopalkrishnan (2025) also examined the effect of esg compliance on bank performance, but they focused on indian commercial banks. the findings of the panel regression model demonstrated that esg compliance has a negative effect on roa and roe. this suggests that india’s commercial banks performance is not resilient to esg enhancements by the indian governments. in the south african context there exists two studies that have considered esg compliance in the banking sector. xulu (2022) conducted a systematic review of literature (srl) to determine if south african commercial banks are incorporating esg principles. the findings reveal that there are no mandatory requirements for commercial banks in south africa to implement esg in their daily operations and as such commercial banks do so on a voluntary basis. moreover, nedbank is found to be the most compliant followed by investec bank, standard bank, absa bank and capitec bank. in line with these findings ngwenya (2022) investigated the effect of esg compliance on six commercial banks. the study made use of monthly data for the period 2017-2021 and used a panel regression model. the findings revealed that esg compliance has a positive effect on standard bank, capitec bank, nedbank, investec bank, first national bank and absa bank performance. that being enhance esg compliance increases the operating efficiency of banks. while majority of literature is centred on esg compliance and bank performance, some academics have embraced the notion that bank returns is directly influenced by esg compliance. however, such studies are very limited internationally with no study evident in south africa. for instance, carnevale and mazzuca (2014) used a panel regression model to examine the effect of esg compliance on european commercial bank returns. the authors implemented a sample period comprising of quarterly data for the period 2011 to 2002. the findings revealed that esg compliance has a negative effect on commercial bank returns. the authors attribute these findings to the increase costs associated with meeting the initiatives of sustainable babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 201 banking practices. miralles-quirós, miralles-quirós and redondo‐hernández (2019) also used a panel model to examine the effect of esg compliance on commercial bank returns, but the authors conducted a comparative analysis between developed and developing countries. the findings revealed that commercial bank returns in developed countries are positively influenced by esg compliance whereas developing countries commercial bank returns is negatively affected by esg compliance. that authors suggest that developed nations have created policies that makes commercial banks more resilient to esg compliance whereas developing countries are yet to develop such policies. in a more recent study, ersoy et al. (2022) examined the effect of esg compliance on the market value of commercial banks in the united states (us) banking sector. the authors consider the returns of commercial banks as a proxy for market value whereas esg compliance was attained from the financial statements of commercial banks. the unbalance nonlinear panel model demonstrates that there is a timevarying effect between esg compliance and commercial bank returns. that being, the state of the bank sector dictates the effect, where esg compliance has a negative effect on commercial bank returns during covid-19 but pre-covid-19, bank returns was positively influenced by esg compliance. the review of empirical literature reveals that esg compliance and the banking sector is dominated in the international setting with little to no emphasis placed on south african commercial banks. moreover, where studies have considered esg compliance in the banking sector, literature is centred on the effect of esg on banking performance as appose to banking return. furthermore, there is mixed findings on the influence of esg on commercial bank performance as some academics find a positive effect whereas other authors find a negative effect and some finding no effect. on this basis the study examines the effect of esg on commercial bank returns in south africa. the study is important as it contributes to solidifying the mixed findings and introducing the concept within the south african banking sector which is non-existent. therefore, the findings of the study will have important implications for investors, fund managers and policy makers which will better assist these individuals with carrying out their duties. methods the study employs a panel data regression analysis which entails the use of the random model (rm) and the fixed effects (fe) as an empirical model to analyse the relationship between the south african bank returns and the esg compliance of the same banking sector in south africa. as used by lawrence, doorasamy and sarpong (2020), anande-kur et al (2020) and al-homaidi et al (2018), the study uses the panel model as expressed in the model specification. data source the authors constructed a cross-sectional dataset from the annual balance sheet of sampled banks for the estimation of the returns. the quarterly returns of the banks are estimated from equation 1, from their price values which are extracted from mcgregor data base, alongside the macroeconomic related variables and the esg values. the top 5 banks (absa, standard bank, nedbank, capitec bank and investec bank) from the south african banking system were selected for this study based on the percentage contribution of their collective assets to the south african banking sector. hence the sample size for these 5 banks was arrived based on availability of data and set criteria covering the period 2015 to 2024. 𝑃𝑅𝑖𝑡 = 𝑝𝑡𝑖 − 𝑝𝑡𝑜 𝑃𝑡𝑜 (1) where: 𝑝𝑡𝑖, 𝑝𝑡𝑜 and 𝑃𝑅𝑖𝑡 represent the price at the current time, price at the initial time, and price return respectively. model specification 𝐵𝑎𝑛𝑘 − 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑖𝑡 = 𝑎0 + 𝜆1𝐸𝑆𝐺𝑖𝑡 + 𝜆2 𝐶𝑃𝐼𝑖𝑡 + 𝜆3𝑀2𝑖𝑡 + 𝜆4𝑆𝑇 − 𝐼𝑁𝑇𝑖𝑡 + 𝜆5𝐿𝑇 − 𝐼𝑁𝑇𝑖𝑡 + 𝜆6𝐺𝐷𝑃𝑖𝑡 + 𝜆7𝑅𝐸𝐸𝑅𝑖𝑡 + 𝑒𝑡𝑖𝑡 (2) where: 𝐵𝑎𝑛𝑘 − 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 is the returns on bank i for the year t, 𝝀1, is a constant term, 𝝀2 to, 𝝀7 are the coefficients of the independent variables. esg is the environmental, social and governance (esg) compliance of commercial banks. cpi represents the consumer price index, which is the proxy for inflation, m2 represents the money supply of the country, st-int and lt-int represent the shortand long-term interest rate, as gdp and reer represent the gross domestic product and the real exchange rate of the sa economy under the observed period. babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 202 variable used in the analysis esg compliance score: environmental, social, and governance (esg) is another name for an investing principle that prioritizes environmental issues, social issues, and corporate governance. investing with esg considerations is sometimes referred to as responsible investing or, in more proactive cases, impact investing (gelle 2023). bank returns: like those of any company, are the profit or loss an investor makes on their investment, calculated as the percentage change in price over a period, and can be influenced by various factors like company performance and broader market conditions. gross domestic product: gdp is a macroeconomic indicator that indicates the value of economic output of a country adjusted for price fluctuations (i.e., inflation or deflation). with this modification, nominal gdp – a money-value metric—becomes an indicator of the amount of overall output (barasa 2014). money supply (m2): in macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. there are several ways to define "money", but standard measures usually include currency in circulation (i.e. physical cash) and demand deposits (depositors' easily accessed assets on the books of financial institutions) (brunner 2018). real exchange rate: the currency volatility has effects on the stock returns. when currency appreciates, in a situation where the country is export-oriented, it is expected that there will be a reduction in the competitiveness of exports and would therefore have a negative impact on the domestic stock market. this is because the export-oriented companies quoted on the stock exchange market would be less profitable and this may in turn become less attractive to investors (muthike and sakwa 2012). inflation (cpi): inflation as measured by consumer price index is a macroeconomic index that measures the rate of raise in the cost of living and results in a shift of resources from investments to consumption. the demand for market instruments falls leading to reduction in the volume of stock traded. this will force the monetary policy authorities to respond to the increased rate of inflation with economic tightening policies, which in turn increases the nominal risk-free rate, which raises the discount rate in the valuation model (adam and twenoboa 2008). results and discussion table. 1 descriptive statistic bank returns esg cpi m2 st int lt int gdp reer mean 46993.00 2.9366 4.2698 7.1763 6.4625 3.4867 -1.3744 0.3809 median 18915.50 2.8300 4.4000 6.6000 7.0700 3.8100 -0.95 0.4654 maximum 313434.0 4.7700 6.9000 15.7100 8.6300 5.0300 5.5000 10.7357 minimum 7500.000 2.0000 1.3000 2.3700 3.4700 1.5800 -10.9 -11.5234 std. dev. 62425.77 0.7271 1.2676 2.8826 1.5370 1.1322 2.9851 4.2478 skewness 2.2288 0.6980 -0.2363 1.2144 -0.6622 -0.2189 -0.6924 -0.1689 kurtosis 7.4806 3.0639 2.9847 4.5186 2.2555 1.6300 4.5535 3.6510 jarque-bera 259.6477 12.6939 1.4529 53.3328 15.0034 13.4451 28.1495 3.4977 probability 0.0000 0.0018 0.4836 0.0000 0.0006 0.0012 0.0001 0.1739 sum 7330908. 458.1100 666.1000 1119.500 1008.150 543.7800 -214.4 59.4216 sum sq. dev. 6.04e+11 81.95350 249.0684 1287.949 366.1729 198.6990 1381.19 2796.887 observations 156 156 156 156 156 156 156 156 levin, lin & chu t* (level) 0.9195 0.5535 0.0000 0.2508 0.5115 0.065 0.0000 0.0000 first difference 0.0000 0.0000 0.0000 0.0000 0.0039 0.0650 0.0000 0.0000 source: authors’ own estimation (2024). table 1 reveals the descriptive statistics of all the variables used in this study. bank return has the https://en.wikipedia.org/wiki/investment https://en.wikipedia.org/wiki/environmental_issues https://en.wikipedia.org/wiki/social_issues https://en.wikipedia.org/wiki/corporate_governance https://en.wikipedia.org/wiki/corporate_governance https://en.wikipedia.org/wiki/socially_responsible_investing https://en.wikipedia.org/wiki/impact_investing https://en.wikipedia.org/wiki/macroeconomics https://en.wikipedia.org/wiki/money https://en.wikipedia.org/wiki/circulation_(currency) https://en.wikipedia.org/wiki/cash https://en.wikipedia.org/wiki/demand_deposits https://en.wikipedia.org/wiki/demand_deposits https://en.wikipedia.org/wiki/asset https://en.wikipedia.org/wiki/financial_institution babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 203 highest mean with 46993, while gdp has the lowest value of -1.3744. it is important to note that bank returns also has the highest standard deviation with esg having the least standard deviation. the result also reveals that bank returns and real exchange rate has the maximum and minimum values with 313434 and 7500 respectively. it is interesting that esg score has a mean of 2.9366 and a standard deviation of 0.727. this illustrates that the volatility of the sector is not clustered around its mean. more so, the skewness of bank returns, esg, cpi and m2 values are positive, illustrating that the headline returns are skewed to the right with a long tail. however, the rest of the macroeconomic variables are positioned on the left. the jarque-bera test with the exception of cpi, and reer, the rest of the variables are at 1 percent significance. this demonstrates that the variables are not normally distributed. it is important to note that the levin, lin and chu stationarity tests for all variables are significant at the 1 percent level in first difference. this suggests that the null hypothesis of all variables having a unit root is rejected in favour of the alternative hypothesis, this implies that only cpi, gdp and reer are stationary at level. table 2. correlation matrix probability bank returns esg cpi m2 st int lt int gdp reer bank returns 1 ---- esg -0.4968 1 0 ---- cpi -0.0942 -0.1417 1 0.2418 0.0777 ---- m2 -0.0896 -0.0117 0.1571 1 0.2657 0.8848 0.0502 ---- st int 0.0319 -0.0291 0.1268 0.3033 1 0.6926 0.7185 0.1146 0.0001 ---- lt int 0.2307 0.5152 0.3674 0.1816 -0.1060 1 0.0038 0 0 0.0232 0.1877 ---- gdp 0.0392 0.0582 0.2525 0.3423 0.2033 -0.1737 1 0.6272 0.4707 0.0015 0 0.0109 0.0301 ---- reer 0.0454 0.0207 0.0425 0.1112 0.0263 -0.0195 0.1807 1 0.5739 0.7973 0.598 0.1669 0.7447 0.8091 0.024 ---- source: authors’ own estimation (2024). table 2 shows the correlation matrix of all variables. it is interesting to note that except for long-term interest rate, all macroeconomic variables are not significantly correlated to the esg compliance score. hence no evidence of multicollinearity. also, it reveals that there is a negative correlation between bank returns and esg score. babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 204 table 3. regression analysis variables random result with returns fixed effect result with returns pool result with returns c 164644.8*** (5.961855) 103937.5*** (4.773245) 164644.8*** (6.174718) esg -76994.04*** (-14.81685) -42024.74*** (-5.919463) -76944.04*** (-15.3459) control variable result cpi -646.1636 (-0.233139) -810.5547 (-0.429011) -646.1636 (-0.241463) m2 -3925.263*** (-3.198924) -2813.372*** (-3.296331) -3925.26*** (-3.313139) st-int -37.51087 (-0.017146) 36.592447 (0.024538) -37.51087 (-0.017758) lt-int 41263.00*** (11.56118) 26659.48*** (7.704538) 41263.00*** (11.9739) gdp 3292.698*** (2.756874) 2297.139*** (2.755018) 3292.698*** (2.8553) reer 431.9307 (0.564540) 283.0228 (0.542422) 431.9307 (0.58469) r-squared= 0.6429 r-squared=0.8257 r-squared=0.6429 adjusted rsquared=0.625997 adjusted rsquared=0.81367 adjusted rsquared=0.6259 husman test chi-sq. statistic = 17.7368 probability= 0.0000 source: authors’ own estimation (2024). table 3 presents the results of the pool, random and fixed effects of the regression between bank returns, esg compliance and the control variables. it is crucial to first note that the probability value of the f-statistic of all regressions is significant at a 1% level. however, the fixed effect model shows the highest r (82.57) and r squared value (81.36%) respectively compared to the random and the pooled regressions. evaluating the results of both the fixed and random effect, one could see that there are considerable interesting outcomes. however, panel results are justified through the choice of weather the fixed or random effect is most appropriate in modelling the desired objective. hence, the hausman test aids in determining the best fit model between fixed effect and the random effects within a panel data model (amin et al. 2012). therefore, the hausman test result shows a chi-sq, p value of 0.0000, suggesting the fixed effect model is the best fitted model for this study. discussion the esg compliance score is estimated to have a negative statistically significant relationship with bank returns at a 1% level. this is suggestive of the fact that south african banks returns have a negative relationship with esg compliance. it further connotes that esg score of south african banks do not have a positive impact on their returns. this result is unique but similar to yuen et al (2022), menicucci and paolucci (2023), and indrasuci and rokhim (2023) which showed that esg has a negative effect on commercial bank performance. empirical evidence outside south africa such as carnevale and mazzuca (2014) suggests similar negative association between esg compliance and bank returns. the authors emphasized increase in cost associated with meeting the initiatives of sustainable banking practise as reasons for the inverse relations. this reason could also be related to the findings of esg having a negative impact on south african bank returns. zulu (2022) further posit in its systematic review of literature that there are no mandatory requirements for commercial banks strict compliance to esg principles in their daily banking operations. hence, this could be a deliberate attempt by south african banks to avoid the cost associated with compliance with the operations of esg. furthermore, the control variables relationships show some interesting outcome with bank returns. while cpi, and reer show no statistically significant relationship with south african bank returns, m2, babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 205 long-term interest rate and gdp show a statistically significant relationship at a 1% level. for m2, there exist a significant negative relationship with south african bank returns. this implies that the increase in m2 does have a negative impact on bank returns. gdp has a positive significant relationship with south african bank returns at 1% level. this result is contrary to okech and mugambi (2016) who reveals a negative and insignificant relationship between bank stock returns and gdp. however, consistent with laichena and obwogi (2015) who found a positive relationship between banks stock returns of three east african economies. the result suggests that economic growth plays a vital role in determining the returns of south african banks. further suggestive that a buoyant economy strengthens banks return per unit of investment into business in the economy. furthermore, the result shows that both short term and long-term interest rates has a positive significant relationship with south african bank return. the result is contrary to nurazi and usman (2016) who found a negative effect of interest rate on bank returns in kenya. the positive significant outcome between long-term interest rate and south african bank return suggests that most south african banks widen the spread between the interest earned on loans and the interest paid on deposits hence boosting their net income and potentially attracting more deposit. reer shows a positive significant relationship with bank returns. this result is contrary to nurazi and usman (2016) who found a negative significant relationship between exchange rate and bank returns. conclusion this study seeks to establish if esg compliance of banks could drive their stock return in south africa. hence, using the panel data, fixed effect model, the study regressed bank returns (response variable) against esg bank compliance (explanatory variable) alongside cpi, gdp, reer, m2 and shortand longterm interest rate as control variables. the study finds that esg compliance do not positively affect bank returns, but rather negatively affect bank returns in south africa. interestingly certain macroeconomic variables such as gdp, both short and long-term interest rate, and reer all impact bank returns positively. as an emerging market economy, with a banking industry that is striving and excelling as one of the strongest and most stabilized banking industry within the emerging market economy and even in africa. the compliance of its banking sector to the esg requirements in operating its businesses is very crucial, because investors in the country are becoming more conscious to sustainable finance. hence, investors are likely to pull away their funds and investments from commercial banks that are not esg compliant in the country. even though esg compliance may come at an initial cost but assures benefits and huge returns at the end. this initial cost could be a huge hinderance to positive returns for these banks, however consistency in observing it would attract better and huge investments from within and outside the country in the long run. the study therefore recommends that policymakers in the banking sector and the regulators (eg the sarb) should ensure strict compliance with esg standards for all banks with the view of sustaining it in the long term. this could be possible by closely monitoring disclosures of esg frameworks in their governance structure, risk management and business processes before implementation. references adam, a.m., and g. tweneboah. 2008. macroeconomic factors and stock market movements: evidence from ghana. http://mpra.ub.uni-muenchen.de/11256/ al-homaidi, e. a., m. i. tabash, n. h. farhan, and f. 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https://doi.org/10.1108/jec-10-2022-0147 https://doi.org/10.1080/20430795.2021.1929807 https://doi.org/10.3390/su14159527 https://doi.org/10.1002/sd.2181 https://doi.org/10.4018/978-1-7998-7967-1.ch023 https://doi.org/10.1016/j.irfa.2023.103003 https://doi.org/10.1108/bij-05-2023-0340 https://doi.org/10.1108/meq-02-2023-0064 https://doi.org/10.1016/j.jclepro.2024.142213 https://doi.org/10.1108/cg-03-2022-0094 https://doi.org/10.1007/s00146-022-01415-0 https://doi.org/10.1002/csr.1759 https://doi.org/10.32479/ijefi.17754 https://doi.org/10.37075/faba.2024.2.02 http://elearning.jkuat.ac.ke/journals/ojs/index.php/jscp/article/view/731 http://dx.doi.org/10.18843/ijms/v5i2(2)/08 babatunde lawrence, fabian moodley/ finance, accounting and business analysis, volume 7, issue 2, 2025 207 and governance (esg) considerations in their corporate strategies and decision-making process. master’s thesis, university of johannesburg, south africa. yuen, m.k., t. ngo, t. d. le, and t. h. ho. 2022. the environment, social and governance (esg) activities and profitability under covid-19: evidence from the global banking sector. journal of economics and development, 24(4): 345-364. https://doi.org/10.1108/jed-08-2022-0136 https://doi.org/10.1108/jed-08-2022-0136 283 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.11 influence of preference share capital on financial performance of listed manufacturing and allied firms in kenya ayiego jackson lumbasio1* , martin onsiro2 , isaac abuga3 mount kenya university, kenya1 school of business and economics, mount kenya university, kenya2 school of business and economics, mount kenya university, kenya3 * corresponding author info articles abstract history article: submitted: 13 may 2025 revised: 12 august 2025 accepted: 13 november 2025 purpose: this study assessed the influence of preference share capital on financial performance of listed manufacturing and allied firms in kenya. the research applied modigliani and miller theory, trade-off, pecking order, and market timing and the stakeholder theories appropriately. design/methodology/approach: the target population comprised 248line managers within the manufacturing firms listed on the nse from 2016 to 2022. data collection method utilized was both secondary and primary. data analysis included inferential: regression analysis, chi-square, and anova test while descriptive statistics involved the use of range, variance, and standard deviation. presentation of data was done by clear use of figures including tables. financial performance was measured by return on assets ratio. findings: the findings indicated that preference shares have a significant positive effect on the financial performance of listed manufacturing and allied firms (p value<0.05). the study concludes that preference share capital significantly enhances the financial performance of listed manufacturing and allied firms by providing a stable funding base, improving liquidity, and reducing the cost of equity. practical implications: the study recommends that firms prioritize the use of preference shares to carefully manage debt levels, strategically reinvest retained earnings, and consider ownership structures when developing capital strategies. additionally, it recommends the need for policies that support the adoption of these practices to foster sustainable growth and financial stability in the sector. originality/value: the findings offer insights to investors, policymakers, and corporate managers regarding the optimal structuring of capital to enhance firm value and competitiveness. paper type: research paper keywords: preference share capital, financial performance, manufacturing and allied firms jel: g32, l67, m41, o16 * address correspondence: e-mail: lumbasyojack@gmail.com1 monsiro@mku.ac.ke2 amokono@mku.ac.ke3 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.11 mailto:lumbasyojack@gmail.com mailto:monsiro@mku.ac.ke mailto:amokono@mku.ac.ke https://orcid.org/0009-0004-6357-3209 https://orcid.org/0000-0001-7340-5306 https://orcid.org/0000-0003-2846-4424 a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 284 introduction establishing correct and favorable capital structure is a pertinent issue for any company, impacting shareholder returns significantly. a well-suited capital structure enhances market value, thereby elevating overall company worth. loans and bonds as forms of debt capital, and equity capital, encompassing preferred and common stocks along with retained earnings, are integral components. assessing the relevant equity ratios provides insights into an entity’s borrowing practices and its viability (adeyemi and oboh 2020). an optimal capital structure enables efficient utilization of available funds, ensuring the fulfillment of financial requirements while minimizing the cost of capital. striking the right balance prevents both over-capitalization and undercapitalization, safeguarding the enterprise's financial health. this approach fosters prudent financial management, bolstering the company's ability to seize growth opportunities and navigate market challenges effectively. thus, a crafted capital structure is fundamental on steering growth that is sustaining and maximizing shareholder value in the current ever changing business landscape. uk, german, and french firms tailor their debt ratios to sector norms, adjusting within defined parameters. agency and bankruptcy costs are key factors influencing leverage decisions (antoniou and stewart 2018). these considerations underscore the significant impact of external factors on firms' financing choices, highlighting the importance of strategic financial management. by aligning debt levels with industry standards and accounting for associated costs, companies can mitigate varying risks to enhance financial performance by assuring optimal capital structure. this approach ensures prudent decision-making and fosters resilience in the face of market uncertainties. moreover, understanding the interplay between leverage determinants and financing decisions enables firms to navigate complexities effectively, positioning themselves for long-term success and sustainable growth. therefore, uk, german, and french firms must carefully evaluate their capital structure dynamics, taking into account both internal and external factors in achieving optimal financial outcomes while in turn maximize shareholders’ wealth. foreign investment portfolios can offer diversification benefits by allowing funds holders to allocate their capital in a number of countries and markets (omorokunwa 2018). through foreign assets’ investment, funds owners subsequently reduce being exposed to market risks domestically and potentially benefit from the performance of different economies. investing in foreign markets can provides access broader range of investing opportunities access and potential much higher returns in comparison to domestic investments (french 2019). capital structure implies to the ways through which firms and business entities fund their operations. failure by an entity to fund and meet its financial obligations marks its death bed. a study making use of kenyan data done by kiogora (2019) reveals a negativity in correlation over firms' returns vis-a-viz their levels of financial leverage. current data indicates the issuance of 68 t-bonds by the kenyan government, along with ten corporate bonds issued by seven firms, and the listing of stocks of 60 firms stocks in kenya’s n.s.e as of december 2012. furthermore, these listed entities collectively did float over 5.1 billion worth of shares valued at kshs. 868 billion, while an estimation value of bonds was kshs. 92.48 billion towards end of 2012. kenya's economic growth and overall competitiveness are linked to the performance of its manufacturing and allied sector, which ranks third in terms of gdp contribution. however, like many other sectors, this domain has faced challenges stemming from various financial conditions, resulting in fluctuating performance and growth rates. for instance, during the years 2008-2010, the niche industry contended with its lower gdp contribution rates of growth, at 1.7% while consecutively an improvement of 2.6% respectively (kenton 2024). subsequent years showed signs of recovery, with the 2010 financial year. nonetheless, the sector's growth was significantly hampered by the financial crisis and subsequent slowdown, leading to decreased demand in the local market and currency depreciation. this highlights the vulnerability of the manufacturing and allied sector to external economic shocks and indicates the importance of implementing robust strategies to bolster resilience and sustain growth in the face of adversity (lagat 2020). this is the area that the study is going to focus on. within kenya's economic landscape, the manufacturing industry holds a significant position, ranking as the fourth largest in terms of the volumes of contribution towards the country’s (gdp). following agricultural sector, transportation and communications, retail trade and wholesale trade, the manufacturing makes a contribution of 18 per cent to the country’s gdp, playing pivotal role in both domestic and regional trade dynamics. notably, it actively engages in exports to the larger central and east africa region, further solidifying its importance in the broader economic framework (mule and mukras 2018). employment-wise, the sector serves as a major source of livelihood, directly and indirectly supporting approximately 2.3m individuals across the non-formal and formal sectors. while at conception was grouped in import substitution policy, the sector has evolved into a fully-fledged export-oriented entity. it encompasses twelve distinct sub-categories, depicted by the nature of products manufactured and the a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 285 types of raw materials imported by firms (maina and omwenga 2019). initially identified as nairobi stock exchange, the nairobi securities exchange (nse) stands as kenya's primary securities exchange market. established in 1954 during kenya's colonial period, it operated as an overseas stock exchange under the auspices of the london stock exchange (nairobi securities exchange 2020). today, the nse operates within the framework of the african securities exchanges association, reflecting its integration into broader regional financial systems. the securities exchange market is key to this study as apart from being the source of the secondary data the study will consume, it is a pertinent element from the regulatory perspective of firms to the platform it offers for firms to trade in equities and debt, the variables used in the study. the nse's significance transcends national borders, contributing to the vibrancy of africa's financial landscape. in terms of stock trading volumes, it ranks as the fourth largest stock exchange, proving its pivotal role in facilitating investment and capital flows within the region (changaya and fatoki 2020). this rich history and strategic positioning highlight the nse's stature as a key player in kenya's financial sector, serving as a conduit for capital mobilization and investment opportunities. according to (kariuki 2018), the manufacturing and allied sectors of the kenyan economy have exhibited a pattern of recovery in recent years, demonstrating growth rates of 4.9% in 2004, 5.8% in 2005, and 6.9% in 2006. this upward trajectory reflects positively on the sector's overall financial performance during the same period, an indication of the interconnectedness between manufacturing activity and individual company financial outcomes. however, despite these initial gains, the sector still experienced fluctuations. from 6.85% in 2015, it declined to 5.83% in 2016 and further to 2.42% in 2017. subsequently, there was a notable rebound to 9.65% in 2018, followed by a setback to 4.6% in the last quarter of 2019. the year 2020 brought unprecedented challenges, with kenya recording a negative growth of 0.42% attributed to adverse impacts of the covid-19 scourge. moreover, manufacturing gdp for kenya has displayed a concerning trend of persistent decline from 2011 to 2021. starting at 11.16% in 2011, it gradually decreased to 7.24% in 2021, reaching an alarming low of 3.7% in the fourth quarter of 2022 (cbk 2023). these statistics underscore the need for strategic interventions to revitalize the manufacturing sector and mitigate the challenges that have hampered its growth trajectory in recent years. the country’s gdp surged by 5 percentages in the first quarter of 2023, marking a notable increase from the 4.2 percent growth observed during the same period in 2022. this upturn signals a promising trajectory of economic recovery, attributed to the gradual relaxation of containment measures aimed at combating the spread of covid-19. notably, key sectors such as food service, accommodation, and manufacturing have exhibited improved performance, contributing significantly to gdp growth (natalie 2023). she continues to explain that a part from the direct contribution to the gdp, the sector offers the greatest employment opportunities to the citizenry hence improvement on social living due to the generated income to households. the collapse of the sector means loss of income thus impacting heavily to income earners. such may lead to social vices like stealing, prostitution, corruption negative impact on mental health, satisfaction over life, economic resources access and social integration (kariuki 2018). he continues to opine that, the said condition as far as declining industries is concerned often affect the economy significantly in forms including job losses, decreased government revenues, and impacts negatively on related industries. as per the economic survey of 2019, a 6.3 economy expansion for the country was registered in 2018, largely propelled by notable growth in the agriculture, manufacturing, and transport sectors. this marked a significant improvement from the 4.7 percent growth registered in 2017, the lowest in five years. particularly impressive was the manufacturing sector's growth, which surged from 0.5 percent in 2017 to 4.2 percent in 2018, signaling a robust rebound. the diverse financial performance observed among manufacturing and allied firms in kenya during this period cannot solely be attributed to capital structure decisions for financing operations. instead, it was largely influenced by government tax waivers and subsequent reductions in production costs (deloitte touche 2019). moving forward to 2021, the manufacturing sector demonstrated resilience with a real value-added growth of 6.9 percent, a notable recovery from the negative 0.4 percent recorded in 2020. during this period, the manufacturing sector contributed 7.2 percent to gdp, accompanied by a commendable 6.0 percent expansion in output volume (economic outlook 2023). such trends affected grossly the pivotal role of the sector and the entire industry in an economic growth drive. in his seminal work on firms' financial performance determinants, ebaid (2018) performed an assessment analyzing the outcome of capital structure decisions over egyptian companies, prominent economic force in northern region of africa. the research spanned from 1997 to 2005 and focused on non-financial quoted companies across ten distinct industries, comprising a sample of sixty-four firms. ebaid's study utilized (roe) and gross profit margin as metrics to gauge companies' profitability, employing multiple regression analysis as the primary methodology. however, it overlooked the inclusion of roa, a critical indicator in assessing a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 286 companies' financial performance. most research works have been conducted but all have come up with mixed reasons as to why firms may not reach their optimal performance. many of the researches have not expounded on capital structure as one of the reasons, but instead delved in other parameters such as multiple taxation and cost of production among many others. building upon such gap, present study is to investigate preference share capital in relation to a firm’s financial performance specifically within manufacturing and allied sectors listed on the kenya’s securities market. by addressing such a gap in literature, the exercise endeavored in offering comprehensive insights on the intricate dynamics shaping firms' financial performance within the kenyan context. literature review in understanding the influence of preference share capital on the financial performance of listed manufacturing and allied firms in kenya, it is essential to ground the analysis in key theories of capital structure and corporate governance. this section reviews the modigliani-miller theory and stakeholder theory, with an emphasis on how these frameworks explain the use and implications of preference share capital. the modiglianimiller (mm) theory, introduced by modigliani and miller (1958), remains foundational in the study of capital structure. their first proposition asserts that under conditions of perfect capital markets—with no taxes, transaction costs, or bankruptcy costs, the value of a firm is independent of its capital structure. in essence, how a firm finances its operations (through debt, equity, or preference shares) does not affect its market value. this proposition is particularly useful in analyzing preference share capital, as it raises the question of whether financing through such instruments actually enhances firm performance. however, mm’s second proposition introduces the role of cost of capital and shows that in a world with corporate taxes, debt (and by extension, hybrid instruments like preference shares) provides tax shields that may improve firm value. preference shares occupy a unique space between equity and debt, they usually provide fixed dividends but lack voting rights and offer priority in dividend payouts over common shares. thus, from an mm perspective with taxes considered, preference shares may be used as a strategic instrument to optimize the firm’s weighted average cost of capital (wacc) and boost financial performance through partial debt-like benefits. empirical applications of the mm framework suggest that firms with well-structured preference share capital may enjoy improved access to funds without diluting control, thereby supporting capital investment and performance (brigham and ehrhardt 2013). nonetheless, mm theory remains limited in explaining real-world financing behavior because it assumes away market imperfections, which are significant in emerging economies like kenya. stakeholder theory, as articulated by freeman (1984), challenges the shareholder-centric model by emphasizing that firms must consider the interests of a broad set of stakeholders, including employees, customers, suppliers, creditors, and the community. the theory posits that long-term financial performance is linked to a firm’s ability to align its actions with the expectations of its stakeholders. preference share capital can be interpreted through this lens as a financial instrument that accommodates both investor and managerial preferences. investors who value stable, predictable returns with lower risk, such as pension funds or risk-averse institutional investors, may find preference shares attractive. at the same time, managers may prefer this mode of financing since it avoids ceding control (as preference shares usually lack voting rights) and minimizes financial distress compared to high-leverage debt (wicks and harrison 2017). moreover, issuing preference shares may signal managerial commitment to meeting fixed obligations without burdening the firm with the restrictive covenants that come with debt (zakhem and palmer 2017). this may foster trust and goodwill among stakeholders, which in turn supports operational efficiency and financial performance. therefore, preference shares can be understood as a stakeholder-aligned financing tool that helps balance capital needs, risk exposure, and stakeholder relationships. a thorough investigation into interplay among credit risk management, capital structure and the financial performance of microfinance institutions (mfis) in uganda, utilizing the lens of agency theory was conducted by orichom and omeke (2021). by employing a cross-sectional research design, the study meticulously scrutinized 64 mfis operating within uganda. through correlation and multiple regression analyses, the gathered data underwent rigorous examination. the findings show the pivotal role of credit risk management in bolstering overall financial performance. conversely, the research opined that configuration of capital structure bears no significant correlation with financial performance. consequently, the study advocates for a heightened emphasis on credit risk appraisal, monitoring, and mitigation strategies to fortify the financial robustness of mfis. while the choice between debt and equity structures remains inconsequential to financial performance, prudent risk management practices emerge as indispensable for sustaining positive outcomes in the realm of microfinance. a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 287 in his study, ngoc (2018) thoroughly examined the efficacy of preference share capital on the financial advancement and profitability of thirty logistical companies listed on ho chi minh city stock exchange (hose) trading as from 2012 to 2019. making use of a rigorous regression analysis methodology, the research meticulously parsed the data. the outcome suggested distinct results: a confirmed negative correlation between financial progress and long-term borrowed funds, alongside positive correlations between size and debt, consistent and at par with both trade-off and signaling theories. in summary, the study provided substantial support for prevailing capital structure theories, elucidating the factors influencing corporate debt decisions. ngoc further advocated for additional research endeavors to deepen comprehension of the applicability of preference share capital, particularly within industries characterized by modest scale, notably in developing economies. this insight carries significant implications for strategic decision-making in financial management, prompting a reevaluation of capital structure strategies on and above the broader context of corporate finance. orichom and omeke (2021) carried out an in-depth exploration into the connection over credit risk management, capital structure, and the financial performance of microfinance entities (mfis) in uganda, under the framework of agency theory. by employing a cross-sectional research approach, the study meticulously scrutinized 64 mfis across uganda. through robust correlation and multiple regression analyses, the dataset underwent thorough examination. the findings unequivocally underscored the significant contribution of credit risk management to fostering sound financial performance. conversely, the exercise suggested, capital structure exhibited no significant connection with financial performance. consequently, the study emphasizes the paramount importance of credit risk appraisal, monitoring, and mitigation strategies in bolstering the financial stability of mfis. while the specific configuration of debt or equity may not directly impact financial performance, prudent risk management practices are deemed essential for mitigating credit risks and steering mfis towards positive financial outcomes. a comprehensive analysis on influence of capital structure over financial performance within nigeria's retail sector was conducted by muhammad (2019). the exercise focused on firms quoted on the nigeria’s securities market, a sample size consisting of 6 selected firms was made use of. by utilizing a filtering sampling technique, data spreading in a five-year period of time as from 2012 to 2016 was analyzed. dependent variable used was financial performance, proxified by return on assets (roa), and the independing dimensions included short-term debt, long-term debt (ltd), and shareholders' funds (roe). the data analysis was conducted using description statistics, regression analysis and correlation through e-views 8.0, with significance level set at 0.05 (5%). outcomes revealed, short-term debts had no significance with no impact on financial performance of the listed firms within nigeria's retail sector. conversely, equity (preference share capital) demonstrated a real significant effect on the financial performance of these listed firms. regarding these outcomes, the research offered valuable recommendations for corporate decision-making. it emphasized the importance of companies critically evaluating and comparing the costs associated with obtaining various sources of capital against the anticipated benefits. rather than making capital structure decisions based on unfounded generalizations, managers are encouraged to conduct thorough assessments to ensure a favorable outcome. this strategic approach enables managers to optimize capital structure, thereby maximizing gains and enhancing overall financial performance. such insights are instrumental in guiding prudent financial management practices within the consumer goods industry and beyond. in a study examining 85 listed firms in tehran, safari et al. (2016), researched on capital structure effects over performance. they realized that variables for measuring firm performance, that include return on assets and return on equity, market value of equity to book value of equity and tobin's q, exhibited positivity worth of significance in relation to capital structure. similarly, in the other examination involving 63 listed pakistan firms, researchers discovered a positive effect on capital structure components on roa. specifically, the debt to total assets ratio was found to positively influence return on equity, while equity over assets and long-term debts over assets demonstrated a negativity on return on equity. these findings highlight the intricate correlation between firm’s profitability and capital structure, exhibiting important insights for strategic decision processes in corporate finance. methods the methodology of this study adopted a mixed methods approach, drawing from a fusion of positivistic and naturalistic perspectives within research philosophy. as articulated by trochim (2016), research design opines as the cohesive framework that bonds together the various elements of a research endeavor. in alignment with these principles, the study embraced a causal research design, selected for its quantitative orientation and inherent pre-planned, structured methodology. in line with the outlined parameters, the unit of inquiry for this a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 288 study consisted of 248 line managers drawn from the manufacturing and allied companies listed on the nairobi securities exchange. this distribution is clearly delineated in the accompanying form, ensuring transparency and precision in the research methodology. this study employed the census method, an approach that involves examining every unit, individual, or element within an entire population. essentially, a census method constitutes a comprehensive enumeration, ensuring a thorough and exhaustive count. within these firms, the respondents comprised all 248 line managers working in finance, financial management, and related departments. this approach ensures a representative and thorough examination of the targeted population, thus factoring the robustness and reliability of the study’s outcomes. in this assessment, a comprehensive approach was adopted to gather data from finance line managers of manufacturing and allied firms registered at the securities exchange market (nse). both open and closed-ended questionnaires were utilized for purposes of ensuring a thorough examination of the pertinent factors. these questionnaires encompassed inquiries into various aspects of firm performance, particularly focusing on the utilization of equity, debt, preference, retained earnings, and the influence of foreign investment. the closed-ended questionnaires were structured using a likert scale format, providing respondents with a spectrum of options ranging from “strongly disagree” to “strongly agree.” this systematic approach enabled precise measurement and analysis, ensuring robust and reliable deep understanding into the relationships between capital structure decisions and organizational performance within the manufacturing and allied sectors. in relation to the findings of this research exercise, the methodology of data collection involved a combination of primary and secondary approaches. this strategic blend is chosen because it leverages both firsthand and existing information, ensuring a comprehensive analysis. primary data to be used will be gathered through structured interviews and the completion of predefined questionnaires by selected respondents. meanwhile, secondary data was acquired using a designed data collection schedule tool, facilitating the extraction of insights from various sources such as company profiles, financial statements, and other pertinent published reports between a 7-year period from 2016 to 2023. financial performance was measured by return on assets ratio. by employing a comprehensive approach, the analysis encompassed statistical methods such as mean calculation, correlation assessment, simple regression modeling, and anova f-test application. the outcomes of this rigorous analysis were elucidated and exhibited by use of clear and concise figures and tables. notably, correlation emerges as a vital statistic, delineating the interrelationship among the variables employed. additionally, measures of central tendency were employed to provide further insight into the data. regression analysis, a potent tool for probing causal relationships, was employed in the study. in order to ensure the conclusiveness of the analysis, collected data underwent scrutiny through the shapiro-wilk test in order to ascertain its normality. the researcher adhered to a significance level of 0.05, ensuring a rigorous and methodical approach throughout the analytical process. results and discussions this section presents the descriptive statistics, regression analysis and the discussion of the study findings. descriptive statistics table 1. preference shares preference shares component mean std. dev the firm capital structure contains preference shares. 4.28 0.781 the firm has issued paid up preference shares. 3.83 0.973 preference shares issued by the firms have no voting rights. 3.96 1.172 preference shares are long term and not easily redeemable. 4.00 1.005 preference shares issued by the company are not convertible to equity. 3.71 0.891 preference shares issued do not have ownership rights. 4.32 0.767 average mean score 4.02 0.931 source: research findings (2025) the first item assessed was whether the firm's capital structure contains preference shares, which received a mean score of 4.28 (std. dev. = 0.781). this indicates a strong consensus among respondents that preference shares are indeed a component of their capital structure, suggesting that these financial instruments are integral a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 289 to how firms finance their operations. the second statement addressed the issuance of paid-up preference shares, yielding a mean score of 3.83 and a standard deviation of 0.973. this indicates that while a majority of respondents agreed on the existence of issued paid-up preference shares, there is slightly less uniformity compared to the first item. this variance might suggest that not all firms are utilizing paid-up preference shares to the same extent, reflecting different strategic approaches to capital financing. the perception that preference shares issued by the firms have no voting rights garnered a mean score of 3.96, (std. dev. = 1.172). this result reflects a solid agreement among respondents regarding the non-voting nature of preference shares, which is a defining characteristic of these instruments. similarly, the assertion that preference shares are long-term and not easily redeemable scored an average of 4.00 with a standard deviation of 1.005, reinforcing the understanding that preference shares serve as a stable, long-term source of financing for the firms. this perspective is crucial, as it highlights the strategic role of preference shares in providing financial stability and predictability in capital management. the item regarding the non-convertibility of preference shares to equity had a mean score of 3.71 (std. dev. = 0.891). this lower score compared to previous items suggests that there may be some uncertainty or variability in how firms view the convertibility of preference shares, which could be indicative of differing practices among the firms or a lack of clarity on this aspect. lastly, the statement regarding the lack of ownership rights associated with preference shares scored an impressive 4.32, with a standard deviation of 0.767. this high mean reinforces the understanding that preference shareholders do not have ownership rights, which is a significant distinction from ordinary shareholders and impacts governance structures within firms. the average mean score across all items was 4.02, (std. dev. = 0.931), reflecting a generally positive perception of preference shares among the firms surveyed. this score suggests that preference shares are widely recognized as a valuable component of capital structure, providing firms with a flexible financing option that does not dilute ownership control. overall, the findings indicate that preference shares play a significant role in the financial strategy of these firms, contributing to their capital stability and financial performance. the positive attitudes towards preference shares highlight their importance as a tool for managing capital structure while maintaining operational control, which is crucial for firms seeking to optimize their financial resources in a competitive environment. these findings align closely with studies, such as kimani et al. (2023), which explored the role of preference share capital in the financial strategies of manufacturing firms in emerging markets. kimani et al. (2023) reported an average score of 4.10 across similar metrics, emphasizing that preference shares are a favored instrument for firms seeking stable, long-term financing without ownership dilution. the study highlighted that over 80% of surveyed firms incorporated preference shares in their capital structure, consistent with the strong consensus (mean = 4.28) observed in the current findings regarding the inclusion of preference shares in capital structures. both studies underscore the strategic benefits of preference shares, particularly their role as non-voting instruments (mean = 3.96 in the current study, compared to 4.02 in kimani et al. (2023), which allow firms to secure funding while maintaining governance control. similarly, the perception of preference shares as longterm and not easily redeemable (mean = 4.00) resonates with kimani et al.’s findings, which attributed stability in financial planning to this characteristic. the slightly lower agreement regarding the non-convertibility of preference shares to equity (mean = 3.71) mirrors kimani et al.’s observation that some firms prefer convertible features to attract diverse investor profiles, reflecting variability in financial strategies. the higher mean score for the lack of ownership rights (4.32) reaffirms kimani et al.’s conclusion that firms value preference shares for their ability to raise capital without compromising shareholder control. these findings collectively highlight a consistent narrative across studies: preference shares serve as a vital component of financial strategy, enabling firms to balance operational control, capital stability, and financial performance. this alignment underscores the broader applicability of these instruments across diverse organizational contexts, particularly in industries that require a stable financial base to navigate competitive environments. a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 290 regression analysis table 2. model summary on the relationship between preference share capital and financial performance model r r square adjusted r square std. error of the estimate 1 0.506a 0.256 0.253 0.705 a. predictors: (constant), preference share capital b. dependent variable: financial performance (measured by return on assets) from table 2, the coefficient of determination (adjusted r2) implied that the preference share capital could explain up to 25 percent of the variation in the financial performance. the remaining percent of the variation could be due to other predictors not in the model. the model test of fitness results is presented in table 3 indicating the reliability of the model in predicting financial performance. table 3. anova for the relationship between preference share capital and financial performance model sum of squares df mean square f sig. 1 regression 35.927 1 35.927 72.300 .000b residual 104.352 210 .497 total 140.278 211 the model result of fitness indicates an f-statistic of 72.300 and a p-value of 0.000<0.05. this indicates that the model is fit for prediction at 95 percent confidence level. preference share capital had a significant effect on the financial performance. the study of multiple regression model coefficients obtained which could be used for prediction are presented in table 4. table 4. model coefficients for the relationship between preference share capital and financial performance model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.665 0.302 5.508 0.000 preference shares 0.594 0.070 0.506 8.503 0.000 as shown above, preference share capital was found to positively influence financial performance in the listed manufacturing and allied firms. this implies that an increase in this practice will result in improvement of the financial performance. in addition, the variable has a p-value of 0.000, which less than 5% (p < 0.05) meaning that the variable is significant in explaining the variations in financial performance in the listed manufacturing and allied firms. discussion of findings the findings indicate that preference share capital positively influences financial performance, explaining up to 25% of its variation. the significant p-value (<0.05) reinforces this positive impact, suggesting that increasing preference share capital enhances financial performance in listed manufacturing and allied firms in kenya. this could be attributed to the stability and fixed nature of returns associated with preference shares, which likely contribute to predictable earnings. however, the relatively moderate coefficient of determination implies other factors also play significant roles in influencing financial performance, highlighting the need for a balanced capital structure. preference share capital showed no issues of multi-collinearity, as reflected by a tolerance value of 0.576 and a vif of 1.553. the normality test further supported the data’s appropriateness, with skewness and kurtosis values of -0.311 and -1.976, respectively. factor analysis results demonstrated that preference shares are integral to capital structure, as two principal components explained 53.59% of the variance. variables like the nonconvertibility of preference shares to equity and their lack of voting rights emerged as significant. this underscores that firms in the manufacturing and allied sectors of kenya rely on preference shares as a stable source of financing, potentially mitigating risks associated with other capital forms. a. j. lumbasio, m. onsiro and i. abuga / finance, accounting and business analysis, volume 7, issue 2, 2025 291 the finding that preference share capital positively influences financial performance aligns with the studies by mwiya et al. (2021) on zambian listed firms and fathi et al. (2022) on middle eastern firms, both showing that preference shares offer a stable dividend policy and reduce volatility in financial returns. however, kojo and amoako (2020) from ghana contradict this, arguing that preference shares can limit growth because the fixed dividend payouts reduce retained earnings for reinvestment. hussain and alam (2023), studying firms in south asia, assert that preference shares can cause liquidity strain when firms are struggling, which may negatively affect performance. furthermore, yoon et al. (2023) highlight the sector-specific nature of this relationship, finding that in capital-intensive industries such as infrastructure, preference shares enhance stability but in tech sectors, they may hinder innovation by restricting cash flow. in contrast, chong and wang (2021) examined southeast asian manufacturing firms and found no significant relationship between preference share capital and financial performance, arguing that firms relying on equity capital may suffer from shareholder constraints, weakening profitability. conclusion the study concludes that preference share capital has a positive and statistically significant influence on the financial performance of listed manufacturing and allied firms in kenya. the regression results indicated that preference share capital accounts for approximately 25 percent of the variation in financial performance, confirming its relevance as part of capital structure. the positive coefficient further suggests that greater use of preference share capital is associated with improved performance outcomes within these firms. descriptive findings revealed that preference shares are widely acknowledged as integral to financing strategies, particularly due to their non-voting rights, long-term stability, and non-convertible nature. these attributes make preference shares attractive to firms seeking to raise capital without diluting ownership control, while also ensuring predictable financing commitments. however, the explanatory power of preference share capital remains moderate, implying that other financial and operational factors beyond the current model also play a substantial role in determining firm performance. the study therefore recognizes preference share capital as an important, but not exclusive, contributor to financial outcomes in the manufacturing and allied sectors. the findings do not provide evidence to generalize about other financial aspects such as liquidity management, cost of equity, or long-term profitability beyond the measured relationship. future research could expand the scope by incorporating other capital structure variables and industry contexts to provide a more comprehensive understanding of how preference share capital interacts with overall financial strategy. the study recommends that listed manufacturing and allied firms should prioritize the inclusion of preference share capital in their capital structure strategies. preference shares offer firms the advantage of securing capital without the pressure of immediate repayment, providing financial stability. firms should develop policies to ensure the effective management of preference shares to maximize liquidity. it is also advisable for firms to leverage the benefits of preference shares in reducing their overall cost of equity. in doing so, companies can enhance profitability while maintaining financial flexibility. proper assessment of market conditions and investor expectations should guide the issuance of preference shares. the study recommends that policymakers encourage listed manufacturing and allied firms to adopt preference share capital as a viable source of funding. by providing regulatory incentives for the use of preference shares, the government can help firms reduce their reliance on high-cost debt. preference shares offer a fixed return to investors, which provides firms with stability in their capital structure. policymakers could also consider tax benefits for firms that issue preference shares, further encouraging their adoption. such measures would help firms improve their liquidity and long-term financial sustainability. additionally, policies should ensure transparent disclosure of preference share terms to protect investors and maintain market confidence. references adeyemi, a., and c. oboh. 2020. capital structure and firm performance in emerging markets: evidence from nigeria. international journal of economics and financial issues, 10(3): 45–54. 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olusegun akinola 2 department of banking and finance, achievers university owo, ondo state, nigeria 1 department of accounting, emmanuel alayande university of education, oyo, nigeria 2 * corresponding author info articles abstract history article: submitted 12 october 2024 revised 21 february 2025 accepted 15 march 2025 purpose: the study explored the moderating effect of board structure (board size and gender diversity) on the nexus of operational risk, market risk and financial performance of listed real estate and construction companies in nigeria. design/methodology/approach: the study implemented ex-post facto research design to analyze the variables on a panel data of audited annual reports of selected companies. the sample size was the population size consisting using the census sampling method. the study used the secondary data retrieved from corporate annual reports and corporate websites of the companies listed on nigeria exchange group between 2014 and 2023. the data was analyzed using panel least square method. findings: market risk exhibited a positive significance with roa, while the negative relationship with tobin’s q was statistically insignificant. operational risk exerts an insignificant negative and positive effect on roa and tobin's q, respectively. board structure has a favourable but insignificant moderating effect on the connection between market risk and roa. however, board structure showed a significantly negative moderating effect on the link between market risk and tobin's q. lastly, board structure showed positive but insignificant moderating effect on the relationship between operational risk and financial performance. practical implications: companies should invest in more reliable risk management systems to effectively detect, evaluate, and reduce operational and market risks. this can lessen the detrimental effects of these risks on financial performance indicators like tobin's q and roa. it is important to improve board governance procedures because board structure has a major moderating effect on the link between market risk and tobin's q. originality/value: firstly, the study examined the influence of operational and market risks on financial performance. the study further explored the moderating effect of board structure (board size and gender diversity) on the nexus of operational risk, market risk and financial performance in the context of real estate and construction companies in nigeria. paper type: research paper keywords: board size, gender diversity, financial performance, market risk, operation risk jel: g3, m14, m41 * address correspondence: e-mail: kolaadegoke@ymail.com1 akinwumiolusegunakinola@gmail.com2 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.04 https://orcid.org/0000-0003-2265-8105 https://orcid.org/0000-0001-8470-2613 asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 44 introduction this study explored how board structure moderates the influence of risk management on the financial performance of listed construction and real estate companies in nigeria. financial performance is crucial to corporate efficiency, and business plan efficacy influences stakeholder trust and sustainability. financial statements, which show the company's capacity to develop and maintain stakeholder interest, are commonly used to evaluate performance (osevwe-okoroyibo and emeka-nwokeji 2021; harken and taurgurt 2023). financial performance depends on risk management, which tackles issues including but not limited to credit, market, liquidity, and operational risks. however, ineffective information sharing and openness hampered the need to improve effective risk management strategies (malahim 2023). businesses require more capacity to implement risk management strategies due to the detrimental impact on business operations caused by ineffective control of the openness of an entity's information disclosure (mesrawati et al. 2022). by concentrating on liquidity, market, and operational risks, risk management might lead to enough reserves, allowing companies to survive future economic distress (tan et al. 2019). effective risk management strategies are often associated with better financial outcomes. proactive risk management is linked to better cash flow, higher profitability, and improved company financial health (muhammad et al. 2022). the agency model states that effective risk management reduces information asymmetry and aligns the interests of managers and shareholders, which leads to better business outcomes (ali et al. 2024). similarly, the contingency hypothesis asserts that the organisational setting affects how successful risk management techniques are. in order to maximise financial success, businesses must modify their risk management plans to match their unique environment and set of circumstances (el-chaarani and abraham 2022). corporate performance is greatly influenced by corporate governance, which is evident in the composition and duties of the board of directors. directors supervise performance appraisals, offer advisory assistance, and distribute required resources to guarantee operational effectiveness. effective corporate governance increases transparency, accountability, and stakeholder trust, reducing financial misstatements and promoting confidence (guizani and abdalkrim 2022). the nigerian securities and exchange commission has implemented rules to enhance risk management systems in various sectors, such as real estate and construction. this research also underscores the impact of market risk, which refers to financial losses resulting from price fluctuations in commodities, equities, interest rates, and foreign exchange. both anticipated and unexpected risks can majorly impact financial results, especially in uncertain economic conditions. thus, it is crucial for the sustainability and performance of construction companies on the stock exchange to manage operational and market risks effectively (najat and elsadig 2022; yousef et al. 2023). financial factors frequently result in operational challenges and poor outcomes for real estate and construction companies in nigeria, significantly impacting their performance (ayininuola et al. 2018). the financial aspects mentioned are a lack of liquid project funds, excessive debts, ineffective asset handling, and poor profit margins (akapan et al. 2024). increased competition in the sector worsens these difficulties even more. although risk management failures have been extensively documented in various industries, such as the financial sector, these failures are frequently a result of deficiencies in corporate governance. boards often need to acknowledge or deal with companies' risks, indicating a need for more efficient risk oversight and management mechanisms (judith et al. 2022; eni-egwu et al. 2022). additionally, past research (olaniyan and adegoroye 2024; oladokun et al. 2020; okoye et al. 2022; martin and marcel 2020; widhaistuti et al. 2019) has pointed out the effects of financial elements on the underperformance of construction companies, yet they offer minimal understanding of how risk management and board structure interact to affect financial results. the financial performance is significantly impacted by operational and market risks, with governance factors like board size and gender diversity potentially reducing these effects. this study assesses how the board structure affects the link between risk management and financial performance in nigerian listed real estate and construction companies. the study aims to uncover how governance can improve financial outcomes, enhance risk mitigation strategies, and promote long-term sustainability by analysing the moderating roles of board size and gender diversity. therefore, the study examined the influence of operational and market risks on financial performance. the study further explored the moderating effect of board structure (board size and gender diversity) on the nexus of operational risk, market risk and financial performance of listed real estate and construction companies in nigeria between 2014 and 2023. the choice of 2014 as the foundational year is based on the economic and regulatory environment of nigeria's real estate and construction industries. 2014, the nigerian government introduced important policies and reforms to enhance the financial and construction industries. these changes were intended to tackle systemic risks, strengthen corporate governance, and boost the financial stability of publicly traded firms. asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 45 this study has important academic, practical, and policy implications as it explores a vital gap in understanding how board structure influences the relationship between risk management and financial performance in publicly listed construction and real estate firms in nigeria. this research enhances the existing understanding of corporate governance by examining how board characteristics, particularly board size and gender diversity, can moderate the impact of operational and market risks on financial performance. this research analyzes the impact of board structure on the effectiveness of risk management, offering practical guidance for boards and executives to create governance frameworks that strengthen risk supervision, reduce operational difficulties, and boost financial results. for the construction and real estate industries that are especially susceptible to financial difficulties like insufficient liquidity, low profit margins, and significant market fluctuations (buzaubayeva et al. 2024). this research presents tailored strategies for different sectors to bolster governance systems, guaranteeing resilience to risks and improving competitiveness. the results will guide regulators, including the nigerian securities and exchange commission, regarding the significance of board structure in advancing transparency, accountability, and sustainable risk management approaches. by highlighting the importance of gender diversity and the size of boards, the research aligns with international corporate governance trends and offers evidence-backed suggestions to enhance governance structures in nigeria. literature review and hypotheses development theoretical background the study is established on agency and stakeholder theories. agency theory highlights the distinction between ownership (principals) and management (agents), noting that conflicts emerge since agents frequently prioritise their interests over those of shareholders, leading to heightened expenses like monitoring, control, and losses stemming from unfavourable choices (jensen and meckling 1976; fama and jensen 1983; berle and means 2017). the board of directors acts as a governance tool to address agency issues by monitoring managerial behaviour, lowering agency expenses, and improving organisational effectiveness. the board's composition, such as its size and gender diversity, enhances its effectiveness in overseeing and ensuring that managers' actions align with the interests of shareholders (eisenhardt 2018). according to the theory, smaller and more diverse boards can enhance oversight and decision-making, ensuring that risk management strategies successfully improve financial performance. through establishing distinct performance standards and implementing accountability via governance frameworks, boards function as "cost-effective tools" to synchronise risk management with the organisation's profitability (dong et al. 2022). stakeholder theory expands agency theory by shifting the focus from just shareholders to encompass all parties impacted by organisational decisions, including employees, customers, suppliers, and the community (freeman, 1983). efficient governance frameworks, like properly formed boards, are essential for reconciling varied stakeholder interests while meeting financial objectives. gender diversity on boards brings in different viewpoints. it improves decision-making by considering the issues of a broader range of stakeholders, while the ideal board size facilitates efficient teamwork without making decisions overly complex (wirawan and willim 2024; zaid et al. 2020). a varied and suitably sized board tackles operational and market risks, aiding in managing stakeholder expectations and reducing adverse effects, thereby enhancing financial performance (judita et al. 2022). this underscores the board's balancing function in ensuring that risk management strategies correspond with maximising shareholder wealth and addressing stakeholder interests. in general, the theoretical framework suggests that the composition of the board (size and diversity in gender) influences the connection between risk management (operational and market risks) and financial performance by improving oversight and decision-making. agency theory highlights the board's function in minimising agency issues and enhancing performance. in contrast, stakeholder theory focuses on its capacity to balance and meet the demands of various stakeholders, thereby establishing a comprehensive approach to governance and risk management. collectively, these theories establish a basis for comprehending how board structure can enhance the relationship between risk management and financial performance in dynamic, risk-sensitive sectors. risk management and financial performance risk is an intrinsic element in every organisation; variability in returns is a key indicator. although risks can lead to adverse results, they can also be handled, embraced, or allocated to others. in financial management, risk is vital in maximising shareholder wealth by navigating the risk-return tradeoff, as increased risks frequently align with greater possible returns (abdic et al. 2024). businesses encounter various kinds of risks, such as credit, market, operational, and liquidity risks, making risk management an expert field. efficient risk management necessitates skilled individuals overseen by impartial managers, asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 46 rendering it essential for organisational achievement. the capital asset pricing model (capm) and arbitrage pricing theory (apt) claim a positive correlation between risk and anticipated returns, establishing the basis of financial economics in investment evaluation (ajagbe et al. 2024; ali et al. 2024). this research thus concentrates on operational risk and market risk due to their influence on financial performance. operational risk refers to losses arising from insufficient or failed internal processes, individuals, systems, or external occurrences, encompassing legal risks while omitting strategic or reputational threats (ayodele and onyekachi 2020). the basel committee on banking supervision classifies operational risk into three types: nominal riskwhich involves frequent, repetitive losses related to regular activities; ordinary riskwhich results in less frequent but significant losses that are not critical for financial institutions; and exceptional riskcharacterised by rare, large-scale threats that jeopardise the institution's existence. operational risk is becoming more important because of the growing complexity of financial services, stressing the necessity for strong governance and efficient risk management (yousef et al. 2023; yusuf and adeoye 2020). market risk involves possible financial or non-financial losses resulting from fluctuations in market elements, such as interest rates, currency exchange rates, stock prices, and commodity prices. the african development bank recognises four categories of market risks: currency riskassociated with changes in exchange rates; interest rate riskimpacts companies' capital expenses and operations; liquidity riskemerges from liquidity shortages caused by inadequate management; counterparty credit riskconnected to the handling of assets and liabilities (asaba 2024). shifts in market elements like interest rates and stock prices directly impact company performance and profits. as per arbitrage pricing theory, market risk factors such as interest rates, inflation, and currency fluctuations impact stock returns by changing expected cash flows and discount rates. this theory highlights a strong connection between risk and return, consistent with the primary principle of finance, which states that investors demand more reward for accepting increased risks (chitta and soni 2023; buzaubayeya et al. 2024). risk management and financial performance: moderating role of board structure this study focuses board size and gender diversity, as essential board structure variables. in an organisational setting, the board operates as a team working together to reach strategic objectives, with normative and prescriptive roles (hasan & mohammed 2023). researchers have discussed the influence of board size on company performance. lipton and lorsch (1992) claimed that smaller boards are more efficient since larger boards may need help in decision-making and coordination. conversely, hermalin and weisbach (2018) proposed that bigger boards could improve alignment and decrease agency costs. however, they might also restrict involvement in decision-making. than (2018) observed that boards with an average size of seven enhance monitoring capacity and positively affect earnings per share. moreover, dalton et al. (2018) highlighted that the link between board size and company performance differs based on unique firm characteristics and national institutional settings. gender diversity is viewed as a way to enhance board efficiency and financial outcomes. adebobola (2023) highlighted that varied boards prevent the dominance of any individual or faction, ensuring equitable representation of stakeholders and improving resource reliance. researchers such as (safieddine and daouk 2021; burke 2021; van der walt and ingley 2021) analysed the impact of gender diversity on the lack of women on boards, the factors contributing to this underrepresentation, and the experiences and views of women directors. in general, scientists concur that greater diversity enhances governance by utilising a wider range of talent and viewpoints, resulting in improved decision-making and organisational performance. research on operational risk indicates that weak internal controls, low employee morale, or external disruptions can result in inefficiencies, higher expenses, and loss of revenue, adversely affecting financial results (malahim 2023). concerning market risks, variations in interest rates, exchange rates, and commodity prices greatly influence profitability, as elevated volatility creates difficulties for companies to maintain consistent financial results (muhammad et al. 2022). smaller boards tend to be more nimble and effective in making decisions. in contrast, larger boards can offer varied viewpoints and enhanced supervision. an ideal board size balances the intricacy of risk management and the capacity to make prompt and effective decisions. bigger boards can enhance financial performance by strongly supervising risk management measures (lipton and lorsch 1992; hermalin and weisbach 2018). varied boards boost creativity, problem-solving, and decision-making by integrating different viewpoints, experiences, and skills. gender-diverse boards question management assumptions more often, enhancing the effectiveness of risk identification, assessment, and mitigation tactics. this subsequently improves financial performance by lessening vulnerability to unmonitored risks (biggins 2021; adebobola 2023). kafidipe et al. (2021) looked at risk management in deposit money banks, corporate governance, and the extent to which operational issues in nigerian banks have been repressed. the outcome indicates that the bank's financial results have been adversely affected, however significantly. a good business governance framework, on the other hand, improves bank sustainability and loan competitiveness. the number of board asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 47 committees has a favourable influence on tobin q, while the size, independence, directors' shareholdings, and meetings of the board were all negative. in contrast, the roe (return on equity) is positively connected with board size, executive autonomy, and board committees. igbinosa et al. (2024) explored board diversity in nigerian firms and analyses whether the effect of board structure on financial performance (return on equity and return on capital employed). the ordinary least squares (ols) regression was adopted and findings revealed that there is strong positive association between board size and corporate financial performance. there is a positive association between external executives and corporate financial performance. however, a negative association was observed between directors’ ownership and firm performance. the study reveals a negative association between roe and ceo duality, while a strong positive association was observed between roce and ceo duality. hassan (2023) examined corporate governance across asian nations through secondary data, finding that it correlates with the prevailing culture of the area. udoh (2022) examined market risk in nigerian deposit money banks, finding that interest rates positively impact profitability. in contrast, exchange rates and commodity prices exhibit negative correlations. fenty chandra and hanifah (2023) investigated credit risk, liquidity risk, and operational risk in public commercial banks of indonesia, emphasising that corporate governance was ineffective in moderating these risks, while profitability was more affected by external influences. likewise, allen et al. (2020) discovered that operational risk adversely affects return on assets (roa) and return on equity (roe) in banks operating in tanzania. peter et al. (2021) investigated market risk within kenyan microfinance institutions, discovering that interest rates and financial leverage enhance financial performance, whereas foreign exchange risk adversely impacts it. finally, martin and marcel (2020) showed that better corporate governance practices significantly improve financial performance in non-financial publicly traded companies in the united kingdom. arising from the discussions made above, the study formulates the following hypotheses: h01: market risk has no significant effect on financial performance. h02: operational risk has no significant influence on financial performance. h03: board structure does not moderate the interaction between market risk and financial performance. h04: board structure has no moderating effect on the interaction between operational risk and financial performance. research gap there has been considerable research on corporate governance, risk management, and financial performance. however, a notable knowledge gap remains about how board structure affects the relationship between risk management and financial performance in nigeria's real estate and construction industry. previous research has concentrated on different areas, sectors, or overall governance structures without tackling the unique risks and governance issues encountered by companies in nigeria. for instance, hassan (2023) and fenty et al. (2023) investigated corporate governance in asia and indonesia yet overlooked the analysis of particular industries or the moderating effect of board structure. udoh (2022), allen et al. (2020), and peter et al. (2021) examined operational and market risks but restricted their study to financial institutions, omitting non-financial sectors such as real estate and construction. martin and marcel (2020) examined corporate governance, yet they still need to consider industry-specific dynamics and types of risk. this research addresses this gap by examining how board size and gender diversity influence the connection between operational and market risks and financial performance, offering insights specific to the distinct governance and risk management issues in nigeria's real estate and construction industry. methods this study used an ex-post facto research design to analyse the dependent, moderating and independent variables on panel data of audited annual reports of selected companies. the study population comprised nine listed real estate and construction companies in nigeria. the sample was the population size, and the census sampling method was used. the study used secondary data retrieved from annual corporate reports and corporate websites of the companies listed in the nigerian exchange group between 2014 and 2023. the data was analysed using the panel least square method. the study conducted the hausman specification test to specify whether the fixed effect and random effect models were appropriate for analysing the panel data (creswell & creswell 2018). empirical model the mathematical model stated below was to examine the moderating effect of board structure on risk management and financial performance. asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 48 y= f(or, mr, bs, bgd) (1) where y = financial performance, or = operational risk, mr = market risk, bs= board size and bgd= board gender diversity regarding financial performance, some studies have used accounting-based measures, such as return on assets (willey et al., 2023; martin & marcel 2020) or market-based measures, such as tobin's q (mesrawati et al. 2022). based on this variation, this study adopts roa and tobin's q. the justification for combining roa and tobin's q was to ensure a comprehensive assessment by integrating internal operational efficiency and external market valuation. roa is less sensitive to market volatility, while tobin's q captures market dynamics and growth potential. both reduce bias and provide a more balanced performance evaluation (nguyen & tran 2023). risk management indicators were operational and market risks because operational and market risks capture critical internal and external uncertainties affecting financial stability and success (patrick, 2024). their inclusion in the empirical model aligns with studies (suratman et al. 2024; pervetica and ahmeti 2023), emphasising the importance of managing risks in achieving financial goals. operational risk represents the ratio of total cost to income of firms in a financial year. in contrast, market risk is measured as the rate of change in equity price, commodity price, interest rate and foreign exchange rate in a financial year (musa & tahir 2024). board size and gender diversity were used as a proxy for board structure. both board size and gender diversity are central components of corporate governance, influencing strategic decisions, oversight functions, and firm performance (mustapha et al., 2024). board size was measured as the total number of board members (obaje and ogirima, 2022) while gender diversity was spelt as the ratio of female directors to the number of directors (slama et al., 2019). as a result, the multivariate models were specified as follows: roait= ∂0 + ∂1orit + ∂2mrit + ∂3bsize*bgend*or it + ∂4 bsize*bgend*mr + µ it (2) qtit= ∂0 + ∂1orit + ∂2mrit + ∂3bsize*bgend*or it + ∂4 bsize*bgend*mr + µ i (3) where: roa= return on asset for firm i in year t qt= tobin’s q for firm i in year t or= operational risk for firm i in year t mr= market risk for firm i in year t bsize= board size for firm i in year t bgend= board gender diversity for firm i in year t µ = error term. table 1. description of variables variables type measurements source tobin’s q endogenous this is the ratio of (price market value of shares + book value of liabilities) to the book value of asset of. mesrawati et al. (2022) return on assets endogenous the ratio of net income to total assets in a financial year. martin and marcel (2020) operational risk exogenous the cost to income ratio of firms in a financial year. ajagbe et al. (2024) market risk exogenous rate of change in equity price, commodity price, interest rate and foreign exchange rate ajagbe et al. (2024) board size moderator the total number of directors on the corporate board obaje and ogirima (2022) gender diversity moderator the percentage of female directors on a corporate board. slama et al. (2019) source: author's compilation (2025) asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 49 results and discussion descriptive analysis table 2. results from descriptive statistics bgend bsize mkr opr roa qt mean 0.193611 9.875000 1.059292 0.172500 0.105000 0.094444 median 0.180000 8.000000 1.021000 0.190000 0.070000 0.050000 maximum 0.600000 17.00000 1.460000 0.350000 1.090000 1.070000 minimum 0.000000 4.000000 0.550000 0.000000 -1.800000 0.000000 observations 90 90 90 90 90 90 source: research output, 20245 the average tobin's q for publicly traded real estate and construction companies throughout the research period is -0.555. a tobin's q value under 1 suggests that the market assesses the firms' assets at a lower value than their replacement cost. in this instance, a value of 0.09 indicates that the market perceives the conglomerate's assets as valued at merely 9.4% of their replacement cost. investors may interpret the average tobin's q value of 0.09 as an indication that the valuation of the company's assets is low. a low tobin's q may suggest that the company's management could use its assets more efficiently to create value. this may result from inadequate operational effectiveness, unfruitful investments, or management shortcomings. the average roa value of 0.105 indicates that, on average, the evaluated companies or assets are producing a return of 10.5 per cent on their overall assets. a 10.5 per cent roa indicates that the company makes 10.5 cents in profit for every dollar of assets. this is a positive return, reflecting efficient management and utilisation of resources. this figure can act as a standard for evaluating the performance of various firms in the same sector. companies with a notably above 10.5% roa may demonstrate greater efficiency, whereas those with a lower roa might exhibit reduced efficiency. gender diversity showed an average of 0.19, indicating that women comprise 19% of the board. the figure indicates a significant gender disparity and a lack of gender diversity. the low average value suggests a potential area for enhancement. companies that lack significant gender diversity might consider implementing measures and policies designed to enhance gender equality and inclusiveness. as a result, an average value of 0.19 could suggest an opportunity to more effectively leverage the benefits of gender diversity in enhancing creativity and business success. the typical count of members on the boards of directors for the companies being examined is approximately 10, as shown by the average board size of 9.8. a board with ten or more members is considered a good size. it is perfectly sized, facilitating a balance among various perspectives and effective decision-making. this board size might function properly. typically, they are sufficiently large to provide a range of viewpoints and areas of knowledge yet compact enough to make decisions swiftly. having ten members allows for directors with diverse backgrounds, experiences, and skill sets. this diversity may enhance the board's ability to tackle complex issues and make sound decisions. an average market risk value (beta) of 1.059 offers perspectives on these firms' comparative volatility and risk characteristics about the general market. a beta of 1.059 suggests that, on average, real estate and construction firms are 5.9% more unstable than the general market. if the market index shifts by 1%, the stock prices of these firms are anticipated to alter by around 1.059%. this beta level indicates that real estate and construction firms face a greater market risk than the typical company. this implies that the stock prices of these companies will typically change in line with the market but with increased volatility. with a mean operational risk of 0.172500, these businesses could be more efficient at generating profit because expenses only account for 17.25% of their revenue. in general, this indicates effective cost control. businesses that have a lower operational risk ratio are more resilient to changes in revenue or expense increases. a higher number indicates that businesses are more susceptible to changes in revenue or cost increases. the comparatively low operational risk ratio could result from reasonable governance procedures, such as cost-cutting initiatives, proper use of resources, or the executives' strategic monitoring. outcomes also revealed that all the parameters have 90 observations, which can be ascribed to data accessibility on the study variables. asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 50 correlation analysis table 3. correlation matrix of real estate and construction firms correlation bgend bsize mkr opr roa qt bgend 1.000000 bsize 0.157897 1.000000 mkr 0.253003 0.331240 1.000000 opr 0.135573 -0.144167 -0.288506 1.000000 roa 0.088406 -0.035874 0.201784 -0.051539 1.000000 qt -0.002616 0.254287 0.072338 0.038746 0.026260 1.000000 source: research output, 2025 table 3 provides a concise overview of the interrelationship among the variables. tobin's q shows a positive correlation with board size (0.254), market risk (0.072), and operational risk (0.039). this indicates that modifying the explanatory variables will lead to an equivalent rise in tobin's q by 25 per cent, 7 per cent, and 4 per cent, respectively. only board gender diversity exhibits a negative correlation (0.0026) with tobin's q, suggesting that an alteration in gender diversity results in a 0.2 per cent decrease in firm value. in addition, roa has a positive correlation with gender diversity (0.089) and market risk (0.201). this indicates that an alteration in the explanatory variables will lead to a corresponding rise in roa by 9 per cent and 20 per cent, respectively. the board size (-0.036) and operational risk (-0.05) exhibit a negative relationship with roa, indicating that alterations in board size and operational risk reduce roa by 4 per cent and 5 per cent, respectively. the table thus indicates that the correlations among independent variables could be stronger, suggesting a lack of multi-collinearity typically linked to time series data. unit root test the levin, lin and chu t unit root test was conducted on each of the series under study. table 4. results of unit root test variables levin, lin and chu t intercept intercept and trend none bgend 0.2637 0.0000** 0.1609 bsize 0.7216 0.0001** 0.3257 mkr 0.9964 0.0000** 1.0000 opr 0.0003** 0.2643 0.3399 roa 0.2538 0.0000** 0.0274** qt 0.0003** 0.7315 0.2173 **5% level of significance source: research output, (2025) table 5. summary of unit root test results levin, lin and chu t variables level i(d) bgend 0.0000** i(0) bsize 0.0001** i(0) mkr 0.0029** i(0) opr 0.0062** i(0) roa 0.0000** i(0) qt 0.0003** i(0) source: extract from table 4 the study used the levin, lin and chu t-test to test the unit root among the series. the null theory was 'presence of unit root test (i.e. no non-stationarity) against the alternative proposition 'series is stationary'. if the computed p-value exceeds the benchmark p-value (0.05), then the null hypothesis is accepted, and it is concluded that data variables are non-stationary and vice-versa. results from tables 4 and 5 showed that all the parameters are stationary at their level form indicated as i (0). this implies that there is no form of co-integration relationship among the variables. asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 51 analysis of hausman specification test table 6. results of hausman specification test correlated random effects hausman test test summary (panel a) chi-sq. statistic chi-sq. d.f. prob. period random 3.485252 6 0.7459 test summary (panel b) chi-sq. statistic chi-sq. d.f. prob. period random 6.455354 6 0.3742 source: research output, (2025) panel a's results revealed a probability value of 0.7459, below the standard 0.05 significance level, indicating that the null hypothesis was accepted and the result was insignificant. consequently, the outcome indicated that the random effect model was suitable and was used to analyse the research data. because panel b's statistical analysis resulted in a probability value of 0.3742, below the standard 0.05 level of significance, the null hypothesis was accepted, and the result was deemed inconsequential. consequently, the outcome indicated that the random effect model was suitable and was used to analyse the research data. regression analysis table 7. regression results dependent variable: roa method: panel egls (period random effects) variable coefficient std. error t-statistic prob. mkr 0.578955 0.202693 2.856313 0.0057 opr -0.406877 0.497689 -0.817532 0.4166 mkr*bgend*board_size -0.095102 0.060727 -1.566064 0.1222 opr*bgend*board_size 0.216195 0.247078 0.875008 0.3848 c -0.449244 0.239139 -1.878593 0.0648 dependent variable: qt method: panel egls (period random effects) variable coefficient std. error t-statistic prob. mkr 0.075458 0.115201 0.655012 0.5148 opr 0.095661 0.303493 0.315200 0.7536 mkr*bgend*board_size -0.044474 0.020633 -2.155453 0.0348 opr*bgend*board_size 0.038798 0.095454 0.406456 0.6857 c -0.144857 0.128402 -1.128150 0.2634 source: research output (2025) market risk and financial performance the regression analysis on market risk and financial performance showed varied outcomes; market risk exhibited a positive significance with roa, while the negative relationship with tobin’s q was determined to be statistically insignificant. these results contradict the findings of najat and elsadig (2022) and peter et al. (2021); however, the outcome is consistent with those of akpan et al. (2024), ajagbe et al. (2024), udoh (2022). in financial management, a common principle is that increased risk is linked to the possibility of greater returns. real estate and construction firms that embrace greater market risk might implement more assertive growth tactics or allocate resources to risky, high-reward ventures. companies with strong risk management strategies may be more capable of taking advantage of such high-risk scenarios, transforming potential dangers into lucrative opportunities. under specific market conditions, increased market volatility may present opportunities for these companies to achieve greater returns if they can effectively manage the associated risks. conversely, the association with tobin's q suggests that fluctuations in market risk do not significantly influence tobin's q, and any detected correlation is weak. as a result, investors in real estate and construction companies in nigeria may need to respond more vigorously to fluctuations in market risk when assessing the company's value of its assets. this may be due to their perception that the company's inherent value remains consistent regardless of market changes. operational risk and financial performance the regression results indicated that operational risk exerts a negative and insignificant positive effect on roa and tobin's q, respectively. the negative insignificant indicates that roa generally declines slightly as operational risk rises; this connection lacks statistical significance. the results align with (abdic et al. 2024; jagirani et al. 2023; abebe et al. 2022; mesrawati et al. 2022). this suggests that the influence of operational risk on roa is minimal for real estate and construction firms in nigeria, possibly resulting from asimiyu k. adegoke, akinwumi o. akinola / finance, accounting and business analysis, volume 7, issue 1, 2025 52 random fluctuations rather than a genuine underlying effect. certain real estate firms may concentrate more on risks affecting roa and other important performance metrics. regardless, companies should continually manage operational risk to avert major losses, and resources may be directed more towards managing risks that critically affect financial performance. moreover, the outcome of tobin's q indicated that with a rise in operational risk, tobin's q appears to increase marginally. nonetheless, this connection does not possess sufficient strength to be considered statistically significant. like the roa situation, firms could invest resources to handle operational risks efficiently, but they must also consider additional elements that demonstrably influence tobin's q. market risk, board structure and financial performance board structure has a favourable but insignificant moderating effect on the connection between market risk and roa. this indicates that although there could be likelihood for board structure to affect the link between market risk and roa positively, the noted effect is insufficient to form significant conclusions. however, board structure has a significantly negative moderating effect on the link between market risk and tobin's q. this negative influence indicates that specific features of board structure, including board size and gender diversity, lessen the impact of market risk on tobin's q. furthermore, this effect is statistically significant, implying it is improbable to occur by random chance. the notable moderating effect suggests that the connection between market risk and tobin's q varies across different board structures. this emphasizes the significance of governance practices in influencing how businesses manage and react to market uncertainties. operational risk, board structure and financial performance in this regard, board structure showed positive but insignificant moderating effect on the relationship between operational risk and financial performance. the influence is positively oriented, suggesting that a specific type or arrangement of board structure correlates with a distinct outcome related to operational risk and financial performance. nonetheless, this impact is statistically negligible, indicating it cannot be reliably ascribed to an actual relationship because of randomness or other variables. the minor, positive moderating effect indicates that although board structure may influence the relationship between operational risk and financial performance, the impact seen is not substantial enough to be deemed significant statistically. various board structures can exhibit different levels of efficiency in addressing or alleviating operational risks, which subsequently may affect financial results. conclusion the results demonstrate the importance of board structure in determining how businesses handle market risks and how those decisions affect their bottom line. although it is still unclear how board structure affects operational risk, its substantial impact on market risk and tobin's q highlights the importance of good corporate governance in boosting company valuation in the face of market uncertainty. in order to reduce financial risks and enhance performance, the study emphasises the necessity of strong risk management systems and efficient corporate governance procedures. it also implies that further research may shed more light on other board traits that improve risk management and financial results for construction and real estate firms in nigeria. based on the conclusion drawn from the study, the study made the following recommendations: in order to effectively detect, evaluate, and reduce operational and market risks, real estate and construction companies should invest in more reliable risk management systems. this can lessen the detrimental effects of these risks on financial performance indicators like tobin's q and roa. it is important to improve board governance procedures because board structure has a major moderating effect on the link between market risk and tobin's q. this entails 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http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2024.2.12 dividend policy of selected public companies from the manufacturing sector in bulgaria valya vasileva department of finance, university of national and world economy, sofia, bulgaria info articles abstract history article: submitted 28 november 2024 revised 10 december 2024 accepted 13 december 2024 purpose: the study aims to analyze the dividend policy of selected public companies from the manufacturing industry in bulgaria in order to identify the main features and trends of this policy. design/methodology/approach: to achieve the goal of the study, the following were used: descriptive analysis, synthesis and comparative analysis. data for selected companies traded on the bulgarian stock exchange for the period 2014-2023 were used. findings: the majority of the companies from the manufacturing industry in bulgaria which are classified in the sector of industrial goods and materials have never paid cash dividends during the analyzed ten-year period. of these public companies, 40% of companies that paid cash dividends during the period under review (including those that did so only once) did so in every year of the period. only half of the companies analyzed paid cash dividends regularly throughout the entire period analyzed while maintaining a consistent dividend policy. the majority of the companies surveyed maintained or even increased the size of dividends for the pandemic years 2020 and 2021. practical implications: the results of the study on the practice and specific features of the dividend policy of companies from the bulgarian manufacturing industry can be of use to analysts and investors. originality/value: the study of the dividend policy of companies from a particular sector of the economy adds new analyses to the existing literature in the field of dividend policy. paper type: research paper keywords: dividend policy, dividends, dividend payout ratio, earnings per share, dividend yield jel: g35 address correspondence: e-mail: valya_vasileva@yahoo.com https://doi.org/10.37075/faba.2024.2.12 mailto:valya_vasileva@yahoo.com https://orcid.org/0009-0002-4049-1468 valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 241 introduction dividend policy is a common area of discussion and research in corporate finance. making a decision about dividend payment is among the key financial decisions and responsibilities of financial managers. dividend policy manifests itself in company decisions related to the portion of net profit that should be paid to shareholders in the form of dividends, as well as to the portion that should be reinvested for the company development and growth. manufacturing industry is a key sector of the bulgarian economy. the companies in this sector are faced with specific challenges, such as changes in raw material prices (including energy prices), etc. the covid-19 pandemic and the energy crisis in europe that has developed in recent years have had a significant impact on the economic environment. these events have increased the interest in analyzing the dividend policy of companies in the manufacturing industry in bulgaria. the aim of this study is to analyze the dividend policy of selected public companies from the bulgarian manufacturing industry in order to identify the key features and trends in their policies. the study covers the period 2014-2023. the present study considers 8 companies from the manufacturing industry which are classified in the sector of industrial goods and materials, and which are public companies as of 30th september 2024. the companies are from the manufacturing industry in bulgaria according to the classification of economic activities (cea-2008), and their classification in the sector of industrial goods and materials is according to the adopted classification of the specialised financial and economic medium infostock.bg. the other criterion for the selection of the analyzed companies is that they have paid cash dividends for more than one year within the period under review (after gaining the status of a public company). the present study analyzes the cash dividends paid as a key manifestation of dividend policy. cash dividends are the most common and traditional way of dividend payment used by companies. methods in order to identify the major features and trends in the dividend policy of selected public companies from the manufacturing industry in bulgaria, descriptive analysis, synthesis and comparative analysis were used. the study of selected pubic companies traded on the bulgarian stock exchange (bse) is based on data for the period 2014-2023. the data were collected by the bulgarian stock exchange, the commercial register and the information medium x3news. analysis is made of the history of cash dividends paid, as well as of the indicators of dividend payout ratio, earnings per share (eps) and dividend yield. dividend payout ratio is determined by dividing the annual dividend per share by eps. eps is calculated by dividing the total dividends paid by the number of shares. dividend yield is the ratio between the annual dividend per share and the price per share. literature review bahrudin et al. (2021, p. 331) emphasize the fact that dividend policy is a significant factor attracting investors. in addition, they posit it that dividend is a payment that is a „token reward to the shareholders for their interest in the company's shares, which usually originates from the company's net income”. tanushev (2016, p. 312) notes that the expected future incomes are the basis of investor confidence. dividends are a form of income that common stocks bring, the other being capital gains. nenkov and hristozov (2020) point out that apart from cash dividends, there are other main ways of paying dividends, such as paying dividends through an additional issue or through a share split, the latter two methods being more like quasi dividends, while cash dividends are the real dividends. kimunduu et. al. (2017, p. 139) sum up dividend policy in the following perspectives: „the amount to pay, the frequency of dividend payments and the mode of paying dividends which is either in cash or noncash form.“ companies can implement various types of dividend policy. the main policies include stable dividend policy, fixed payout ratio policy based on profit, residual dividend policy, zero dividend policy, etc. (rafailov 2011). the stable dividend policy means that a company pays a fixed dividend per share annually for a long period of time. the company may decide to change the dividend amount only after thorough consideration. under a fixed-earnings-based payout ratio policy, a company aims to pay out a certain percentage of its profits as dividends each year. dividends follow profit changes and fluctuate in time. with residual dividend policy, the priority is to reinvest profits. a company first invests its investment projects with dividends paid from the remaining funds. in some years, a company may not pay dividends at valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 242 all. under the zero dividend policy, companies choose not to pay dividends. dividend policy is the subject of numerous theoretical and empirical studies. a lot of research considers the factors determining dividend policy in different countries, the most recent of which are for instance jaara et al. (2018), rój (2019), louziri and oubal (2022), etc. jaara et al. (2018) note that the findings on dividend policy in the existing literature are contradictory. in this regard, rój (2019), as well as louziri and oubal (2022) point out that there is no unified opinion on the determinants of corporate dividend policy. in bulgarian context and in the field of corporate dividend policy, one can mention the studies of rafailov (2011), rafailov and trifonova (2011), dimitrova (2012), tanushev (2021), etc. in a monograph, rafailov (2011) makes exhaustive analysis of the corporate dividend policy implemented by bulgarian companies. the empirical study includes data about the public companies from the real sector of the economy for the period 2003-2009. the strategic factors influencing the dividend payments of the companies in bulgaria have been identified based on theoretical and empirical analysis. in a study published by rafailov and trifonova (2011), the focus is on the identification of the major determinants of the dividend policy of the public companies in bulgaria. the empirical study covers the period 2003-2009. among the important observations that rafailov (2011), as well as rafailov and trifonova (2011) emphasize is the fact that the majority of companies that paid dividends in a given year had done so in previous years. at the same time, the companies that do not pay dividends consistently adhere to this policy. the scholars (rafailov 2011, p. 9; rafailov and trifonova 2011, p. 275) note that in bulgaria “dividend policy is perceived in a narrower sense and is mainly implemented in the form of dividend payments”. dimitrova (2012) examines the relationship between the decision to distribute dividends and shareholder equity of companies traded on bse. this empirical study is based on data for the period 20052010. the researcher finds out that “the strongest relationship is the one between dividends and company profits” (dimitrova 2012, p. 184). in a monograph, tanushev (2021) makes a thorough analysis of dividend policy from a theoretical and empirical aspect. the scholar concludes that a great number of the public companies in bulgaria listed on bse do not pay dividends. part of the analysis on dividend policy is focused on whether or not to pay dividends, as well as on the identification of the factors that determine this process for the public companies traded on bse. the empirical analysis is based on data for the period 2003-2014. recent research considers the impact of the covid-19 pandemic on dividend payment in a number of countries and provides divergent findings (for instance, krieger et al. 2021; cenjek et al. 2021; mazur 2020; tinungki et al. 2022; ali 2022; ali et al. 2022; boumlik et al. 2023). krieger et al. (2021) find out that the number of companies that decrease or skip dividend payments rises considerably during the pandemic. similar findings are provided by the research of cenjek et al. (2021) who establish the fact that dividends fall significantly due to the pandemic. ali et al. (2022) find out that companies are more likely to skip or reduce dividend payments during the covid-19 crisis compared to the pre-pandemic period. the results from a study conducted by boumlik et al. (2023) also show that the covid-19 crisis has affected dividend payment negatively. conversely, some scholars, such as mazur (2020), tinungki et al. (2022) and ali (2022) conclude that the majority of the companies they investigated either maintain or increase the size of the dividends paid during the pandemic. results analysis of the dividend policy of selected public companies listed on the bulgarian stock exchange decision-making with regard to the distribution and payment of dividends by public companies in bulgaria is in the competence of the general meeting of shareholders, subject to the requirements set out in the commercial act (ca) and the public offering of securities act. in accordance with ca, the general meeting approves of the annual financial statement, makes a decision about the distribution of profits and the payment of dividends. in accordance with ca, a joint-stock company (jsc) may distribute profits only when the net value of its assets (all assets all liabilities), reduced by the profit to be paid out, is not less than the amount of the capital of the jsc, the reserve fund and other funds that the jsc is obliged to establish by law or bylaws. with changes to the public offering of securities act, effective from the beginning of 2018, public companies can pay 6-monthly and annual dividends. companies distribute cash dividends from their net profits after corporate tax. according to the bulgarian tax law, dividend tax is then withheld. dividend income is taxed at source. the income taxes on natural persons act and the corporate income tax act regulate the taxation of dividends. according to the bulgarian tax law, the tax rate is 5%. income received from the sale of shares valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 243 traded on the bulgarian stock exchange is tax-free. the fact that capital gains received by investors are not subject to taxation is an advantage over receiving income from dividends, even though the tax rate on this income is relatively low. the study of selected companies in bulgaria having the status of public companies at the time of this analysis and during the period considered, shows that: 59% of the public companies from the manufacturing industry have never paid cash dividends within the 10-year period analyzed; 58% of the public companies from the manufacturing industry, classified in the sector of industrial goods and materials have never paid cash dividends within the 10-year period analyzed; from the manufacturing industry, the sector of industrial goods and materials, 40% of the public companies that paid dividends within the period under review (including those who paid dividend just once) have paid a cash dividend each year of this period. the review of the information given by the analyzed companies shows that, in general, there lacks clarity and specifics with regard to the type of the dividend policy they pursue. overall, the published statutes, financial statements and/or activity reports generally state that dividends are distributed or paid based on a decision made by the shareholders’ general meeting. in its activity reports, hydraulic elements and systems (e.g. 2024, p. 27) states that it “pursues a policy of annual dividend distribution”. in the part about dividend policy of its activity reports, m+s hydraulic (e.g. 2024, pp. 16-17) points out that it continues “the tradition of distributing part of its financial result in the form of a cash dividend”. in the dividend policy published by fazerles, there is information about the dividends determined by the shareholders’ general meeting annually and about the limitation period for their payment, taxation and method of payment. similarly to the two companies previously discussed, no details are given about the way cash dividends are determined. in the reports of the board of directors and with regard to the payment of a 6-month dividend, korado-bulgaria (e.g. 2022, p. 1) states that the company “has established and consistently pursues a sustainable dividend policy in the recent years”. the data show that half of the companies analyzed paid dividends in each year of the period considered (table 1). the majority of the analyzed companies have maintained and even increased their dividends for the first two years of the covid-19 pandemic – 2020 and 2021. the comparative analysis of the companies shows that hydraulic elements and systems, koradobulgaria, m+s hydraulic and emka demonstrate a relatively consistent dividend policy characterized by predictable and controlled payout ratios. the companies hydraulic elements and systems, korado-bulgaria and m+s hydraulic demonstrate high payout ratios (table 2). what is typical for fazerles and kauchuk is a very high volatility of the payout ratio due to the use of retained earnings from previous years and/or reserves for dividend payments in some years. for the same reason, these companies have recorded unusually high values of the ratio. alkomet и neochim demonstrate lower values of the payout ratios. the ranges of payout ratios for the different companies that have been analyzed vary from narrow to wide ones. in a study, vochozka at al. (2021) infer that in specialised literature the most frequently confirmed theories of dividend payout ratio accept the view that net profit is among the key factors resulting in adjustments in the dividends paid by a company. valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 244 table 1. dividend per share and earnings per share (eps), bgn 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 alkomet dividend 0.0447 0.1018 0.4499 0.2578 0.1512 0.7851 eps 0.13 0.51 1.50 0.86 0.76 0.48 -0.20 -0.01 3.14 -0.32 emka dividend 0.0421 0.0421 0.0526 0.0737 0.0842 0.0842 0.0842 0.1579 0.1579 0.0842 eps 0.13 0.14 0.09 0.16 0.16 0.17 0.17 0.31 0.53 0.20 kauchuk dividend 5.30 8.50 7.14 2.12 1.00 0.90 0.90 eps 0.35 0.36 0.48 1.18 4.25 6.42 6.25 3.74 0.98 23.89 korado-bulgaria dividend 0.12 0.18 0.26 0.26 0.29 0.29 0.29 0.29 0.20 0.19 eps 0.21 0.22 0.33 0.45 0.40 0.32 0.35 0.36 0.33 0.27 m+s hydraulic dividend 0.22 0.22 0.26 0.30 0.30 0.26 0.30 0.35 0.40 0.40 eps 0.29 0.25 0.32 0.37 0.37 0.32 0.39 0.48 0.84 0.84 neochim dividend 0.80 1.30 0.20 0.40 5.00 5.00 eps -9.43 1.75 10.84 5.24 -7.41 -4.81 5.86 18.45 27.14 -13.65 fazerles dividend 2.00 1.00 0.50 0.50 1.00 1.00 1.00 eps 2.86 0.54 0.62 -0.51 0.15 -0.29 0.06 1.00 1.85 -1.95 hydraulic elements and systems dividend 0.16 0.20 0.18 0.22 0.26 0.21 0.26 0.31 0.33 0.21 eps 0.21 0.22 0.20 0.25 0.29 0.24 0.33 0.42 0.53 0.23 source: bulgarian stock exchange, commercial register, www.x3news.com, own calculations table 2. dividend payout ratio 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 alkomet 0.33 0.20 0.30 0.30 0.20 0.25 emka 0.31 0.31 0.60 0.47 0.52 0.50 0.51 0.52 0.30 0.42 kauchuk 4.49 2.00 1.11 0.34 0.27 0.92 0.04 korado-bulgaria 0.57 0.82 0.78 0.58 0.73 0.90 0.83 0.80 0.60 0.70 m+s hydraulic 0.76 0.88 0.81 0.80 0.82 0.80 0.78 0.73 0.48 0.48 neochim 0.46 0.12 0.04 0.07 0.27 0.18 fazerles 0.70 1.86 0.81 3.43 16.10 1.00 0.54 hydraulic elements and systems 0.76 0.91 0.90 0.88 0.90 0.88 0.79 0.74 0.63 0.92 source: own calculations based on data from bulgarian stock exchange, commercial register and www.x3news.com the average dividend yield for all companies for the period is 4.46% (table 3). the companies with average dividend yield for the period above the average for all companies are kauchuk, m+s hydraulic and hydraulic elements and systems. the rest of the analyzed companies have an average dividend yield for the period below the average for all companies. the analysis shows different approaches to the dividend policy of the examined companies. http://www.x3news.com/ valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 245 table 3. dividend yield (%) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 average alkomet 0.71 1.20 2.48 1.94 1.44 8.77 2.76 emka 2.19 2.41 2.08 2.56 3.34 4.21 2.63 4.01 3.66 4.01 3.11 kauchuk 19.6 3 18.4 8 14.2 8 4.24 2.53 2.60 1.84 9.08 korado-bulgaria 4.00 3.60 2.92 3.42 4.00 4.39 5.27 3.41 2.90 3.76 3.77 m+s hydraulic 4.11 4.32 3.27 3.76 3.85 4.44 3.90 3.85 4.00 3.57 3.91 neochim 1.51 2.13 0.45 1.67 8.85 13.9 3 4.75 fazerles 4.00 2.77 1.43 2.48 4.76 4.76 5.43 3.66 hydraulic elements and systems 4.65 5.97 3.33 4.23 5.20 5.53 4.64 4.43 4.82 3.65 4.64 average 4.46 source: own calculations based on bulgarian stock exchange data alkomet jsc alkomet jsc is a manufacturer of aluminum products. the company is a member of the broad index bgbx40 as of 30th september 2024. the index includes the forty most liquid companies on the bulgarian stock exchange. during the 10-year period under review, alkomet does not pay dividends every year. for each of the years in the period 2014-2018, the company pays out dividends. the gross dividend amount increased from bgn 0.0447 in 2014 to bgn 0.4499 in 2016 following the eps trend (table 1). eps also recorded a significant increase, reaching bgn 1.50 in 2016 from bgn 0.13 in 2014. in 2019, eps decreased significantly, but remained positive. despite the positive financial result for 2019, in 2020 the company decided not to pay dividends for 2019. this demonstrates caution in resource management and, possibly, a reaction to the economic uncertainty related to the covid-19 pandemic. in 2020 and 2021, the company reported losses and no dividends were paid for these years. having achieved a record net financial result in 2022 (related to the increase in the price of aluminum), alkomet again pays a dividend 0.7851 bgn per share for the corresponding year. this is the highest dividend paid by the company consistent with the record eps of 3.14 bgn in 2022. in the face of military conflicts, inflation, weaker economic growth, alkomet realizes a negative financial result in 2023 and does not pay dividends for this year. the dividend payout ratio is relatively stable in 2014, 2016 and 2017 – it varies between 0.30 and 0.33 (table 2). in 2015 and 2018, it falls to 0.20. the distribution of 20% of the profit as dividends and the retention of the remaining 80% as retained earnings in these years means that the company applies a more conservative approach to its dividend policy and makes an effort to enhance its financial stability. after resuming dividend payment, dividend payout ratio amounts to 0.25 in 2022. this value is higher compared to 2015 and 2018, but it is lower than the historical 0.30-0.33. in the period 2014-2018, dividend yield gradually increases from 0.71% in 2014 to 2.48% in 2016 (table 3). then, it falls dramatically reaching 1.44% in 2018. in 2022, there is a considerable growth of dividend yield to 8.77%. this sharp rise is due to the high dividend of 0.7851 at a relatively low share price. the record net profit achieved in 2022 allows the company to reward its shareholders significantly after the difficulties in the previous years. the significant growth in dividend yield in 2022 increases the average dividend yield for the period under review to 2.76%. the analysis of alkomet’s dividend policy reveals a trend of regular payment of dividends only for the first half of the period under review with the dividend being of variable size. it can be said that the company is flexible in its dividend policy and, overall, it adapts dividend payments to its current financial situation. emka jsc emka jsc produces cables and conductors. the company is part of the bgbx40 index as of 30th september 2024. emka consistently pays cash dividends every year of the analyzed period (table 1). in the period 2014-2017, the dividend per share increased slowly (from bgn 0.0421 to bgn 0.0737). in the first two years of the period, the company paid a constant dividend of bgn 0.0421 per share, and eps changed slightly. at the same time, the payout ratio for these two years is the same – 0.31. in the period 2018-2020, the company paid a stable dividend per share of bgn 0.0842. during this period, eps shows a slight change valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 246 from bgn 0.16 to bgn 0.17. this indicates a trend towards predictability and ensuring stable income for shareholders when profit is relatively stable. for the same period, the payout ratio remains similar between 0.50 and 0.52, which is associated with the small change in eps. maintaining a similar payout ratio emphasizes the company's commitment to providing stable payouts. during the pandemic 2021, eps increased significantly, and the dividend per share was raised to bgn 0.1579. for 2022, the dividend remains at the 2021 level, despite a significant increase in eps to a peak of bgn 0.53. the dividend for 2023 decreases, again being bgn 0.0842 which shows the company's reaction to the decrease in eps to bgn 0.20. the review of the data makes it possible to conclude that the covid-19 pandemic did not affect the company dividend policy negatively. emka shows periodic changes in the dividend payout ratio which can be interpreted as an adjustment to earnings. the payout ratio reached its peak of 0.60 in 2016 (table 2). in the period 2018-2021, the ratio remained in a narrow range (0.50 and 0.52). in 2022 and 2023, the company pays out a smaller part of its profit as dividends compared to previous years. taking into account the higher profit in 2022, the ratio drops to 0.30. in 2023, the payout ratio rises to 0.42, but is below the levels of 2018–2021. the average dividend yield of the company for the period under review is 3.11% (table 3). the highest dividend yield was recorded in 2019 (4.21%) and the lowest in 2016 (2.08%). overall, dividend yields increased during the period 2014–2019. in 2020, the yield fell (2.63%), but then recovered and stabilized around 4.0% in the period 2021–2023. emka pursues a policy of regular dividend payout because during the whole period under review it does not stop distributing dividends. in the short term, the dividend remains fixed for certain periods, while in the long term, for the period 2014–2022, there is a general trend towards growth. during a part of the analyzed period, the dividend payout ratio remains relatively stable. emka’s dividend policy can be defined as consistent, with periods of stability and adaptation to its financial results. kauchuk jsc kauchuk jsc manufactures rubber products. the period 2014-2016 is characterized by a lack of cash dividends (table 1). for each of these years, the company makes a decision to transfer the profit to the reserve fund. for the period 2017 – 2023, kauchuk pays dividends regularly, but there are significant fluctuations in the amount of the dividend paid. for the period 2017-2019, the amount is more considerable with the dividend per share as follows: bgn 5.30 for 2017, bgn 8.50 for 2018 and bgn 7.14 for 2019. what is typical for this period is that the company uses both net profit for the respective year and retained earnings and reserves to pay dividends. it is noteworthy that regardless of the instability related to the pandemic, in 2020 the company decided to pay dividend for 2019. the covid-19 pandemic had a negative impact on the company’s activity. the company realised a positive financial result in 2020, even though it was lower compared to the previous year. the dividend per share starts decreasing in 2019 and in 2022 it reaches bgn 0.90. in 2023, it is bgn 0.90 as well. under the influence of a complex of factors, including the negative effects of the pandemic and the military conflict between russia and ukraine that broke out in 2022 (affecting the prices of energy resources), in 2021 and 2022 the company's net profit decreased, but it continued to pay dividends. eps shows instability with periods of a fall and rise (table 1). in the period 2017-2019, eps is in an upward trend. the observed growth indicates a steady improvement in the company financial results. in the period 2020-2022, eps declines. in 2022, it drops to bgn 0.98 indicating a considerable fall in profit. in 2023, it rockets to bgn 23.89 showing a significant improvement in financial results. despite this high value, the dividend remains at the level of bgn 0.90. data show significant fluctuations in both dividends paid and payout ratios over the years. the high values of the payout ratio above 1 in the period 2017-2019 (table2) reflect the fact that the amount of the dividends paid is provided not only from the profit for the respective year, but also from the reserves, and for part of the period from retained earnings. in the period 2017-2021, a downward trend is observed with regard to the payout ratio. after 2020, the payout ratio plunges and reaches values below 1. it remains below 1 until the end of the analyzed period. in the period 2020-2023, most often the company pays a relatively small portion of its net profit as a dividend. in 2021, the ratio declines to 0.27. in 2022, the company pays a very large portion of its net profit for 2021 (0.92) as a dividend. in 2023, the payout ratio reaches a minimum value of 0.04 (4%), which shows a minimum payout as a dividend regardless of the high eps. dividend yield is higher in the period 2017-2019, reaching peak values of 19.63% in 2017 and 18.48% in 2018, which is attractive to shareholders (table 3). the company maintains this high yield through significant dividends. in the period 2020-2023, dividend yield declines considerably and reaches 1.84% in 2023. the average dividend yield recorded for the period under review is high – 9.08%. kauchuk shows flexibility in its dividend policy, which allows it to adapt depending on the financial valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 247 environment, its strategic priorities and the market. the company policy demonstrates commitment to the regular payment of dividends for seven years in a row, despite the significant fluctuations in both the amount of payouts and the payout ratio. korado-bulgaria jsc korado-bulgaria jsc is a manufacturer of steel radiators. the company is a member of the bgbx40 index as of 30th september 2024. the company pays dividends annually with no interruption within the 10-year period analyzed. the dividend per share is relatively stable during most of the period. in the period 2014–2016, an increase in the dividend is observed – from bgn 0.12 in 2014 to bgn 0.26 in 2016. this increase can be explained with the rising eps during the period (table 1). in the period 2016–2017, the dividend per share remains stable at a level of bgn 0.26 and from 2018 to 2021 it remains unchanged at a level of bgn 0.29. this change between 2017 and 2018 is small and it can be said that for the period 2016–2021 the general trend is towards stability in dividend policy. despite the fluctuations in eps, dividend remains relatively stable during this period. thus, the company demonstrates a clear desire towards predictability and stability, which is a key factor in maintaining shareholders’ confidence. the company maintained the dividend at bgn 0.29 in 2019 and in the pandemic 2020 and 2021, which indicates that the covid-19 pandemic did not influence the decision to pay during this period. the decrease in the dividend per share in 2022 and 2023 (to bgn 0.20 and bgn 0.19 respectively) can be interpreted as adaptation to the decreasing eps. korado-bulgaria took advantage of the legal changes that allowed for the payment of dividends twice a year. since 2018, the company has been paying a 6-month dividend. this tradition was interrupted when a one-time dividend was paid for 2023 due to the company's deteriorating financial results. the dividend payout ratio is relatively high in most years, which indicates that the company distributes a considerable portion of its profit to the shareholders. the highest value of the dividend payout ratio is registered in 2019 – 0.90, while the lowest one is in 2014 – 0.57 (table 2). due to profit fluctuations, the dividend payout ratio varies over the years since the company adjusts it to maintain dividend stability during a part of the period. in 2022 and 2023, the payout ratio falls to 0.60 and 0.70, which shows some adjustment to the policy of dividend payout. dividend yield peaks to 5.27% in 2020 (table 3). the years with the lowest dividend yield are 2016 (2.92%) and 2022 (2.90%). the average dividend yield for the period 2014-2023 is 3.77%. the company dividend policy for the period 2014–2023 is characterized by consistency. koradobulgaria pays cash dividends every year of the analyzed period. at the same time, for the period 2016–2021 the company demonstrated a sustainable dividend policy by maintaining relatively stable dividends. the company policy also reflects some adaptability to the changing financial results. m+s hydraulic jsc m+s hydraulic jsc is a manufacturer of hydraulic and steering systems. the company is part of the bgbx40 and bgtr30 stock exchange indices as of 30th september 2024. the company pays cash dividends every year and without interruption for the period 2014-2023. for 2014 and 2015, the dividend per share remains the same bgn 0.22, although the eps changes (table 1). in the period 2016-2020, dividend varies slightly – for 2016 and 2019 it is bgn 0.26 and for the other three years of the period it is bgn 0.30. during this period, it changes simultaneously with eps. the dividend paid rises slowly to bgn 0.35 for 2021 and bgn 0.40 for 2022 and remains bgn 0.40 for 2023. this emphasizes both the smooth increase in dividends in the long term and the pursuit of stability in payouts. eps increases significantly in 2022 reaching bgn 0.84 compared to bgn 0.48 in 2021, which is a nearly double increase. however, dividend grows a lot more smoothly. the dividend payout ratio varies over the years between 0.88 in 2015 and 0.48 in 2022 and 2023 (table 2). in the period 2016–2019, when dividend varies within a relatively stable range, the payout ratio remains high and relatively stable, fluctuating between 0.80 and 0.82. this movement within a narrow range is probably due to the slight changes in the net profits during this period. the high values of the payout ratio mean that a considerable part of the profit is distributed as dividends. in 2021, the payout ratio drops more significantly to 0.73. in 2022, it falls sharply to 0.48 remaining at this level in 2023 as well. this decrease is related to the significant growth in profits, while dividend rises more smoothly. data analysis shows that the company keeps pursuing its dividend policy successfully even in the pandemic covid-19 situation. dividend yield varies within a range from 3.27% to 4.44% (table 3). it peaks in 2019 while its lowest value is in 2016. the average dividend yield for the period 2014-2023 is 3.91%. m+s hydraulic’s dividend policy is consistent and sustainable. the company regularly pays valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 248 dividends every year during the period 2014–2023, thus demonstrating predictability and commitment to shareholders. in the short term (year-on-year), dividend is relatively stable and in the long term a trend for smooth increase is observed. during part of the period under review, the payout ratio remains relatively stable. at times, the company shows flexibility by adapting payments to the dynamics of the financial results. this policy ensures return for shareholders and at the same time maintains the balance with the long-term sustainability of the business. neochim jsc neochim jsc is a manufacturer of nitrogen compounds and fertilizers. the company is included in the bgbx40 index as of 30th september 2024. the company does not pay cash dividends regularly during the period under review (table 1). it paid dividends during the first six years of the analyzed period when it had a positive financial result. the dividend paid per share varies significantly during the period 2014-2023 (from bgn 0.20 to bgn 5.00 per share). during the pandemic 2020, neochim had a positive financial result as the drop in sales revenue was compensated by the reduced costs due to the fall in the prices of natural gas (main production raw material of the company). in 2021, dividend goes up significantly. a dividend of bgn 5.00 per share was paid in 2021 and 2022, which indicates that the company uses its higher profits to reward shareholders. the company reports a loss for 2023 and no dividend is paid. eps varies significantly during the period under review (table 1). there are years of high positive values (for instance, 2022) and years of significant negative values (2014 and 2023). the fluctuations show instability in the company’s operating results, which directly affects its ability to pay dividends. the amount of the dividend per share does not indicate a stable relationship with eps. the dividend payout ratio is very volatile as well (table 2). in 2015, it is 0.46, while in 2016 it drops to 0.12 and in 2017 it is much lower – 0.04. in 2020, the dividend payout ratio is low as well (0.07 or 7%). the low vaues indicate a very conservative approach to profit distribution for dividends. in 2021 and 2022, the dividend payout ratio is 0.27 and 0.18 respectively. compared to previous years, these values show greater profit distribution as the company takes advantage of its significantly better financial results. dividend yield shows significant fluctuations as well (table 3). in some years it is very low (e.g. 0.45% in 2016), whereas in others, such as 2022 it is 13.93%. this does not provide a stable return for investors who rely on dividend yield as a source of income. the average dividend yield for the period is 4.75%. the analysis shows that during the period under review the company is not consistent in its dividend policy. neochim’s dividend policy demonstrates some flexibility through the variable amounts of dividend in the years with a positive financial result, which generally reflects in adaptation to the current financial situation. fazerles jsc fazerles jsc is a manufacturer of wood fiber boards. with the exception of three years (2017, 2019 and 2023), when the company made a loss, during the remaining seven years of the analyzed period it paid cash dividends. the amount of dividend payout varies (table 1). in the period 2014-2023, the highest dividend paid is in 2014 (bgn 2.00) and the lowest ones are recorded in 2016 and 2018 (bgn 0.50). in 2015 and in the period 2020-2022, the company pays the same amount of dividend per share despite the eps fluctuations in these years. in the period 2020-2022, the company demonstrates predictability to shareholders and stability by managing to maintain a stable dividend amount – bgn 1.00. in 2020, company activity is negatively affected by the covid-19 pandemic (decline in the demand for its products and in the volume of orders). a positive financial results was achieved in that year, but it is a lot lower. nevertheless, in the pandemic 2021, a decision was made for the distribution of a gross dividend amounting to bgn 1.00, which is also at the expense of a part of the retained earnings. eps varies considerably during the period under review (table 1). its highest value is observed in 2014 when the highest dividend amount was paid. in 2017, 2019 and 2023, eps is negative. in terms of dividend payout ratio, a lack of consistency is observed (table 2). in 2015, 2018 and 2020, its value exceeds 1 because during these years the company pays out more in dividends than it currently earns relying on retained earnings as well. the value of the ratio was 1.86 in 2015 and 3.43 in 2018. in 2020, it rose sharply to 16.10, which is an extremely unusual value. over the next two years, the payout ratio normalised decreasing to 1 and 0.54, respectively. dividend yield also shows significant fluctuations varying from 1.43% in 2016 to 5.43% in 2022. (table 3). the average dividend yield is 3.66%. with regard to the dividend policy of fazerles, it can be said that it shows a tendency to adapt to valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 249 financial results and available resources, showing flexibility in challenging years. it does not demonstrate strict consistency, but for part of the period considered (2020-2022) the company manages to maintain stability in dividends. hydraulic elements and systems hydraulic elements and systems is a manufacturer of hydraulic cylinders. the company is part of the bgbx40 index as of 30th september 2024. the company pays cash dividends every year of the analyzed period (table 1). in the period 2014– 2022 and in the long term, the dividend per share gradually rises from bgn 0.16 in 2014 to bgn 0.33 in 2022, despite the temporary falls in some years (2016 and 2019). however, this trend is interrupted in 2023 when the dividend drops significantly to bgn 0.21 as a reaction to the significant fall in eps in that year. the dividend per share follows the eps trends. when eps is growing, dividend is growing as well, with the eps peaking in 2022 (table 1). in the years of decrease in eps (2016, 2019 and 2023), dividend decreases. the long-term relationship between eps and dividend remains strong. overall, for the period 2014–2023 the fluctuations in dividends are more moderate than those in eps. during the period under review, the payout ratio varies within 0.60-0.92 (table 2). during the fiveyear period 2015-2019, the payout ratio is in a narrow range between 0.88 and 0.91, which indicates stability and consistency in payouts. this means that the company aims to maintain a relatively constant share of the profit that it distributes as dividends. at the same time, during this period, the absolute amount of the dividend per share indicates moderate changes, fluctuating in the range of 0.18 to 0.26 bgn. in 2020 and 2021, the payout ratio gradually decreases to 0.79 and 0.74, which shows some flexibility with regard to the financial situation. the fall to 0.63 in 2022 is a more considerable deviation from the previous years, being the lowest value for the entire period. in the same year, the company reported the highest net profit and highest absolute dividend size for the period 2014-2023. in 2023, the payout ratio reaches its highest value of 0.92, comparable to previous peak levels for the period. this rise in the payout ratio reflects consideration of the significantly lower net profit compared to the previous few years and shows flexibility in the company dividend policy. despite the challenges of the covid-19 pandemic, the company continues to pursue its dividend policy successfully. in the beginning of the period (2014–2016) dividend yield shows considerable volatility, with a sharp increase to 5.97% in 2015 and a fall to 3.33% in 2016 (table 3). in the next years (2017–2022), dividend yield varies within a more moderate range between 4.23% and 5.53%. after the pandemic breaks out, in the period 2020–2022, dividend yield is relatively stable (between 4.43% and 4.82%), but it remains low compared to some of the previous years. in 2023, there is another drop to 3.65%, which is the second lowest value for the period under review. this reflects adaptation of dividend policy to the current economic situation. for the whole period, the average dividend yield is 4.64%. hydraulic elements and systems pursues a policy of annual distribution of dividends. the company dividend policy for the period 2014–2023 is characterized by sustainability and consistency, which shows an ability for moderate flexibility in different financial situations. for the period 2015–2019, its policy is characterized by a relatively stable payout ratio and moderate changes in dividends, both resulting in predictability. for the period 2014–2022, a long-term trend is observed of gradual increase in dividends, even though there are temporary falls. this trend was interrupted in 2023. the company dividend policy reflects a strive to ensure shareholders rewards, as well as long-term stability. conclusion the study of public companies from the manufacturing industry in bulgaria shows that the majority of them have never paid cash dividends for the period 2014-2022. this is also true for public companies in this industry classified in the sector of industrial goods and materials. among these public companies, 40% of the companies that paid cash dividends during the period under review (including those that did so only once) did so every year. only half of the examined companies have paid dividends every year of the whole period under review and at the same time have implemented a consistent dividend policy. most of the analyzed companies maintain or even increase the dividend amount for the pandemic 2020 and 2021. in general, the information published by the companies under review lacks clear details and specifics about the type of dividend policy they implement. greater clarity and transparency with regard to the processes for determining the dividends paid would provide a better picture of the stability and reliability of the companies, which strengthens the confidence of investors in them. implementing a consistent dividend policy reduces uncertainty, increases trust in the company and investors' confidence in the stability and longterm prospects of the investment. valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 250 references ali, h. 2022. corporate dividend policy in the time of covid-19: evidence from the g-12 countries. finance research letters, 46: 102493. https://doi.org/10.1016/j.frl.2021.102493. ali, n., m. z. rehman, b. n. ashraf, and f. shear. 2022. corporate dividend policies during the covid19 pandemic. economies, 10: 263. https://doi.org/10.3390/economies10110263. bahrudin, n. z., s. z. saddam, a. h. mustaffa, h. abdullah, and z. sahudin. 2021. 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https://doi.org/10.15388/ekon.2019.1.6 valya vasileva/ finance, accounting and business analysis, volume 6, issue 2, 2024 251 dividend policy in indonesia: the static and dynamic panel data approaches. economies, 10: 11. https://doi.org/10.3390/economies10010011. vochozka, m., v. machová, and e. sedmíková. 2021. fixing a payout ratio by dividend policies: a case of the utility sector. entrepreneurship and sustainability issues, 9 (2): 416-432. https://doi.org/10.9770/jesi.2021.9.2(27). x3news. www.x3news.com. https://doi.org/10.3390/economies10010011 https://doi.org/10.9770/jesi.2021.9.2(27) http://www.x3news.com/ 304 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.13 stock price forecasting using a time-series long short-term memory model adedeji daniel gbadebo department of accounting science, walter sisulu university, mthatha, south africa info articles abstract history article: submitted: 16 september 2025 revised: 13 november 2025 accepted: 6 december 2025 purpose: this study aims to introduce and evaluate a novel application of long short-term memory (lstm) networks for stock price forecasting by integrating multi-stock comparative analysis across different volatility regimes, addressing a key gap in the literature regarding model robustness and generalizability. design/methodology/approach: using a time-series covering 2019– 2023, the study implements an lstm model within a python-based framework. the model is trained on data from 01/01/2022 to 12/31/2023 and tested on 01/01/2019 to 12/31/2021. mean squared error is employed as the primary evaluation metric to assess forecasting accuracy across heterogeneous stocks. findings: empirical results show that the lstm model effectively captures complex temporal dependencies and nonlinear patterns in financial time series, producing reliable stock price forecasts. it outperforms conventional time-series benchmarks and demonstrates strong adaptability across stocks with differing volatility characteristics. practical implications: for investors, lstm-based forecasts provide deeper insights into risk–return dynamics and support more informed, data-driven investment strategies. for policymakers, the results highlight the increasing importance of machine learning tools in enhancing transparency, stability, and efficiency in financial markets. originality/value: the study offers a unique contribution by demonstrating that a unified lstm framework can generalize across multiple stocks and volatility regimes, establishing both its theoretical relevance and practical utility in algorithmic trading and financial forecasting. keywords: stock price, lstm, prediction accuracy, pythonbased implementation jel: g17, c45, c53, g14 address correspondence: e-mail : agbadebo@wsu.ac.za http://faba.bg/ https://doi.org/10.37075/faba.2025.2.13 mailto:agbadebo@wsu.ac.za https://orcid.org/0000-0002-1929-3291 adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 305 introduction accurately forecasting stock prices remains a significant challenge for investors and financial institutions. financial markets are inherently volatile and shaped by diverse factors, including macroeconomic trends and firm-specific events, which often render traditional time series methods insufficient. these classical approaches frequently struggle to model the nonlinearities and long-term dependencies characteristic of financial data. the emergence of deep learning, particularly complex neural network architectures, has provided new opportunities to address these difficulties. reliable stock price prediction is essential for guiding investment choices, as a robust predictive model can evaluate both risks and potential returns. a forecasted price increase may indicate a buying opportunity for investors willing to accept higher risk, while a predicted decline may suggest caution (shao & soong, 2016). thus, accurate predictions help shape strategies aligned with individual risk tolerance and financial objectives. despite the proliferation of forecasting models, a major empirical challenge persists: achieving consistent predictive accuracy across assets that exhibit different volatility patterns and market dynamics. much of the existing literature applies long short-term memory (lstm) networks to individual stocks or narrowly defined datasets, leaving open questions about their generalizability to diverse financial instruments. this study seeks to close this gap by assessing the performance of an lstm framework across multiple major stocks that differ in stability and risk, allowing for a more rigorous evaluation of model robustness and adaptability. lstm networks have been widely recognized as a promising solution for financial time series modeling. designed to capture long-term dependencies in sequential data, lstms overcome the vanishing gradient limitations of traditional rnns through their distinctive memory cell architecture. this enables them to retain relevant information over extended periods and uncover underlying temporal patterns that influence future price movements. joosery and deepa (2019) note that while lstms have shown success in numerous domains, their application to the volatile stock market requires careful model tuning. similarly, zeng and liu (2018) emphasize the persistent difficulty of stock price prediction and highlight the importance of advanced methods such as lstm for addressing the complexities inherent in financial markets. existing research often prioritizes technical improvements in predictive models without fully addressing broader implications for investment strategy and policy. this study bridges that gap by connecting the performance of lstm models to their practical value for investors, analysts, and policymakers. through a multi-stock comparative approach, it evaluates whether a single lstm model can preserve predictive accuracy across varying volatility regimes, offering both methodological and practical contributions to the forecasting literature. in response to these considerations, the study focuses on three central research questions: (1) to what extent can lstm models improve predictive accuracy relative to traditional forecasting techniques? (2) how well do lstm models perform when applied to stocks with markedly different volatility characteristics? (3) what are the implications of enhanced predictive accuracy for investment decision-making and financial policy? the contribution of this study is twofold. theoretically, it extends prior work by demonstrating the flexibility of lstm architectures across diverse market environments, linking predictive performance with broader financial interpretability. practically, it illustrates how machine learning–based forecasts can enhance risk assessment and support more strategic investment planning. this introduction frames the application of lstms for stock price prediction within the python programming environment. it outlines the essential concepts underpinning lstm networks, discusses how they model temporal dependencies, and reviews the steps involved in implementing an lstm model, from preprocessing data to selecting architectures and evaluating performance. prior research, such as goyal (2004), has shown that lstms outperform methods like adaptive integrated moving average and traditional feedforward neural networks in financial forecasting. wang et al. (2018) similarly report accuracy rates of 60–65%, reinforcing lstm’s value in predictive finance. by incorporating a multi-stock comparative dimension and examining policy and investment implications, this study advances the empirical understanding of lstm-based financial prediction and contributes to ongoing developments in forecasting research. methods data the dataset employed in this study comprises daily closing prices of four major technology firms, such as tesla, google, apple, and amazon, sourced from yahoo finance. these firms were purposefully selected because they represent globally traded, highly liquid stocks that exhibit distinct volatility patterns and investor behaviors, making them suitable for testing the robustness of lstm models under both stable and adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 306 volatile market conditions. their inclusion aligns with the study’s objective to evaluate the adaptive capacity of deep learning models in heterogeneous market environments. the data frequency is daily, as daily observations capture short-term fluctuations and dynamic responses to market news, which are critical for accurate time-series learning in lstm frameworks. higher frequencies (e.g., minute-by-minute data) were avoided to reduce excessive noise and overfitting, while lower frequencies (e.g., monthly data) would obscure important market dynamics. the sample period spans from january 1, 2019, to december 31, 2023. specifically, the training period covers 01/01/2022 to 12/31/2023, while the testing period spans 01/01/2019 to 12/31/2021. this partitioning ensures that the model learns from recent market patterns while being validated on pre-2022 data to assess predictive generalizability. although the reviewer suggested extending the dataset to december 2024, this is not feasible because the study’s dataset was extracted as of early 2024, and stock price data beyond that point were unavailable or incomplete at the time of analysis. moreover, extending to an unfinished trading year may introduce data inconsistencies and bias the evaluation of model performance. therefore, the selected timeframe provides the most comprehensive and reliable dataset available at the time of study completion. these four stocks represent prominent players in the stock market, each exhibiting unique characteristics and stability profiles. tesla, known for its innovative electric vehicles and volatile stock, presents higher risks but also potential for substantial returns (zou et al. 2022). google demonstrates greater stability and consistent growth. apple, with its strong brand and loyal customer base, offers a balance of stability and growth potential. amazon, dominating e-commerce and cloud computing, showcases robust growth but can experience fluctuations due to market sentiment and competition (nurazi and usman 2016). models recurrent neural networks (rnns) are a specialized class of artificial neural networks designed to effectively handle sequential data such as time series, natural language, and speech. unlike traditional feedforward neural networks, which process data in a single pass, rnns possess internal feedback loops often referred to as "self-connections" that enable them to maintain an internal state or “memory.” this memory allows the network to retain information from previous inputs and use it to influence the processing of subsequent inputs, making rnns particularly well-suited for tasks where the order of data matters. figure 1 illustrates a typical rnn architecture, emphasizing these self-connections. this architecture enables rnns to process sequential data variations by capturing temporal dependencies and patterns within the data stream. key elements of the rnn at time step t include: 𝛼𝑡: the input vector at time 𝑡 (input layer); 𝛿𝑡: the output at time 𝑡 (output layer); 𝜇𝑡: the memory or hidden state at time 𝑡 (hidden layer); 𝜎: the weight matrix for input; 𝛽: the weight applied to the input sample at time 𝑡; and 𝜅: the weight applied to the output. source: author figure 1: a simple rnn structure the rnn incorporates a feedback mechanism within the hidden layer. the hidden state from the previous time step can be transmitted to the current hidden layer and combined with the current external input variables. the hidden state update is defined as: 𝜇𝑡 = tanh(𝜎𝜇𝑡−1 + 𝛽𝛼𝑡) (1) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 307 where: tanh serves as the nonlinear activation function, filtering information and performing nonlinear mapping. the output at time 𝑡 is computed as: 𝛿𝑡 = 𝑓(𝜅𝜇𝑡) (2) rnns’ ability to process sequential data makes them a natural choice for time-series analysis, such as stock price prediction. however, traditional rnns face challenges when dealing with long sequences due to the vanishing and exploding gradient problems. these issues arise during backpropagation, where gradients used to update network weights either diminish exponentially (vanishing gradients) or grow uncontrollably (exploding gradients), hindering learning of long-term dependencies. the vanishing gradient problem limits the network’s memory capacity by preventing effective association of current outputs with inputs from many steps earlier, while exploding gradients cause unstable training and unpredictable outcomes. to overcome these limitations, hochreiter and schmidhuber (1997) introduced the long short-term memory (lstms) network. lstms are a specialized type of rnn designed to address vanishing and exploding gradients, thereby enabling the learning and retention of long-term dependencies in sequential data. this makes lstms particularly effective for analyzing and forecasting time series with long intervals or delays between significant events, such as stock prices. the primary difference between lstms and traditional rnns lies in their internal architecture. while rnns update a single hidden state at each time step, lstms feature a more complex memory mechanism comprising a cell state and three gates input, output, and forget gates that regulate information flow into, out of, and within the cell state:  cell state: functions as a conveyor belt, carrying information across time steps with minimal modification. unlike the hidden state in rnns, the cell state is protected by gates, preventing rapid changes and allowing preservation of long-term dependencies.  input gate: controls which new information is added to the cell state based on the current input and previous hidden state. it uses a sigmoid activation to output values between 0 and 1, where 0 means no information is added and 1 means all information is added.  output gate: regulates what information from the cell state updates the hidden state at the current time step. it also applies sigmoid activation to filter cell state contents.  forget gate: determines which information from the previous cell state should be discarded. it assigns a value between 0 and 1 to each element of the cell state using a sigmoid function values near 0 indicate forgetting, while values near 1 indicate retention. this combination of gates and cell state enables lstms to selectively remember and forget information, effectively managing long-term dependencies. while traditional rnns rely solely on the tanh activation function, lstms employ both sigmoid functions (for gate regulation) and tanh functions, allowing more nuanced control over information flow. by overcoming the fundamental limitations of traditional rnns, lstms have become a powerful tool in various applications, including natural language processing, speech recognition, and crucially, stock price prediction. source: author figure 2. a flowchart based on lstm in python adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 308 implementations stock price prediction is a complex challenge due to the volatile and often unpredictable nature of financial markets. traditional methods frequently fall short in capturing the intricate patterns and long-term dependencies within stock market data. this is where long short-term memory networks, a specialized type of recurrent neural network, offer a significant advantage. lstms are specifically designed to address the limitations of standard rnns in handling long sequences. traditional rnns suffer from the vanishing gradient problem, making it difficult for them to retain information over extended periods. lstms, however, incorporate a unique memory cell structure. this structure, composed of gates that regulate the flow of information, allows the network to selectively remember or forget information over time. this ability to capture long-term dependencies is crucial for stock prediction, as historical trends and market events can have a lasting impact on future price movements. several key features make lstms particularly well-suited for stock price prediction: 1. memory cells: the core of lstm’s power lies in its memory cells. these cells maintain information over time, allowing the network to learn from past data and apply it to future predictions (chen et al. 2020). 2. handling long-term dependencies: lstms excel at capturing relationships between events separated by long intervals, a crucial aspect of stock market analysis where past events can influence future prices (wang and li 2021). 3. non-linearity: lstms can model complex non-linear relationships in data, which is essential for capturing the intricate dynamics of the stock market (zhao et al. 2019). 4. time series handling: lstms are inherently designed for sequential data, making them a natural fit for time-series analysis like stock price prediction (lim et al. 2021). compared to traditional methods, lstms offer several advantages: 1. superior performance: studies have shown that lstms often outperform traditional time-series models like arima in stock price prediction tasks (li et al. 2021; zhao et al. 2019). 2. capturing complexities: lstms can model the non-linear relationships and long-term dependencies that traditional methods often miss. 3. adaptability: lstms can adapt to changing market conditions by continuously learning from new data. while lstms offer significant advantages, stock prediction remains a challenging task. no model can perfectly predict the future, and careful consideration of data quality, model parameters, and risk management is crucial for successful implementation. stock price prediction is inherently challenging due to market volatility and complexity. traditional methods often fail to capture the intricate long-term dependencies in stock data. long short-term memory networks, a specialized type of recurrent neural network. lstms address the limitations of standard rnns by incorporating a memory cell structure that regulates information flow, enabling them to effectively learn and retain long-term dependencies crucial for stock prediction (chen et al. 2020). lstms have demonstrated superior performance compared to traditional methods, capturing market complexities and adapting to changing conditions. stock prediction remains complex, and careful consideration of data, model parameters, and risk management is essential. lstm networks offer a promising approach to improving stock price prediction. the lstm architecture, illustrated in figure 3, is particularly well-suited to this task. figure 3. lstm structure adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 309 the lstm architecture consists of a memory cell, an input gate, an output gate, and a forget gate. the forget gate 𝑓𝑡 determines which information to discard from the cell state. the input gate 𝑖𝑡 controls which new values are added to the memory. the output gate 𝑜𝑡 decides which parts of the cell state and current input are output. the output at each time step 𝑡 is stored in ℎ𝑡. the activation functions used are sigmoid (𝜎) and hyperbolic tangent (tanh), where sigmoid outputs values between 0 and 1, and tanh outputs values between -1 and 1. the input gate is computed as follows: 𝛾𝑡 = 𝜖(𝜎𝛾 ⋅ [𝛼𝑡 , 𝜇𝑡−1] + 𝜃𝛾) (3) δ̃ = tanh(𝜎δ ⋅ [𝛼𝑡 , 𝜇𝑡−1] + 𝜃δ) (4) the forget gate selectively discards irrelevant information. the remaining information, together with new input, is processed by the input gate (𝑖𝑡) to update the cell state (𝐶𝑡) and store the current state (𝐶�̃�): 𝜆𝑡 = 𝜖(𝜎𝜆 ⋅ [𝛼𝑡 , 𝜇𝑡−1] + 𝜃𝜆) (5) δ𝑡 = 𝛾𝑡 ⋅ δ̃ + 𝜆𝑡 ⋅ δ𝑡−1 (6) after the forget and input gates process the information, the lstm cell state contains both long-term (𝐶𝑡) and short-term (ℎ𝑡) information. this information is stored and passed as input to the next time step in the sequence: 𝛿𝑡 = 𝜖(𝜎𝛿 ⋅ [𝛼𝑡 , 𝜇𝑡−1] + 𝜃𝛿) (7) 𝜇𝑡 = 𝛿𝑡 ⋅ tanh(δ𝑡) (8) figure 3 illustrates the lstm-based stock price prediction process implemented in python. according to nelson et al. (2017), the process begins with data preprocessing, where raw stock market data including historical prices, trading volumes, and technical indicators are transformed into a suitable format for lstm input. this typically involves converting the data into tensor format, a multidimensional array structure used in deep learning frameworks. the lstm model is trained with a batch size of 16, meaning that model parameters are updated after processing 16 data points. the hidden state size is set to 128, determining the model’s capacity to capture temporal dependencies. training employs the root mean square propagation (rmsprop) optimizer, known for its effectiveness in handling non-stationary objectives, with a learning rate of 0.001 controlling parameter update steps. the pytorch framework facilitates efficient model training by leveraging gpu acceleration. mean squared error (mse) is used as an evaluation metric for lstm performance in stock price prediction. lower mse indicates better accuracy. python libraries such as scikit-learn assist in mse calculation. results and discussions results table 1 presents the descriptive statistics for the daily stock prices of four major technology firms, including tesla, google, apple, and amazon, over the 2019–2023 period. the mean stock prices indicate significant differences in market valuation across firms, with tesla’s mean price (642.318) far exceeding those of other firms, consistent with its high volatility and speculative investor sentiment (baker and wurgler 2007). the relatively high standard deviation (235.742) for tesla underscores the firm’s sensitivity to innovation announcements, regulatory developments, and market expectations concerning electric vehicles and autonomous technology in contrast, apple and google exhibit more stable price distributions (standard deviations of 29.774 and 24.382, respectively), reflecting the maturity and diversification of their product ecosystems (fama and french 2015). all the stock series display positive skewness, implying a longer right tail in the distribution. this suggests that extreme positive returns, possibly linked to earnings surprises or technological breakthroughs, occur more often than extreme losses. such behavior is typical of growth-oriented technology stocks, where optimism can sustain temporary overvaluation (shiller 2000). the kurtosis values indicate mesokurtic distributions, suggesting that price fluctuations are largely moderate and not dominated by outliers. this finding aligns with the adaptive market hypothesis (lo 2004), which posits that market efficiency varies over time as investors adapt to evolving information conditions. overall, the descriptive patterns indicate that the lstm model will need to accommodate volatility clustering and nonlinear patterns typical of high-growth equities. adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 310 table 1. descriptive statistics of stock prices variable mean std. dev. min max skewness kurtosis tesla 642.318 235.742 180.450 1242.800 0.941 3.218 google 127.456 24.382 88.510 176.280 0.617 2.845 apple 142.775 29.774 82.150 198.700 0.488 2.664 amazon 116.389 25.965 68.430 179.500 0.732 2.921 source: author table 2 reports the results of the augmented dickey–fuller (adf) test for unit roots. at level form, none of the stock price series are stationary, as indicated by t-statistics that fail to reject the null hypothesis of a unit root. however, after first differencing, all series become stationary with highly significant p-values (0.000). this implies that the series are integrated of order one, i(1), consistent with the behavior of most financial time series (nelson and plosser 1982). from an economic standpoint, non-stationarity in prices reflects the random walk nature of asset prices under the efficient market hypothesis (emh), which posits that price changes are driven by new, unpredictable information (fama 1970). stationarity achieved after first differencing implies that while the level of stock prices follows a stochastic trend, the returns (i.e., first differences) are mean-reverting and suitable for modeling and prediction. for machine learning models such as lstm, ensuring stationarity is critical, as non-stationary inputs can cause unstable gradients and biased learning (makridakis et al. 2018). therefore, differencing the series before training ensures that the neural network captures short-term dependencies and temporal dynamics rather than spurious correlations caused by underlying trends. table 2. unit root test results variable level t-stat 1st diff. t-stat stationarity p-value tesla -1.924 -6.732 stationary (1st diff.) 0.000 google -2.108 -7.144 stationary (1st diff.) 0.000 apple -2.021 -6.951 stationary (1st diff.) 0.000 amazon -1.876 -6.843 stationary (1st diff.) 0.000 note: all variables become stationary after first differencing, indicating i(1) processes. this confirms that differencing the data before training prevents bias from non-stationary variance, ensuring stable lstm learning. table 3 summarizes the bai–perron multiple structural break test results, which identify significant shifts in the mean and variance of each stock price series. the results indicate multiple breaks for tesla (2020– 03, 2022–11) and amazon (2020–04, 2022–06), and single breaks for google (2021–05) and apple (2020– 09). these breakpoints correspond to major macroeconomic and firm-level shocks, including the covid-19 pandemic, monetary tightening cycles, and post-pandemic market corrections. the break in march–april 2020 coincides with the onset of global lockdowns and the ensuing liquidity crisis, which caused widespread market selloffs (zaremba et al. 2020). the subsequent breaks in 2021–2022 align with policy normalization by central banks and investor repositioning toward value stocks following inflationary pressures and interest rate hikes (baker et al., 2022). the presence of structural breaks highlights the nonlinear and regime-dependent nature of financial time series-conditions under which traditional linear models often underperform. to address these issues, the lstm framework was designed with dropout regularization and normalized input (hochreiter and schmidhuber 1997). by capturing long-term dependencies and adapting to evolving market regimes, the lstm model can effectively learn the dynamic relationships even in the presence of structural changes (zhang et al. 2020). table 3. bai–perron structural break variable no. of breaks break dates (approx.) f-statistic significance tesla 2 2020–03, 2022–11 12.681 0.000 google 1 2021–05 10.324 0.001 apple 1 2020–09 9.742 0.002 amazon 2 2020–04, 2022–06 11.507 0.000 source: author table 4 (panel 1) shows tesla’s stock prediction loss is 143.8036. figure 4 depicts the various plots for tesla stock price predictions. panel a is the mse loss during training, panel b is the stock price prediction (training dataset), panel c is stock price prediction (test data), panel d is stock price prediction using 50 adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 311 epoch (training data), panel e is stock price prediction using 50 epoch (test data). using epoch 50 for both the training and validation mse loss for the tesla stock price prediction, panel a and b depict that the epoch 50 is closer to the true stock value. the evidence shows that tesla’s stock has experienced a significant downturn recently, marking its worst month, quarter, and year on record (das et al. 2023). a steep decline of 44% in december alone represents the most substantial monthly drop ever recorded for the company. this downturn extends to the quarterly performance, with a 59% decrease in the fourth quarter exceeding the previous worst quarter, q2 of the same year, which saw a 38% drop (goswami 2023). several factors contribute to this negative trend, including expanded discounts for model 3 and model y vehicles in north america and earlier incentives offered in china. additionally, production cuts at the shanghai facility, though possibly denied by the company, add to the uncertainty surrounding tesla’s recent performance (lupton et al. 2022). the stock’s decline has transformed it from an "object of religious veneration" to a more conventional automaker facing the realities of the electric vehicle market (jain 2017). increased trading volume since mid-december further reflects the market’s reaction to these developments (goswami 2023). panel a: mse loss during training (tesla) panel b: stock price prediction (training) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 312 panel c: stock price prediction (testing) panel d: stock price prediction using epoch = 50 (testing) panel e: stock price prediction using epoch = 50 (testing source: author figure 4. tesla predictions (panel a-e) table 4 (panel 2) shows google’s stock prediction is 1.5394. figure 5 depicts the various plots for google’s stock price predictions. panel f is the mse loss during training, panel g is the stock price prediction adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 313 (training dataset), panel h is stock price prediction (test data), panel i is stock price prediction using 50 epoch (training data), panel j is stock price prediction using 50 epoch (test data). using epoch 50 for both the training and validation mse loss for the google stock price prediction, panel a and b depict that the epoch 50 is closer to the true stock value. the evidence shows that google’s stock performance has recently mirrored the broader tech market’s behavior, influenced by overall market volatility, competitive pressures, regulatory scrutiny, and financial performance. over the years, google’s stock has experienced significant growth, leading to substantial returns for investors. pinpointing a precise “best time” is difficult, as stock performance is influenced by numerous factors and market conditions. the period following google’s ipo in 2004 saw substantial growth, with early investors benefiting significantly. more so, various periods of innovation and expansion, such as the rise of mobile computing and the growth of google’s advertising business, have coincided with stock price increases (liao et al 2024). it’s important to remember that past performance is not indicative of future results, as general economic uncertainty and interest rate fluctuations contribute to market volatility, impacting google’s stock price. furthermore, the evolving tech landscape, including competition and innovation in key areas, shapes investor sentiment. regulatory scrutiny also plays a role, potentially affecting investor confidence (nguyen et al. 2023). google’s own financial performance, including earnings reports and growth projections, significantly influences its stock price. staying informed about market trends and seeking professional financial advice are crucial for navigating the complexities of stock market investments (bakar and wurgle 2007). panel f: mse loss during training (google) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 314 panel g: stock price prediction (training) panel h: stock price prediction (testing) panel i: stock price prediction using epoch = 50 (training) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 315 panel j: stock price prediction using epoch = 50 (testing) source: authors figure 5. google predictions (panel f-j) table 4 (panel 3) shows apple’s stock prediction is 14. figure 6 depicts the various plots for apple’s stock price predictions. panel k is the mse loss during training, panel l is the stock price prediction (training dataset), panel m is stock price prediction (test data), panel n is stock price prediction using 50 epoch (training data), panel 0 is stock price prediction using 50 epoch (test data). using epoch 50 for both the training and validation mse loss for the apple stock price prediction, panel a and b depict that the epoch 50 is closer to the true stock value. the evidence shows that apple inc.’s prominent position within the technology sector and its stock market performance has garnered significant attention. as with all publicly traded equities, apple’s stock price exhibits periods of volatility, influenced by macroeconomic trends, prevailing economic conditions, and company-specific factors (ouyang et al. 2024). while apple has achieved remarkable growth and market success (barbosa and de oliveira 2020), its stock remains susceptible to market fluctuations. factors such as new product releases (zhang and zhang 2021), consumer demand, and competitive pressures can influence investor sentiment and impact stock performance (ouyang 2020). despite experiencing periods of substantial growth historical performance is not indicative of future returns. a comprehensive understanding of apple’s stock performance necessitates consulting reputable financial news sources and analyst reports. furthermore, it is crucial to acknowledge that investment decisions inherently involve risk. panel k: mse loss during training (apple) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 316 panel l: stock price prediction (training) panel m: stock price prediction (testing) panel n: stock price prediction using epoch = 50 (training) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 317 panel o: stock price prediction using epoch = 50 (testing) source: author figure 6. apple predictions (panel k-o) table 4 (panel 4) shows amazon’s stock prediction loss is 2.4875. figure 7 depicts the various plots for amazon’s stock price predictions. panel p is the mse loss during training, panel q is the stock price prediction (training dataset), panel r is stock price prediction (test data), panel s is stock price prediction using 50 epoch (training data), panel t is stock price prediction using 50 epoch (test data). using epoch 50 for both the training and validation mse loss for the amazon stock price prediction, the figures shows the epoch 50 is closer to the true stock value. since its 1997 ipo, amazon has evolved from an online bookstore to a dominant force in e-commerce, cloud computing, and digital streaming (kumar and ahuja 2020). its customer-centric approach, innovative business model, and aggressive expansion fueled early growth, propelling its stock price upward (das et al. 2023). while the dot-com bubble posed a challenge, amazon’s strong fundamentals enabled its recovery and continued market leadership. despite recent market volatility, its strong performance and dominant position suggest a positive outlook, though challenges like competition and regulation remain (wang et al 2022). panel p: mse loss during training (amazon) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 318 panel q: stock price prediction (training) panel r: stock price prediction (testing) panel s: stock price prediction using epoch = 50 (training) adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 319 panel t: stock price prediction using epoch = 50 (testing) source: authors figure 7. apple predictions (panel p-t) table 4. company stock (epoch and mse) mse epoch train validate panel 1: tesla 1 0.0449 0.0053 50 0.0019 0.0017 panel 2: google 1 0.0653 0.0038 50 0.0023 0.0004 panel 3: apple 1 0.0908 0.0024 50 0.0026 0.0004 panel 4: amazon 1 0.0383 0.0030 50 0.0022 0.0014 source: authors (2025) policy and managerial implications the findings from the lstm predictive framework reveal critical insights for policymakers, financial regulators, and firm managers operating in technology-driven capital markets. from a policy perspective, the high volatility and structural breaks detected, particularly during 2020–2022, underscore the sensitivity of equity markets to macroeconomic shocks such as pandemic disruptions and monetary tightening. regulators must therefore strengthen macroprudential frameworks to mitigate systemic risks originating from speculative behavior in high-growth sectors (borio 2014). by integrating real-time financial analytics powered by deep learning, central banks can enhance their surveillance systems to detect abrupt regime shifts or “flash crashes,” thus improving crisis response mechanisms (adrian and liang 2018). secondly, the presence of multiple structural breaks emphasizes the role of monetary policy in shaping investor expectations. the breakpoints around 2020–2022 correspond to interest rate adjustments and inflationary pressures, consistent with findings that liquidity tightening can induce valuation corrections in growth-oriented firms (baker et al. 2022). policymakers should therefore recognize that abrupt policy normalization can amplify volatility in technology equities that are priced heavily on future earnings potential. this calls for gradual policy signaling and enhanced forward guidance to allow market participants to recalibrate expectations smoothly, reducing the probability of herding and abrupt capital flight (blinder et al. 2008). from a managerial standpoint, the predictive evidence offers actionable guidance for strategic decision-making and risk management. the lstm model’s superior predictive accuracy indicates that firm managers can leverage such models to anticipate short-term price movements, enabling better timing of share adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 320 repurchases, capital issuance, or hedging activities. for example, the elevated mse loss for tesla signals the heightened uncertainty faced by firms engaged in emerging technologies with rapidly evolving market sentiments. managers in such contexts should adopt flexible financing and inventory policies to accommodate abrupt demand or valuation shifts, in line with dynamic capability theory (teece et al. 1997). on a broader economic level, the results carry implications for financial stability and innovation policy. the high volatility and episodic breaks in tesla and amazon prices mirror speculative tendencies in markets with incomplete information and innovation-driven narratives (shiller 2000). policymakers should thus design innovation-supportive yet stability-oriented interventions, including transparent disclosure requirements for emerging technologies and clearer regulatory oversight of ai-driven trading systems. ensuring that innovation incentives do not foster unsustainable asset bubbles remains a central challenge for regulators in post-pandemic financial governance (lo 2004). furthermore, the documented regime shifts reinforce the necessity of adaptive market regulations. as financial markets evolve through non-linear dynamics, static regulatory frameworks may become obsolete. integrating ai-driven monitoring tools within stock exchanges and central depositories can enable the early detection of market anomalies, such as algorithmic mispricing or coordinated speculative trading (zaremba et al. 2020). such initiatives align with the adaptive market hypothesis, which emphasizes the need for continuous learning and adjustment in market institutions (lo 2004). by adopting such adaptive mechanisms, regulators can promote more resilient and transparent markets. from the investor and portfolio management perspective, the lstm’s predictive capabilities highlight new avenues for algorithmic risk assessment. investors can integrate model outputs into portfolio optimization frameworks to rebalance assets in anticipation of volatility surges, especially around known breakpoints or policy announcements. the empirical evidence that all series become stationary after first differencing supports the notion that return-based forecasting is more reliable than price-level modeling. this reinforces the practical necessity of pre-processing financial data before deploying ai-based trading algorithms to prevent bias and overfitting (hochreiter and schmidhuber 1997). finally, at the intersection of public policy and firm strategy, the results advocate for a co-evolutionary approach between innovation policy and financial governance. the post-2020 structural breaks demonstrate that exogenous shocks, such as pandemics or policy shifts, can destabilize even the most robust technology firms. policymakers and corporate leaders should therefore co-develop resilience frameworks that integrate predictive analytics into both corporate strategy and macroeconomic planning. this includes stress-testing corporate valuations under simulated macroeconomic shocks and encouraging transparency in data-driven decision-making (das et al. 2023). ultimately, the synergy between ai-enabled forecasting models and prudent policy design can enhance economic resilience in an increasingly data-driven global financial system. conclusions this research contributes to the growing body of evidence supporting the potential of lstm networks for enhancing stock price prediction. by leveraging the lstm’s capacity to model complex temporal relationships, investors and financial analysts can gain a more informed perspective on market trends and individual stock behavior (lim et al 2021). the focus on tesla, google, apple, and amazon provides a practical context for evaluating the model’s real-world applicability. notably, advanced techniques like lstms are not foolproof because external factors, market sentiment, and unforeseen events can significantly impact stock prices. therefore, combining predictions with thorough fundamental analysis and risk management strategies is essential for sound investment decisions (kumar et al. 2023). however, this study is not without limitations. the analysis is confined to daily data spanning 2019– 2023, which, although comprehensive, does not capture post-2023 structural and policy developments due to the data unavailability at the time of analysis. extending the dataset to 2024/12, as suggested, was not feasible because complete and validated stock price records for all four firms were not yet released in consistent format across data repositories during the period of study completion (january 2025). furthermore, the model focuses exclusively on historical price dynamics and does not integrate other relevant financial variables such as trading volume, macroeconomic indicators, or sentiment data. these omissions may limit the model’s ability to fully capture multidimensional drivers of stock behavior, particularly during high-volatility regimes. another limitation concerns the inherent black-box nature of lstm models, which constrains interpretability and may obscure the underlying causal mechanisms behind predicted price movements (makridakis et al. 2018). additionally, while dropout regularization and differencing were employed to mitigate overfitting and non-stationarity issues, further robustness checks using alternative machine learning models could provide a more comprehensive understanding of model generalizability. these limitations should guide readers to interpret the findings within the specific temporal and methodological context of the study. adedeji daniel gbadebo / finance, accounting and business analysis, volume 7, issue 2, 2025 321 future research should expand the scope by integrating hybrid deep learning architectures such as lstm–gru or attention-based transformers to enhance model transparency and accuracy (zhang et al. 2023). researchers could also explore cross-market applications by comparing the performance of lstm models on emerging versus developed markets, enabling broader policy and investment implications. in addition, incorporating real-time sentiment 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department of economics, university of south africa, south africa1 department of economics, university of south africa, south africa2 department of economics, university of south africa, south africa3 * corresponding author info articles abstract history article: submitted 30 january 2025 revised 17 april 2025 accepted 28 april 2025 purpose: this study re-examines the relationship between interest rates and economic growth, focusing on the asymmetric effects of lending interest rates on kenya's economic performance. design/methodology/approach: the study applied the nonlinear autoregressive distributed lag (nardl) model to ascertain the distinct impacts of positive and negative interest rate shocks on economic growth in both the short and long run. it uses yearly time series data spanning the years 1980-2021. findings: the results of the cointegration tests found evidence supporting the existence of an asymmetric long-run relationship, while the wald test results show that there is a long-run and short-run asymmetry link between interest rates and economic growth in kenya. on average, positive changes in lending interest rates have no significant impact on economic growth in kenya, both in the short and long run. however, negative interest rate shocks spur economic growth in the short run but impede growth in the long run. research limitations/implication: the study is limited to the kenyan context and the dataset range of 1980–2021. future research could explore thresholds for optimal interest rate levels and include a broader range of countries for comparative analysis. originality/value: this study uniquely applies the nardl framework to kenya, providing new insights into the asymmetric impact of interest rates on economic growth. paper type: research paper. keywords: economic growth, interest rates, kenya, nardl jel: c32, e43, o42 * address correspondence: e-mail: talknice2009@gmail.com1 malulg@unisa.ac.za2 odhianm@unisa.ac.za3 http://faba.bg/ mailto:talknice2009@gmail.com1 mailto:odhianm@unisa.ac.za https://orcid.org/0000-0003-1255-7837 https://orcid.org/0000-0002-5234-3115 https://orcid.org/0000-0003-4988-0259 t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 70 introduction introduction, theoretical and empirical literature synthesis beginning with the asian tiger economies and shifting to newly industrialised economies, such as china, south africa, india, russia and brazil, the most powerful and successful strategy for poverty reduction is through sustained economic growth emanating from aggressive and rapid innovation and industrialisation (chatterjee and naka 2022; united nations industrial development organisation 2020). these two groups of countries pursued both export-oriented and import substitution strategies, while advancing innovative production technologies (liu et al. 2023). while both monetary and nonmonetary factors can be drivers of economic growth, nonmonetary factors have received most of the attention in research studies. this insight serves as the motivation for this paper, which has two primary goals. the first is to thoroughly review and document the relationship between lending interest rates and economic growth in kenya. lending interest rates can have a significant impact on the rate and trajectory of economic growth by influencing the magnitude and return of investment, as well as the scope and composition of both saving and consumption. infrastructure development, industrialisation, institutional investors, mutual funds, and the corporate sector are all exposed to risks stemming from interest rate volatility (olasehinde-williams et al. 2024). the second is to bridge the gap in interest rate modelling by applying a model that can be used to quantify and comprehend the nature of the link between interest rates and growth in kenya. specifically, this study investigates the asymmetric impact of interest rates on economic growth in kenya using time series data from 1980 to 2021. the nonlinear ardl method captures the positive and negative changes asymmetrically and the shortand long-run dynamics of interest rates on economic growth in kenya, enabling a more precise analysis across different economic conditions (see saungweme et al. 2024; shin et al. 2014). to the best of our knowledge, this is the first analysis of its kind conducted in kenya, and it is unique since it employs an advanced estimation procedure that takes into account the asymmetrical characteristics of lending interest rates. therefore, the primary goals of this study are to complement previous growth research on kenya and to support ongoing reforms in the areas of monetary, economic, and financial policy. these reforms are essential to preserving macroeconomic stability, preserving debt sustainability, strengthening market confidence, and enhancing the achievement of kenya's medium-term growth prospects (international monetary fund/imf 2024; odhiambo and saungweme 2023a; saungweme and odhiambo 2021). in addition, kenya’s economy faces unique structural challenges and external shocks, such as fluctuating global interest rates and capital flows (imf 2024). therefore, understanding how interest rate fluctuations affect growth can provide insights into optimal policy decisions for sustainable development. from a theoretical standpoint, there are multiple opposing hypotheses about the relationship between interest rates and economic growth. the first is a cogent explanation of the boom-bust pattern offered by the austrian school of economic thought. that is, low interest rates from the central bank would encourage investment bubbles, which would then lead to a burst in asset prices, a financial crisis, and a severe recession (foldvary 2015). the rate of interest is interpreted by the austrian school as reflecting a methodical discounting of future values. the austrian hypothesis states that the relationship between interest rates and economic growth typically revolves around the time preference issue. for example, increased productivity could encourage people to invest more now, making present-day investing more preferred over future investment (holmes 2011). furthermore, the market for loanable funds—funds that are accessible for borrowing—determines the interest rate (foldvary 2015). borrowers will be able to access more funding for consumption and investment at reduced interest rates. in general, austrian economics holds that a central bank's manipulation of money and interest rates is what causes recessions; the best way to prevent these controls is to let the money supply and interest rates be determined by free market forces in money and banking. keynesian theory comes second. keynes' approach to interest rate dynamics is in contradistinction with loanable funds theory. for keynes, interest rate dynamics is based on his conception of ontological uncertainty, liquidity preference, investors’ expectations and animal spirits, financial institutions, financial markets, and institutional practices (akram 2021). according to keynes, the short-term interest rate is determined by the central bank's policy rate, which then affects the long-term interest rate (akram 2021). these long-term interest rates then influence investment, saving and consumption decisions in the economy. the mckinnon-shaw hypothesis comes in third. in their original individual works, they contended that financial policies in developing and emerging economies, including low and restricted interest rates and restrictive credit management, among other financial repression acts, result in a decrease in savings, investment and economic growth (wilson and odhiambo 2023). mckinnon (1973) studied an economy in which the vast majority of investors had very limited access to external financing. in his view, savers may find it more convenient to build up their money in financial assets until they have sufficient funds to invest t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 71 in higher-yielding physical assets (leshoro and wabiga 2023). thus, deposits can act as a channel for the accumulation of capital, rendering deposits and capital complementary assets. the availability of deposits with positive real rates of return may thus encourage both saving and capital accumulation. in contrast to mckinnon, shaw (1973) focused more on external rather than internal financing options as a fundamental constraint to capital formation. shaw also underlined the significance of positive real deposit rates as an incentive to save in financially depressed economies. shaw (1973) emphasised that high deposit rates might encourage investment spending by enabling the credit supply to grow in accordance with the financing requirements of the economy's productive sectors (iddrisu and alagidede 2020). thus, mckinnon (1973) and shaw (1973) suggest that low interest rates do not really increase investment and economic growth (owusu 2023). after analysing the mckinnon-shaw arguments, mohlo (1986) came to the conclusion that deposits and physical capital complement each other in an intertemporal fashion, with current deposits being used to fund future investments. this link suggests that higher deposit rates inhibit investment in the short run but will eventually boost it in the long run. there is currently little but growing empirical research on the link between interest rates and economic growth (leshoro and wabiga 2023; adabor 2022). first, leshoro and wabiga (2023) looked at how both positive and negative interest rate shocks affect private investment in south africa. the study employed annual time series data from 1971 to 2019 and a nonlinear autoregressive distributed lag technique. the results indicate that interest rates and private investment exhibit short-run and long-run asymmetric relationships, with private investment responding differently to negative and positive shocks in interest rates. second, by applying the nardl approach, adabor (2022) tested the asymmetric impact of lending interest rates on economic growth in ghana using yearly time series data covering the period of 1970 to 2019. the study found evidence of long-run and short-run asymmetrical effects of lending on economic growth in ghana. the findings further show that positive changes in lending rates generate a decrease of nearly 0.2% in economic growth while negative changes lead to an increase of about 0.7% in economic growth. other non-asymmetric studies conducted on the interest rate-growth linkage include lee and werner (2023), shaukat et al. (2019), awad and al karaki (2019). lee and werner (2023) analysed the impact of interest rates on economic growth in 19 industrialised and emerging economies. the analysis used a timevarying dynamic conditional correlation in a garch model and further tested the direction of causation between the two variables in the studied economies. the results provide evidence consistent with the conclusion that lowering interest rates is counterproductive when trying to stimulate the economy. awad and al karaki (2019) examined the impact of bank lending on economic growth in palestine using quarterly time series data for the period from 1996 to 2015. the study employed the vector autoregressive model and vector error correction model, as well as the granger causality test to test the underlying relationships. the study found that there was a statistically insignificant relationship between bank lending and economic growth. additionally, there is evidence of unidirectional causality that runs from economic growth to bank lending. shaukat et al. (2019) studied the mechanism by which the real interest rate establishes a negative effect on economic growth in 38 transitory economies. the study applied a dynamic panel data technique based on the generalised method of moments for the period 1996-2015. the study found that during the transition period of developing economies, a high real interest rate restricts the economy's potential to grow. considering the aforementioned theoretical stances and empirical evidence, the goal of this study is to empirically test the interest rate-growth relationship tailored to the kenyan context. the remainder of the research is arranged as follows: section 2 provides an overview of interest rates and economic growth trends in kenya. data, methodology, and estimation techniques are provided in section 3. the empirical analysis is presented in section 4, and the main conclusions and policy implications are summed up in section 5. overview of interest rate and economic growth trends in kenya kenya experienced a general balance of payments surplus from 1964 to 1972, with the exception of 1964, 1967, and 1971 (world bank 2022). interest rate policy in kenya was largely dormant throughout this time. the government managed interest rates by setting minimum savings for all deposit-taking institutions and minimum lending rates for commercial banks, non-bank financial institutions, and building societies (baynham 1989). a variety of internal and external causes, notably inflation brought on by a significant rise in oil prices and the consequences of a severe national drought in 1973, had a negative impact on the economy between 1972 and 1981 (imf 1985). following the shocks, the government re-examined its regulatory structure, which resulted in the progressive escalation of restrictions on imports, exports, interest rates, and domestic pricing. between 1974 and 1989, the monetary authorities in kenya used an administered interest rate framework. the employment of statutory credit ceilings and minimum savings deposit rates was a crucial t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 72 tool for managing market liquidity (imf 1991a). a revision to the credit ceiling policy between 1989 and 1991 resulted in the maximum rate being split between short-term and long-term lending (imf 1991a). the major challenge with controlling interest rates was a widening gap between administered and effective bank lending rates. for this reason, the monetary authorities have been unable to sell enough quantities of government securities to limit the growth of the money supply (imf 1991b). the government then started a series of economic adjustment programs with the world bank and imf in 1991 and continued them until 1996. the overarching policy framework placed a strong emphasis on trade liberalisation, interest rate deregulation, and macroeconomic stabilisation (obrien and ryan 1999). in 1991, this framework resulted in a comprehensive liberalisation policy ideology. this philosophy is supported by the theoretical expectations of the mckinnon-shaw hypothesis, which postulates that easing regulatory restrictions on interest rates will increase the volume of funds in deposit-taking institutions (mckinnon 1973; shaw 1973). regarding economic growth, the years 1963 and 1973 can be regarded as a decade of exceptional growth, with an average annual real growth rate of 6.7% (world bank 2022). the favourable weather and trade conditions for kenya's commodity exports, along with the successful execution of the importsubstitution program, all contributed to the country's impressive economic performance (odhiambo and saungweme 2023b). between 1974 and 1979, the country underwent an economic recession marked by declining terms of trade and rising oil prices (imf 2022). the period 1980-85 can be described as an era of macroeconomic imbalance and stabilisation, with low growth. economic and monetary policy interventions between 1985 and 1989, which were further enhanced by the 1986 coffee boom, led to an economic rebound. for the first half of this period, real gdp increased by an average of 5.3% yearly (world bank 2022). figure 1 shows interest rates and gdp per capita growth rates for the period 1980 to 2022. source: authors’ compilation using world bank (2022) data figure 1. interest rate and economic growth trends in kenya (1980-2022) figure 1 largely describes a negative correlation between interest rates and annual growth of gdp per capita in kenya. interest rates rose sharply during times of economic instability, such as 1980–1985, 1989–1992, 1995–1996, 2008, and 2019. despite the series of economic reforms and monetary reforms, interest rates in kenya remained high over the period under review, 1980-2022. these high interest rates on loans from the banking sector have been perceived by some policymakers as an obstacle to greater investment, financial inclusion, and economic growth (imf 2019). as a result, the monetary authorities in kenya were compelled to revert to managing interest rates in 2016. as a result, the observable flip in interest rates from 2016 is consistent with the capping of interest rates in kenya, which went into effect that same year (central bank of kenya/cbk 2018). according to the new rule, the maximum lending rate cannot be more than 4% over the base rate set by the central bank (cbk 2018). however, the interest rate caps on commercial loans were lifted in 2019, and this is shown by an upturn in interest rates in figure 1 (imf 2021). the goal of eliminating interest rate ceilings in 2019 was to facilitate greater credit expansion and to stimulate private investment (imf 2021). despite the repeal, lending rates charged by banks have not increased significantly over the prior cap rate. in 2023, as part of an ongoing set of reforms, the kenyan central bank established a new interest rate corridor to guide the -10 -5 0 5 10 15 20 25 30 35 40 1980 1985 1990 1995 2000 2005 2010 2015 2020 a n n u a l % interest rates gdp per capita growth t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 73 overnight interbank rate and reduce the premium for its discount (imf 2024). the initiative was undertaken to further strengthen the monetary policy implementation framework. from the economic growth front, the notable downward spike in gdp per capita between 1990 and 1992 can be linked to the suspension of the balance of payments assistance from bilateral donors, while the downward spike in the 2019-20 period is attributable to the covid-19 pandemic shock and ongoing volatility in the global financial system (see also imf 2022). methodology data description the study used annual time-series data from 1980 to 2021. the availability of reliable and consistent time-series data for each of the model variables for the study country influenced the selection of the data range. the data used in this study were obtained from the world bank's online database. table 1 presents the definition of variables, measurements, and expected signs. table 1. definitions of variables and data sources variables definitions of variables (measurements) a priori expectation economic growth (y) gdp per capita (constant 2015 us$) dependent variable interest rate (int) lending interest rate (%) +/ investment (inv) gross fixed capital formation (% of gdp) + financial development (cred) domestic credit to private sector (% of gdp) + trade openness (to) trade (% of gdp) +/ exchange rate (exc) official exchange rate (lcu per us$, period average) +/ model specification the baseline model used in this study is defined as follows: yt = f(int, inv, cred, to, exc) (1) where table 1 defines each variable. in order to obtain elasticity coefficients on the variables and minimise the impact of outliers, the variables are converted to logarithms. therefore, equation (1) is specified as follows: lyt = α0 + β1lintt + β2linvt + β3lcredt + β4ltot + β5lexct + μt (2) there is a vast array of literature that attempts to theorise the numerous causes of economic growth. the core tenet of the harrod-domar (h-d) model of economic growth is that increased production levels at the micro and macro levels are the result of a progressive accumulation of additional physical capital financed by savings and investments (nguyen 2023). subsequent to the h-d model is the solow-swan model, which emphasises the smooth substitution between capital and labour (nguyen 2023). early in the 20th century, financial depth and trade openness were recognised as crucial components of economic growth (odhiambo and saungweme 2023a). nyasha et al. (2021), use gdp per capita as the dependent variable to facilitate cross-country comparisons of different population sizes. in other words, gdp per capita adjusts nominal gdp for changes in price levels and population growth. the lending interest rate is the primary independent variable in this study. theoretically, interest rates are regarded as the costs of borrowing investment and consumption funds from financial institutions. bank lending rates are expected to either have a positive or negative relationship with economic growth. a decrease in lending rates is expected to induce borrowing for investment and consumption, hence leading to economic growth (adabor 2022; foldvary 2015). however, an increase in lending interest rates can lead to a decline in economic growth as it increases the cost of borrowing, which might discourage borrowing for investment and consumption, which is needed to grow the economy. the incorporated control variables in model 1, namely investment, financial development, trade t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 74 openness, and exchange rate, are buttressed by both theory and prior empirical evidence; hence, it is anticipated that their coefficients will be statistically significant. the solow-swan model states that investment variations have an impact on total production up until steady-state per capita income is reached. this suggests that while investment has a significant role in determining growth in the short term, its impact on national output is essentially neutral over the long term. empirical studies consistent with a positive relationship between investment and economic growth include odhiambo and saungweme (2023b) and ibrahimov et al. (2023). the inclusion of financial development in the model is due to the perceived positive spillover effects in an economy reliant on knowledge and technology, which ultimately leads to economic growth (giri et al. 2023). furthermore, the underlying theory supporting the inclusion of trade openness in the baseline model argues that trade openness either amplifies or attenuates the effects of globalisation, which in turn encourages technology transfer and foreign direct investment, which eventually influences economic growth (chen et al. 2020). however, baliamoune-lutz and ndikumana (2007), in their panel data analysis from 39 african countries covering the period 1975-2001, found evidence in support of a negative relationship between trade openness and economic growth. this relationship was caused by weak institutions in the studied economies. the role of exchange rates in influencing economic growth cannot be understated, particularly in an analysis of a commodity-exporting country, such as kenya. overvalued currencies can be linked to macroeconomic instability, rent-seeking and corruption, unsustainable high current account deficits, foreign exchange shortages, and balance of payments crises (rodrik 2008). all these factors are detrimental to economic growth. estimation techniques this study applies a nonlinear autoregressive distributed lag (nardl) model. the nardl model explicitly captures the short-run and long-run asymmetries (positive and negative shocks) in lending interest rates on economic growth—a major advantage over linear vector autoregressive models. the cumulative dynamic multipliers of the nardl model further explain the speed with which economic growth returns to equilibrium following a negative or positive shock in lending interest rates (shin et al. 2014). the superiority of nardl over other competing techniques is its ability to give reliable coefficients even in small samples, account for short-run volatilities and structural break problems in the data, account for endogeneity among all the variables, and its applicability to data with mixed orders of integration of at most one (shin et al. 2014). thus, following shin et al. (2014), interest rates can be decomposed into partial sums of positive changes and negative changes, making it possible to examine the marginal impact of the two components on economic growth in kenya. this gives the following expression: lyt = η+lintt + + η−lintt − + zt + ξ1t (3) where: 𝑙𝐼𝑁𝑇𝑡 + = ∑ ∆𝑙𝐼𝑁𝑇𝑡 + 𝑡 𝑘=1 = ∑ max(∆𝑙𝐼𝑁𝑇𝑘 ; 0) 𝑡 𝑘=1 (4) 𝑙𝐼𝑁𝑇𝑡 − = ∑ ∆𝑙𝐼𝑁𝑇𝑡 − 𝑡 𝑘=1 = ∑ min(∆𝑙𝐼𝑁𝑇𝑘 ; 0) 𝑡 𝑘=1 (5) where ∆ change, z is a set of control variables, 𝜉1𝑡 is white noise error term. using equations (4) and (5), the nardl framework as defined by shin et al. (2014) is specified as: ∆𝑙𝑌𝑡 = 𝜅0 + ∑ 𝜆1𝑖∆𝑙𝑌𝑡−𝑖 + 𝜌 𝑖=1 ∑ 𝜆2𝑖 + ∆𝑙𝐼𝑁𝑇𝑡−𝑖 + + 𝜐1 𝑖=0 ∑ 𝜆3𝑖 − ∆𝑙𝐼𝑁𝑇𝑡−𝑖 − + 𝜐2 𝑖=0 ∑ 𝜆4𝑖∆𝑙𝐼𝑁𝑉𝑡−𝑖 𝜐3 𝑖=0 + ∑ 𝜆5𝑖 𝜐4 𝑖=0 ∆𝑙𝐶𝑅𝐸𝐷𝑡−𝑖 + ∑ 𝜆6𝑖∆𝑙𝑇𝑂𝑡−𝑖 𝜐5 𝑖=0 + ∑ 𝜆7𝑖∆𝑙𝐸𝑋𝐶𝑡−𝑖 𝜐6 𝑖=0 + 𝜓1𝑙𝑌𝑡−1 + 𝜓2 +𝑙𝐼𝑁𝑇𝑡−1 + + 𝜓3 −𝑙𝐼𝑁𝑇𝑡−1 − + 𝜓4𝑙𝐼𝑁𝑉𝑡−1 + 𝜓5𝑙𝐶𝑅𝐸𝐷𝑡−1 + 𝜓6𝑙𝑇𝑂𝑡−1 + 𝜓7𝑙𝐸𝑋𝐶𝑡−1 + 𝜉2𝑡 (6) where 𝜌; 𝜐1 − 𝜐6 is optimal lag order, 𝜅0 is constant, 𝜆1, 𝜆4, 𝜆5, 𝜆6, 𝜆7 𝑎𝑛𝑑 𝜆8 are short-run t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 75 coefficients, 𝜆2𝑖 + 𝑎𝑛𝑑 𝜆2𝑖 − are short-run asymmetric distributed lag parameters, 𝜓1, 𝜓4, 𝜓5, 𝜓6, 𝜓7𝑎𝑛𝑑 𝜓8 are long-run coefficients, 𝜓2 + 𝑎𝑛𝑑 𝜓2 − are long-run asymmetric distributed lag parameters, 𝜉2𝑡 is white noise error term, t is time period and l is natural logarithmic transformation. all other variables are as defined in table 1. cointegration in a nardl model setting is ascertained by comparing the computed f-statistic to the upper and lower critical bounds from pesaran et al. (2001) critical values. the asymmetric impact of lending interest rates on economic growth in kenya is ascertained if 𝜓2 + ≠ 𝜓3 −. if this condition holds, then the following error correction model (ecm) is specified: 𝑙𝑌𝑡 = 𝜅0 + ∑ 𝜆1𝑖∆𝑙𝑌𝑡−𝑖 + 𝜌 𝑖=1 ∑ 𝜆2𝑖 + ∆𝑙𝐼𝑁𝑇𝑡−𝑖 + + 𝜐1 𝑖=0 ∑ 𝜆3𝑖 − ∆𝑙𝐼𝑁𝑇𝑡−𝑖 − + 𝜐2 𝑖=0 ∑ 𝜆4𝑖∆𝑙𝐼𝑁𝑉𝑡−𝑖 𝜐3 𝑖=0 + ∑ 𝜆5𝑖 𝜐4 𝑖=0 ∆𝑙𝐶𝑅𝐸𝐷𝑡−𝑖 + ∑ 𝜆6𝑖∆𝑙𝑇𝑂𝑡−𝑖 𝜐5 𝑖=0 + ∑ 𝜆7𝑖∆𝑙𝐸𝑋𝐶𝑡−𝑖 + 𝜙𝐸𝐶𝑀𝑡−1 + 𝜉3𝑡 𝜐7 𝑖=0 (7) where 𝜙 is coefficient of the error term and ecm is error correction term. to confirm convergence to long-run equilibrium following a shock or short-term disequilibrium, the coefficient of the error correction term (𝜙) is anticipated to be negative and statistically significant, lying between 0 and 1. the current paper makes use of time series data, so it is necessary to pre-test each variable for unit root in order to prevent spurious regressions and to determine the order of integration for each variable. according to pesaran et al. (2001) and shin et al. (2014), the nardl model requires that no variable be integrated of an order higher than one. to distinctly determine the order of integration, the paper uses three techniques, namely, the dickey-fuller generalised least square (df-gls), phillips-perron (pp) and zivotandrews (zauroot) techniques. the paper incorporates the zauroot technique so as to correct for structural breaks and, therefore, correctly determine the order of integration among the variables. after ascertaining the order of integration for each variable, the paper then conducts a cointegration test to ascertain the applicability of the nardl process. the paper also undertakes nonlinearity tests in the series using the bds test. the null hypothesis of linearity, under various bds dimensions (m = 2, 3, 4, 5, 6), is put to the test. the wald test is also included in this paper to check for both short-run and long-run asymmetries. after undertaking these preliminary checks, the paper proceeds to estimate the asymmetrical longand short-run effects of lending interest rates on economic growth using equations 5 and 6. finally, the paper carries out post-diagnostic tests, including the recursive cusum and cusumsq tests, to check the null hypothesis that the parameters are unstable. the dynamic multiplier tests further show graphically the rate of response of economic growth to positive and negative variations in interest rates (see shin et al., 2014). results and discussion nonlinearity and stationarity results the study first determines whether the series has a nonlinear relationship. the findings are shown in table 2. there is evidence indicating the existence of a nonlinear relationship between the series in table 2. this result is confirmed by the bds test statistics for each variable, which were found to be statistically significant at 1% across all dimensions. panels a, b, and c of table 3 provide a summary of the three stationarity test results. the results of the df-gls test show that investment is stationary at all levels [i(0)], while gdp per capita, trade openness, and exchange rate are all conclusively stationary after first differencing [i(1)]. according to the findings of the pp and zauroot tests, all series are conclusively integrated of order one (1). overall, the stationarity results indicate that the order of integration of the variables is a mixture of not more than 1. this attests to the appropriateness of using the bounds test to investigate the long-run relationship between interest rates and gdp per capita in kenya. t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 76 table 2. bds test results for nonlinearity variables bds statistic dimension 2 dimension 3 dimension 4 dimension 5 dimension 6 bds statistic pvalue bds statistic pvalue bds statistic pvalue bds statistic pvalue bds statistic pvalue ly 0.153*** 0.000 0.239*** 0.000 0.274*** 0.000 0.279*** 0.000 0.251*** 0.000 lint 0.146*** 0.000 0.237*** 0.000 0.290*** 0.000 0.318*** 0.000 0.326*** 0.000 linv 0.070*** 0.000 0.100*** 0.000 0.110*** 0.000 0.107*** 0.000 0.093*** 0.000 lcred 0.105*** 0.000 0.153*** 0.000 0.180*** 0.000 0.184*** 0.000 0.170*** 0.010 lto 0.132*** 0.000 0.193*** 0.000 0.201*** 0.000 0.169*** 0.000 0.113*** 0.000 lexc 0.203*** 0.000 0.343*** 0.000 0.442*** 0.000 0.510*** 0.000 0.558*** 0.000 notes: *** denote statistical significance at 1% leve1. table 3. stationarity results panel a: dickey-fuller generalised least square (df-gls) variable level first difference without trend with trend without trend with trend ly 1.488 -0.434 -4.021*** -4.814*** lint -1.217 -1.425 -4.591*** -5.611*** linv -2.774*** -2.980* ___ ___ lcred -1.196 -3.094* -7.389*** -7.882*** lto -0.605 -1.974 -6.602*** -6.608*** lexc 0.086 -1.073 -4.368*** -5.705*** panel b: phillips-perron (pp) level first difference without trend with trend without trend with trend ly 1.419 -0.323 -3.949*** -4.710*** lint -1.862 -2.061 -5.432*** -5.606*** linv -2.732* -2.890 -11.123*** -11.332*** lcred -1.102 -3.521* -8.038*** -7.958*** lto -0.888 -1.848 -6.605*** -6.655*** lexc -3.207** -1.772 -5.039*** -5.615*** panel c: zivot-andrews (zauroot) level first difference without trend break with trend break without trend break with trend break ly -2.466 1992 -3.339 2000 -5.441*** 1991 -5.730*** 1990 lint -2.936 1989 -3.177 1999 -6.836*** 1995 -7.043*** 1995 linv -4.198 1996 -4.261 1996 -6.443*** 2000 -6.415*** 2000 lcred -3.765 2006 -4.018 2006 -6.464*** 1991 -7.196*** 2013 lto -3.635 2015 3.814 2010 -6.906*** 1988 -7.147*** 1995 lexc -4.254 1991 -6.761*** 1993 -6.276*** 1995 -6.571*** 1994 notes: ** and *** denotes statistical significance at 5% and 1% level. cointegration and asymmetric test results table 4 displays the outcomes of the cointegration tests carried out utilising the nardl bounds testing methodology. the results show that the f-statistic value for the nardl model is 4.215 and is statistically significant at the 5% level. this suggests that the variables in the nonlinear model have a cointegrating correlation. the wald test results presented in table 5 firmly reject the null hypothesis of longrun and short-run symmetry. this is confirmed by the associated long-run and short-run p-value of the wald f-statistic (wlr), which is statistically significant at 1%, and wsr, which is significant at the 10% level. this finding implies that interest rates have a distinct long-run and short-run asymmetric effect on economic growth in kenya. t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 77 table 4. bounds f-test results for cointegration – nardl f-statistic cointegration status 4.215** cointegrated pesaran et al. (2001), p.300, table ci(iii) case iii asymptotic critical values for 10% 5% 1% i(0) i(1) i(0) i(1) i(0) i(1) 2.53 3.59 2.87 4 3.6 4.9 notes: **denotes statistical significance at 5% level. table 5. wald test results test f-statistic p-value decision wlr 9.201*** 0.007 asymmetric wsr 4.046* 0.056 asymmetric notes: wlr is long-run asymmetric test; wsr is short-run asymmetric test; *** and * signifies significance at 1% and 10% level. long-run and short-run nardl results table 6, panels a and b, presents the long-run and short-run nardl results, respectively. table 6. nardl results long-run and short-run coefficients dependent variable is y panel a: long-run results regressor coefficient t-ratio [p-value] lint+ -0.086 -0.980 [0.339] lint− 0.461*** 4.399 [0.000] linv -0.043 -0.269 [0.791] lcred 0.066 0.570 [0.575] lto 0.056 0.480 [0.637] lexc -0.322*** -4.174 [0.001] panel b: short-run results regressor coefficient t-ratio [p-value] c 4.229*** 6.225 [0.000] @trend 0.031*** 6.335 [0.000] ∆lint+ 0.030 0.721 [0.480] ∆lint− 0.041 1.278 [0.217] ∆lint−(−1) -0.178*** -3.989 [0.001] ∆lint−(−2) -0.120*** -3.297 [0.004] ∆linv 0.057* 1.817 [0.085] ∆linv(−1) 0.131*** 4.327 [0.000] ∆lcred -0.089*** -3.097 [0.006] ∆lcred(−1) -0.076** 2.408 [0.026] ∆lto 0.056* 2.052 [0.054] ∆lto(−1) -0.061** -2.254 [0.036] ∆lexc -0.183*** -3.972 [0.001] ecm(−1) -0.567*** -5.904 [0.000] panel c: test statistics rsquared r-bar-squared f-statistic [prob] normality serial correlation heteroscedasticity functional form 0.793 0.693 7.959 [0.000] 0.779 [0.677] 0.969 [0.400] 1.007 [0.493] 0.879 [0.361] notes: *, ** and *** denote statistical significance at 10%, 5% and 1% levels, respectively “+” and “-” denotes positive and negative shocks. t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 78 the nardl results, which are reported in table 6, indicate that positive changes in interest rates (𝑙𝐼𝑁𝑇+) have no significant impact on economic growth, irrespective of whether the analysis is conducted in the short run or in the long run. the results also indicate that negative changes in interest rates (𝑙𝐼𝑁𝑇−) and economic growth move in the same direction, as evidenced by the positive and statistically significant coefficient of the negative partial sum of interest rates. this suggests that, other things being equal, negative shocks to interest rates are likely to be accompanied by a corresponding decline in economic growth in the long run. one reason for this could be that when the central bank lowers interest rates, economic agents save less because they will not be earning higher returns on their savings. the low saving rate can lead to a lower level of investment, which could contribute to a decrease in economic growth. the results also indicate that there is an inverse relationship between negative changes in lending interest rates from the preceding period and economic growth in the short run. this is supported by the coefficient of the partial negative sum of interest rates, which has been found to be negative and statistically significant. this indicates that decreases in interest rates have the potential to spur economic growth in the short run, as lower rates can incentivise borrowing for both investment and consumption. the major findings of this study indicate that negative changes in interest rates have an asymmetrical impact on economic growth in kenya, depending on the direction of change and the time scale taken into account. overall, based on these conclusions, the study concludes that negative interest rate changes play a significant role in defining the country's possibilities for future prosperity. the results of control variables reported in panels a and b show that investment has a significant positive impact on economic growth in kenya, only in the short run. this finding is consistent with the principles of h-d and solow-swan models presented in earlier sections. the findings of financial development point to detrimental effects on economic growth exclusively in the short run, while it is statistically insignificant in the long run. trade openness has been shown to promote economic growth in the short run, but the results also indicate that trade openness from previous periods causes economic decline. while the adverse effects of financial development may indicate a small financial sector vulnerable to adverse financial developments in international markets, baliamoune-lutz and ndikumana (2007) contend that weak institutions to facilitate reciprocal trade benefits are the root cause of the negative correlation between trade openness and economic growth (see also, imf, 2024). furthermore, it was shown that changes in exchange rates have a negative impact on economic growth in the long and short run. this implies that a depreciation of the exchange rate in kenya is likely to boost exports and increase economic growth. the dynamic multiplier graph presented in figure 2 validates the presence of an asymmetric relationship between interest rates and economic growth. explicitly, the black dotted line indicates the nonlinear adjustment of economic growth to negative shocks, while the solid black line portrays the adjustment of economic growth to positive shocks. overall, the dynamic multiplier reported in figure 2 shows that the effects of positive shocks to interest rates are more pronounced than those of negative shocks in the long run. the cusum and cusumsq graphs presented in figure 3 are within the bounds at a 5% significance level, implying that the estimated model passes the stability test, confirming the consistency and reliability of the coefficients. figure 2. dynamic multiplier graph -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 1 3 5 7 9 11 13 15 multiplier for lint(+) multiplier for lint(-) asymmetry plot (with c.i.) t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 79 figure 3a. cusum graph figure 3b. cusumsq graph conclusion and recommendations the economic and monetary policies of kenya underwent significant evolution from 1964 to 2023. initially characterised by dormant interest rate policies managed through statutory controls, the landscape shifted by 1991 as internal and external shocks prompted economic adjustments emphasizing trade liberalisation and interest rate deregulation. therefore, this study extended the investigation of the asymmetric impact of lending interest rates on economic growth in kenya using a nonlinear ardl model and annual time-series data spanning the years 1980-2021. unlike some of the previous studies, which used linear models, this research employed the nardl framework to examine the shortand long-run asymmetric impact of lending interest rates on economic growth in kenya, providing an intricate understanding of the interest rate-growth nexus. the findings underscore the existence of an asymmetric long-run relationship, as evidenced by cointegration and dynamic asymmetry tests. specifically, while positive shocks in lending interest rates exhibit no significant impact on economic growth, negative interest rate changes are shown to spur growth in the short run but impede it in the long run. short-run benefits of lower interest rates stem from increased borrowing for productive investments, enhanced consumption, and the stimulation of export-driven industries such as agriculture and manufacturing, owing to currency depreciation. conversely, prolonged interest rate reductions may deter savings and compromise long-term investment, posing challenges to sustained economic growth. investment, financial development, trade openness, and exchange rates were found to play critical roles in moderating the growth trajectory, though their effects varied across time horizons. policy suggestions from this paper are: (1) policymakers should carefully balance short-term stimulus policies with long-term sustainability by avoiding extreme interest rate fluctuations. short-term measures should focus on reducing lending rates during economic slowdowns to encourage borrowing for investment, entrepreneurship, and job creation. (2) given that investment positively affects economic growth in the short run, particularly with a lag, policymakers should implement short-term measures to stimulate both private and public investments, such as subsidies and credit facilities. since investment also contributes to long-term economic growth, authorities should establish sustainable financing mechanisms, such as public-private partnerships for infrastructure projects. (3) as credit to the private sector has a negative impact on economic growth in the short run, financial regulators should closely monitor excessive lending to ensure that credit allocation supports productive sectors rather than speculative activities. authorities should promote responsible lending through macro-prudential policies while also developing robust credit risk management frameworks and fostering financial literacy to enhance the positive long-run effects of financial intermediation. (4) since exchange rate depreciation negatively affects economic growth in both the short and long run, the central bank should continuously monitor exchange rate fluctuations and, when necessary, implement appropriate monetary policies within the bounds of its existing free-floating exchange rate system to smooth out extreme and undesirable movements. (5) export diversification strategies should be encouraged to reduce vulnerability to external shocks and enhance economic resilience. future studies on the subject should extend the analysis to estimate the threshold point of lending interest rates that would set the country on an optimal growth path. additionally, the scope of analysis should be broadened to include other african economies to uncover regional trends and policy implications. -15 -10 -5 0 5 10 15 2004 2006 2008 2010 2012 2014 2016 2018 2020 cusum 5% significance -0.4 0.0 0.4 0.8 1.2 1.6 2004 2006 2008 2010 2012 2014 2016 2018 2020 cusum of squares 5% significance t. saungweme, g. maluleke, n. odhiambo / finance, accounting and business analysis, volume 7, issue 1, 2025 80 references akram, t. 2021. a keynesian approach to modelling the long-term interest rate. levy economics institute. working paper no. 988. awad, i. m., and m. s. karaki. 2019. the impact of bank lending on palestine economic growth: an econometric 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https://doi.org/10.1007/s13132-024-01924-x https://doi.org/10.47654/v25y2021i3p1-25 https://doi.org/10.1016/j.physa.2019.122193 https://doi.org/10.1007/978-1-4899-8008-3_9 109 finance, accounting and business analysis volume 7 issue 1, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.1.09 measurement of non-financial assets at current operational value mariam vardiashvili ivane javakhishvili tbilisi state university, georgia info articles abstract history article: submitted 24 march 2025 revised 19 may 2025 accepted 28 may 2025 purpose: in public sector entities, non-financial assets may provide either economic benefits or service potential, depending on their intended use. this distinction influences the selection of an appropriate measurement method. measuring non-financial assets intended to provide services – rather than generate revenue – has long been a challenge in the public sector. to address this issue, the international public sector accounting standards board (ipsasb) introduced changes to the conceptual framework for general purpose financial reporting by public sector entities and, in may 2023, issued a new standard: ipsas 46 – “measurement.” as part of these changes, ipsasb revised the concept of “current value” by introducing two new bases into the ipsas framework: fair value and current operational value. the purpose of this research is to review the newly developed measurement base – current operational value – and analyze its significance and impact on financial statements. the objectives of the research are: (1) to examine the various measurement methods; and (2) to analyze the circumstances under which non-financial assets are measured using this method. design/methodology/approach: to achieve the objectives of the study, a combined approach was employed, incorporating a structured review, scientific literature analysis, and empirical data collection. the structured review involved the analysis of international standards and guidelines related to asset valuation. scientific articles were identified and reviewed using the google scholar platform. empirical data were collected through a telephone survey involving 45 respondents, including representatives from the state treasury, public sector organizations, and academia. findings: this paper highlights the key issues related to the measurement of assets in the public sector. it analyzes the factors that have led to changes in the measurement of financial statement elements under ipsas. the paper presents the concept of current operational value, its measurement approach, and the significance of this method in enhancing the qualitative characteristics of financial statements. practical implications: by highlighting new trends in the measurement of non-financial assets, this research contributes to the understanding of asset measurement challenges in the public sector and their practical application. originality/value: this study explores the challenges associated with the use of current operational value and its impact on asset valuation in the public sector. keywords: measurement, current value, fair value, operating assets, current operational value jel: m41 * address correspondence: e-mail: mariam.vardiashvili@tsu.ge http://faba.bg/ https://doi.org/10.37075/faba.2025.1.09 mailto:mariam.vardiashvili@tsu.ge https://orcid.org/0009-0007-4745-9336 mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 110 introduction the recognition of elements in financial statements occurs in monetary terms, which requires the measurement of their value. the basis of this measurement is any identifiable characteristic of the item being measured—for example, initial cost, fair value, or fulfillment value. based on the selected measurement basis, certain indicators in the financial statements are derived (jikia 2019). this research examines the changes and innovations introduced by the international public sector accounting standards board (ipsasb) regarding the measurement of elements in financial statements. the purpose of the study is to review and analyze the measurement methods defined by ipsas 46, including improvements to the conceptual framework, and to assess their importance in the recognition of assets and liabilities in financial statements. the objectives of the research are to study various measurement methods—including the concept of current operational value—and to analyze the conditions under which non-financial assets are measured using this approach. the article systematically identifies the key issues related to asset measurement in the public sector. the presented material, which highlights new trends in measurement, aims to contribute to understanding the development of asset measurement challenges in the public sector and their practical implications. the study outlines the main directions of asset measurement in the public sector, based on the analysis, synthesis, and comparison of relevant standards, guidelines, and recommendations. literature review several significant studies have addressed the measurement of financial reporting elements, particularly focusing on fair value measurement within the ifrs framework. marks (2011), in his book the most important thing, emphasizes the importance of valuation principles and the inherent uncertainties associated with asset valuation, offering a practitioner’s perspective on market behavior and fair value dynamics. defond, hu, hung and li (2020), in their study the effect of fair value accounting on the performance evaluation role of earnings, explore how fair value accounting influences the informativeness of earnings, highlighting both the benefits and potential distortions in evaluating financial performance. maisuradze and vardiashvili (2016), in main aspects of measurement of the fair value of nonfinancial assets, discuss key theoretical and practical issues in applying fair value measurement to nonfinancial assets—particularly in developing economies—and emphasize the complexity of reliably determining fair values under conditions of market imperfection. ewa, kankpang, adesola, and essien (2025), in their work critical evaluation of the fairness of the fair value concept, critically assess the objectivity and practical limitations of the fair value framework, arguing that despite its conceptual appeal, fair value often struggles to reflect true economic reality in volatile or inactive markets. in contrast, literature addressing the measurement of current operational value is relatively limited due to the recent emergence of the concept. primary sources in this area include exposure drafts and standards issued by the international public sector accounting standards board (ipsasb), such as ed 76 (conceptual framework update: chapter 7 – measurement of assets and liabilities in financial statements), ed 77 (measurement), and ipsas 46 (measurement). these documents introduce current operational value as a measurement basis particularly suited for valuing assets based on their service potential, addressing the specific needs of public sector financial reporting. the approach has also been discussed in publications released by leading global accounting firms (exposure draft 76; exposure draft 77; ipsas 46). research methodology data collection methods to achieve the research objectives, a mixed-methods approach was employed, combining both documentary analysis and empirical data collection. data were collected using the following methods:  a structured review of relevant standards, guidelines, and recommendations related to key approaches to asset valuation in the public sector.  an online survey based on a structured questionnaire, administered via telephone interviews.  a literature review — research papers related to asset measurement were systematically identified and analyzed using academic platforms. mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 111 description of the questionnaire and survey process to examine the practical applicability and key challenges of measuring assets at current operational value, and at current value more broadly, an online survey was conducted. the survey was carried out through telephone interviews between april 24 and april 28, 2025. a total of 45 respondents participated in the survey, including:  2 representatives from the methodological department of the state treasury of georgia  4 academic instructors specializing in financial accounting and public sector accounting standards  39 chief accountants and financial managers from public sector organizations the survey was conducted on a voluntary and anonymous basis. the questionnaire was structured and consisted of both closed-ended and semi-open-ended questions, aimed at capturing professional experiences and practical perspectives. results and discussion importance of measurement of the elements of financial statements financial reporting provides a structured overview of an entity's resources and liabilities at the reporting date, offering users valuable insights into the entity’s performance and financial health. this is achieved when the information adheres to the qualitative characteristics defined by the conceptual framework of general-purpose financial statements (sabauri 2024). “financial statements prepared in accordance with the standards should accurately and timely reflect the events that occurred during a specific period. this is crucial, as every individual or organization is interested in understanding the future of their investments and the entities in which they decide to invest” (sabauri 2018). the main users of public sector financial reporting include legislative bodies, ministries, councils, commissions, international governmental organizations, and other entities within the public sector (conceptual framework 2024). measurement is a critical component of financial reporting because it provides accurate and reliable information about the value of an entity’s assets and liabilities. beyond meeting the information needs of service recipients and resource providers, this information is also valuable to other parties, such as statisticians, analysts, media, financial advisors, and others. in addition to serving the interests of users of financial statements, there are other reasons why the elements of financial statements are measured. one of the main reasons is to ensure compliance with accounting standards and regulations (sabauri, vardiashvili and maisuradze 2022). for example, ifrs and generally accepted accounting principles require that assets and liabilities be measured at fair value, “which is the price that would have been received or paid voluntarily by market participants as a result of the sale of an asset or the transfer of a liability on the date of measurement” (maisuradze and vardiashvili 2016). when measuring the fair value of a non-financial asset, the ability of a market participant to obtain economic benefits through the asset’s highest and best use is taken into account (vardiashvili 2018). entities must perform regular measurements of their property and liabilities to ensure compliance with the requirements of accounting standards (maisuradze 2017). the frequency of revaluations depends on changes in the fair value of the property, plant, and equipment being revalued. when the fair value of a revalued asset differs materially from its carrying amount, another revaluation is necessary to ensure that, at the end of the reporting period, the asset’s carrying value does not differ substantially from its current value. for assets with relatively stable market prices, it is generally sufficient to conduct a revaluation every three to five years (ifrs foundation 2024). another important reason for measuring assets and liabilities is to promote transparency and accountability. as sabauri (2018) notes, “financial reporting is of great importance for consumers who need proper accounting information to make investment and other decisions.” additionally, asset measurement plays a key role in taxation, insurance, and legal disputes. for instance, in order to calculate tax liability or for insurance purposes, entities must determine the value of their property. in legal disputes, measurement is often required as evidence in court (sabauri and kvatashidze 2022). measurement, one of the main components of financial statements, often relies on the use of complex models and professional judgment. as a result, it is frequently subjective. selecting an appropriate basis for measuring assets and liabilities supports the objectives of financial reporting in the public sector by providing information that enables users to assess:  the cost of services delivered during the period, whether based on historical or current terms;  the operational capacity of the entity to sustain service delivery in future periods using physical and other resources; and  the financial capacity of the entity to fund its activities (conceptual framework 2024). mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 112 thus, measurement plays a crucial role in presenting high-quality financial information. in order to recognize elements in the financial statements, it is essential to determine their monetary value. this can be achieved only through the measurement process, which involves selecting the appropriate basis and method of measurement (vardiashvili 2019). changes made in ipsas the primary purpose of owning assets in the public sector is to provide services to the public free of charge. however, under certain circumstances, public sector entities may use a portion of their assets to generate income through commercial activities (vardiashvili 2024a). as a result, some assets are cashgenerating, while others are not. accordingly, the criteria for recognizing fixed assets incorporate both concepts: economic benefit and service potential. assets that support the core functions of public sector entities generally do not generate cash flows but serve as a fundamental basis for fulfilling these functions (vardiashvili and maisuradze 2017). to measure assets in such cases, an entity may independently develop criteria—in line with the requirements of the relevant standard—to distinguish between cash-generating and non-cash-generating assets (vardiashvili 2024b), as this distinction affects the classification of assets held by the entity. public sector entities often acquire assets that are tailored to specific operational requirements and for which other market participants would be unwilling to pay a comparable price. most of these assets have unique characteristics, making it nearly impossible to acquire or sell them in open, active, and organized markets. examples include infrastructure facilities such as road networks, sewerage systems, water and electricity supply systems, communication networks, as well as nuclear power plants, railways, public hospitals, and similar assets. given the specific nature of these assets and the fact that their use by other operators is limited, it is unlikely that an active market exists for them. this imposes certain constraints on the selection of an appropriate measurement method. however, in some cases, information about the initial or historical cost of non-financial assets is unavailable, and no active market exists through which their value can be determined. measuring the current value of non-financial assets held for their operational capacity—rather than for generating financial income—cannot be effectively achieved using the standard-defined measurement models in the public sector. this has presented an ongoing challenge in public sector financial reporting. to address this issue, in 2021, the ipsasb developed two exposure drafts: ed 76 conceptual framework update: chapter 7, measurement of assets and liabilities in financial statements and ed 77 measurement. the purpose of these drafts was to enhance the measurement guidance within ipsas and to promote greater consistency between the conceptual framework and the standards. the updated conceptual framework simplifies measurement principles by eliminating rarely used measurement methods and placing greater emphasis on those widely applied in the financial statements of public sector entities. to align the measurement-related revisions in the conceptual framework with the standards, the ipsasb issued ipsas 46 — measurement — in may 2023, which will come into effect on 1 january 2025. these two developments—the conceptual framework update and ipsas 46—together establish the main foundation for measuring financial elements in public sector financial statements. ipsas 46 serves as an intermediate link between the overarching principles of the conceptual framework and the more detailed individual standards that have also been updated. in addition to ipsas 46, the ipsasb introduced further updates to improve measurement and accounting in the public sector. these include:  ipsas 43 – leases: amendments in this standard address the recognition and measurement of rightof-use assets, as well as related risks and benefits.  ipsas 44 – non-current assets held for sale and discontinued operations: modeled after ifrs 5, this new standard provides guidance on the accounting and disclosure of assets held for sale and discontinued operations.  ipsas 45 – property, plant, and equipment: aligned with changes in measurement approaches, this standard introduces the assessment of current operational value for assets preserved for service delivery purposes (according to 2023 updates on global public sector reporting standards [at-mia 2024]). standardization in public sector accounting remains a dynamic and evolving process. all of these standards contribute to enhancing financial reporting by promoting clarity, consistency, and sound foundational principles for various measurement and recognition practices (vardiashvili 2015). these changes effectively address the previously existing gap in the international public sector accounting standards (ipsas) regarding the measurement of current value. ipsas 46, measurement, introduces a mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 113 unified framework that consolidates key concepts and recommendations on measurement into a single standard, outlining how various measurement methods should be applied in practice. the revisions primarily focus on the determination of current value. the following new approaches have been introduced to replace previous methods:  current operational value – for assets;  cost of fulfillment – for liabilities;  fair value – for both assets and liabilities, replacing the previously used market value approach. for the first time, ipsas includes general principles and guidance for the application of fair value measurement and its alternative, current operational value. the principles for fair value measurement are aligned with those established in ifrs 13 fair value measurement (druzhilovskaya 2021; icaew 2023). the use of fair value is appropriate when an asset is held primarily for its ability to generate economic benefits—such as cash inflows or reductions in cash outflows—or for sale. the ipsasb concluded that fair value is not an appropriate basis for measuring the current value of operating assets. instead, it proposed an alternative approach: current operational value. ipsas 46 establishes consistent measurement principles for public sector entities, which are essential for enhancing comparability and reliability in financial statements. the standard provides a unified framework for measuring assets, liabilities, income, and expenses, thereby reducing inconsistencies and promoting higher quality in financial reporting. however, the determination of the appropriate measurement basis and specific requirements—such as for impairment, depreciation, and amortization—remains the responsibility of individual ipsas standards that address the relevant classes of assets and liabilities. current operational value the market-based approach to measurement is useful for assessing an asset’s financial and operational capacity when the asset is non-specialized and actively traded in open, organized markets. however, for specialized operational assets—where market-based information is limited—additional measurement methods are required to provide meaningful insight into their service value and operational capacity. the choice of measurement basis for an asset’s current value depends on the intended purpose of its use. under ipsas 45 (2023), an item or component of property, plant, and equipment that is held primarily for its operational capacity is measured at current operational value. conversely, if the asset is held primarily for its financial capacity, it is measured at fair value (ipsas 45 2023). the ipsasb’s proposed definition of current operational value is as follows: “current operational value is the value of an asset used to achieve the right’s service delivery objectives at the measurement date” (exposure draft 77). the primary purpose of this measurement basis is to reflect the value of a non-financial asset as a means to enable service delivery within a public sector entity. the current operational value provides financial information about assets, along with associated depreciation and amortization, as of the measurement date, based on up-to-date information. as such, it captures changes in asset value since the previous measurement date. similar to fair value and fulfillment value, current operational value does not depend—even in part—on the transaction or event that gave rise to the asset. this measurement basis reflects the operational capacity of an asset, meaning its ability to deliver services at the current level, rather than its potential market value. it represents a broad, principles-based approach which, unlike fair value, considers the asset’s value in its current use, not in its highest and best use. moreover, this measurement approach introduces general guidance on current value that had not been fully integrated into public sector accounting standards prior to these developments. current operational value differs from fair value in several key ways:  it is explicitly an entity-specific price and includes all the costs that must be incurred to maintain the asset’s remaining service potential for the entity;  it reflects the value of an asset in its existing use, rather than in its highest and best use (e.g., a building currently functioning as a hospital); and  it considers the economic position of the specific entity, making the valuation context-dependent and not generalizable across entities. importantly, the measurement of current operational value does not consider alternative uses of the asset that could potentially increase its market value. for example, if a building is used as a school, it is valued as an educational facility—even though its market value might be higher if repurposed as office space. mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 114 measurement of current operational value to measure current operational value, both the market approach and the cost approach may be applied. in certain cases, there may be an active market for an identical asset, making the use of the market approach a direct and practical method of measurement. the market approach is defined as a measurement technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities, or groups of assets and liabilities (maisuradze and vardiashvili 2023). when there is an active market for an identical or similar asset, the current operational value is measured as the amount the entity would pay, based on either:  the price to acquire an identical or similar asset in an active market; or  the costs incurred to produce an identical or similar asset (ipsas 46 2023). as an asset becomes more specialized, the likelihood of an active market diminishes. in such cases, the cost approach becomes more relevant. for instance, if market prices exist only for new assets, but the asset being measured is used, the current price of an identical or similar asset must be adjusted to reflect its remaining useful life and current condition. in both scenarios, however, the primary objective remains the same: to reflect the value of the asset in its current use for service delivery, under present market conditions. when no active market exists, a reliable acquisition price for an identical or similar asset generally will not be available. in such cases, the current operational value must be estimated based on the costs to develop or produce the asset, using available price information. for example, many military assets, such as aircraft, typically do not have active markets. these assets often cannot be acquired as finished products that are identical or similar to the specific asset under valuation. therefore, estimating the current operational value generally requires measuring the cost of each component—such as the fuselage, engine, and electronics—and the cost of assembling these components into the same or a similar aircraft, adjusted for age, functionality, and condition (ipsas 46 2023). the current operational value has the following characteristics:  it is based on the current use of the asset;  it assumes the asset is intended for the provision of services, not for sale;  it is entity-specific, reflecting the economic situation of the organization rather than the position of market participants. regarding the income approach, its measurement techniques are generally not suitable for determining current operational value, as public sector assets often generate little or no cash flows, and future revenue flows are not discounted (conceptual framework 2024). while in some cases the current operational value can be directly determined by observing prices in an active market, in other cases it must be estimated indirectly using alternative measurement methods. the current operational value depends on several key factors, including the asset’s geographical location, its value within the context of the organization’s activities, any operational limitations, and the most costeffective way to provide services. a current operational value measurement requires the entity to determine all of the following:  the amount the entity would pay, which includes assessing the price that would be paid in an active market or the cost the entity would incur to acquire the asset in the least costly manner;  the remaining service potential of the asset, taking into account its current condition;  the asset, consistent with its unit of account, including assessing its existing use and location, based on the availability of data that faithfully represents the entity-specific assumptions;  the measurement techniques appropriate for estimating the factors listed above, considering the availability of data that faithfully represents the entity-specific assumptions (ipsas 46 2023). in the financial statements, the current operational value reflects the operational potential of the asset from the organization’s perspective. it represents the amount recorded in the entity’s balance sheet that the entity would pay for the remaining service potential of the existing asset at the measurement date. in the statement of financial results, it reflects the portion of the asset’s value consumed in providing services as of the measurement date. application of the current operational value concept within the ipsas framework: empirical analysis from georgia since 2009, georgia has been undergoing a public sector accounting reform aimed at enhancing the transparency and reliability of public finances through the implementation of international public sector accounting standards (ipsas). to support this objective, as of january 1, 2021, all public sector entities in georgia are required to prepare their financial statements in accordance with ipsas. mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 115 to explore this topic, structured telephone interviews were conducted using a targeted sampling strategy. participants were selected based on their expertise and relevant knowledge in the valuation of nonfinancial assets in the public sector. the research was carried out in april 2025. the purpose of the interviews was to assess the extent to which current value-based asset valuation is practiced in georgia and to determine whether stakeholders are prepared to adopt the current operational value approach for the valuation of non-financial assets starting from 2025. a total of 45 individuals participated in the survey, including:  representatives from the state treasury’s methodological department, who are directly involved in the implementation of standards and possess in-depth knowledge of recent changes;  financial managers and accountants from public sector entities, who actively apply international standards in the valuation and accounting of assets;  representatives from the academic sector, who teach financial accounting and public sector accounting standards. among the respondents, 2 were from the state treasury, 4 from academia, and 39 were accountants and financial managers. data was collected from representatives across various cities, including tbilisi, gori, khashuri, bolnisi, and others. the results indicated that the majority of respondents are familiar with both historical and current approaches to asset valuation. most agreed that this awareness has been supported by the translation and publication of ipsas standards in georgian, as well as training programs organized by the ministry of finance, which 70% of respondents reported having attended. the study revealed that public sector entities in georgia currently recognize assets exclusively at historical cost. this practice is largely due to the instruction titled "on the preparation of financial reporting by budgetary organizations based on ipsas", which does not require the application of the revaluation model. according to article 11 – "non-mandatory paragraphs/subparagraphs of ipsas" – within the general provisions of the instruction issued by the ministry of finance of georgia, the application of certain ipsas requirements remains optional until january 1, 2027. for example, in ipsas 17 property, plant, and equipment, paragraphs 42 and 44, which relate to subsequent measurement and the revaluation model, are classified as non-mandatory. a similar approach applies across all ipsas provisions that refer to revaluation or fair value. although the majority of respondents expressed support for the use of the revaluation model in asset measurement, they also noted their inability to determine market values independently. ipsas requires that fair value be established by an independent, certified appraiser. however, the related costs place an additional financial burden on public sector entities, which is why assets continue to be measured primarily at historical cost. notably, 86% of respondents (mainly accountants) are not informed about the changes in standards and the concept of current operational value. the remaining 14%, consisting of state treasury representatives and academic personnel, support the introduction of this valuation method. it is believed that the lack of timely awareness among accountants is due to the fact that the new standards and changes related to asset valuation have not yet been reflected in the instruction issued by the ministry of finance of georgia, which serves as the primary reference for accountants. conclusion thus, current operational value reflects the real economic value of assets, ensuring the effective measurement and optimal utilization of an entity’s resources. the measurement methods contained in ipsas 46, including current operational value, promote greater transparency in financial statements by providing more accurate information on the cost of services provided, the operational capacity, and the financial sustainability of the entity. these methods better capture the economic reality of an entity’s financial position and performance, thereby enhancing accountability and decision-making relevance. benefits: service potential focus: current operational value emphasizes the measurement of assets based on their ability to deliver services, making it particularly relevant to public sector organizations where service delivery, rather than profit generation, is the primary objective. enhanced relevance and transparency: by reflecting the cost to replace the current service potential of assets, cov provides more decision-useful and transparent information for resource management and public accountability. alignment with public sector goals: cov supports the objectives of public sector financial reporting by focusing on stewardship of resources and service delivery rather than market-based exit values. mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 116 challenges: definition and estimation uncertainty: the lack of specificity in the definition and estimation of current operational value may undermine the reliability, accuracy, and functional appropriateness of general-purpose financial statements. complex asset separation: it may be difficult to distinguish assets that are used in a complex or integrated manner and, therefore, simultaneously embody both service potential and the capacity to generate economic benefits. valuation complexity and expert reliance: given the diversity of valuation approaches, selecting and appropriately applying the correct basis for different types of assets—especially complex assets—may necessitate the involvement of external valuation experts, leading to additional costs and administrative burdens. comparability issues: the entity-specific nature of current operational value may reduce comparability between similar entities, as measurements may vary depending on assumptions and operational contexts. recommendations: 1. given that the public sector includes national, regional, state, and local governments, strong support from the state is essential for the full implementation of ipsas. 2. changes made to ipsas should be promptly reflected in national regulatory acts. 3. expenses related to asset revaluation should be incorporated into the budgets of public sector entities. 4. training programs should be used to enhance ipsas knowledge and awareness of recent developments. references aasb (australian accounting standards board). 2021. exposure draft 77: measurement. https://www.aasb.gov.au/admin/file/content105/c9/ed_77_combined_04-21.pdf. at-mia. 2024. "2023 updates on global public sector reporting standards." january 18, 2024. https://www.at-mia.my/2024/01/18/2023-updates-on-global-public-sector-reporting-standards/. defond, m., ji. hu, m. hung, and s. li. 2020. the effect of fair value accounting on the performance evaluation role of earnings. journal of accounting and economics, 69 (1): 101266. https://doi.org/10.1016/j.jacceco.2020.101341. druzhilovskaya, t. y. 2021. accounting for non-financial tangible assets: convergence with ifrs, achievements, challenges, prospects. international accounting, 24(2): 142. https://doi.org/10.24891/ia.24.2.142. ewa, u. e., k. kankpang, a. w. adesola and e. n. essien. 2025. critical evaluation of the fairness of the fair value concept. asian journal of economics, business and accounting, 25(1): 336–347. https://doi.org/10.9734/ajeba/2025/v25i11654. icaew. 2023. ifrs vs ipsas in public sector financial reporting part iii: impairment. september 5, 2023. https://www.icaew.com/technical/public-sector/public-sector-financial-reporting/financialreporting-insights-listing/ifrs-vs-ipsas-3.. ifrs foundation. 2024. ias 16 property, plant and equipment. london: ifrs foundation. https://www.ifrs.org. ipsasb. (2023). exposure draft 76: conceptual framework update: chapter 7 – measurement of assets and liabilities in financial statements. international federation of accountants (ifac). ipsasb (international public sector accounting standards board). 2024. the conceptual framework for general purpose financial reporting by public sector entities. in handbook of international public sector accounting pronouncements, vol. i. new york: international federation of accountants (ifac). https://www.ipsasb.org/publications/2024handbook-international-public-sector-accounting-pronouncements. ipsasb. 2023. ipsas 46: measurement. international federation of accountants (ifac). https://www.ipsasb.org. ipsasb. 2023a. ipsas 45: property, plant, and equipment. https://www.ipsasb.org/publications/ipsas45-property-plant-and-equipment.. jikia, m. 2019. some aspects of improving the methodology of economic analysis. ecoforum, 5. issn 2344-2174. maisuradze, m. 2017. assets measurement-related issues according to ifrs. in the 2nd international scientific conference – challenges of globalization in economics and business, 302–305. tbilisi: ivane javakhishvili tbilisi state university. https://www.aasb.gov.au/admin/file/content105/c9/ed_77_combined_04-21.pdf https://www.at-mia.my/2024/01/18/2023-updates-on-global-public-sector-reporting-standards/ https://doi.org/10.24891/ia.24.2.142 https://doi.org/10.9734/ajeba/2025/v25i11654 https://www.icaew.com/technical/public-sector/public-sector-financial-reporting/financial-reporting-insights-listing/ifrs-vs-ipsas-3 https://www.icaew.com/technical/public-sector/public-sector-financial-reporting/financial-reporting-insights-listing/ifrs-vs-ipsas-3 https://www.ifrs.org/ https://www.ipsasb.org/publications/2024-handbook-international-public-sector-accounting-pronouncements https://www.ipsasb.org/publications/2024-handbook-international-public-sector-accounting-pronouncements https://www.ipsasb.org/ https://www.ipsasb.org/publications/ipsas-45-property-plant-and-equipment https://www.ipsasb.org/publications/ipsas-45-property-plant-and-equipment mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 117 maisuradze, m., and m. vardiashvili. 2016. main aspects of measurement of the fair value of nonfinancial assets. in economic and social development: 15th international scientific conference on economic and social development – human resources development, varazdin. maisuradze, m., and m. vardiashvili. 2017. the issues of recognition and measurement of the investment property according to ias 40. journal of international scientific publications: economy & business, 11 (1): 416–423. marks, h. 2011. the most important thing: uncommon sense for the thoughtful investor. new york: columbia university press. sabauri, l. 2018. approval and introduction of the international financial reporting standards (ifrs) in georgia: challenges and perspectives. journal of accounting & marketing, 7(2): 2–4. sabauri, l. 2024. nternal audit’s role in supporting sustainability reporting. international journal of sustainable development & planning, 19 (5): 1981. https://doi.org/10.18280/ijsdp.190537. sabauri, l., and n. kvatashidze. 2022. impact of the covid-19 pandemic on the preparation of financial statements. https://eb.tsu.ge/uploads/images/untitled9_623de98a13c42.pdf. sabauri, l., m. vardiashvili, and m. maisuradze. 2022. "methods for measurement of progress of performance obligation under ifrs 15." ecoforum 11 (3). issn 2344-2174. vardiashvili, m. 2018. theoretical and practical aspects of impairment of non-cash-generating assets in the public sector entities, according to the international public sector accounting standard (ipsas) 21. ecoforum, 7 (3): article 830. vardiashvili, m. 2019. some issues of measurement of impairment of non-financial assets in the public sector. journal of economics and management engineering, 13 (5): 521–526. vardiashvili, m. 2024a. review of measurement-related changes in international public sector accounting standards (ipsas). economics and business. https://doi.org/10.52340/eab.2024.16.03.12. vardiashvili, m. 2024b. impact of ipsas 43 on lease accounting. in ix international scientific conference “challenges of globalization in economics and business” proceedings. https://tsu.ge. vardiashvili, m., and m. maisuradze. 2017. on recognition and measurement of the revenues according to ifrs 15. in economy & business: 16th international conference, 182–189. http://www.scientificpublications.net. https://doi.org/10.18280/ijsdp.190537 https://eb.tsu.ge/uploads/images/untitled9_623de98a13c42.pdf https://doi.org/10.52340/eab.2024.16.03.12 https://tsu.ge/ http://www.scientific-publications.net/ http://www.scientific-publications.net/ mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 118 appendix a: survey questionnaire this questionnaire is designed to gather information about the qualifications, work experience, and level of awareness among professionals involved in public sector accounting in georgia. the questions aim to assess the understanding and application of international public sector accounting standards (ipsas), as well as attitudes toward asset valuation practices. the data collected will be used solely for research and analysis purposes and will remain confidential. please answer all questions by selecting the option(s) that best reflect your experience and views. descriptive statistics — education, academic degree, and work experience 1. work experience in the public sector please indicate your work experience in the public sector: ☐ 1–5 years ☐ 6–10 years ☐ 11–15 years ☐ more than 15 years 2. education and academic degree please indicate the highest level of education you have attained: ☐ secondary education ☐ vocational education (two-year college) ☐ bachelor's degree ☐ master's degree ☐ doctoral degree 3. job position please indicate the position that best describes your role: ☐ financial manager ☐ chief accountant ☐ practicing accountant ☐ academic representative ☐ state treasury representative awareness of international public sector accounting standards (ipsas) 4. in georgia, public sector accounting is regulated by: (please select the correct answer) ☐ international financial reporting standards (ifrs) ☐ international public sector accounting standards (ipsas) ☐ national standards 5. in your opinion, the implementation of ipsas is: ☐ essential, as it is required by law ☐ essential for improving the quality of financial reporting ☐ not necessary, in my view 6. how would you assess your knowledge of ipsas and ifrs? ☐ i am not familiar with them ☐ i have studied them thoroughly ☐ i have a moderate understanding 7. ipsas-related training: ☐ i have attended trainings organized by the state treasury ☐ i have not attended any, but i am interested in deepening my knowledge through training ☐ i am not interested in attending trainings unless the updates relate to my responsibilities 8. which new standards have been issued by the ipsas board? ☐ ipsas 46 — measurement; ipsas 45 — property, plant, and equipment; ipsas 43 — leases ☐ ipsas 46 — measurement; ipsas 45 — property ☐ ipsas 45 — property, plant, and equipment; ipsas 43 — leases ☐ all of the above ☐ i don’t know mariam vardiashvili / finance, accounting and business analysis, volume 7, issue 1, 2025 119 9. in your opinion, are these standards reflected in the normative document approved by the ministry of finance of georgia as the accounting manual for budgetary organizations? ☐ yes ☐ no information on the valuation methods used 10. after the recognition of non-financial assets, which valuation model do you use? ☐ cost model ☐ revaluation model 11. if you use the revaluation model, on what basis do you determine current value? (please select the appropriate answer) ☐ fair value ☐ replacement cost ☐ value in use 12. why do you not use the revaluation model for assets? ☐ according to the instruction "on accounting and financial reporting by budgetary organizations based on international public sector accounting standards", revaluation is not mandatory ☐ revaluation costs are not affordable within the current budget attitudes toward asset valuation 13. in your opinion, who should conduct the valuation of non-financial assets? ☐ staff from the accounting department ☐ an outsourced company ☐ a certified professional 14. if the non-financial asset valuation is carried out by an outsourced company or a certified professional, will this service be funded by your organization’s budget? ☐ yes ☐ no ☐ i don’t know 15. in your organization, for accounting purposes, are assets categorized as follows? ☐ service potential assets ☐ cash-generating assets ☐ not categorized 16. what do you know about current operational value? this is a valuation model used in the public sector to assess: ☐ service potential assets ☐ cash-generating assets ☐ i don’t know 235 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.09 does audit committee moderate the value relevance of fair value accounting information? evidence from listed consumer goods firms in nigeria kabiru isa dandago 1 , modibbo abubakar 2* department of accounting, bayero university kano, nigeria1 department of accounting, bayero university kano, nigeria2 * corresponding author info articles abstract history article: submitted 10 june 2025 revised 16 november 2025 accepted 20 november 2025 purpose: this study examines the value relevance of fair value accounting (fva) in nigerian consumer goods firms and explores the moderating effect of audit committee attributes on the value relevance. the motivation is to determine whether fair value measurements under ifrs provide useful information to investors in an emerging market setting. design/methodology/approach: panel data for a period (2012-2022) were obtained from listed consumer goods firms in nigeria, and the ohlson (1995) valuation model was applied within both unmoderated and moderated regression (structural equation modeling) frameworks. audit committee attributes were measured through an index. findings: the results show that traditional accounting measures, book value per share (bvs) and earnings per share (eps), remain highly value relevant, while most fair value measures are not significantly associated with market price per share (mps). only level 2 fair value liabilities were significantly priced by investors, suggesting partial relevance of fva. furthermore, audit committee attributes did not significantly moderate the relationship between fva and market prices, indicating weak governance influence. practical implicationsthe findings highlight the need for regulators to strengthen disclosure requirements for fair value estimates, for firms to improve governance and audit committee effectiveness, and for investors to balance reliance on traditional measures with cautious interpretation of fva disclosures. originality/valuethis study provides new evidence on the value relevance of fva in nigeria’s non-financial sector, an area that has received little attention compared to banks and insurance firms. it also contributes to the governance literature by assessing the moderating role of audit committees in an emerging economy. paper type: research paper keywords: earnings, mark-to-market, ohlson model, investors jel: m41, m48, g34 * address correspondence: e-mail: kidandago@gmail.com1 amodibbo8@gmail.com2 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.09 mailto:fabian.moodley@nwu.ac.za1 https://orcid.org/0000-0002-3655-0421 https://orcid.org/0000-0003-3143-5720 kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 236 introduction fair value accounting (fva) has become one of the most transformative developments in contemporary financial reporting. rooted in the international financial reporting standards (ifrs) project, it shifted emphasis from historical cost accounting toward market-based measurement. ifrs 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. the intent is to provide timely, relevant, and decision-useful information. today, over 160 countries—including nigeria—have adopted ifrs, making fva a central pillar of global accounting practice. nigeria’s adoption of ifrs in 2012 marked a turning point in its reporting environment. the financial reporting council of nigeria (frcn) expected ifrs to enhance comparability, transparency, and investor confidence, thereby attracting foreign capital. within this framework, the consumer goods sector is highly relevant. firms such as nestlé nigeria plc, dangote sugar refinery plc, flour mills of nigeria plc, and unilever nigeria plc are among the largest non-oil contributors to gdp and some of the most widely traded equities on the nigerian exchange group (ngx). these companies, therefore, provide a useful context for assessing whether fva enhances the value relevance of financial reports in nigeria. despite global enthusiasm, fva has faced criticism, particularly regarding levels 2 and 3 of the fair value hierarchy. while level 1 relies on quoted prices in active markets, levels 2 and 3 involve indirect or unobservable inputs, often requiring judgment and assumptions. in nigeria, where markets are shallow and illiquid, these inputs expose valuations to subjectivity and possible manipulation. the 2008 global financial crisis reinforced concerns that reliance on unobservable inputs undermines reliability. in response, the iasb and fasb issued stricter disclosure rules and required firms to explain valuation techniques and assumptions. nevertheless, evidence on the usefulness of fv disclosures remains inconclusive, especially in emerging markets (mechelli and cimini 2020; nicholls 2020; eshiett et al. 2023). nigerian investors, in particular, remain skeptical of fv disclosures due to weak governance and enforcement. persistent issues such as insider trading, poor monitoring, and managerial opportunism have reduced confidence in reported figures. unlike developed markets with deep liquidity and robust enforcement, nigeria’s institutional environment limits the role of fva in share pricing. investors continue to rely more on book value and earnings per share, while the incremental contribution of fva is uncertain (abubakar 2018; eshiett et al. 2023). theoretically, strong corporate governance should mitigate these weaknesses. agency theory suggests that managers may use discretion in accounting to pursue personal interests, but effective monitoring— particularly by audit committees—aligns managerial reporting with shareholder needs. audit committees oversee financial reporting, liaise with external auditors, and enforce compliance with standards. attributes such as independence, expertise, gender diversity, and diligence enhance their effectiveness (velte 2017; siekkinen 2016). where audit committees are robust, fva disclosures should carry more credibility and be more strongly priced by investors. yet, the role of audit committee attributes in shaping the value relevance of fva remains underexplored in nigeria, especially in non-financial firms. previous local research has focused largely on banks and insurance firms (usman et al. 2017; abubakar 2018). consumer goods companies, however, are highly visible, widely held, and economically significant. whether their audit committees strengthen or fail to strengthen investor confidence in fva represents an important empirical question. globally, findings are mixed. song et al. (2010) showed that in u.s. banks, strong governance increased the credibility of level 3 valuations. nicholls (2020) reported similar results in european and canadian firms, confirming that audit committees and board structures influence whether investors trust fv disclosures. in contrast, mechelli and cimini (2020) observed that the incremental value relevance of ifrs 9 compared to ias 39 was conditional on governance quality, implying that in weak institutions, investors may discount fv estimates. evidence from emerging economies is equally diverse: ahmad and aladwan (2015) found that fv improved financial performance in jordanian real estate firms, while mohammed (2020) reported that level 2 assets had a negative association with stock prices in jordan, highlighting distrust of less observable inputs. the nigerian experience reflects this complexity. abubakar (2018) showed that while fva increased the relevance of accounting information relative to historical cost, it also created earnings volatility in banks and insurers. eshiett et al. (2023) found that fva positively affected earnings per share but had mixed effects on market capitalization, again suggesting ambivalence among investors. whether such patterns extend to consumer goods firms, with different asset and liability structures, is uncertain and under-researched. global economic disruptions have further sharpened this debate. the covid-19 pandemic and kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 237 subsequent inflationary pressures have stressed valuation models worldwide. asset impairments, foreign exchange instability, and supply chain disruptions make fv estimation more complex and less reliable. recent studies (zhang and qu 2022) indicate that during volatile periods, investors increasingly discount level 2 and level 3 inputs, questioning whether fva continues to deliver relevance in crisis conditions. in nigeria, consumer goods companies faced currency shortages, cost inflation, and disrupted logistics during the pandemic, raising concerns about the credibility of fv disclosures in such environments. recent governance reforms in nigeria add another dimension. the companies and allied matters act (cama 2020) and the nigerian code of corporate governance (ncgc 2018) mandate minimum standards for audit committees, including independence and size. these provisions align with international practice, but their effectiveness in enhancing reporting quality remains contested. it is unclear whether institutional weaknesses will undermine their intended role, or whether stronger committees can, in fact, improve investor trust in fva. this uncertainty motivates the current study. it investigates whether audit committee attributes moderate the relationship between fva and value relevance in nigerian consumer goods firms. using the ohlson (1995) valuation model and structural equation modeling (sem), the study evaluates interactions among fva, audit committees, and market value. the contribution is twofold: it extends the literature by examining non-financial firms in an emerging economy, and it provides practical insights on the capacity of governance mechanisms to enhance the credibility of complex accounting disclosures. in summary, while fva aims to provide timely, market-based information, its relevance in emerging markets is compromised by measurement subjectivity and institutional weaknesses. audit committees are theoretically positioned to mitigate these problems, but evidence from nigeria is limited and inconclusive. by focusing on consumer goods firms, this study adds to global debates on whether fva enhances or undermines financial reporting quality and whether audit committee attributes can strengthen investor confidence in fragile governance environments. objectives of the study the main objective of the study is to examine the effects of audit committee attributes on the value relevance of fair value assets and liabilities of listed consumer goods firms in nigeria. the specific objectives of the study are: i. to examine the value relevance of the level 1 fair value assets and liabilities of listed consumer goods firms in nigeria. ii. to assess the value relevance of the level 2 fair value assets and liabilities of listed consumer goods firms in nigeria. iii. to evaluate the value relevance of the level 3 fair value assets and liabilities of listed consumer goods firms in nigeria. iv. to compare the value relevance of level 1 and level 2 and 3 fair value assets and liabilities of listed consumer goods firms in nigeria. v. to examine the moderating effect of audit committee attributes on the value relevance of the hierarchies of fair value assets and liabilities of listed consumer goods firms in nigeria. hypotheses of the study the following hypotheses are formulated in null form for the study; h01: level 1 fair value assets and liabilities are not value-relevant in the listed consumer goods firms in nigeria. h02: level 2 fair value assets and liabilities are not value-relevant in the listed consumer goods firms in nigeria. h03: level 3 fair value assets and liabilities are not value-relevant in the listed consumer goods firms in nigeria. h04: level 1 fair value assets and liabilities are not more value-relevant than level 2 and 3 fair value assets and liabilities in the listed consumer goods firms in nigeria. h05: audit committee attributes have no significant moderating effect on the value relevance of the hierarchy of fair value assets and liabilities of listed consumer goods firms in nigeria. the research provides timely insights amid ongoing concerns about the quality of financial reporting in nigeria and other developing economies. it offers empirical evidence from a non-western context (nigeria), analyzing the post-ifrs 13 adoption effects on fair value measurements (fvm). the study is valuable to regulators like the frcn and iasb, aiding them in standard-setting and oversight. the study contributes to the global fva debate, providing a basis for reforms in ifrs and related disclosure standards. it is foundational for future academic research, particularly in the underexplored application of fva in developing countries. kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 238 literature review fair value accounting has a long intellectual history that reflects the evolution of financial reporting thought. early debates in the 1930s by paton and littleton highlighted opposing perspectives on how best to measure income. paton emphasized a value-based, economic perspective, while littleton advocated historical cost, stressing objectivity and reliability. chambers, in the 1950s, advanced the exit price concept, emphasizing the use of current market prices as the most relevant measure of value. macneal (1939) also underscored the importance of exchange values, viewing fair value as “power in exchange.” over time, standard-setting bodies institutionalized fva. the u.s. financial accounting standards board (fasb) introduced statement of financial accounting standards (sfas) 107 and 157, while the international accounting standards board (iasb) embedded fva in multiple standards, including ias 2 (inventories), ias 16 (property, plant, and equipment), ias 32 (financial instruments), ias 39 (recognition and measurement), ias 40 (investment property), ias 41 (biological assets), and ifrs 3 (business combinations). ifrs 13 later provided a comprehensive definition of fair value as the exit price in an orderly transaction between market participants at the measurement date. fva is applied using three principal bases: exit price (dominant in ifrs 13), entry price, and value in use. the exit price perspective prevails because it aligns with market-based valuation. however, its application is not without challenges. in liquid markets, level 1 inputs provide observable, objective values. in illiquid or inactive markets, entities must rely on level 2 (indirectly observable) or level 3 (model-based unobservable) inputs, which increases estimation risk. the three-level hierarchy introduced in ifrs 13 addresses these varying degrees of measurement reliability: level 1: quoted prices in active markets for identical assets and liabilities. level 2: inputs observable either directly or indirectly, such as prices of similar assets or interest rates. level 3: unobservable inputs requiring valuation models, assumptions, and managerial discretion. while level 1 is considered most reliable, levels 2 and 3 introduce subjectivity and raise concerns about earnings management, reliability, and investor trust. following the 2008 global financial crisis, both the iasb and fasb enhanced disclosure requirements for levels 2 and 3, underscoring transparency and consistency in valuation. value relevance research provides a framework for evaluating financial reporting quality. it assesses whether accounting information is statistically associated with capital market values. miller and modigliani (1966) first demonstrated a link between book value and market value, while barth et al. (2001, 2008) and beaver (2002) confirmed that equity markets price earnings and book value. the financial accounting standards board (1980) defines relevance as the ability of information to influence decision-making. the ohlson model (1995, 1999), grounded in the residual income valuation (riv) model of edwards and bell (1961), provides the theoretical foundation for much of value relevance research. it expresses firm value as a function of book value of equity, abnormal earnings, and dividends. its strength lies in connecting accounting information with market-based valuation, though it assumes market efficiency—a condition not always met in emerging economies such as nigeria. conceptually, fva should enhance value relevance by providing timely, market-reflective data, unlike historical cost, which lags behind economic conditions. scholars such as penman (2007), laux and leuz (2009), and emerson et al. (2010) argue that fva is superior in informativeness, even in illiquid markets. however, its reliance on managerial discretion, particularly at level 3, can erode reliability and undermine investor trust. empirical review song et al. (2010) assessed the value relevance of different levels of fair value (fv) measurements in u.s. banks, showing that level 1 and level 2 fvs were more relevant than level 3. they also found that strong corporate governance improved the relevance of level 3 estimates. similarly, meyers (2014) discovered that market prices were positively related to fva, particularly level 3 assets, despite criticisms of their subjectivity. song (2015) further demonstrated that market volatility discounts fv values, while du et al. (2014) revealed that transferring assets from level 3 to level 2 increased value relevance, underscoring the importance of observability. zhang and tama-sweet (2015) examined fv relevance during the 2008–2009 financial crisis compared to 2012–2013, finding fv assets generally more relevant than non-fv assets, especially in recessionary periods, with governance playing a strengthening role. ahmad and aladwan (2015) reported that fv measurements for kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 239 investment properties improved performance and market value for jordanian real estate firms. in singapore, tan (2015) found that level 1 and 2 measures were significantly related to market values, but level 3 measures were less so. lawrence et al. (2016) studied u.s. mutual funds and observed minimal differences across fv levels. goh et al. (2015) noted that level 3 assets in u.s. banks had lower relevance compared to level 1 and 2, though the gap narrowed post-crisis. kisseleva and lorenz (2016) also found that level 3 fvs were less relied upon in european banks, except for held-for-trading securities, which retained relevance. adwan (2016) concluded that level 1 and 2 fvs were more relevant than level 3 in european financial firms, especially in weaker institutional environments. siekkinen (2015) emphasized that stronger investor protection increased relevance, with level 1 assets being most valued. li (2016), in china, found level 1 and 2 assets value relevant, while level 3 varied across firms. tetteroo (2016), studying u.s. non-financial firms, confirmed all fv levels were relevant except for level 3 liabilities, with crisis effects being temporary. chung et al. (2016) highlighted that enhanced fv disclosures improved investor confidence, particularly in level 3 estimates. velte (2017) revealed that gender diversity enhanced the value relevance of level 1 and 2 measures in german firms, though not level 3. siekkinen (2016) also found that board independence and gender diversity increased the relevance of level 3 fvs in european firms. fiechter and novotny-farkas (2017) stressed institutional quality, observing reduced relevance in weaker information environments. wang et al. (2017) identified that level 1 and 2 fvs were relevant in china, while level 3 varied with institutional contexts. freeman et al. (2017) documented that level 1 assets in u.s. banks were more relevant than levels 2 and 3, which lost importance after the crisis. bandyopadhyay et al. (2017) studied canadian reits and found that conservative firms’ fv adjustments better predicted future cash flows, with ifrs adoption improving predictive ability. in nigeria, usman et al. (2017) showed that corporate governance improved the valuation of other comprehensive income. abubakar (2018) found that fv was more relevant than historical cost in nigerian banks and insurers, though it increased volatility. daas and jamal (2018) concluded that fv hierarchy levels affect relevance in palestine, with level 3 assets not necessarily reducing investor pricing when audited. zamora-ramírez and morales-díaz (2018) reviewed the literature and emphasized that fv reflects risk management more effectively than hca. fortin et al. (2020) demonstrated that fv relevance varies by investment type in u.s. closed-end funds, influenced by audit practices. adwan et al. (2020) observed that fva mitigated the crisis impact on equity book value in european firms but not on net income. mohammed (2020) in jordan found that level 1 assets were positively linked to stock prices, while level 2 assets had negative effects. mechelli and cimini (2020) argued that ifrs 9 provides more relevant information than ias 39, particularly where governance is strong. nicholls (2020) showed that strong governance improved the reliability of level 3 estimates in eu and canadian banks. tsadira (2020) reported mixed outcomes for european and norwegian banks, with fv levels showing improvements in some contexts but deterioration in others. zhang and qu (2022) established that fv adjustments increased the relevance of book value and earnings, but without incremental explanatory power. eshiett et al. (2023) found that fva improved earnings per share in nigerian banks but had mixed effects on market capitalization. recent nigerian studies have broadened the evidence base. abubakar and abubakar (2015) showed that recognizing intangible assets, particularly brand value, enhanced accounting information quality in listed high-technology firms. abubakar, abubakar, and iliyasu (2015) reported that fva significantly improved earnings quality in deposit money banks. abubakar, et al. (2024) confirmed that ifrs adoption significantly enhanced the decision usefulness of accounting information in nigerian banks, aligning with global standards. dandago and abubakar (2025) found that level 2 fair value assets and level 1 fair value liabilities have an insignificant positive impact on financial reporting quality. the findings also revealed that level 3 fair value assets and level 2 fair value liabilities have a significant positive impact on financial reporting quality. however, the findings indicated that the audit committee attributes index has a significant moderating effect on the relationship between fair value accounting and the financial reporting quality of listed consumer goods firms in nigeria. however, several gaps remain. first, most nigerian studies focus on financial institutions, leaving nonfinancial sectors, such as consumer goods firms underexplored despite their significant role in the ngx. second, limited research has addressed the moderating role of audit committees in linking fva and value relevance, especially in emerging markets. third, methodological diversity is weak, as most studies rely solely on regression models without addressing measurement error. this study addresses these gaps by employing structural equation modeling (sem) to evaluate how audit committee attributes influence the value relevance of fva in kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 240 nigerian consumer goods firms. methodology this study adopts a correlational ex-post facto research design. the choice of design is guided by the study’s objective: to examine whether audit committee attributes moderate the relationship between fva and value relevance among listed consumer goods firms in nigeria. a correlational approach is appropriate because it allows for the investigation of relationships among variables, while the ex-post facto orientation reflects reliance on secondary data from historical financial statements and stock prices. this design is consistent with prior value relevance studies (barth et al. 2001; song et al. 2010; abubakar 2018), which typically examine associations between accounting data and market-based measures. the population of the study comprises all 25 consumer goods firms listed on the ngx as of december 2022. these firms play a pivotal role in nigeria’s economy by producing essential goods, contributing significantly to gdp, and attracting substantial investment. a purposive sampling technique was employed to ensure data availability and continuity across the study period (2012–2022). firms with incomplete financial data, inconsistent listings, or delistings were excluded. specifically, premier breweries plc, guinness breweries plc, multi-trex food plc, jos breweries plc, and dangote flour mills plc were removed due to listing irregularities. dn tyre & rubber plc and p.s. mandrid plc were excluded due to delisting, while bua foods plc was only recently listed in 2022. after applying these criteria, 17 firms were retained as the final sample. this sample size is consistent with studies of similar scope in nigeria and is deemed adequate for sem, which requires a relatively large sample-to-variable ratio for robust estimation (hair et al. 2010). the study relied exclusively on secondary data. annual reports and accounts of the sampled firms provided information on book value, earnings, fair value disclosures, and audit committee characteristics. stock price data were sourced from ngx daily price listings. to ensure consistency, stock prices were measured 90 days after each firm’s year-end to allow for market assimilation of published financial information, in line with barth et al. (2001). traditional regression models such as ols and panel regression are widely used in value relevance studies. however, they assume perfect measurement and often fail to account for latent constructs and error correlations. this study employs sem using ibm amos because the audit committee index is a composite latent variable that sem models more accurately than ols; sem explicitly accounts for measurement error in observed variables, and sem provides goodness-of-fit statistics (rmsea, cfi, tli, srmr) that evaluate the adequacy of the model. this methodological advancement addresses the limitations of prior nigerian studies that relied solely on regression analysis. one of the market measures of frq is the association of accounting information with firm market values. to test the value relevance of fva, the study estimates the association between share prices and fair values of assets and liabilities using the modified ohlson (1995) model, which has been extensively employed in the literature. the model is as follows: mpsit = β0 + β1bpsit + β2epsit + β3fva1it + β4fva2it + β5fva3it + β6fvl1it + β7fvl2it + β8fvl3it + β9aciit + β10fszit + β11fgeit + εit (1) where; mpsit market price per share of firm i in year t bpsit book value per share of firm i in year t epsit earnings per share of firm i in year t β0 is the regression intercept, β1β11 are estimators, while εit is the residuals to examine the moderating effect of the audit committee (using an index score) on the value relevance of fair value assets and liabilities of listed consumer goods firms in nigeria, the following model will be used: kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 241 mpsit = β0 + β1bpsit + β2epsit + β3fva1it + β4fva2it + β5fva3it + β6fvl1it + β7fvl2it + β8fvl3it + β9aciit + β10fva1it*aciit + β11fva2it*aciit + β12fva3it*aciit + β13fvl1it*aciit + β14fvl2it*aciit + β15fvl3it*aciit + β16fszit + β17fgeit + εit (2) as a moderating variable and for the study to capture the multiple dimensions of the firms’ ac structure and attributes, an audit committee attributes index (aci) was developed based on the attributes: audit committee size, appointment of independent directors, independent chair, financial expertise, women, foreign membership, audit committee meetings frequency, and meetings attendance. results and discussions descriptive statistics the descriptive statistics of the variables are presented in table 1. table 1. descriptive statistics of variables of the study variables mean std. dev. minimum maximum skewness kurtosis n mps 88.086 267.155 1.000 1557 4.086 19.162 187 fva1 1.609 7.587 0.000 62.300 5.699 36.978 187 fva2 1.073 5.298 0.000 57.100 8.856 86.235 187 fva3 104.28 130.389 0.050 639.00 1.614 5.158 187 fvl1 19.232 34.629 0.010 178.00 2.734 10.672 187 fvl2 33.166 47.708 0.030 257.00 2.105 7.367 187 fvl3 53.636 75.554 0.010 408.00 2.029 7.116 187 acs 5.689 0.664 4.000 7.000 -0.996 3.887 187 ain 1.957 0.848 0.000 3.000 -0.503 2.667 187 amf 3.561 0.688 2.000 5.000 -0.073 2.793 187 ama 18.567 3.652 11.000 26.000 -0.020 2.269 187 acf 0.481 0.501 0.000 1.000 0.075 1.005 187 acc 0.936 0.246 0.000 1.000 -3.557 13.652 187 afx 0.492 0.246 0.000 1.000 0.032 1.001 187 acg 0.663 0.474 0.000 1.000 -0.690 1.476 187 aci 4.118 0.662 3.000 5.000 -0.131 2.272 187 bvs 12.396 14.321 -8.000 63.000 1.348 4.149 187 eps 3.083 9.457 -5.740 61.770 4.437 23.434 187 fsz 114.42 145.26 0.057 667.01 1.575 4.781 187 fge 48.941 20.547 7.000 99.000 0.023 2.986 187 source: generated by the author from annual reports of the sampled firms the descriptive results show wide variations in market and accounting variables of nigerian consumer goods firms during the study period. market price per share (mps) averaged ₦88.09, ranging from ₦1 to ₦1,557, with high dispersion and non-normal distribution indicated by strong positive skewness and kurtosis. for fair value measures, level 1 assets (fva1) averaged ₦1.61 billion, level 2 assets (fva2) ₦1.07 billion, and level 3 assets (fva3) ₦104.28 billion, all with large dispersions and extreme non-normality. on the liabilities side, level 1 (fvl1) averaged ₦19.23 billion, level 2 (fvl2) ₦33.17 billion, and level 3 (fvl3) ₦53.64 billion, each also showing high variation and deviations from normal distribution. audit committee attributes reflected moderate compliance with governance codes. average size was about 6 members, generally consistent with cama 2020 and ncgc 2018 requirements, though some firms fell short. independence averaged 2 non-executive directors, meeting minimum standards, while meeting frequency averaged 4 times yearly, aligning with quarterly requirements. attendance was high, with an average of 19 members present across sessions. nearly 94% of committees were chaired by independent directors, and about half of the members possessed financial expertise. gender diversity averaged 66% female representation, though some firms had none. foreign membership was present in about half the firms. an audit committee attributes index (aci) constructed from these dimensions averaged 4.12, suggesting relatively strong but uneven governance practices. kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 242 other firm-specific variables also displayed wide variability. book value per share (bvs) averaged ₦12.39, ranging from negative values to ₦63, while earnings per share (eps) averaged ₦3.08, with a wide range and high skewness. firm size was substantial, averaging ₦114.42 billion in total assets but ranging widely from ₦0.06 billion to ₦667 billion. firm age averaged 49 years, with all firms established before 2012, and was the only variable showing normal distribution. overall, the results demonstrate substantial heterogeneity across firms, with most financial and governance variables exhibiting skewed and non-normal distributions, reflecting differences in firm size, asset structures, governance composition, and market valuation within the nigerian consumer goods sector. the analysis of the descriptive statistics revealed that the data for the variables of the study did not follow the normal distribution assumption of parametric analysis. however, to determine the statistical evidence with regards to the data normality, the study employed the shapiro-wilk test for normal data. the results of the test are presented in table 2. table 2. data normality test variables w v z prob>z n mps 0.3432 92.675 10.379 0.0000 187 fva1 0.2891 100.037 10.561 0.0000 187 fva2 0.1061 125.790 11.086 0.0000 187 fva3 0.5212 67.297 9.652 0.0000 187 fvl1 0.8589 19.854 6.852 0.0000 187 fvl2 0.8652 18.972 6.748 0.0000 187 fvl3 0.9902 1.383 0.743 0.2287 187 aci 0.9682 4.479 3.438 0.0003 187 fva1*aci 0.7072 41.200 8.526 0.0000 187 fva2*aci 0.1274 122.787 11.030 0.0000 187 fva3*aci 0.7683 32.601 7.990 0.0000 187 fvl1*aci 0.9214 11.058 5.511 0.0000 187 fvl2*aci 0.8824 16.551 6.435 0.0000 187 fvl3*aci 0.9503 6.991 4.459 0.0000 187 bvs 0.8512 20.940 6.975 0.0000 187 eps 0.4079 83.312 10.141 0.0000 187 fsz 0.9385 8.651 4.948 0.0000 187 fge 0.9727 3.841 3.086 0.0010 187 source: generated by the author from the data of the sampled firms the shapiro-wilk test is a useful tool for testing normality. the null hypothesis principle is used in the shapiro-wilk (w) test for normal data; under the principle, the null hypothesis that ‘the data is normally distributed’ is tested. table 2 indicates that data from all the variables of the study are not normally distributed because the p-values are significant at a 1% level of significance (p-values of 0.0000), except for the fvl3, which is not statistically significant at all levels of significance (p-value of 0.2287). therefore, the null hypothesis (that the data is normally distributed) is rejected for frq, mps, aci, fva1, fva2, fva3, fvl1, fvl2, fva1*aci, fva3*aci, fva3*aci, fvl1*aci, fvl2*aci, fvl3*aci, bvs, eps, fsz, and fge, while not rejected for fvl3. this may lead to problems in ols regression, hence the need for more generalized regression models. this has prompted the study to resort to sem, because it uses techniques like maximum likelihood (ml) and generalized least squares (gls), and can handle complex error structures and correlations among error terms. correlation analysis table 3 shows the correlation coefficients between the dependent and the independent variables. the asterisk beside the correlation coefficient shows the coefficient's significance level. the correlation indicates the direction of the relationships as well as the strength of the relationship. values of the correlation coefficient range from -1 to 1. the sign of the correlation coefficient indicates the direction of the relationship (positive or negative), and the absolute value of the correlation coefficient indicates the strength, with larger values indicating stronger relationships. kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 243 table 3.correlation matrix variables m p s f v a 1 f v a 2 f v a 3 f v l 1 f v l 2 f v l 3 a c i f v a 1 a c i f v a 2 a c i f v a 3 a c i f v l 1 a c i f v l 2 a c i f v l 3 a c i b v s e p s f s z f g e mps 1.000 fva1 -0.046 1.000 fva2 -0.032 0.019 1.000 fva3 0.063 -0.298*** 0.053 1.000 fvl1 0.183** 0.288*** 0.172** -0.146** 1.000 fvl2 0.057* 0.182** -0.122* 0.015 0.092 1.000 fvl3 0.129* -0.064 -0.171** 0.087* -0.073* 0.090 1.000 aci 0.247*** -0.140 -0.117 -0.104 0.045 -0.046 0.064 1.000 fva1aci -0.104 -0.526*** 0.068 0.264*** -0.025 -0.065 0.017 -0.319*** 1.000 fva2aci 0.013 -0.020 -0.988*** -0.043 -0.179** 0.127* 0.169** 0.025 -0.036 1.000 fva3aci 0.099 0.120 -0.067 0.302*** -0.049 0.096 -0.072 0.126* -0.241** 0.056 1.000 fvl1aci 0.096 -0.009 -0.228*** -0.041 -0.244*** 0.079 0.137* -0.098 0.198*** 0.246*** -0.106 1.000 fvl2aci 0.112 -0.023 0.154** 0.075 0.075 -0.321*** 0.179** -0.126* 0.100 -0.143* -0.002 0.071 1.000 fvl3aci 0.098 -0.006 0.199*** 0.055 0.127* 0.174** -0.341* -0.129* 0.008 -0.191*** 0.030 -0.209*** 0.376*** 1.000 bvs 0.607*** -0.084* -0.082 0.089 0.084 -0.133* 0.165** 0.339*** 0.047 0.054 0.017 0.210*** 0.095 -0.131* 1.000 eps 0.779*** -0.035 -0.033 0.053* 0.219*** -0.017 0.103 0.209*** -0.093 0.015 0.078 0.100* 0.075 0.092 0.567*** 1.000 fsz 0.234*** -0.227*** -0.181** -0.018 -0.095 -0.283*** 0.205* 0.455*** -0.009 0.142* -0.040 0.091 0.064 -0.219** 0.542*** 0.266*** 1.000 fge 0.046 -0.122* -0.171** -0.049 -0.175** -0.089* 0.257*** 0.481*** -0.106 0.123* -0.011 -0.051 -0.106 -0.268*** 0.359*** 0.050 0.467*** 1.000 source: generated by the author from results/data of the sampled firm kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 244 the correlation analysis revealed mixed relationships between fair value measures and market prices of nigerian consumer goods firms. level 1 and level 2 fair value assets showed weak, insignificant negative correlations with mps, indicating low value relevance. level 3 assets and level 2 liabilities exhibited weak positive but insignificant associations with mps, also suggesting limited decision usefulness. by contrast, level 1 and level 3 liabilities displayed significant positive correlations with mps at the 5% and 10% levels, respectively, implying that these liability measures were value relevant to investors. audit committee attributes (aci) were significantly and positively correlated with mps at the 1% level, suggesting that stronger governance structures enhance reporting quality and investor confidence. however, when fva variables were moderated with aci, only fva1*aci showed a negative but insignificant relationship with mps, while all other moderated interactions (fva2*aci, fva3*aci, fvl1*aci, fvl2*aci, fvl3*aci) were positive but statistically insignificant, indicating no meaningful improvement in value relevance. traditional accounting measures showed stronger associations. bvs and eps both had highly significant positive correlations with mps at the 1% level, confirming their central role in valuation and financial reporting quality. firm size was also positively significant, while firm age showed a positive but insignificant relationship, suggesting that size matters more than longevity in explaining firm value. in conclusion, the results demonstrate that only level 1 and level 3 liabilities are significantly value relevant, whereas most fair value assets and moderated measures are not. conventional measures (bvs, eps, and firm size) remain the most reliable indicators of firm value. furthermore, the absence of excessively high correlation coefficients (above 0.80) indicates no multicollinearity among independent variables, confirming the suitability of the dataset for regression analysis. regression diagnostic tests to ensure the reliability of results, the study conducted several robustness checks, including tests for normality, heteroskedasticity, multicollinearity, model specification, and sem model fit. the breuschpagan/cook-weisberg test confirmed the absence of heteroskedasticity in both models, indicating constant error variance. multicollinearity was also ruled out, as the mean variance inflation factors (1.46 and 1.94) were well below the threshold of 10. model specification tests (ramsey reset and linktest) showed no omitted variables or misspecification, confirming the correctness of the regression models. for sem, model fit was assessed using multiple indices. the chi-square test was non-significant (χ² = 6.45, p = 0.092), suggesting the model adequately reproduced the data. other fit indices supported this conclusion: rmsea (0.079) and srmr (0.0122) fell within acceptable ranges, while cfi (0.998) exceeded the 0.95 benchmark. although tli (0.886) was slightly below the ideal cutoff, overall indices indicated a good fit. these results demonstrate that the models are statistically sound, free of major violations of classical assumptions, and adequately capture the relationships among variables, providing a reliable basis for hypothesis testing. path analysis (regression analysis) and hypothesis testing in this section, the regression results obtained are analyzed and interpreted to generate findings that address the research objectives. the results are presented in table 4. they show the standardized path coefficients of the variables, their respective significance levels, and the variances explained for the direct and moderated effects model. kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 245 tables 4. path coefficients model 1 & 2 model 1 (unmoderated model) model 2 (moderated model) variables coefficients p-value coefficients p-value mps<---bvs 0.325 0.000 0.353 0.000 mps<---eps 0.599 0.000 0.574 0.000 mps<---fva1 -0.046 0.324 -0.106 0.062 mps<---fva2 0.009 0.832 0.097 0.767 mps<---fva3 -0.015 0.743 -0.020 0.684 mps<---fvl1 -0.006 0.894 -0.001 0.985 mps <---fvl2 0.085 0.061 0.114 0.036 mps <---fvl3 0.049 0.270 0.034 0.521 mps <---aci 0.112 0.030 0.091 0.142 mps <---fva1*aci -0.098 0.093 mps <---fva2*aci 0.103 0.752 mps <---fva3*aci 0.012 0.793 mps <---fvl1*aci -0.027 0.605 mps <---fvl2*aci 0.078 0.192 mps <---fvl3*aci 0.011 0.862 mps <---fsz -0.091 0.123 -0.093 0.110 mps <---fge -0.124 0.022 -0.120 0.028 r-square 0.676 0.688 chi-square (χ²) 7.831 0.082 6.450 0.092 source: results output from ibm amos the regression analyses, both unmoderated and moderated, provide valuable insights into the value relevance of fva and the moderating role of audit committee attributes in nigerian consumer goods firms. the unmoderated model explained 67.6% of the variation in mps, suggesting strong explanatory power. the results revealed that bvs and eps exert a positive and highly significant effect on mps at the 1% level. this confirms their strong value relevance and demonstrates that investors in nigeria continue to rely heavily on conventional indicators such as earnings and book value in making valuation decisions. the finding is consistent with prior evidence from both developed and emerging economies (barth et al. 2001; ohlson 1995; abubakar, 2018; eshiett et al. 2023). by contrast, most fair value measures were not significantly related to mps. specifically, level 1 fair value assets (fva1) and liabilities (fvl1) both exhibited insignificant negative effects on firm value. this supports hypothesis 1 (h1), which stated that level 1 items are not value relevant to nigerian investors. similarly, level 3 assets (fva3) and liabilities (fvl3) were also insignificant, supporting hypothesis 3 (h3) that level 3 measures lack value relevance. on the other hand, level 2 results were mixed. while level 2 assets (fva2) showed an insignificant positive effect, level 2 liabilities (fvl2) displayed a positive and significant relationship with mps at the 10% level. this leads to the rejection of hypothesis 2 (h2), since level 2 liabilities are considered value relevant by nigerian investors. finally, a comparison across the hierarchy levels suggests that level 1 items are not more value relevant than level 2 or 3 items, which supports hypothesis 4 (h4). collectively, the unmoderated results demonstrate that while bvs and eps are highly valued by investors, fair value information is largely ignored, except for level 2 liabilities. these findings align with song et al. (2010) and chukwu et al. (2020), who reported that investors’ perception of financial reporting quality is not strongly associated with fair value disclosures, attributing this to the learning curve and the predominance of unsophisticated investors in nigeria. however, the results contradict those of siekkinen (2016) and tsadira (2020), who concluded that fair value assets at all levels were value relevant to investors’ decisions. they also diverge from mohammed (2020), who provided strong evidence that level 1 fair value assets offered a reliable explanation of stock prices in jordan. the control variables provided additional insights. firm size had a negative but insignificant effect on mps, suggesting that larger firms are not necessarily valued more highly in the nigerian consumer goods sector. firm age, however, had a significant negative effect at the 5% level, indicating that older firms tend to lose value relevance over time. this may reflect the market’s preference for more agile and innovative firms in a dynamic economic environment. turning to the moderated model, the results show that the interaction of audit committee attributes (aci) kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 246 with fva marginally improved explanatory power, as the adjusted r-squared increased to 68.8%. however, the interaction effects themselves were largely insignificant. the only exception was fva1aci, which hurt mps and was significant at the 10% level. this suggests that investors perceive level 1 assets, even when combined with stronger audit committees, as subject to discretionary accruals and therefore discount their value. all other moderated interactions, fvl1*aci, fva2*aci, fvl2*aci, fva3*aci, and fvl3*aci, were statistically insignificant, indicating that audit committees did not enhance the relevance of these fair value measures. at the same time, the results confirm song et al. (2010), who argued that weaker corporate governance reduces the relevance of fair value disclosures, and align with tama-sweet and zhang (2015), who showed that governance structures shape the pricing of fair value information. furthermore, they support velte (2017), who found that gender diversity in boards enhances the value relevance of fva under ifrs 13. the findings therefore confirm hypothesis 5 (h5), which posits that audit committee attributes have no significant moderating effect on the value relevance of fair value measures. this limited moderating role of audit committees is not unique to nigeria. cohen et al. (2008), drawing on institutional theory, argued that audit committees often perform ceremonial rather than substantive monitoring duties. similarly, beasley et al. (2000) observed that audit committee oversight varies widely, but is often inadequate. more critically, krishnan et al. (2011) provided evidence that audit committees may even be associated with less accurate reporting and a higher likelihood of fraud, supporting the notion of managerial hegemony. in the same vein, bruynseels and cardinaels (2014) reported that audit committees are linked to a lower likelihood of disclosing internal control deficiencies or receiving going concern opinions, while wilbanks et al. (2017) revealed that audit committees are often less alert to fraud risk, thereby enabling greater earnings management. taken together, this body of evidence helps explain why audit committee attributes in nigerian consumer goods firms failed to strengthen the value relevance of fva: they may exist more in form than in substance, with limited capacity or willingness to constrain managerial discretion. overall, the findings highlight several important patterns. traditional accounting measures, namely bvs and eps, remain the most value-relevant to nigerian investors, reaffirming their dominance in valuation decisions. fair value assets and liabilities are generally not priced by investors, except level 2 liabilities, which appear to provide useful information about firms’ obligations. audit committee attributes, despite being associated with governance quality, do not significantly moderate the relationship between fva and firm value. this underscores persistent institutional weaknesses, limited investor confidence, and enforcement challenges in nigeria’s capital market. in sum, the evidence demonstrates that while fair value accounting is conceptually intended to improve reporting relevance, nigerian investors remain skeptical of its usefulness. instead, they continue to depend on traditional accounting measures that are perceived as more reliable. the limited moderating effect of audit committees further points to the need for stronger governance mechanisms, improved expertise, and stricter regulatory oversight if fva is to achieve its intended role in enhancing financial reporting quality in nigeria. conclusion the study examined the value relevance of fair value accounting in nigerian consumer goods firms and the moderating role of audit committee attributes. the results showed that traditional measures—book value per share and earnings per share remain highly value relevant, while most fair value measures are not, except for level 2 liabilities, which investors found useful. audit committee attributes did not significantly moderate the relationship between fva and firm value, confirming weak governance influence. overall, the evidence suggests that nigerian investors still rely more on conventional indicators, reflecting skepticism about fair value reporting and the limited effectiveness of audit committees. the study recommends that regulators such as the frcn, sec, and ngx strengthen disclosure requirements for fair value estimates, enforce compliance with ifrs, and enhance monitoring of corporate governance practices. boards and audit committees should improve oversight by including more independent, financially skilled, and diverse members, while also providing continuous training to strengthen vigilance. firms should invest in robust valuation processes, internal controls, and transparent communication to build investor trust in fair value reporting. finally, investors should combine reliance on traditional measures like earnings and book value with informed interpretation of fair value data, supported by investor education programs to reduce knowledge gaps and improve market efficiency. kabiru isa dandago, modibbo abubakar / finance, accounting and business analysis, volume 7, issue 2, 2025 247 references abubakar, a. a. 2018. the impact of fair value accounting on the relevance of accounting information in nigerian banks and insurance firms. international journal of economics and finance, 10 (3): 35–51. abubakar, m., s. ndagi, and u. aliyu. 2024. value relevance of ifrs adoption in the deposit money banks in nigeria. advances in management, 17(1). https://doi.org/10.25303/1701aim0109. abubakar, s., and m. abubakar. 2015. intangible assets and value relevance of accounting information of listed high-tech firms in nigeria. research journal of finance and accounting 6, (11): 68–76. https://iiste.org/journals/index.php/rjfa/article/view/23354/24180 abubakar, s., m. abubakar, and h. iliyasu. 2015. effect of fair value 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zhang, j., and l. qu. 2022. fair value measurement, value relevance and economic development: adoption evidence of china’s listed firms. asia-pacific journal of accounting & economics, 29(4): 849–865. https://doi.org/10.1080/16081625.2020.1754252 https://doi.org/10.22495/cgsrv1i1p1 https://doi.org/10.2308/acch-51695 https://doi.org/10.1111/acfi.12235 https://doi.org/10.15640/jfbm.v3n1a2 https://doi.org/10.1080/16081625.2020.1754252 294 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.12 from rules to reason: a cognitive framework for evaluating the differential impact of isa compliance on audit report quality abdelbasset midoune1* , khaireddine serdani2 department of accounting and finance, illizi university center, illizi, algeria 1 department of management sciences, illizi university center, illizi, algeria 2 * corresponding author info articles abstract history article: submitted: 24 july 2025 revised: 17 november 2025 accepted: 28 november 2025 purpose: this study aims to deconstruct the concept of isa compliance to understand why certain auditing standards have a more significant impact on audit report quality than others. it introduces and empirically tests a novel cognitive framework that distinguishes between standards based on the intellectual task they impose on auditors. design/methodology/approach: the study employs a quantitative, cross-sectional survey design. data was collected from a sample of 398 external auditors in algeria, a jurisdiction that has adopted the isas. the framework reclassifies core evidence-gathering standards into ‘verificational evidence standards’ (x1) and ‘evaluative evidence standards’ (x2). the relationships were tested using pearson correlation and multiple linear regression. findings: the results show that while both dimensions are significant predictors of audit report quality (explaining 29.9% of its variance), compliance with evaluative evidence standards (β = 0.395, p < 0.001) has a substantially stronger impact than compliance with verificational evidence standards (β = 0.213, p < 0.001). practical implications: the findings suggest that audit firms, educators, and regulators should shift their focus from ensuring rote compliance to strategically cultivating the sophisticated evaluative competencies demanded by standards like isa 540 and isa 520. this implies a need for changes in training, performance incentives, and quality control reviews. originality/value: this study is one of the first to move beyond administrative or monolithic views of isa compliance by providing a theoretically grounded and empirically tested cognitive framework. it offers a new, more insightful lens for understanding the drivers of audit quality, with relevance for the global auditing profession. keywords: audit report quality, audit evidence, professional judgment, verificational evidence, evaluative evidence jel: m42 address correspondence: e-mail : abdelbasset.midoune@cuillizi.dz 1 kh.serdani@cuillizi.dz 2 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.12 https://orcid.org/0000-0002-2510-9905 https://orcid.org/0009-0008-0945-9332 a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 295 introduction in the architecture of modern capital markets, the external auditor serves as a crucial pillar of trust. by providing an independent opinion on the fairness of financial statements, auditors mitigate information asymmetry between corporate management and external stakeholders, a central theme in auditing research since the seminal work of deangelo (1981). the quality of the audit report is the tangible output of a complex process involving professional judgment and the critical evaluation of evidence (bonner 2008). consequently, understanding the determinants of audit report quality is not merely an academic exercise but a matter of profound importance for economic stability and corporate governance. to ensure consistency and a high baseline of quality across global engagements, the international auditing and assurance standards board (iaasb) promulgates the international standards on auditing (isas). while the link between isa compliance and enhanced audit quality is a foundational assumption in the profession (francis 2011), the mechanisms of this relationship remain underexplored. research often treats compliance as a monolithic concept, implicitly suggesting that adherence to a standard on procedural sampling carries the same weight as a standard governing the complex evaluation of accounting estimates. this approach overlooks a fundamental duality within the standards themselves: the distinction between tasks that require adherence to rules and those that demand sophisticated professional reason. this leaves a critical question unanswered: are all standards created equal in their contribution to audit quality? this paper moves beyond the monolithic view of compliance. we argue that the journey to achieving the auditor's overall objectives—obtaining reasonable assurance (isa 200)—is not uniform but is shaped by the cognitive nature of the standards applied. to operationalize this argument, this study introduces and empirically tests a novel cognitive framework that deconstructs isa compliance into two distinct dimensions: 'verificational' tasks, which emphasize procedural accuracy and factual confirmation, and 'evaluative' tasks, which demand deep judgment and skeptical reasoning. by connecting this framework to the perceived quality of the audit report, we aim to demonstrate that while both dimensions are necessary, it is the mastery of evaluative reasoning that ultimately forges the most credible and reliable audit outcomes. literature review the multifaceted nature of audit quality audit quality is a complex construct, often defined as the joint probability that an auditor will both discover and report a material misstatement deangelo (1981). more recent frameworks, such as the iaasb's framework for audit quality (2014), describe it as a result of interactions between various elements, including the inputs, processes, and outputs of the audit. for the purpose of this study, we focus on the perceived quality of the audit report from the perspective of practitioners, as it represents the ultimate communication of the audit process's value to stakeholders and the tangible outcome of the overall audit engagement. existing perspectives on isa compliance and audit quality a comprehensive review of the extant literature reveals three primary, yet largely disconnected, research streams. first, the "monolithic view" treats the isa framework as a single, undifferentiated intervention. studies in this stream often examine the macro-level impact of adopting international standards. for example, a major cross-country study by francis, michas, and seavey (2013) examined the economic consequences of globalized auditing standards across 42 countries. they found that while the standards aim to create a uniform high-quality environment, their effectiveness is highly dependent on a country's institutional features, such as legal enforcement and investor protection regimes. while crucial for confirming the overall value of standardization, this approach inherently treats the entire set of isas as a "black box," assuming, implicitly, that compliance with a standard on audit sampling has the same quality implication as compliance with a standard on auditing complex estimates, an assumption we challenge. attempting to open this "black box," a second stream of research can be termed the "administrative classification view". this line of inquiry categorizes standards based on their function or application area. research has often focused on specific procedures or components of the audit report. for instance, the introduction of key audit matters (kams) or critical audit matters (cams) has spurred a wave of research. christensen, glover, and wolfe (2014) investigated the impact of communicating cams on investor decisions, finding that they can influence nonprofessional investors' judgments. other studies have examined the impact of standards related to fraud detection (isa 240), going concern assessments (isa 570), or communication with those charged with governance (isa 260). this line of research highlights that the structure and content of audit tasks matter. however, its classification remains procedural and a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 296 administrative. it tells us what auditors do (e.g., assess going concern) but fails to provide a deep theoretical reason for why certain tasks might be more critical than others from a fundamental cognitive standpoint. third, the "auditor cognition view" operates in a parallel stream, focusing on the auditor's internal traits, skills, and mental processes. this rich body of literature has robustly demonstrated that cognitive skills are fundamental to audit quality. in a comprehensive review, nelson (2009) synthesized the literature on professional skepticism, establishing it as a critical and enduring component of audit quality. more recently, griffith, hammersley, kadous, and young (2015) demonstrated that auditor mindsets—specifically, having a more deliberative rather than implemental mindset—are a key determinant of the quality of auditing complex estimates. this research often draws on psychological theories, such as dual-process theory, which distinguishes between intuitive, automatic "system 1" thinking and deliberate, analytical "system 2" thinking. however, this research stream often treats these cognitive skills as independent variables without systematically linking them back to the specific standards that are designed to guide, structure, and arguably develop these very skills in practice. the research gap and a new cognitive framework the critical research gap emerges at the intersection of these three streams. the literature lacks a unifying framework that classifies isas based on the fundamental cognitive demands they place on the auditor. to address this gap, this study proposes a new cognitive framework for audit evidence, which is theoretically grounded in dual-process theory. we reclassify core evidence-gathering standards not by what they apply to (e.g., inventory, estimates), but by the type of thinking they require. this moves beyond a purely procedural classification to a more profound, cognitive one. our framework has two core dimensions:  verificational evidence standards (x1): this dimension includes standards whose primary purpose is to guide the auditor in confirming objective, verifiable facts. the cognitive task is one of matching, tracing, and confirming within a "closed system." these tasks primarily trigger system 1 (fast, intuitive) or highly structured system 2 (rule-based, procedural) thinking. we place standards such as isa 501 (regarding physical inventory counts) and isa 530 (audit sampling) as archetypes for this category.  evaluative evidence standards (x2): this dimension includes standards that require the auditor to engage in complex professional judgment, assess reasonableness, and navigate high levels of uncertainty. the cognitive task is one of reasoning, analyzing relationships, and critiquing assumptions within an "open system." these tasks demand the deep, deliberate engagement of system 2 thinking. we place standards such as isa 540 (auditing accounting estimates) and isa 520 (analytical procedures) as archetypes for this category. while the survey uses these standards as clear archetypes, the framework is broadly applicable. for instance, isa 330 (the auditor's responses to assessed risks), which requires designing audit procedures based on risk assessment, would be predominantly evaluative. conversely, isa 320 (materiality) presents a hybrid nature: the initial calculation is largely verificational, whereas its adjustment during the audit is highly evaluative. this classification is based on the dominant cognitive demand of the standard, recognizing that some standards may contain elements of both. hypothesis development based on this new framework, we can formulate a more sophisticated set of hypotheses. a quality audit requires both factual accuracy and sound judgment; therefore, we expect both types of evidence standards to be important.  h1: compliance with verificational evidence standards (x1) has a significant positive impact on audit report quality (y).  h2: compliance with evaluative evidence standards (x2) has a significant positive impact on audit report quality (y). however, our core thesis is that the value-add of the modern auditor lies increasingly in their ability to handle judgment and uncertainty. evaluative tasks represent the pinnacle of professional service. therefore, we hypothesize that the impact of evaluative standards will be substantially greater.  h3: the impact of compliance with evaluative evidence standards (x2) on audit report quality (y) is significantly greater than the impact of compliance with verificational evidence standards (x1). methods research philosophy and design this study is situated within a post-positivist research paradigm, which acknowledges that while an objective reality exists, our ability to perceive it is imperfect and subject to bias. this aligns well with survey research that captures perceptions of complex social phenomena like audit quality. a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 297 a quantitative, cross-sectional survey design was deemed most appropriate for several reasons. first, it allows for the collection of data from a large and diverse sample of professionals, enhancing the generalizability of the findings. second, it enables the statistical testing of hypothesized relationships between our defined variables (x1, x2, and y). while a longitudinal design could track changes over time, a cross-sectional approach provides a robust snapshot of the current state of the profession, which is sufficient for testing our theoretical framework. sample and data collection procedure to test our internationally relevant framework in a practical setting, the target population for this study was defined as the 3,641 external auditors officially registered and practicing in algeria. the sample was purposefully structured to be diverse, comprising three key groups: (1) statutory auditors, (2) accounting experts, and (3) practicing academics. an electronic questionnaire was distributed, and after screening, a final usable sample of 398 valid responses was obtained. the 11% response rate is modest, a common challenge in surveys of elite professionals, and the single-country focus are limitations that will be discussed further in section 5.2. however, the final sample size provides sufficient statistical power for the analysis. the demographic profile of the sample is detailed in table 1. statutory auditors constitute the largest group (61.6%), complemented by accounting experts (15.1%) and practicing academics (23.4%). the high levels of experience (58.6% with over 11 years) and education lend significant credibility to the findings. this table summarizes the key characteristics of the study sample. table 1. demographic profile of respondents (n=398) characteristic category frequency (n) percentage (%) profession statutory auditor 245 61.6 accounting expert 60 15.1 practicing academics 93 23.4 years of experience < 5 years 67 16.8 5 10 years 98 24.6 11 15 years 109 27.4 > 15 years 124 31.2 highest education level bachelor's degree 159 39.9 master's degree (master & magister) 131 32.9 phd 97 24.4 other 11 2.8 source: author's own elaboration from survey data. measures and instrumentation the survey instrument was developed using multi-item scales measured on a 5-point likert scale, with items grounded in established literature to ensure content validity.  independent variable 1 (x1): the 5-item scale for verificational evidence standards was adapted from foundational concepts in practitioner guides such as lessambo (2018) and flood (2023) to capture the core procedural requirements of isa 501 and isa 530.  independent variable 2 (x2): the 5-item scale for evaluative evidence standards was adapted from influential frameworks on auditor judgment, drawing on seminal research by griffith et al. (2015) and validated scales like the hurtt (2010) skepticism scale, to measure the application of judgment required by isa 520 and isa 540. dependent variable (y): the 16-item scale for audit report quality was developed to reflect the key attributes of a high-quality audit, drawing on both the iaasb (2021) quality management framework and established academic proxies discussed in research by francis (2011) and knechel et al. (2013). the instrument's overall internal consistency was high (cronbach's alpha of 0.864). the full survey instrument is provided in appendix a to ensure transparency and facilitate replicability. analytical strategy the collected data were analyzed using spss version 28. the analysis proceeded in three stages: descriptive analysis, bivariate correlation analysis using pearson's correlation coefficient, and multiple linear regression. the model is specified as: y = β₀ + β₁(x1) + β₂(x2) + ε (1) a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 298 where y is perceived audit report quality, x1 is verificational compliance, x2 is evaluative compliance, and ε is the error term. result and discussion result this section presents and discusses the results of the data analysis. descriptive statistics for the key variables are presented in table 2. all three constructs scored high means (all > 4.0 on a 5-point scale), suggesting strong agreement among respondents regarding the importance of these dimensions for audit quality. the standard deviations are relatively small, indicating a strong degree of consensus. table 2. descriptive statistics variable n mean std. deviation verificational compliance (x1) 398 4.0985 0.46732 evaluative compliance (x2) 398 4.1181 0.46718 audit report quality (y) 398 4.2282 0.40408 source: author's own elaboration from survey data. the pearson correlation matrix is presented in table 3. as hypothesized, both verificational compliance (x1) and evaluative compliance (x2) are positively and significantly correlated with audit report quality (y). the correlation between evaluative compliance and audit quality (r = 0.518, p < 0.01) is notably stronger than the correlation for verificational compliance (r = 0.441, p < 0.01), providing strong preliminary support for all three hypotheses. table 3. pearson correlation matrix variable verificational (x1) evaluative (x2) audit report quality (y) 0.441** 0.518** source: author's own elaboration from survey data. a multiple linear regression was conducted to test the unique predictive power of each evidence dimension. the overall model was statistically significant (f (2, 395) = 84.247, p < 0.001), indicating that the framework as a whole is a strong predictor of audit report quality. the model summary in table 4 shows an r square value of 0.299, meaning that our two independent variables collectively explain 29.9% of the variance in perceived audit report quality. table 4. regression model summary model r r square adjusted r square std. error of the estimate 1 0.547 0.299 0.295 0.33917 source: author's own elaboration from survey data. the regression coefficients are detailed in table 5. the results provide clear support for all three hypotheses.  h1 is supported: compliance with verificational evidence standards (x1) is a significant positive predictor of audit report quality (β = 0.213, p < 0.001).  h2 is supported: compliance with evaluative evidence standards (x2) is a significant positive predictor of audit report quality (β = 0.395, p < 0.001).  h3 is supported: a comparison of the standardized beta coefficients shows that the magnitude of the impact from evaluative compliance (β = 0.395) is substantially larger—nearly double—that of verificational compliance (β = 0.213). table 5. regression coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta (β) (constant) 2.065 0.169 12.190 0.000 verificational compliance (x1) 0.184 0.045 0.213 4.131 0.000 evaluative compliance (x2) 0.342 0.045 0.395 7.661 0.000 dependent variable: audit report quality (y) source: author's own elaboration from survey data. a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 299 discussion this study set out to deconstruct the concept of isa compliance, moving beyond traditional classifications to a more conceptually profound framework based on the cognitive demands of audit evidence. the empirical results provide a clear and compelling narrative: while both verificational and evaluative evidence are crucial pillars of a quality audit, compliance with standards that mandate evaluative reasoning is a significantly more powerful driver of perceived audit report quality. the central finding—that evaluative evidence standards (β = 0.395) have nearly double the statistical impact of verificational evidence standards (β = 0.213) — demands a deeper explanation than mere statistical significance. we argue that this differential impact stems from the fundamental nature of the cognitive tasks involved, which can be framed using dual-process theory. verificational tasks, guided by standards like isa 501 and 530, operate largely within a "closed system". here, the auditor's goal is to confirm a fact against a known, objective criterion. this is a critical but essentially algorithmic process that requires diligence and precision, aligning with more structured, rulebased system 1 or procedural system 2 processing. while essential for establishing a factual baseline of reliability, the contribution of these tasks to overall quality is ultimately bounded by the facts themselves; they confirm what is, but offer little insight into what it means. in stark contrast, evaluative tasks, guided by standards like isa 540 and 520, operate within an "open system" characterized by uncertainty and ambiguity. when an auditor assesses a complex accounting estimate, they are navigating a "zone of reasonableness" by critiquing a web of interconnected assumptions. similarly, when investigating an anomaly identified through analytical procedures (isa 520), the auditor is not just identifying a variance; they are forming a hypothesis about its cause. this is an act of abductive reasoning — inferring the most plausible explanation from a set of observations (hammersley 2011). it is this deep engagement with higher-order cognitive processes, which are at the heart of professional judgment (bonner, 2008), that elevates the quality of the audit from a technical, compliance-driven exercise to a professional service that adds true value. the greater beta coefficient for evaluative compliance is, therefore, an empirical reflection of the greater value added by these complex cognitive skills. it is crucial to acknowledge that this cognitive classification is not a rigid dichotomy but rather a continuum. as insightfully noted during the review process, certain standards possess elements of both categories. for example, while isa 501 is predominantly verificational, its guidance on litigation and claims requires significant evaluative judgment. our framework, therefore, classifies standards based on their dominant cognitive demand — the primary intellectual challenge they pose to the auditor. the nearly doubled statistical impact of evaluative standards suggests that while both system 1 (verificational) and system 2 (evaluative) processes are essential, it is the mastery of the deliberate, analytical system 2 thinking that truly differentiates a high-quality audit in complex situations. the primary theoretical contribution of this study lies in its ability to synthesize the three previously disconnected streams of literature. first, we provide a causal mechanism for the findings of the "administrative view," showing that it is the evaluative nature of the procedure, not just its classification, that matters. second, we provide a practical context for the "auditor cognition view." the literature on professional skepticism and judgment has long established their importance (nelson 2009). our study demonstrates that isas are not merely a compliance burden but are the very scaffolding that prompts their application. isa 540, for example, can be seen as a "cognitive checklist" that forces the auditor to engage in specific acts of skepticism (hurtt 2010). finally, by bridging these views, we challenge the "monolithic view." our findings extend the work of researchers like francis et al. (2013) by deconstructing which standards matter most. this implies that regulators should adopt a more targeted approach, recognizing that strengthening standards related to evaluation will likely yield the greatest returns in overall audit quality (knechel et al. 2013). the practical implications of these findings are significant. the results strongly advocate for a move from technical training to a "cognitive apprenticeship." audit firms must evolve their programs from focusing on rule-application to fostering evaluative reasoning. the complexity of modern standards (flood 2023) necessitates a move beyond simple compliance to deep understanding, aligning with foundational research on expertise by libby and luft (1993). as big data and ai (brown-liburd and vasarhelyi 2015) automate many verificational tasks, the human auditor's value will increasingly reside in their evaluative capabilities, making the high-level judgments that remain beyond the scope of current technology (nwadialor and obi 2020). conclusion, limitations, and future research conclusion the journey from compliance to quality is a journey from rules to reason. this study, by filling a critical gap in the literature, demonstrates that the apex of audit quality is reached not through the meticulous a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 300 verification of established facts, but through the rigorous and skeptical evaluation of inherent uncertainties. our cognitive framework provides a new, more insightful lens for the profession, showing that the standards that challenge auditors to think critically are the same standards that forge the most credible and reliable reports. the empirical evidence is clear: while both verificational and evaluative tasks are significant pillars of a quality audit, the latter carries nearly double the weight in determining the final quality of the audit report. this finding is not merely academic; it is a strategic imperative for a profession at a crossroads. to thrive in an era of increasing complexity and automation, the focus of training, methodology, and culture must shift decisively towards cultivating the sophisticated evaluative skills that represent the true art and science of auditing. the future-proof auditor is not one who can follow a checklist better, but one who can think better when there is no checklist to follow. limitations and future research the findings of this study should be interpreted in light of several limitations which provide avenues for future research:  generalizability and sample limitations: the data was collected from a single country (algeria), which may limit the generalizability of the findings to different institutional and cultural contexts. furthermore, the 11% response rate, while not atypical for surveys of senior professionals, raises the possibility of non-response bias, where the views of respondents may differ systematically from those of non-respondents. future research should replicate this study in different jurisdictions (e.g., developed vs. developing markets) to test the framework's external validity.  perceptual data: the study relies on self-reported perceptions of compliance and quality, which may not perfectly align with actual audit practices. future research could triangulate these findings using archival data, such as analyzing regulatory inspection reports (e.g., from the pcaob or frc) to code deficiencies based on whether they relate to verificational or evaluative tasks and linking them to audit outcomes like audit failures or financial restatements.  cross-sectional design: the cross-sectional design establishes strong association but not definitive causality. an experimental design using vignettes, where auditors are presented with either a factual error or a questionable judgment, could provide stronger causal evidence. reference bonner, s. 2008. judgment and decision making in accounting .illustrated ed. pearson/prentice hall. brown-liburd, h., and m. a. vasarhelyi. 2015. big data and audit evidence. journal of emerging technologies in accounting, 12(1):1-16. https://doi.org/10.2308/jeta-10468 christensen, b. e., s. m. glover, and c. j. wolfe. 2014. do critical audit matter paragraphs in the audit report change nonprofessional investors' decision to invest? auditing: a journal of practice & theory, 33(4): 71-93. https://doi.org/10.2308/ajpt-50793 deangelo, l. 1981. auditor size and quality. journal of accounting and economics, 3(3): 183-199. retrieved from https://doi.org/10.1016/0165-4101(81)90002-1 lessambo, f. i. 2018. auditing, assurance services, and forensics. palgrave macmillan. https://doi.org/https://doi.org/10.1007/978-3-319-90521-1 flood, j. 2023. practitioner's guide to gaas 2023: coveringall sass, ssaes, ssarss, and interpretations 2nd ed. wiley. https://doi.org/10.1002/9781394152735 francis, j. 2011. a framework for understanding and researching audit quality. auditing: a journal of practice & theory, 30(2): 125-152. https://doi.org/10.2308/ajpt-50006 francis, j., p. michas, and s. seavey. 2013. does audit market concentration harm the quality of audited earnings? evidence from audit markets in 42 countries. contemporary accounting research, 30(1): 325-355. https://doi.org/10.1111/j.1911-3846.2012.01156.x griffith, e., j. hammersley, k. kadous, and d. young. 2015. auditor mindsets and audits of complex estimates. journal of accounting research, 53(1): 49-77. https://doi.org/10.1111/1475-679x.12066 hammersley, j. 2011. a review and model of auditor judgments in fraud-related planning tasks. auditing: a journal of practice & theory, 30(4): 101–128. https://doi.org/10.2308/ajpt-10145 hurtt, r. 2010. development of a scale to measure professional skepticism. auditing: a journal of practice & theory, 29(1): 149–171. https://doi.org/10.2308/aud.2010.29.1.149 iaasb. 2021. handbook of international quality management, auditing, review, other assurance, and related services pronouncements. ifac. retrieved from https://www.iaasb.org/publications/2021a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 301 handbook-international-quality-control-auditing-review-other-assurance-and-related-services knechel, w., g. krishnan, m. p-evzner, l. bhaskar, and u. velury. 2013. audit quality: insights from the academic literature. auditing: a journal of practice & theory, 32(1): 1-68. retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2040754# libby, r., and j. luft. 1993. determinants of judgment performance in accounting settings: ability, knowledge, motivation, and environment. accounting, organizations and society, 18(5): 425-450. https://doi.org/10.1016/0361-3682(93)90040-d nelson, m. 2009. a model and literature review of professional skepticism in auditing. auditing: a journal of practice & theory, 28(2): 1-34. https://doi.org/10.2308/aud.2009.28.2.1 nwadialor, e., and t. obi. 2020. effect of big data on the quality of audit reports in anambra. international journal of advanced academic research (social and management sciences), 6(10): 48-65. https://doi.org/10.46654/ij.24889849.s6107 a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 302 appendix a: full research questionnaire introduction greetings, we invite you to participate in an academic study aiming to understand the differential impacts of compliance with international standards on auditing (isas) on audit report quality. this survey will take approximately 10-12 minutes to complete. your participation is entirely voluntary, and all collected data will be treated with strict confidentiality and used only for aggregated academic research purposes. we highly appreciate your time and valuable contribution. part 1: demographic information 1. current profession: ( ) statutory auditor ( ) accounting expert ( ) practicing academic 2. years of professional experience in audit and assurance: ( ) less than 5 years ( ) 5 to 10 years ( ) 11 to 15 years ( ) more than 15 years 3. highest educational qualification obtained: ( ) bachelor's degree ( ) master's degree ( ) phd ( ) other (please specify): __________ part 2: independent study constructs to what extent do you agree that the following practices are essential for achieving a high-quality audit? (1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly agree) statement 1 2 3 4 5 a. verificational evidence standards (x1) 1. attending the physical inventory count to inspect inventory and perform test counts. 2. designing and selecting an audit sample in a way that provides a representative basis for drawing conclusions about the entire population. 3. performing audit procedures on each item selected for the sample to gather appropriate evidence. 4. obtaining evidence regarding litigation and claims by communicating directly with the entity's external legal counsel. 5. projecting misstatements found in an audit sample to the entire population to evaluate their overall effect. b. evaluative evidence standards (x2) 1. assessing the reasonableness of significant and complex accounting estimates made by management. 2. critically evaluating the underlying assumptions and models used by management in fair value measurements. 3. investigating the root causes of significant or unexpected relationships and variances identified through analytical procedures. 4. evaluating the adequacy and clarity of financial statement disclosures for complex transactions and areas of uncertainty. 5. challenging management’s judgments and assessing the potential for management bias when evaluating their intent and future plans. a. midoune and k. serdani/ finance, accounting and business analysis, volume 7, issue 2, 2025 303 part 3: dependent variable audit report quality to what extent do you agree that the following attributes are essential characteristics of a highquality audit report? (1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly agree) attribute of audit report quality 1 2 3 4 5 dimension 1: credibility and reliability 1. the auditor's opinion is stated in a clear, unambiguous, and conclusive manner. 2. the report provides a credible and well-supported basis for its conclusions, reflecting that sufficient and appropriate audit evidence was obtained. 3. the "basis for opinion" section explicitly states adherence to international standards on auditing (isas). 4. the report clearly affirms the auditor’s independence from the audited entity. 5. the reasoning presented throughout the report is logical and internally consistent. 6. the report provides a high level of assurance to users about the fairness of the financial statements. dimension 2: informative value and transparency 7. the report is written in clear, concise language, avoiding excessive technical jargon. 8. the discussion of key audit matters (kams) is specific to the entity, not boilerplate. 9. the kams section clearly links the identified risk to the specific audit response. 10. the report effectively distinguishes between the responsibilities of management and the auditor. 11. if applicable, any material uncertainty related to going concern is explained with sufficient clarity. 12. the report provides valuable context about the entity's industry or specific circumstances that influenced the audit. dimension 3: professionalism and quality indicators 13. the tone and content of the report reflect a professionally skeptical mindset. 14. the report is presented with an objective and neutral tone, free from any apparent management influence. 15. the content of the report reflects a deep understanding of the entity's business model and its specific risks. 16. emphasis of matter or other matter paragraphs are used appropriately to highlight crucial information without modifying the opinion. 120 finance, accounting and business analysis volume 7 issue 1, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.1.10 factors that influence dividend policy: do macroeconomic factors matter? emmanuel kwame doffour 1* , emmanuel boye asamoah2 , isaac kwadwo anim3 , eric agyenim-boateng4 department of accounting, university of cape coast, cape coast, ghana1 department of accounting, university of cape coast, cape coast, ghana2 department of accounting, university of cape coast, cape coast, ghana3 directorate of finance, university of cape coast, cape coast, ghana4 * corresponding author info articles abstract history article: submitted 14 march 2025 revised 11 may 2025 accepted 29 may 2025 purpose: this research examines the effects of macroeconomic variables (money supply, interest rates, inflation, and exchange rates) on the dividend policies of firms in the ghana stock exchange. design/methodology/approach: the study employed panel data from 23 ghanaian firms from 2010 to 2022. to overcome endogeneity and unobserved heterogeneity, a dynamic two-step difference generalized method of moments (gmm) was used, employing stata 15 for the analysis. findings: the findings also show that money supply, interest rates and inflation have a positive and significant effect on the dividend payout ratio, while exchange rates have a significant inverse effect on the dividend payout ratio. practical implications: these results reveal that macroeconomic factors play a significant part in determining dividend policies in ghanaian firms. the study has significant implications for corporate managers in the formulation of dividend policy, investors in evaluating the dividend prospects, and policymakers in the realisation of the effects of macroeconomic policies on corporate finance. originality/value: this research provides significant information on the relationship between macroeconomic variables and firms’ dividend decisions in ghana. it builds on the existing literature by including a wider set of macroeconomic variables, unlike most previous ghanaian studies that mainly focused on firm-specific factors. paper type: research paper keywords: dividend policy, macroeconomic factors, generalized method of moments jel: g35, l25 * address correspondence: e-mail: emmanueldoffour15@gmail.com1 emeritus.asamoah@gmail.com2 ianim@ucc.edu.gh3 eagyenim-boateng@ucc.edu.gh4 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.10 https://orcid.org/0000-0001-7285-5575 https://orcid.org/0009-0001-6163-5021 https://orcid.org/0000-0002-5138-2307 https://orcid.org/0009-0000-7264-3599 doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 121 introduction the rationale for establishing a business focuses on clear objectives, notably enhancing shareholders' wealth by increasing market value (jensen and meckling 1976). shareholder wealth can grow through dividends and capital appreciation, with dividend policies influencing how profits are distributed. various approaches exist, such as fixed payout ratios and regular dividends with special payments (brigham and houston 2013). research shows that higher risk-averse investor populations correlate with lower dividends (akyildirim et al. 2014), while factors like profitability, growth prospects, and external influences like economic policies also play significant roles (khan et al. 2018). recent macroeconomic changes driven by globalisation and technology are crucial for decision-making in firms, as stock values fluctuate with interest and inflation rates (fredrick 2021), affecting both immediate returns and future growth (kanwal and nadeem 2013). black (1976) highlighted the lack of strict guidelines on dividend payments versus reinvestment, leaving ongoing questions about dividend policies. the anchor theory, based on the bird-in-hand theory, suggests that economic uncertainty may drive investors to prefer immediate returns (frankfurter and wood 2002). additionally, the arbitrage pricing theory, introduced by ross (1976), emphasises that multiple factors can influence investment return strategies. ghana's economy has shifted from agriculture to a more diverse post-colonial landscape, with growth in manufacturing, services, and finance since the ghana stock exchange's inception in 1990 (kolavalli et al. 2012; bokpin 2011). in developing countries like ghana, dividends are key for reliable income and financial stability, especially in economic instability (marfo-yiadom and agyei 2011). macroenvironmental factors, often beyond a company's control, such as high inflation and rising interest rates, can negatively affect corporate earnings and dividends (adelegan 2009; ghafoor et al. 2014). the capital market is influenced by gdp growth, inflation, and trade (kaimba 2010). international firms face challenges from exchange rate fluctuations, impacting costs and stock returns (zghidi et al. 2016). taxation and government spending also affect profits and dividend capacity (appiah-kubi et al. 2021), while political fluctuations lead to reduced dividends during uncertainty (montes and nogueira 2022). dividends are critical for firms and shareholder returns, particularly in ghana, where limited investment opportunities create challenges in balancing regular dividends and reinvestment for growth (bossman et al. 2022; enyan 2009). although research on global dividend policies is extensive (rój 2019; kaźmierska-jóźwiak 2015), the specific impacts of macroeconomic factors in ghana remain underexplored, especially regarding high inflation, exchange rates, and rising interest rates, which can constrain dividend capacity (abor and bokpin 2010). this study uniquely analyses the effects of macroeconomic factors, namely, money supply, exchange rates, interest rates, and inflation, on dividend policy for financial and non-financial firms in ghana, as these factors exert cross-sectoral impacts that affect firms regardless of industry or sector. also, both were incorporated to increase data variation and sample size which enhances statistical power and robustness in a gmm analysis as well as generalisation. the research aims to fill a gap in understanding the impact of these variables, with specific objectives to assess how each factor influences dividend policy.. literature review theoretical review bird-in-hand theory the dividend irrelevance argument is contested by the bird-in-hand theory, which was first proposed by gordon and lintner in the 1960s. it highlights that investors would rather have the assurance of dividends than the uncertainty of potential capital appreciation (gordon 1963). according to baker and powell (1999), this uncertainty makes shareholders value an amount of anticipated dividends more highly than a dollar of anticipated stock appreciation. additionally, the theory posits that dividend payments reduce investor uncertainty, leading to a lower discount rate for dividends compared to potential capital gains (gordon and shapiro 1956). the theory suggests that a higher dividend payout ratio corresponds with increased stock valuations, as investors favour the immediate certainty of dividends (gordon 1959). moreover, it highlights that macroeconomic volatility heightens the preference for immediate cash returns, influencing corporate dividend decisions during unstable times (frankfurter and wood 2002). thus, firms may strategically increase the dividend payout ratio when facing greater economic uncertainty. arbitrage pricing theory (apt) apt, established by ross in 1976, explains asset returns as a linear function of multiple macroeconomic factors. this theory posits that investment returns are influenced by various factors related to future dividends and discount rates (shrestha and subedi 2014). it assumes that systematic risk characterises project portfolios and that while some risks can be diversified, pure risks do not exist in this doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 122 process. however, the model has limitations, including uncertainty about which factors determine individual assets (ross 2013). it assumes a perfect market, which is unrealistic in practice (dhrymes et al. 1984), and acknowledges that different stocks may respond differently to various risks (chen et al. 1986). the apt correlates investment returns with discount rates and future dividends (mukherjee and naka 1995), while also providing an understanding of corporate planning (burmeister and wall 1986). apt includes multiple macroeconomic factors that significantly influence return on securities (ross 1976) unlike capm which includes only market risk (roll and ross 1980). this theory can be used to explain how these factors affect dividends paid as a return on share securities. conceptual review money supply according to agarwal et al. (2018), money supply represents the total amount of monetary instruments in an economy, including cash and demand deposits. it is a crucial macroeconomic indicator influencing spending, inflation, and investment. an increase in money supply typically leads to lower interest rates, making borrowing cheaper, which can boost corporate profits and dividend distributions. conversely, a decrease in money supply raises interest rates, reduces spending, and negatively impacts earnings, forcing firms to retain earnings for uncertain economic conditions (mankiw 2021; mishkin 2007). friedman and schwartz (2008) argue that money supply is essential for economic growth; a higher money supply correlates with growth, while a decrease signals a slowdown. the link between money supply and dividend policy is mediated by factors like liquidity, capital structure, and economic conditions. when monetary policy favours abundant money and low interest rates, firms can finance growth and enhance dividends (blanchard and johnson 2017). research by tran et al. (2019) and mbaka (2022) indicates that changes in money supply significantly impact firms’ dividend decisions, with expansions allowing for increased dividends and contractions leading to reductions interest rates interest rates are a crucial factor in economic activity, affecting the cost of savings and investment. high interest rates lead to high capital costs and reduced capital expenditures, while low rates encourage borrowing and investment. for firms, interest rates heavily influence funding costs and potential returns on investment (buckley 2013). additionally, interest rates signal economic conditions, inflation expectations, and monetary policy shifts (blanchard et al. 2015). high rates can decrease profitability as firms often lower dividends, whereas lower rates reduce capital costs, stimulate economic growth, and allow for higher dividends (baker and wurgler 2013). exchange rate exchange rates are crucial for currency conversion and significantly impact import and export prices as well as international investments (madura 2018). they consist of a base (local) currency and a foreign currency; for example, in the usd/eur, usd is the base currency. exchange rate systems fall into two categories: floating and fixed. in a floating system, currency values change according to supply and demand, as noted by krugman and obstfeld (2009). conversely, a fixed exchange rate ties a currency to another currency or commodity (like gold) and requires central banks to maintain constant rates, providing stability for international transactions but necessitating large foreign exchange reserves (frankel 1999). the choice between systems depends on an economy’s characteristics and monetary policy goals. floating rates offer flexibility, while fixed rates provide stability. research by pan et al. (2007) shows that exchange rate and stock price volatility can vary based on the adopted system, affecting firms' risk management strategies. inflation inflation, as described by salim (2019), refers to the overall rise in prices of products and services, often driven by rising expenses like wages and raw material costs, as well as heightened demand exceeding supply. high inflation can impact a company's dividend strategy by decreasing the purchasing power of money, which in turn affects costs and revenues (basse and reddemann 2011). increased operating expenses can reduce gross profits, leading firms to retain more earnings for reinvestment rather than distribute dividends. during periods of low inflation, companies may pay higher dividends (kauffman et al. 2016) due to fewer high-return investment opportunities theissen et al. 2023). ultimately, firms must consider both current and expected inflation rates when formulating their dividend policies to maintain shareholder confidence, as noted by basse and reddemann (2011). dividend policy according to samrotun (2015), dividend policy involves the trade-off between the dividend payout ratio to investors and retaining earnings for control over funds. while management may lower dividends to doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 123 retain more capital, investors often perceive high dividends as a sign of firm efficiency (sutrisno 2009). the dividend signalling theory suggests that higher dividends indicate better company performance, influencing investor perception (pamungkas et al. 2017; jogiyanto 2003). ultimately, dividend policy outlines the amount of the total earnings distributed versus reinvested (brealey et al. 2014). balancing a high dividend payout ratio with sufficient retained earnings for reinvestment is a key challenge for firms. empirical review rinanda (2022) studied the impact of macroeconomic factors on the dividend policies of manufacturing companies listed on the indonesian stock market (idx) during the global health crisis. focusing on food and beverage firms with reports from 2012 to 2016, the research used multiple linear regression through eviews software. surprisingly, changes in currency exchange rates, inflation rates, and interest rates did not significantly affect the firms' dividend policies. also, mbaka (2022) examined the influence of macroeconomic factors on dividend distribution among companies in nairobi from 1987 to 2021, analysing the data with spss. the results showed money supply and exchange rates had a significant direct effect (β = 0.310 and β = 0.317, p = 0.000 < 0.05), but inflation had a positive yet insignificant effect (β = 0.009, p = 0.501 > 0.05). khan et al. (2018) used annual data from 2001 to 2017 to analyse macroeconomic indicators and dividend payout ratio with ols. they found that exchange rates positively correlated with the dividend payout ratio, while interest rates and inflation had a negative relationship. tran et al. (2019) also studied money supply and dividend policies in vietnamese non-financial companies between 2008 and 2017. their findings indicated that money supply positively impacted dividend policies, especially during the global financial crisis. yakubu (2019) studied factors influencing the dividend policies of listed banks in ghana from 2006 to 2015. the analysis revealed that domestic macroeconomic instability, indicated by inflation, had an insignificant direct impact on these policies. basse and reddemann (2011) analysed dividend policies in the u.s. their results suggested a positive effect of inflation on dividends paid out. romus et al. (2020) studied how macroeconomic factors, particularly gdp and the interest rate, influence dividend policies. they measured firm performance through roa and analysed a sample of 10 out of 48 companies in real estate on the idx. the study found that gdp growth positively affected firm performance and dividend policy, while the interest rate had no significant impact. moreover, firm performance positively influenced dividend policy. the empirical studies discussed in this paper give a general picture of the macro environment and dividend policies in various countries and at different periods. rinanda (2022) noted that macroeconomic factors had a limited impact on indonesian dividend policies, while mbaka (2022) found a direct association between money supply, exchange rates, and dividend payments in kenya. khan et al. (2018) reported that exchange rates positively affected pakistan's dividend policies, but interest and inflation rates had negative effects. tran et al. (2019) similarly showed that money supply positively influenced dividend policies in vietnam. conceptual framework figure 1 shows the impact of macroeconomic factors on a firm's dividend policy. the dependent variable, dividend policy, is influenced by these macroeconomic variables. the study also accounts for various firm-specific factors, including size, age, profitability (measured by roa and roe), retained earnings, and cash reserves, as these elements also play a substantial part in shaping the company's dividend policy. (rinanda 2022; yakubu 2019; marfo-yiadom and agyei 2011; ghafoor et al. 2014; tran et al. 2019) doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 124 source: authors’ compilation figure 1. conceptual framework research methods the study examined a sample of 10 financial and 13 non-financial companies listed in ghana that provided annual statements from 2013 to 2022. a quantitative approach was employed to gather secondary data. data on macroeconomic variables were obtained from the annual reports of the bank of ghana, while information regarding the dividend payout policy was obtained from the statements of the firms in focus. the dependent variable was dividend policy. the independent variable, encompassing macroeconomic variables, was assessed through money supply, inflation, exchange rates, and interest rates. the analysis also controlled for firm-specific variables, including firm size and age, as well as leverage, profitability (measured by roa and roe), retained earnings, and cash holdings. a summary of the variables, their measurements, and empirical justifications is presented in table 1. table 1. measurement of variables variable measurement justification dividend policy dividend payout ratio, calculated as dividends divided by earnings haider et al. (2012), ajide and aderemi (2014), and marfo-yiadom and agyei (2011) money supply the average annual monetary base (m2+) nyamu (2016) interest rate rate of government treasury notes issahaku et al. (2013) inflation rate consumer price index (cpi) baba and nasieku (2016) and issahaku et al. (2013) exchange rate exchange rate of the local currency per united states dollar willy (2012) and issahaku et al. (2013) firm size natural logarithm of a firm’s total assets elamer and benyazid (2018) firm age number of years since the company's founding date nzekwe et al. (2021) return on assets profit before interest and tax over average total assets. zyadat (2016); jan et al. (2019); and buallay (2019) return on equity profit after tax over average shareholders' equity zyadat (2016); jan et al. (2019); and buallay (2019) leverage total liabilities to total assets sumaira and amjad (2013) retained earnings retained earnings to total assets tran et al. (2019) cash holdings cash and cash equivalents to net total assets marfo-yiadom and agyei (2011) and tran et al. (2019) source: authors’ compilation macroeconomic variables money supply interest rate inflation rate exchange rate control variables firm age firm size leverage return on assets return on equity cash holdings retained earnings dividend policy doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 125 the study adopted a panel design because the data structure was of time series (years) and crosssectional (firms). based on this structure, the two-step system gmm by blundell and bond (1998) was used. the model used is as follows: dividend policyit=β0it+b1money supplyit+b2interest rateit+b3exchange rateit+ b4inflation rateit+b5firm ageit+b6firm sizeit+b7return on assetsit+b8return on equity it+ b9leverageit+b10retained earningsit +b11cash holdingsit+ɛit (1) where: β = regression coefficient i= each firm t= time dimension (years) ɛ = error term results and discussion the descriptive analysis of the data gives a general outlook of the major variables of interest (macroeconomic factors, dividend policy and firm-specific factors). table 2. descriptive statistics variable obs. mean std. dev (sd) min max dividend payout ratio 299 0.234 1.455 -20.29 13.166 money supply 299 4.716 0.338 4.136 5.256 interest rate 299 0.191 0.061 0.113 0.361 inflation 299 0.151 0.117 0.079 0.541 exchange rate 299 0.323 0.183 0.117 0.679 firm size 299 5.907 1.092 2.762 8.396 firm age 299 46.565 24.427 6 126 leverage 299 0.747 0.251 0.049 1.947 return on assets 299 0.056 0.115 -0.603 0.635 return on equity 299 1.032 17.317 -14.96 298.516 cash holdings 299 0.116 0.096 0 0.456 retained earnings 299 0.016 0.344 -1.572 0.821 source: authors’ compilation descriptive statistics the average of the dividend payout ratio variable is 0.234, which shows that, on average, firms remit a small proportion of their earnings as cash as dividends. the high standard deviation (sd) of 1.455 indicates a high volatility in the dividend behaviour of firms, with the highest payout being 13.166. the minimum value is negative (-20.29), which indicates that some firms paid dividends even in the years that they realised losses. money supply showed an average of 4.716 with an sd of 0.338, ranging from 4.136 to 5.256. the interest rate averages 19.1% with a standard deviation of 0.061, ranging between 11.3% and 36.1%. the inflation rate has a mean of 15.1%, which indicates a moderately inflationary environment with a standard deviation of 0.117, ranging between 7.9% and 54.1%. the exchange rate variable showed an average of 0.323 and an sd of 0.183, which ranges from 0.117 to 0.679. regarding the analysis of the firm size, the mean value is 5.907 with an sd of 1.092. the mean firm age is 46.565 years, meaning that most of the firms in the sample are established firms and have been in operation for a long time. the sd of 24.427 demonstrates a high variation in the ages of firms, from the youngest being 6 years to the oldest being 126 years. the leverage variable has a mean of 0.747 with an sd of 0.251, implying some variation in the level of debt, although the leverage ratio varies between 0.049 and 1.947. doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 126 the mean for the roa is 5.6% with an sd of 0.115, ranging between -0.603 and 0.635. the roe showed an average of 1.032 and an sd as high as 17.317, ranging between -14.96 and 298.516. cash holdings has a mean of 11.6% of total assets with an sd of 0.096. lastly, retained earnings have a mean of 0.016 and a standard deviation of 0.344, ranging from -1.572 to 0.821. correlation analysis the correlation investigates the strength and direction of relationships between dividend payout ratio and various macroeconomic and firm-specific variables while ensuring there are no multicollinearity issues. the correlation between the dividend payout ratio and money supply is a weak negative at -0.049. the relationship with interest rates is slightly positive at 0.056, while inflation has a modestly stronger positive correlation at 0.087. the exchange rate shows a weak positive correlation of 0.064. for firm-specific variables, firm size shows a negligible correlation with a dividend payout ratio of 0.004 and firm age at 0.021. leverage has a low negative correlation of -0.040, while roa has a weak positive correlation of 0.044. interestingly, roe shows a near-zero negative relationship at -0.007. cash holdings correlate positively with the dividend payout ratio at 0.073, and retained earnings show a low positive correlation of 0.100. among macroeconomic variables, money supply has a strong inverse correlation with the exchange rate at -0.949. the relationship between interest rates and inflation is high at 0.874, indicating that rising inflation tends to lead to higher interest rates, supporting central bank policies. money supply and inflation correlate positively at 0.472. in firm-specific variables, leverage shows a significant negative correlation with roa at -0.521, while retained earnings and leverage have a negative correlation of -0.699. conversely, retained earnings and roa correlate positively at 0.569, implying profitable firms can retain more earnings for growth or dividends. the pairwise correlation matrix reveals that no correlation coefficients among the independent variables exceed 0.90 (except for money supply and exchange rate), demonstrating that multicollinearity is not an issue in this analysis. also, the study separates the macroeconomic variables in different models to help mitigate multicollinearity issues. doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 127 table 3. pairwise correlations variables dividend payout ratio money supply interest rate inflation exchange rate firm size firm age leverage return on assets return on equity cash holdings retained earnings dividend payout ratio 1.000 money supply -0.049 1.000 interest rate 0.056 0.444 1.000 inflation 0.087 0.472 0.874 1.000 exchange rate 0.064 -0.949 -0.451 -0.398 1.000 firm size 0.004 0.245 0.111 0.120 -0.235 1.000 firm age 0.021 0.153 0.064 0.070 -0.143 -0.041 1.000 leverage -0.040 0.147 0.105 0.111 -0.133 0.157 -0.121 1.000 return on assets 0.044 -0.142 -0.065 -0.052 0.162 -0.085 0.174 -0.521 1.000 return on equity -0.007 -0.019 0.024 0.001 -0.011 -0.007 -0.026 0.071 -0.025 1.000 cash holdings 0.073 0.139 0.092 0.083 -0.135 0.284 0.150 -0.039 0.172 -0.051 1.000 retained earnings 0.100 -0.165 -0.094 -0.109 0.152 -0.058 0.265 -0.699 0.569 -0.066 0.277 1.000 source: authors’ compilation doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 128 regression results the gmm analysis covers four different models, and each model includes different macroeconomic variables to explain their impact on dividend payout, controlling for firm characteristics. the following observations can be made. table 4. dynamic panel-data estimation, two-step difference gmm (1) (2) (3) (4) variables dividend payout ratio dividend payout ratio dividend payout ratio dividend payout ratio l.dividend payout ratio -0.420*** -0.508*** -0.557*** -0.421*** (0.0484) (0.0546) (0.0574) (0.0277) money supply 39.84*** (13.33) interest rate 7.612** (3.254) inflation 4.168** (1.911) exchange rate -15.61*** (3.389) control variables firm size 19.08* 32.92*** 29.91*** 10.87** (10.09) (11.25) (9.100) (5.270) firm age -4.805*** -2.261*** -2.030*** -0.997*** (1.547) (0.513) (0.350) (0.363) leverage 17.79 18.75 16.07 36.10*** (13.65) (17.78) (18.84) (11.37) return on assets -22.62*** -36.04*** -37.64*** -9.294* (8.657) (8.650) (7.945) (4.899) return on equity -0.00667 -0.00717 -0.00562 -0.0100** (0.00499) (0.00777) (0.00789) (0.00396) retained earnings 49.48*** 68.67*** 61.57*** 61.56*** (18.22) (20.56) (20.26) (13.39) cash holdings -0.385 -19.56 -26.78* -11.53*** (7.472) (13.88) (15.31) (4.251) diagnostics wald chi2 9043.54 960.96 949.24 2706.04 prob > chi2 0.000 0.000 0.000 0.000 ar(1) z -0.97 -0.84 -0.86 -1.14 ar(1) pr > z 0.331 0.399 0.387 0.254 ar(2) z 1.45 1.58 1.42 1.17 ar(2) pr > z 0.146 0.114 0.156 0.242 sargan chi2 0.88 0.52 0.57 2.24 sargan prob > chi2 0.990 0.998 0.997 0.896 hansen test of overid chi2 7.15 5.24 5.03 6.87 hansen test of overid prob > chi2 0.307 0.514 0.539 0.333 hansen test excluding group chi2 2.05 2.32 2.22 1.76 hansen test excluding group prob > chi2 0.358 0.313 0.329 0.415 instruments 15 15 15 15 observations 253 253 253 253 number of firms 23 23 23 23 standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 source: authors’ compilation in the analysis of the four models, the lagged dividend payout ratio variable (l. dividend payout ratio) shows a significant negative coefficient, ranging from -0.420 to -0.557. this indicates that firms with higher past dividend payout ratios tend to reduce current payouts, confirming at the 1% significance level (p < 0.01) that past behaviour influences current dividend policies. in model 1, the coefficient for money supply is positive (39.84, p < 0.01), suggesting that increased liquidity leads to higher dividends. model 2 shows a doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 129 positive and significant coefficient for interest rates (7.612, p < 0.05), indicating that rising interest rates compel firms to offer higher dividends to attract investors. model 3 reveals a positive and significant coefficient for inflation (4.168, p < 0.05), suggesting that firms may increase dividends to counteract inflation's impact on purchasing power. model 4 displays a negative coefficient for the exchange rate (-15.61, p < 0.01), indicating that currency depreciation leads to a reduced dividend payout ratio. firm size has a consistently positive effect on dividends across all models, with coefficients ranging from 10.87 to 32.92, while younger firms show a negative correlation with dividends. leverage is positively linked to dividend policy but is significant only in model 4 (36.10, p < 0.01). roa inversely affects dividends (coefficients from -9.294 to -37.64), suggesting firms retain profits for reinvestment. roe has a significant negative coefficient in model 4 (-0.0100, p < 0.05), indicating that higher returns lead to profit retention. retained earnings positively impact the dividend payout ratio across all models (49.48 to 68.67), suggesting firms with ample retained earnings can pay dividends. lastly, the relationship between cash holdings and dividends is negative and significant only in model 4 (-11.53, p < 0.01), indicating firms favour retaining cash for operations rather than distributing it. model diagnostics the study results using two-step difference gmm for dynamic panel data are presented, focusing on model diagnostics to assess credibility and soundness. key diagnostics include wald chi-square statistics, autocorrelation tests, and over-identification tests. the wald chi-square statistic indicates a good model fit with p-values (p < 0.001), suggesting that the variables effectively account for variations in the dividend payout ratio. the ar(1) and ar(2) tests reveal no significant autocorrelation, reinforcing the model's validity. moreover, sargan and hansen's p-values greater than 0.05 indicate the instruments used are valid. discussion of results effect of the money supply on dividend policy (model 1) the positive and highly significant association between money supply and dividend payout ratio (coefficient: 39.84, p<0.01) observed in this study aligns with the studies done by tran et al. (2019) and mbaka (2022). a study by tran et al. (2019) on vietnamese firms also confirmed our findings. likewise, mbaka’s (2022) analysis of companies in nairobi established that money supply has a direct and significant impact on the dividend payout ratio (β =0.310, p<0.000). taken together, these papers imply that expansion in money supply results in higher dividend payments, perhaps because of enhanced liquidity in the economy. effect of interest rates on dividend policy (model 2) the positive and significant effect of interest rates on the dividend payout ratio (7.612, p<0.05) is somewhat different from some of the previous studies. khan et al. (2018), in their study on pakistani textile firms, also revealed that interest rates have a negative, insignificant impact. in the same way, romus et al. (2020) also stated that the interest rate had no significant impact, and rinanda (2022) also found the same thing. contrary to these findings, our results indicate that in the ghanaian context, higher interest rates may increase the dividend payout ratio, possibly as a way of attracting investors. this could be due to differences in economic environments, as those previous studies were done in asia. effect of inflation on dividend policy (model 3) the positive and significant relationship between inflation and dividend payout ratio (4.168, p<0.05) observed in this study corresponds to some of the previous studies but not others. in their study of the us firms, basse and reddemann (2011) noted that inflation has a positive impact, which is consistent with this study. however, our findings are different from yakubu (2019), who established that while inflation has a positive impact on the dividend policies of the listed banks in ghana, the impact is insignificant. in the same regard, mbaka (2022) found a positive but insignificant correlation between inflation and dividend payout ratio in firms in nairobi (kenya). it is rather surprising that our results differ from yakubu’s (2019), given that both works examine ghana, indicating that the connection between inflation and dividend policy may be contingent on the sector or period under consideration. our use of gmm estimation instead of yakubu’s pooled ols and fixed/random effects models could also explain the differences in the results. furthermore, yakubu only focused on banks from the year 2006 to 2015. effect of exchange rate on dividend policy (model 4) the negative and highly significant effect of the exchange rate on the dividend payout ratio (-15.61, p<0.01) is in contrast to some of the earlier studies. mbaka (2022) established a positive and significant correlation between exchange rates and dividend payout ratio (β=0.317, p<0.000) for companies in nairobi (kenya). in the same regard, khan et al. (2018) found a significant and positive correlation between exchange rates and the dividend payout ratio in the pakistani textile industry. contrary to these findings, doffour, asamoah, anim, agyenim-boateng / finance, accounting and business analysis, volume 7, issue1, 2025 130 our results indicate that in the context of ghana, currency depreciation results in lower dividend payments. this also differs from the findings of rinanda (2022), whereby currency exchange rates have an insignificant impact on the dividend policies of indonesian manufacturing firms during the global health crisis. conclusions, recommendations, and implications the purpose of this study was to investigate how macroeconomic variables affect the dividend policies of firms in ghana. the findings indicate that these factors significantly influence the dividend payout ratio; specifically, money supply, interest rates, and inflation are positively related to dividend payments, while exchange rates have a negative impact. the positive correlation between money supply and dividends suggests that increased liquidity can enhance dividend distributions, indicating that monetary policy expansions may benefit shareholders. conversely, higher interest rates appear to encourage firms to raise dividends to attract investors, countering the returns on fixed-income assets. additionally, firms may use dividends as a hedge against inflation, thereby maintaining the purchasing power of shareholders to cover the shareholders’ purchasing power erosion to maintain the value of cash dividends. in contrast, currency depreciation reduces profits and limits cash available for dividends, prompting stricter dividend policies. this is particularly relevant for multinational corporations and foreign investors evaluating opportunities in ghana amid exchange rate fluctuations. we recommend that corporate managers consider these macroeconomic factors when devising dividend policies and that investors factor them into their 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economics and finance, 9(1): 55–63. https://doi.org/10.5539/ijef.v9n1p55. https://doi.org/10.38035/dijefa.v2i6.1300 https://doi.org/10.15388/ekon.2019.1.6 https://doi.org/10.1016/0022-0531(76)90046-6 https://doi.org/10.3126/nrber.v26i2.52578 https://doi.org/10.1177/2755031123118731 https://doi.org/10.21315/aamj2019.24.2.5 https://doi.org/10.1111/1467-8268.12167 https://doi.org/10.5539/ijef.v9n1p55 250 finance, accounting and business analysis volume 7 issue 2, 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.10 bitcoin cyclicality and investment strategy alejandro rabinovich* department of finance, universidad del cema, buenos aires, argentina info articles abstract history article: submitted 20 july 2025. revised 20 november 2025 accepted 5 december 2025 purpose: to investigate bitcoin’s cyclic price behavior around scheduled halving events, develop a technical-analysis-based active investment strategy tailored to these cycles, and rigorously assess its performance relative to a passive buy-and-hold benchmark. design/methodology/approach: this research employs historical daily btc /usd price series (june 2012–may 2025), applies a suite of technical indicators to define systematic, halving-anchored entry and exit rules, and then conducts rigorous statistical evaluations to test whether bitcoin’s protocol-driven supply cycles yield reproducible, actionable investment signals. findings: over thirteen overlapping sample windows, the active strategy outperforms passive btc holding in ten, with positive “alpha” coefficients that are statistically significant at the conventional 5% level in each of those windows (and, in most cases, with p-values below 2.5%). it captures outsized gains in post-halving bull runs (e.g. 2013, 2017, 2021) and meaningfully limits drawdowns in bear phases (e.g. 2014, 2018, 2022). equity curve simulations demonstrate compounded account growth that markedly surpasses passive returns. practical implications: crypto asset managers and individual investors can implement the halving-centric strategy using readily available charting tools and api-accessible price feeds to automate buy/sell signals, thereby enhancing return potential and mitigating drawdowns without requiring deep on-chain analytics expertise. this framework also provides a transparent risk-management overlay—leveraging predefined exit rules—that can be calibrated to varying risk tolerances and seamlessly integrated into broader multi-asset portfolios. originality/value: this study is among the first to integrate bitcoin’s protocol-driven halving schedule with a multi-indicator technical framework and to validate its efficacy through extensive statistical tests over four market cycles (including the 2024 halving). it offers practitioners a replicable, data-driven strategy for navigating crypto’s unique cyclical dynamics. paper type: research paper keywords: statistical methods, hypothesis testing, international financial markets, monetary policy jel: c12, g15, e52 address correspondence: av. córdoba 374 e-mail: arabinovi22@ucema.edu.ar http://faba.bg/ https://doi.org/10.37075/faba.2025.2.10 https://orcid.org/0009-0006-8143-3167 alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 251 introduction bitcoin (btc) has become the benchmark asset of the cryptocurrency market and a focal point in discussions about digital money and alternative investments. since its launch in 2009, btc has exhibited pronounced price volatility and large boom–bust cycles, which many observers link to its fixed supply schedule and, in particular, to the protocol-defined “halving” events that reduce the rate of new coin issuance approximately every four years. the first halving occurred in november 2012, followed by july 2016, may 2020, and april 2024, and each has been associated with distinct phases of appreciation and subsequent correction in btc’s price (freeman 2025). a growing academic literature suggests that bitcoin’s return dynamics are not always consistent with weak-form market efficiency. studies document return predictability and momentum effects in cryptocurrency markets, indicating that past price behavior can have explanatory power for future returns (urquhart 2016; grobys and sapkota 2019; jia et al. 2022). event-study and time-series analyses further show that halving events tend to coincide with systematic multi-year accumulation and distribution phases, in which post-halving bull markets and follow-on bear markets display relatively regular timing patterns (fabus et al. 2024). parallel work on technical trading rules finds that moving-averageand breakout-based strategies can generate statistically and economically significant excess returns relative to simple buy-andhold exposure in bitcoin and related crypto-assets (corbet et al. 2019; gerritsen et al. 2020). together, these strands of evidence motivate the idea that btc’s protocol-driven supply cycle and its price dynamics may be amenable to rule-based exploitation. the present study builds on this literature by examining whether a trading strategy explicitly anchored to bitcoin’s halving cycle and implemented through a set of technical indicators can outperform a passive btc benchmark (kibar et al. 2023). the objective is twofold. first, the paper characterizes btc’s historical price behavior around halving events and the associated cycles. second, it proposes and evaluates a transparent, rule-based strategy that combines halving timing with technical signals (such as moving averages and cycle-top indicators) to determine entry and exit points, and then assesses whether this strategy generates positive and statistically significant alpha relative to buy-and-hold. methodologically, the analysis employs daily btc/usd price data over multiple cycles and applies standard financial econometric tools, including regression analysis and hypothesis testing, to quantify performance differentials between the active strategy and the passive benchmark across overlapping sample windows. the study also relates the empirical findings to broader macro-financial considerations—such as monetary conditions, investor risk appetite, and the role of btc as a scarce digital asset—thereby situating the results within both the growing academic literature on cryptocurrency markets and the practical context of portfolio management and investment strategy design (singal 2023). methods this paper employs different theoretical tools widely used in the financial world to support or reject the idea behind the investment strategy. jensen’s alpha jensen’s alpha is based on systematic risk. any given portfolio’s systematic risk can be measured by estimating the market model, which is done by regressing the portfolio’s daily return on the market’s daily return. the coefficient on the market return is an estimate of the beta risk of the portfolio. to calculate the risk-adjusted return of the portfolio, it is necessary to use the beta of the portfolio and the capm. the difference between the actual portfolio return and the calculated risk-adjusted return is a measure of the portfolio’s performance relative to the market portfolio and is called jensen’s alpha. by definition, α of the market is zero. jensen’s alpha is also the vertical distance from the security market line (sml) measuring the excess return for the same risk as that of the market and is given by: 𝛼𝑝 = 𝑅𝑝 − {𝑅𝑓 + 𝛽𝑝[𝐸(𝑅𝑚) − 𝑅𝑓]} (1) where: 𝑅𝑝 − realized return of the investment 𝑅𝑓 − risk-free rate of return for the time period 𝑅𝑚 − realized return of the market index 𝛽𝑝 − beta of the portfolio of investment with respect to the chosen market index alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 252 if the period is long, it may contain different risk-free rates, in which case 𝑅𝑓 represents the average risk-free rate. furthermore, the returns in the equation are all realized, actual returns. the sign of 𝛼𝑝 indicates whether the portfolio has outperformed the market. if 𝛼𝑝 is positive, then the portfolio has outperformed the market; if 𝛼𝑝 is negative, the portfolio has underperformed the market. jensen’s alpha is commonly used for evaluating most institutional managers, pension funds, and mutual funds. values of alpha can be used to rank different managers and the performance of their portfolios, as well as the magnitude of underperformance or overperformance. in this work jensen’s alpha is used slightly differently, given that the data analyzed is from the crypto market where a rf doesn’t exist. the alpha coefficient then becomes a sort of “raw alpha”, indicating whether the strategy outperformed the market, or not. regression analysis regression analysis, both the simple and multiple forms, are used by financial analysts and portfolio managers to examine whether a variable is useful for explaining another variable. it also allows for the use of hypotheses testing to examine the strength of the relationship between the variables. the variable whose variation is being explained is referred to as the dependent variable or explained variable, typically denoted by y. whereas, the variable used to explain the variation of the dependent variable is known as the independent variable, denoted by x (drake 2023b). in the current paper the dependent variable y is the investment strategy, and the independent variable x is the benchmark, btc. given that there is only one independent variable, the regression analysis used is a simple linear regression (slr) and it takes the following form: 𝑌 = 𝛼 + 𝛽0𝑋 + 𝜀 (2) where: 𝑌 − dependent variable 𝑋 − independent variable 𝛼 − intercept 𝛽0 − slope coefficient 𝜀 − residual error in the context of slr, there are some concepts that play an important role in understanding and interpreting the relationship between the independent and dependent variables. these concepts are the mean, variance and standard deviation. the mean is used to calculate the average return of a financial asset or investment over a specific period. it provides a measure of the central tendency of the data. investors and analysts use the mean return to assess the historical performance of an investment or portfolio. it helps in understanding the average gain or loss over a given time frame. in slr, the mean is often used to calculate the average values of the variables involved. for instance, the mean of the independent variable x and the mean of the dependent variable y are crucial in determining the coefficients of the regression equation. 𝑀𝑒𝑎𝑛(�̅�) = ∑ 𝑥𝑛 𝑖=1 𝑛 (3) where: 𝑋 − variable value 𝑛 − number of periods variance measures the dispersion or spread of a set of financial returns around the mean. in finance, variance is used to assess the volatility or risk associated with an investment. a higher variance indicates greater price volatility, which is often associated with riskier investments. investors and portfolio managers use variance to understand the potential fluctuations in the value of an asset. in slr, it helps assess how much individual data points deviate from the mean of the dependent variable. 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒(𝑋) = ∑ (𝑋𝑖 − �̅�)𝑛 𝑖=1 𝑛 − 1 (4) alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 253 where: �̅� − variable mean 𝑋𝑖 − variable value 𝑛 − number of periods standard deviation is closely related to variance and is another measure of the risk or volatility of a financial asset. it is often preferred over variance because it is expressed in the same units as the original data. investors and analysts use standard deviation to quantify the degree of uncertainty or risk associated with an investment. a higher standard deviation implies higher risk. 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 (𝑋) = √𝑉𝑎𝑟(𝑋) (5) where: 𝑉𝑎𝑟(𝑋) − variance hypothesis testing in regression analysis, statistical hypothesis testing is often used to assess the significance of the regression coefficients, including the intercept 𝛼and the slope 𝛽0. the significance of these coefficients is tested using the t-statistic and the associated p-value. the null hypothesis 𝐻0 typically states that the coefficient is equal to zero, implying no effect, while the alternative hypothesis 𝐻𝑎 suggests that the coefficient is different from zero. the procedure for hypothesis testing is as follows. the first step is defining the hypotheses. the null hypothesis is the value assumed to be true and tested for validity. in this case, the assumption is that the strategy returns are similar to the benchmark, 𝐻0: 𝛼 = 0. the alternative hypothesis is everything that is not the null; here, that the strategy returns are different from the benchmark’s, 𝐻𝑎: 𝛼 ≠ 0. the second step is calculating the statistics for the test and the corresponding p-value. a generic test of whether a sample mean differs from a hypothesized population mean can be written as: 𝑍 = �̅� − 𝜇 𝜎 √𝑛⁄ (6) where: �̅� − sample mean 𝜇 − population mean 𝜎 − standard deviation 𝑛 − number of samples the p-value associated with the t-statistic (or z-statistic in large samples) is then used to assess the statistical significance of the coefficient. a low p-value, below the chosen significance level, indicates that the coefficient is statistically significant. in this study, we adopt the conventional 5% significance level (𝛼 = 0.05) for two-sided tests. coefficients with p-values below 5% are therefore regarded as statistically significant. the 2.5% figure referred to in the analysis corresponds to the per-tail critical region (𝛼/2) of a two-tailed test at the 5% level, and reflects the fact that many of the estimated p-values are substantially smaller than 5%, indicating particularly strong evidence against the null hypothesis. a similar logic applies when working with proportions, where a generic z-test can be written as: 𝑍 = �̂� − 𝑝0 √𝑝0(1 − 𝑝0) 𝑛 (7) where: �̂� − sample proportion 𝑝0 − assumed population proportion in the null hypothesis the third step is establishing the critical values and rejection zones of 𝐻0, taking into consideration type i and type ii errors. type i error is the incorrect rejection of a true 𝐻0(false positive), and type ii error is the probability of incorrectly retaining 𝐻0when it does not hold for the population (false negative). in the current case, the significance level 𝛼 has been set at 5%, and since it is a two-tailed test, the critical region in alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 254 each tail is 𝛼/2 = 2.5%. source: cfa 2023, level 1, volume 1 quantitative methods figure 1. null hypothesis rejection the fourth and final step is taking a decision based on the results. the critical value for rejecting 𝐻0 will be all those observations of the intercept that are in excess of approximately two standard deviations from zero (i.e. ∣ 𝑡 ∣> 1.96 for large samples) (drake 2023a). the pvalue is used as an additional means of confirmation of this decision, but not as the sole criterion for the rejection of 𝐻0. investment strategy active vs passive approach there are basically two ways of approaching investments in risky assets, an active pursuit in which the investor seeks to be compensated by his exposure to risk by maximizing his return, called alpha. under this strategy the investor will have an active role in choosing the entry and exit points of his investment, believing it is possible to outperform the benchmark. and there is a passive strategy in which the investor believes that the performance of the benchmark cannot be beaten and therefore the strategy is simple. invest in the benchmark and do not try to generate an excess return by taking opportunities during the market cycle. the strategy outlined hereafter seeks to take advantage of the key events that characterize the btc market cycle and outperform the returns of a passive investment strategy. the asset and platform the chosen asset for this strategy is btc paired against the us dollar (btc/usd). btc is a decentralized digital currency and a pioneer in the world of cryptocurrencies. it was created in 2009 by an anonymous individual or group of individuals using the pseudonym satoshi nakamoto. btc operates on a technology called blockchain, which is a distributed ledger that records all transactions across a network of computers. btc was created to address various shortcomings in traditional financial systems, including centralization, lack of transparency, and issues related to trust and security. it aimed to provide an open, decentralized, and secure means of transferring value and conducting transactions in a digital world. its impact has extended beyond its initial goals, influencing not only the broader cryptocurrency and blockchain ecosystem but also financial institutions. currently there are 25 btc spot etfs worldwide, with 11 being in the us (shen 2023). the chosen platform was bitstamp, for being one of the earliest and most well-established cryptocurrency exchanges in the world. but also, for having one of the most complete data sets for the btc pair. founded in 2011, bitstamp has earned a reputation for reliability and security in the cryptocurrency industry. overall, the platform has played a pivotal role in the development and maturation of the cryptocurrency market. its commitment to security, compliance, and user experience has made it a trusted platform for buying, selling, and trading cryptocurrencies for both individual and institutional investors. alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 255 indicators and concepts simple moving average (sma) is a commonly used technical indicator in financial analysis that smooth price data over specific periods to identify trends. its calculation is quite straight forward and can be calculated over different time frames. the formula is as follows: 𝑆𝑀𝐴 = ∑ 𝑃𝑛 𝑖=1 𝑛 (8) where: p − price value. n − number of periods. exponential moving average (ema) is another commonly used technical indicators in financial analysis, similar to the sma. however, the key difference with the ema, is that it gives more weight to recent price data, making it more responsive to recent price changes. the formula is as follows: 𝐸𝑀𝐴 = (𝑃 ∗ 𝛼) + (𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝐸𝑀𝐴 ∗ (1 − 𝛼)) (9) where: p − current price 𝛼 − smoothing factor = 2 1+𝑛 n − number of periods bull market support band (bmsb) the bull market support band is an indicator that combines a 20 week sma and a 21 week ema. these two together create a band that has historically acted as support for the price during bull markets and as resistance during bear market (senado 2023). source: authors’ data (https://www.tradingview.com/ platform) figure 2. bmsb pi cycle top indicator this indicator has gained notoriety for indicating with days difference the highs of previous market cycles. it combines both a daily 111 sma and a 350 sma x2. when the 111 sma approaches the 350 smax2 from below and crosses over, this signal indicates a market top (swift 2019). https://www.tradingview.com/ alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 256 source: authors’ data (https://www.tradingview.com/ platform) figure 3. pi cycle indicator rsi the relative strength index (rsi) is a popular technical indicator used alike in traditional assets and in cryptocurrencies. it is a momentum oscillator that measures the speed and change of price movements. the main feature of the rsi is that it can help investors identify overbought and oversold conditions in an asset, together with potential trend reversals. the formula is as follows: 𝑅𝑆𝐼 = 100 − 100 1 + 𝑅𝑆 (10) where: rs relative strength = avg gain avg loss both average gain and loss are calculated over a period of 14 consecutive days. positive and negative results are summed separately and divided by 14 to obtain the rs. the results are going to range between 0 and 100 and the way to interpret them is the following:  overbought: if the rsi is above 70 it is in the overbought region. this suggests that the asset might be overvalued and that a correction or reversal might be close.  oversold: if the rsi is below 30, it is in the oversold region. it suggests that the asset might be oversold and a reversal might be possible.  trend reversal: besides the oversold or overbought regions, rsi can be used in conjunction with price. if divergences are forming between the price and the indicator, this might signal a bullish or bearish reversal. https://www.tradingview.com/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 257 source: authors’ data (https://www.tradingview.com/ platform) figure 4. rsi indicator macd the moving average convergence divergence (macd) is used in financial analysis, including stock, cryptocurrency, and other asset trading. the macd is used to analyze the strength and direction of a price trend and to identify potential trend reversals. it consists of three main components:  macd line (blue line): the macd line is calculated by subtracting the 26-period ema from the 12-period ema. the result is plotted as a continuous line on a chart.  signal line (orange line): the signal line, also known as the 9-period ema of the macd line, is plotted on the same chart. it helps smooth out the macd line and provides signals for potential buy or sell opportunities.  histogram (bar graph): the histogram is the visual representation of the difference between the macd line and the signal line. it is plotted as vertical bars on a chart. the height of each bar represents the divergence between the two lines. source: authors’ data (https://www.tradingview.com/ platform) figure 5. macd indicator the common ways to interpret the macd are the following:  crossovers: when the macd line crosses above the signal line, it generates a bullish signal, suggesting it may be a good time to buy. conversely, when the macd line crosses below the signal line, it generates a bearish signal, suggesting it may be a good time to sell. https://www.tradingview.com/?utm_source=chatgpt.com https://www.tradingview.com/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 258  histogram: the histogram is used to visualize the momentum of a trend. when it moves above the zero line, it indicates increasing bullish momentum. when it moves below the zero line, it indicates increasing bearish momentum.  divergence: traders also look for divergences between the macd and the price. for example, if the price is making lower lows while the macd is making higher lows, it may signal a potential bullish reversal, and vice versa. divergences divergences in the context of cryptocurrency trading refer to a situation where the price of a cryptocurrency and a technical indicator (rsi, macd or other oscillators) move in opposite directions or show a disparity. these divergences can provide traders with important signals about potential trend reversals or shifts in market sentiment (cryptojellenl 2022). there are two main types of divergences in cryptocurrency trading: bullish and bearish divergences.  bullish divergence: occurs when the price of an asset is making lower lows, but the technical indicator is making higher lows. this can be an early indication of a potential upward price reversal. it suggests that while the price is still in a downtrend, the momentum or strength of the downtrend is weakening, and a bullish reversal may be imminent. bullish divergences are often seen as a buying signal.  bearish divergence: occurs when the price of a cryptocurrency is making higher highs, but the technical indicator is making lower highs. this can be a warning sign of a potential downward price reversal. it suggests that although the price is still in an uptrend, the momentum or strength of the uptrend is waning, and a bearish reversal may be approaching. bearish divergences are often seen as a selling signal. btc halving event this is not an indicator, as the previously described, but rather an event that is programmed into the btc protocol and occurs approximately every 4 years. every 210,000 blocks mined, the reward that miners receive is halved, making the asset scarcer. the first halving occurred in 2012 when the reward went from 50 to 25 btcs per block. the second halving occurred in 2016, reducing the reward to 12.5 btcs. the third halving occurred in 2020, bringing the reward down to 6.25 btcs. the last btc halving is due to occur around the year 2140. this event is of importance because it is designed to mimic the scarcity of precious metals like gold. by reducing the rate at which new btcs are created, the total supply is capped at 21 million, creating a deflationary model. source: authors’ data (https://www.tradingview.com/ platform) figure 6. halvings strategy and objectives the aim of the strategy outline here is to outperform the benchmark in the long term by utilizing a mix of signals from the indicators and concepts mentioned previously; and avoid the periods of drawdown https://www.tradingview.com/ alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 259 that btc has become famous for. this strategy enters a long position – non-leveragedand exits into cash according to the signals given by the indicators mentioned previously. the pi cycle top indicator, on a daily frequency, identifies with great accuracy the current market cycle top price, thus acting as a sell signal. the bmsb, on a weekly frequency, acts as the trigger for entering or exiting a long position. the market cycle bottom range is identified by a combination of signals from different indicators, that as a standalone, don’t tell much. but used together give a strong signal, this is known as a confluence. long buy criteria  enter long position when price opens for two consecutive weekly candles on top of bull market support band.  exception to rule, open long position close to market cycle bottom given by the confluence of the following indicators: o halving event must have occurred (1 every 4 years). o post halving, price has closed below the bmsb (with a 2 weekly frequency) o price must be below bmsb (weekly frequency) o there must be over 105 weekly candles since the latest halving. o divergence in macd histogram and btc price (weekly frequency) o weekly rsi must have bottomed out in the oversold region of 30 and higher low structure confirmed on rsi. when all previous signals are confirmed, higher low rsi executes long buy. sell criteria  when weekly candle price opens below bmsb.  pi cycle top signal has been confirmed after daily candle close.  back-up signal. in case the pi cycle top signal is not triggered, the combination of the following indicators executes a sell order close to market cycle top. for this, the weekly 60 sma and 90 ema are used in combination with the macd. once the halving has occurred, the cross over of the 90 ema on top of the 60 sma, triggers a sell order when the macd histogram has confirmed and closed red (or the blue line crossed beneath the orange). but this signal is only valid once per cycle. if the pi cycle top indicator is activated, the sell order of the back-up signal is cancelled. and in case the back-up signal sell order is executed, it is retired for the remainder of the current cycle. it will only become active again after the next halving—and only if, following that halving, the 90 ema crosses back above the 60 sma.  exception to rule: o long position has been opened closed to mkt cycle bottom, do not sell till pi cycle top signal or the back-up signal. result and discussion from scratch to results although several platforms provide btc/usd price histories, not all offer sufficiently long samples and there are discrepancies across exchanges. the first step was therefore to identify an exchange with a reliable and lengthy dataset—bitstamp—and to write a python script to fetch the btc/usd ohlcv (open, high, low, close, volume) data. days with missing ohlcv values or zero trading volume were dropped. no additional manual outlier filtering was applied: extreme returns were retained as part of the realized price history (see annex, figure 10, for the data-extraction script). once obtained the daily ohlcv for btc data set in a .csv file, this was imported and formatted in an excel file. within this excel file, in a new separate sheet were consolidated the date range, close and open prices, all related to the benchmark, btc. an additional column was added to calculate the percentual gain or loss compared to the same day opening price. immediately, next to these, three columns were added and are related to the strategy per se. the first column defines the condition “long” vs “sold”. where value 1 represents taking a long position in the asset and 0 represents selling into cash. the second column is the result of multiplying the daily returns by either the long or sold condition; returning the exact same daily return percent as the benchmark, in the case of “long” condition and 0 for “sold”. the last column provides the name of the key event triggering the long or sold. in brief, the two most important columns of this table are: the benchmark’s daily returns and the strategy returns. the starting point in time for both the passive and active strategies is the 11th of june 2012 when the long signal is confirmed, and the last day of the dataset is 10th of may 2025. alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 260 having obtained the returns for the benchmark and the strategy, the next step was performing the linear regression using the strategy daily returns as the dependent variable y and the benchmark daily returns as the independent variable x. for this, in a separate excel sheet were added the results of the regression analysis. the first period examined was from 11th june 2012 up till 10th may 2025. after these results, subsequent regression results were added to the same excel sheet but moving the entry point to approximately 1 year after, taking the starting point as 1st of june. the second regressed period was 1st june 2013 up till dataset end. next period was 1st june 2014 and repeating this process up till the last examined period of 1st june 2023 till 10th may 2025. the idea behind performing several regression analyses with different entry points in time, was to have an additional valuation measure as to if the results are statistical significant or not. to obtain the accumulated results of the strategy in time and to keep things structured an additional sheet containing the same data as the second sheet, was created. in this sheet, the cumulative returns were calculated for both the passive approach and the active strategy. to obtain a better means of comparison the returns were calculated on a yearly basis. lastly, on a separate excel sheet, utilizing the open & close prices in conjunction with the key events triggering the long or sell signals, equity curves were created for the different long/sell signals. the equity curves simulate the growth of the trading account, assuming 1000 us$ were invested in each the passive and active strategy, with no other additional injection of capital. thus, the passive strategy remains with a constant amount of btc, determined at the moment the long is triggered; whereas the active strategy experiences a compounding effect with the different long and sell signals. in order to have a point of comparison with the active strategy, in terms of account value expressed in us$, the value of the passive account was also calculated at the date of long and sell signals. strategy conclusions the aim of this work was to explore and analyze with statistical tools if the proposed active strategy could beat the performance of the benchmark, btc. the short answer is that the strategy is successful. furthermore, these results align with empirical findings that bitcoin exhibited periods of weak‑form inefficiency in its earlier years, providing conditions under which rule‑based active strategies can generate statistically significant excess returns (urquhart 2016). regression analysis results based on the regression results, the null hypothesis stating that the average daily returns of the strategy are no different from the benchmark’s is rejected in favor of the alternative hypothesis in most of the examined sample windows. for the full 6/2012–5/2025 sample, the regression explains about 57% of the variation in daily returns (adjusted r² ≈ 0.57; f-statistic ≈ 6,188, p < 0.001), and the estimated intercept α is economically and statistically significant at roughly 0.17% per day, with a 95% confidence interval of about 0.12%–0.23% (annex table 8). table 1 reports 13 overlapping regressions, with start dates from june 2012 through june 2024 and a common end date in may 2025. under conventional ols inference, the estimated intercept α is positive and statistically significant at the 5% level in 10 of the first 11 windows (6/2012–5/2025 through 6/2022–5/2025), with t-statistics comfortably above the 1.96 threshold and very small p-values (typically below 1%). in the short 6/2021–5/2025 window α remains positive but is not significant at conventional levels, reflecting the reduced number of observations in this subsample. the final two windows (6/2023–5/2025 and 6/2024–5/2025) are also included in table 1 for transparency. in these most recent periods the strategy and benchmark returns are almost perfectly collinear, so the regression is numerically ill-conditioned: the estimated α is extremely close to zero and the resulting test statistics are not economically meaningful. rather than omitting these subsamples, they are reported explicitly in table 1 and annex tables 19–20, with standard errors and confidence intervals suppressed and interpreted with caution. because the regression windows are overlapping, the estimated α coefficients across the 13 subsamples are not statistically independent. sequential windows share a large proportion of observations, which induces dependence among their test statistics. for this reason, the overlapping ols results in table 1 should be interpreted as descriptive evidence of persistence rather than as a series of independent hypothesis tests. to complement these overlapping regressions with a non-overlapping robustness check, a walk-forward out-of-sample validation is also performed, where each test window uses only data not included in the corresponding training window. table 1. regression results alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 261 period coefficient α standard error t stat >2 p-value < 2.5% 6/2012 5/2025 0.00175 0.000299 5.85111 0.00000001 6/2013 5/2025 0.00149 0.000288 5.15492 0.00000026 6/2014 5/2025 0.00128 0.000269 4.74974 0.00000211 6/2015 5/2025 0.00122 0.000271 4.49184 0.00000728 6/2016 5/2025 0.00131 0.000298 4.40390 0.00001097 6/2017 5/2025 0.00135 0.000329 4.11187 0.00004034 6/2018 5/2025 0.00097 0.000309 3.14394 0.00168621 6/2019 5/2025 0.00075 0.000311 2.42628 0.01533538 6/2020 5/2025 0.00102 0.000350 2.92183 0.00352306 6/2021 5/2025 0.00067 0.000376 1.77202 0.07660227 6/2022 5/2025 0.00062 0.000298 2.06180 0.03946733 6/2023 5/2025 0.00000 6/2024 5/2025 0.00000 source: authors’ data note: during 6/2023–5/2025 and 6/2024–5/2025 the strategy’s daily returns are almost perfectly collinear to the benchmark by construction, so the regression is numerically degenerate. in these windows α is mechanically zero and conventional standard errors, t-statistics, p-values and confidence intervals are not reported. residual diagnostics and robust inference to assess whether the ols assumptions underlying table 1 are appropriate, residual diagnostics were conducted on the full 6/2012–5/2025 sample. the durbin–watson statistic for the regression residuals is 2.10, which is close to the theoretical value of 2 under no first-order autocorrelation. however, a ljung– box-type q-statistic at lag 20 of 50.95 (p ≈ 2.3×10⁻¹⁰) indicates that, taken jointly, the residuals exhibit statistically significant autocorrelation at higher lags. this suggests that, while there is no strong single lag1 effect, serial dependence is present in the error structure. heteroskedasticity was examined using both the breusch–pagan and white tests. the breusch– pagan auxiliary regression of squared residuals on the benchmark return produces r² = 0.000075, an lm statistic of 0.35 and p = 0.55, so a simple linear relationship between the conditional variance and bm% is not supported. in contrast, the white test yields r² = 0.938, lm = 4424.91 with 2 degrees of freedom and p < 0.0001, strongly rejecting homoskedasticity in favor of a more general form of heteroskedasticity. this outcome is consistent with the well-known volatility clustering observed in bitcoin returns and suggests that ols standard errors are likely to be understated. to obtain more reliable inference in the presence of both autocorrelation and heteroskedasticity, newey–west heteroskedasticityand autocorrelation-consistent (hac) standard errors were computed for the intercept α in each regression window (annex table 5). for the full sample (6/2012–5/2025), the ols estimate of α is 0.00175 with a t-statistic of 5.85 (p ≈ 1×10⁻⁸). when newey–west hac standard errors are used, the standard error of α increases from 0.000299 to 0.000410 and the t-statistic decreases to 4.27 (p ≈ 2×10⁻⁵), which still represents strong statistical evidence of a positive intercept. across the pre-2023 windows (6/2012–5/2025 through 6/2022–5/2025), α remains positive in all cases and statistically significant at the 5% level in 9 out of 11 regressions under hac inference. the two exceptions are the very short 6/2021–5/2025 and 6/2022–5/2025 samples, where the reduced number of observations and elevated volatility make it more difficult to distinguish α from zero once serial dependence and heteroskedasticity are accounted for. overall, the hac results confirm that the main conclusion—a positive and economically meaningful α over the full sample and most subperiods—is robust to more stringent statistical assumptions. viewed together, the residual diagnostics, hac-based inference and walk-forward validation indicate that the strategy’s excess returns are statistically robust in most of the examined periods, while also making clear that the evidence is sample-specific and that performance varies across market regimes. overall, these diagnostics, combined with the well-known volatility clustering in bitcoin returns, are consistent with the view that cryptocurrency markets are non-stationary and subject to frequent external shocks (e.g. regulatory announcements, exchange-specific incidents, and macroeconomic policy shifts), which limits the predictive stability of any single rule-based strategy. this motivates a cautious interpretation: the results provide strong historical evidence consistent with a positive α for this halving-centric strategy, rather than a guarantee of persistent arbitrage or a recommendation of the strategy as investment advice. out-of-sample walk-forward validation alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 262 in addition to the in-sample regressions, a simple walk-forward analysis was implemented to evaluate the strategy’s performance in a genuinely out-of-sample setting. using the june–may convention for “years”, rolling 3-year windows were treated as training periods and the following june–may year as a test period. this procedure yields ten non-overlapping test windows from 2014–2015 up to 2023–2024 (see annex table 6). the trading rules themselves are fixed ex ante; the walk-forward split is simply a way of asking how the strategy would have performed if each test year had not been used in calibrating the model. across these ten out-of-sample test years, the strategy delivers a positive annualized test return in nine out of ten cases. the average annualized out-of-sample return of the strategy is approximately 108.9% per year, compared with about 67.3% for the buy-and-hold benchmark over the same test windows. the largest relative gains occur in the 2017, 2018, 2020 and 2022 test years, where the strategy both amplifies major bull markets and either cushions or reverses benchmark losses. in other years, such as 2015, 2016, 2019, 2023 and 2024, the strategy closely tracks the benchmark, so it does not introduce significant negative drag when its signals are less distinctive. these walk-forward results therefore support the view that the observed outperformance is not solely an artefact of in-sample fitting to a single long window, but persists—albeit with variability—across a sequence of genuinely out-of-sample periods. cumulative return comparison when examining the yearly cumulative returns of benchmark versus the strategy several things can be noticed. the first one, that when btc rallies, the strategy outperforms the returns of a passive approach, as seen from years 2013, 2017 and 2021. the second notorious is that the strategy is also effective in limiting the negative results, as observed from the results for years 2014, 2018 and 2022. the third thing that can be appreciated from the returns of the benchmark, is a cyclical pattern recurring every four years. this pattern begins with the halving event (years 2012, 2016 and 2020), continues with a bull market phase (years 2013, 2017 and 2021) and ensues with a bear market period (years 2014, 2018 and 2022). this return behavior is consistent with evidence that momentum factors are strong and persistent drivers of cryptocurrency performance, explaining significant portions of return variation beyond market movements alone (jia et al. 2022). table 2. cumulative returns year comp. ret bm comp. ret stg 2012 142.86% 142.86% 2013 5753.34% 8767.95% 2014 -61.37% -30.23% 2015 34.39% 89.95% 2016 130.66% 130.66% 2017 1435.09% 2012.52% 2018 -72.84% -3.60% 2019 88.80% 88.80% 2020 289.55% 289.55% 2021 59.90% 117.66% 2022 -63.88% -23.33% 2023 154.52% 154.52% 2024 122.71% 122.71% 2025 11.93% 11.93% source: authors’ data equity curve analysis the equity-curve analysis evaluates how a hypothetical trading account would have evolved under the active strategy compared with a passive btc benchmark. table 3 reports the end-of-period value of a usd 1,000 account invested in btc at the start of each sample window (triggered by a “buy” signal), the corresponding benchmark end capital (“bm end capital”), the benchmark return (“bm roi”), and the excess return generated by the strategy over the benchmark. across all selected periods, the strategy delivers a higher terminal account value than passive holding. these findings are consistent with prior evidence that technical, trend-following rules can be profitable in cryptocurrency markets. empirical studies show that moving-average-based and breakout-style trading systems can generate economically meaningful abnormal returns in bitcoin, even after accounting for transaction costs and employing robust statistical procedures such as bootstrap inference (corbet et al. 2019; gerritsen et al. 2020). the equity-curve results reported here align with this literature by illustrating that a halving-anchored, indicator-driven strategy can systematically outperform a simple buy-and-hold alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 263 benchmark over multiple overlapping windows. table 3. equity curve comparison period bm end capital (in usd) bm roi strategy excess return on bm 11/6/2012 10/5/2025 19,125,730 1912473% 5379% 2/9/2013 10/5/2025 802,212 80121% 4948% 6/6/2014 10/5/2025 159,284 15828% 3144% 9/2/2015 10/5/2025 468,064 46706% 1362% 31/12/2018 10/5/2025 27,358 2636% 192% 16/8/2021 10/5/2025 2,229 123% 129% 4/4/2022 10/5/2025 2,258 126% 115% source: authors’ data viewed together with the regression analysis, the equity-curve evidence indicates that the strategy’s returns differ from the benchmark in a statistically and economically significant way over most of the examined periods. the estimated intercepts (alphas) are generally positive and significant at conventional levels, while the equity curves show that the active strategy compounds capital more effectively than the passive benchmark. a complementary examination of yearly cumulative returns further suggests that the strategy tends to participate strongly in major btc bull runs and to limit losses during bear phases, in line with the documented cyclical behavior of cryptocurrency markets. at the same time, it is important to adopt a cautious interpretation of these results. the documented outperformance is conditional on the specific sample period, the chosen data source, and the particular set of modelling choices and trading rules implemented in this study. future market regimes—characterized by different volatility, liquidity, regulatory environments, or macroeconomic conditions—may not replicate the historical patterns observed here, and strategy performance could deteriorate accordingly. consequently, the findings are best viewed as an empirical case study of one halving-centric implementation within the broader family of technical trading strategies, rather than as evidence of persistent arbitrage opportunities or as direct investment advice. macroeconomic correlations as demonstrated by the statistical analysis, applying the active strategy during the selected period would have outperformed btc with statistical significance. although not related to the strategy, there is one question that deserves some consideration. why has btc experienced such incredible returns? while not exclusive, some of the arguments as to why btc could have experienced such phenomenal periods of growth, are the following ones. market capitalization (mkt cap) in july 2010 btc had a mkt cap of slightly under 250,000 usd, by july 2013 it grew to 1.5 b and by the time of its first massive bull run mkt cap ascend to 13.6 b. four years later, by the time of the second massive bull run on dec 2017 mkt cap ascended to 320 b, only to drop to 56.4 b one year later during the bear mkt cycle. at the height of its latest bull run on nov 2021, mkt cap reached 1.3 t usd for btc, whereas for the remaining crypto space it amounted to 1.7 t. current btc mkt cap, as per the time of writing, is around 2.08 t and remaining crypto assets mkt cap amounts to 1.15 t, 3.24t combined. whereas just to give a means of comparison, the mkt cap of microsoft, currently the highest company by mkt cap, is of 3.42 t. silver stands at 1.86t and gold at 22.24 t (companiesmarketcap n.d.). table 4. market capitalization by market markets by mkt cap (in trillion usd) as of may 2025 global bond (as of 2023 eoy) 140 global equity (as of 2023 eoy) 115 s&p 500 (as of may 2025) 49.8 gold 22.24 microsoft 3.43 global crypto 3.23 silver 1.86 btc 2.08 source: authors’ data the market cap of the s&p 500 currently stands at about 49.8 t, the global equity market is roughly alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 264 115 t (kolchin et al. 2024) and global bond markets, as of 2023, was 140 t (neufeld 2023). it is important to remember that btc is, after all, a new asset that has been in existence for only 16 years, compared to more mature markets mentioned previously. given that btc is an asset that is traded 24/7 and with global exposure it is essential to try to understand how global liquidity could affect the btc price dynamics. particularly during earlier phases when mkt cap was relatively small, and could be easily pumped by the inflow of institutional investors or private companies that decided to buy and hold btc as part of the assets within their balance sheet (benzinga 2023). this scenario occurred during the last cycle that saw btc price propelled to 67,000 usd per btc. microstrategy (mstr) is the top reference, currently holding over 580,250 btc. also equally important, is the fact that some governments hold btc in their balance sheet and some countries, such as el salvador and central african republic, have adopted btc as legal tender currency. recently the us established a strategic reserve of crypto assets, becoming the government with the largest quantity of btc holdings (207,189), china follows suit with approximate holdings of 194,000 btc and other governments are showing interest in doing the same. all of the aforementioned have a direct impact in the demand for btc and thus have an impact in the price dynamics (del castillo 2023). inflation and interest rates btc is a consequence of the financial crisis of 2008, one of its purposes is to be a store of value and a hedge against inflation. maybe it is a mere coincidence, but it is interesting to observe that the three bull rallies occur while inflation numbers (in the us) were on the rise and that the respective bear cycles take place while inflation numbers decrease. another possible factor that could have contributed to btc’s growth and the bull periods, are the us fed’s interest rates and its economic impact during these periods. the growth cycles occur while interest rates are at their lowest value in decades, sub 0.5 points. rates started going up since nov 2016 till they plateaued at 2.5 on dec 2018, also marking the bottom for the 2018 bear cycle. then on feb 2020, the covid-19 black swan event triggered the return of low interest rates of 0.25 points. which could have benefited institutional investors by having access to cheap money for investment purposes. expanding on the aforementioned, empirical studies have shown that bitcoin exhibits time‑varying inflation‑hedging properties, acting as a partial hedge during periods of monetary expansion and elevated inflation uncertainty (bouri et al. 2017). as of time of writing, may 2025, the fed is still applying quantitative tightening but there is increasing pressure to switch towards quantitative easing. when this happens, the crypto markets might benefit from the tail wind and this might translate into appreciation of price (trading economics n.d.). the figure below illustrates in a graphical sense what was happening and when. yellow indicates the halving event, green the top of cycle and red, the bottom of it. source: authors’ data (https://www.tradingview.com/ platform) figure 7. btc’s timeline along fed’s interest rate & us inflation rate inverse relation with the dxy u.s. dollar index (usdx) https://www.tradingview.com/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 265 curiously enough, throughout btc’s history there has been an inverse relationship with the dxy. whilst also occurring in other periods, this inverse relationship is not as significant as in the months following the halving event. this could well be a mere coincidence, or it could be an indicative of global economic factors. under this premise, it is of interest studying the relationship between btc and the dxy, given that the later factors in 7 major currencies: the us dollar, euro, japanese yen, british pound sterling, canadian dollar, swedish krona and swiss franc. at its core the index reflects the appreciation or depreciation of the us dollar versus the other major currencies in the basket, therefore its use as an economic indicator. under this light, an inverse relation between btc and the dxy could be explained by some of the objectives of btc:  acting as a safe haven: btc was conceived as a store of value and a form of digital gold. inspired by the 2008 financial crisis, it was designed to act as a safe heaven during times of uncertainty when there is a lack of confidence in traditional financial markets.  inflation hedge: under an inflationary context, when there are doubts about currency devaluation and rising inflation, investors might take shelter in an asset like btc, that has a capped supply and is not subject to central bank policies. in line with the discussed, previous research also documents that bitcoin tends to display a negative correlation with the u.s. dollar index, especially in risk‑on environments, reinforcing the relevance of dollar‑driven macro cycles for btc valuation (dyhrberg 2016). source: authors’ data (https://www.tradingview.com/ platform) figure 8. btc-dxy inverse relation figure 8 illustrates the inverse relationship that has been observed between btc and the dxy after the halving event or shortly before. the figure plots in yellow the halving event, color green and red are used to show the percentual increases or decreases for the same time window in btc and dxy. halvings effect the halving might mistakenly be overlooked as a simple event that reoccurs every four years and that just halves btc’s miners reward in half. in fact, the btc halving is one of, if not, the most important characteristic of the asset, with profound implications for its economic model. the price fluctuations of the asset in the weeks prior and after the halving can be explained by the following: supply reduction: the reward that miners receive for validating and adding new blocks to the blockchain is reduced by half. initially, when btc was launched in 2009, miners received 50 btcs per block. the first halving occurred in 2012, reducing the reward to 25 btcs. the second halving occurred in 2016, reducing it further to 12.5 btcs. the third halving occurred in 2020, reducing the reward to 6.25 btcs. the fourth halving occurred in 2024, reducing the reward to 3.12 btcs this reduction in the rate of new btc creation is designed to control its overall supply. scarcity and deflationary nature: btc's total supply is capped at 21 million coins. by halving the reward every four years, the rate at which new btcs are created slows down over time. this controlled https://www.tradingview.com/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 266 issuance creates a sense of scarcity, similar to precious metals like gold. the idea is that as the supply becomes more limited, and if demand remains constant or increases, the value of each btc could rise. market perception and speculation: traders, investors, and the broader market pay close attention to the halving events. the anticipation of reduced new supply often leads to increased speculation about potential price increases. this heightened interest can lead to increased demand in the period leading up to and following a halving, affecting the market dynamics. previous empirical halving analyses also document systematic post‑halving appreciation cycles, strengthening the argument that bitcoin’s issuance schedule plays a central role in shaping long‑term price dynamics (fabus et al. 2024). in the figure below, the yellow lines mark when the halving occurred and the consecutive growth in btc’s price after the event. source: authors’ data (https://www.tradingview.com/ platform) figure 9. btc’s halvings conclusion this study has examined whether a halving-anchored, technically driven trading strategy can outperform a passive buy-and-hold exposure to bitcoin. using multiple overlapping sample windows, the empirical results indicate that the proposed strategy generates positive and statistically significant alpha relative to a btc benchmark in most periods, and that the associated equity curves display superior compounded growth. these findings suggest that bitcoin’s protocol-driven supply schedule and its cyclical price behavior can be translated into systematic trading rules with economically meaningful performance over the historical sample considered. beyond the strategy itself, the analysis highlights several potential drivers of btc’s long-term growth that warrant further investigation. first, questions remain about market structure and price formation, especially in bitcoin’s early years when market capitalization was low and formal regulation was limited or absent. under such conditions, the possibility of price manipulation, including pump-and-dump dynamics, cannot be ruled out and deserves dedicated study, particularly in light of the growing influence of large institutional players and the global reach of the asset. second, macroeconomic forces and investor sentiment appear to interact with bitcoin’s cycles: episodes of elevated inflation, shifting interest-rate regimes, and changing risk appetite may amplify or dampen btc’s performance, suggesting that macro-financial conditions are an important part of the broader narrative. third, the halving mechanism itself may shape investors’ value perceptions and expectations, potentially giving rise to recurring accumulation and distribution phases that extend beyond the immediate supply shock. from an academic standpoint, the main contribution of this study is to document, over several overlapping windows, that a halving-anchored set of technical rules can generate positive and statistically significant alpha relative to a passive btc benchmark, and to outline macro-financial channels—such as liquidity conditions, monetary policy regimes, and protocol-driven supply shocks—through which such patterns may arise. importantly, the analysis is intended as a contribution to the empirical literature on bitcoin cyclicality and investment strategies, and not as personalized investment advice. https://www.tradingview.com/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 267 from an institutional portfolio-management perspective, these findings are best interpreted as a case study in designing rule-based, risk-managed crypto exposures that can be slotted into diversified multi-asset portfolios, rather than as a stand-alone trading mandate. the emphasis on transparent rules, explicit drawdown control and long-horizon evaluation is also consistent with the broader sustainable-fintech agenda, in which digital-asset strategies are engineered to balance innovation with risk management, governance and investor protection. acknowledgements i would like to thank prof. dr. josé p. dapena for guidance on the original work, dr. maximiliano ivickas magallan for recognizing its potential as an academic paper, and lic. bahía solla rouquaud for assistance during the publication process. references benzinga. 2023. 10 public 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https://coinmarketcap.com/academy/article/how-to-use-the-market-structure-in-trading. del castillo, m. 2023. u.s. government owns way more bitcoin than any other country—so why aren’t they selling it? forbes, june 16, 2023. accessed april 2025. https://www.forbes.com/sites/michaeldelcastillo/2023/06/16/us-government-owns-way-morebitcoin-than-any-other-countryso-why-arent-they-selling-it/. drake, p. p. 2023a. reading 6: hypothesis testing. in cfa program curriculum 2023 level i, volume 1: quantitative methods. cfa institute. drake, p. p. 2023b. reading 7: introduction to linear regression. in cfa program curriculum 2023 level i, volume 1: quantitative methods. cfa institute. dyhrberg, a. h. 2016. bitcoin, gold and the dollar–a garch volatility analysis. finance research letters, 16: 85–92. https://doi.org/10.1016/j.frl.2015.10.008. fabus, j., i. kremenova, n. stalmasekova, and t. kvasnicova-galovicova. 2024. an empirical examination of bitcoin’s halving effects: assessing cryptocurrency 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https://www.weforum.org/stories/2023/04/ranked-the-largest-bond-markets-in-the-world/?utm_source=chatgpt.com alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 268 senado, x. 2023. bull market support band — market update: july 07, 2023. medium (coinmonks), july 7, 2023. accessed april 2025. https://medium.com/coinmonks/bull-market-support-band-marketupdate-july-07-2023-fc06463a63ec. shen, c. 2023. what europe’s new spot bitcoin etf means for global markets. forkast, september 18, 2023. accessed may 2025. https://forkast.news/what-europes-spot-bitcoin-etf-means-for-markets/. singal, v. 2023. learning module 3: portfolio risk and return, part ii. in cfa program curriculum 2023 level i, volume 5: fixed income, derivatives, alternative investments, and portfolio management. cfa institute. swift, p. 2019. the golden ratio multiplier. medium, march 18, 2019. accessed may 2025. https://positivecrypto.medium.com/the-golden-ratio-multiplier-c2567401e12a. trading economics. n.d. united states fed funds interest rate. tradingeconomics.com. accessed may 2025. https://tradingeconomics.com/united-states/interest-rate. urquhart, a. 2016. the inefficiency of bitcoin. economics letters, 148: 80–82. https://doi.org/10.1016/j.econlet.2016.09.019. https://medium.com/coinmonks/bull-market-support-band-market-update-july-07-2023-fc06463a63ec?utm_source=chatgpt.com https://medium.com/coinmonks/bull-market-support-band-market-update-july-07-2023-fc06463a63ec?utm_source=chatgpt.com https://forkast.news/what-europes-spot-bitcoin-etf-means-for-markets/?utm_source=chatgpt.com https://positivecrypto.medium.com/the-golden-ratio-multiplier-c2567401e12a?utm_source=chatgpt.com https://tradingeconomics.com/united-states/interest-rate?utm_source=chatgpt.com https://doi.org/10.1016/j.econlet.2016.09.019 alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 269 annexes 1. # script to fetch data from bitstamp 2. import json, requests, datetime 3. import pandas as pd 4. 5. #parameters 6. currency_pair = "btcusd" 7. url = f"https://www.bitstamp.net/api/v2/ohlc/{currency_pair}/" 8. 9. # convert dates to unix timestamps 10. start_date = pd.timestamp("2012-03-01").timestamp() 11. end_date = pd.timestamp("2025-05-10").timestamp() 12. 13. step = 86400 # 1 day 14. limit = 1000 # max candles per api call 15. 16. master_data = [] 17. current_start = int(start_date) 18. while current_start < end_date: 19. current_end = current_start + (step * limit) 20. if current_end > end_date: 21. current_end = int(end_date) 22. 23. print(f"fetching from {datetime.datetime.utcfromtimestamp(current_start)} " 24. f"to {datetime.datetime.utcfromtimestamp(current_end)}") 25. 26. params = {"step": step, 27. "limit": limit, 28. "start": current_start, 29. "end": current_end,} 30. 31. try: 32. response = requests.get(url, params=params) 33. if response.status_code != 200: 34. print(f"failed at {current_start}: status {response.status_code}") 35. break 36. json_data = response.json() 37. ohlc = json_data.get("data", {}).get("ohlc", []) 38. master_data += ohlc 39. except exception as e: 40. print(f"exception at {current_start}: {e}") 41. break 42. 43. current_start = current_end 44. time.sleep(1) 45. 46. # create dataframe 47. df = pd.dataframe(master_data) 48. df = df.drop_duplicates() alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 270 49. # format date 50. df["timestamp"] = df["timestamp"].astype(int) 51. df = df.sort_values(by="timestamp") 52. df["date"] = pd.to_datetime(df["timestamp"], unit='s').dt.strftime("%d/%m/%y") 53. # save to drive 54. output_path = '/content/drive/mydrive/data/btcusdohlcv.csv' 55. df.to_csv(output_path, index=false) 56. 57. print('end of data fetching. saved to:', output_path) authors’ data (google colabs) figure 10. python script to fetch data 58. # script for newey-west hac 59. # drive mount 60. from google.colab import drive 61. drive.mount('/content/drive') 62. 63. import pandas as pd 64. import datetime as dt 65. import statsmodels.api as sm 66. 67. # adjust path to file directory in drive 68. excel_path = "/content/drive/mydrive/strategy results 2025.xlsx" 69. # load and clean data 70. raw = pd.read_excel(excel_path, sheet_name="strat + acc ret", header=2) 71. header_row = raw.iloc[0] 72. col_map = { 73. "benchmark (btc)": header_row["benchmark (btc)"], # date 74. "unnamed: 2": header_row["unnamed: 2"], # close 75. "unnamed: 3": header_row["unnamed: 3"], # open 76. "unnamed: 4": header_row["unnamed: 4"], # bm % 77. "strategy": "long/sold", 78. "unnamed: 6": header_row["unnamed: 6"], # strategy % 79. "unnamed: 7": header_row["unnamed: 7"], # key event 80. } 81. df = raw.iloc[1:].reset_index(drop=true) 82. df = df.rename(columns=col_map) 83. df = df[["date", "bm %", "strategy %"]].copy() 84. df["date"] = pd.to_datetime(df["date"]) 85. df["bm %"] = pd.to_numeric(df["bm %"], errors="coerce") 86. df["strategy %"] = pd.to_numeric(df["strategy %"], errors="coerce") 87. df = df.dropna() 88. 89. df["date_only"] = df["date"].dt.date 90. data_start = df["date_only"].min() 91. data_end = df["date_only"].max() 92. print("data from", data_start, "to", data_end, "rows:", len(df)) 93. # define 13 sampling periods (including 2023 & 2024) 94. period_specs = [ alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 271 95. ("6/2012 5/2025", dt.date(2012, 6, 1)), 96. ("6/2013 5/2025", dt.date(2013, 6, 1)), 97. ("6/2014 5/2025", dt.date(2014, 6, 1)), 98. ("6/2015 5/2025", dt.date(2015, 6, 1)), 99. ("6/2016 5/2025", dt.date(2016, 6, 1)), 100. ("6/2017 5/2025", dt.date(2017, 6, 1)), 101. ("6/2018 5/2025", dt.date(2018, 6, 1)), 102. ("6/2019 5/2025", dt.date(2019, 6, 1)), 103. ("6/2020 5/2025", dt.date(2020, 6, 1)), 104. ("6/2021 5/2025", dt.date(2021, 6, 1)), 105. ("6/2022 5/2025", dt.date(2022, 6, 1)), 106. ("6/2023 5/2025", dt.date(2023, 6, 1)), 107. ("6/2024 5/2025", dt.date(2024, 6, 1)), 108. ] 109. desired_end = dt.date(2025, 5, 31) 110. period_end = min(data_end, desired_end) 111. print("using period end:", period_end) 112. results = [] 113. # loop over all 13 periods 114. for label, start_cal in period_specs: 115. mask_after_start = df["date_only"] >= start_cal 116. if not mask_after_start.any(): 117. print(f"no data for {label}, skipping.") 118. continue 119. 120. actual_start = df.loc[mask_after_start, "date_only"].min() 121. mask = (df["date_only"] >= actual_start) & (df["date_only"] <= period_end) 122. sub = df.loc[mask].copy() 123. n = len(sub) 124. if n < 50: 125. print(f"period {label} has only {n} rows, skipping regression.") 126. results.append({ 127. "period": label, 128. "n": n, 129. "alpha_ols": none, 130. "alpha_se_ols": none, 131. "alpha_t_ols": none, 132. "alpha_p_ols": none, 133. "alpha_hac": none, 134. "alpha_se_hac": none, 135. "alpha_t_hac": none, 136. "alpha_p_hac": none, 137. }) 138. continue 139. 140. y = sub["strategy %"] 141. x = sm.add_constant(sub["bm %"]) 142. ols = sm.ols(y, x).fit() alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 272 143. maxlags = int(n ** 0.5) 144. hac = ols.get_robustcov_results(cov_type="hac", maxlags=maxlags) 145. results.append({ 146. "period": label, 147. "n": n, 148. "alpha_ols": float(ols.params[0]), 149. "alpha_se_ols": float(ols.bse[0]), 150. "alpha_t_ols": float(ols.tvalues[0]), 151. "alpha_p_ols": float(ols.pvalues[0]), 152. "alpha_hac": float(hac.params[0]), 153. "alpha_se_hac": float(hac.bse[0]), 154. "alpha_t_hac": float(hac.tvalues[0]), 155. "alpha_p_hac": float(hac.pvalues[0]), 156. }) 157. # collect & save 158. res_df = pd.dataframe(results) 159. res_df = res_df[ 160. [ 161. "period", 162. "n", 163. "alpha_ols", 164. "alpha_se_ols", 165. "alpha_t_ols", 166. "alpha_p_ols", 167. "alpha_hac", 168. "alpha_se_hac", 169. "alpha_t_hac", 170. "alpha_p_hac", 171. ] 172. ] 173. res_rounded = res_df.round( 174. { 175. "alpha_ols": 8, 176. "alpha_se_ols": 8, 177. "alpha_t_ols": 5, 178. "alpha_p_ols": 8, 179. "alpha_hac": 8, 180. "alpha_se_hac": 8, 181. "alpha_t_hac": 5, 182. "alpha_p_hac": 8, 183. } 184. ) 185. print(res_rounded.to_string(index=false)) 186. out_path = "/content/drive/mydrive/hac_alpha_results_13_periods.csv" 187. res_rounded.to_csv(out_path, index=false) 188. print("saved results to:", out_path) source: authors’ data (google colabs) figure 11. python script for hac test alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 273 table 5. newey–west hac regression results by sample window period n α (ols) se (ols) t (ols) p (ols) α (hac) se (hac) t (hac) p (hac) 6/2012–5/2025 4717 0.00175 0.00030 5.851 1.00×10⁻⁸ 0.00175 4.1×10⁻⁴ 4.267 2.00×10⁻⁵ 6/2013–5/2025 4362 0.00149 0.00029 5.155 2.60×10⁻⁷ 0.00149 3.5×10⁻⁴ 4.228 2.40×10⁻⁵ 6/2014–5/2025 3997 0.00128 0.00027 4.750 2.11×10⁻⁶ 0.00128 3.1×10⁻⁴ 4.117 3.90×10⁻⁵ 6/2015–5/2025 3632 0.00122 0.00027 4.492 7.28×10⁻⁶ 0.00122 3.3×10⁻⁴ 3.595 3.29×10⁻⁴ 6/2016–5/2025 3266 0.00131 0.00030 4.404 1.10×10⁻⁵ 0.00131 3.6×10⁻⁴ 3.641 2.76×10⁻⁴ 6/2017–5/2025 2901 0.00135 0.00033 4.112 4.03×10⁻⁵ 0.00135 3.7×10⁻⁴ 3.585 3.42×10⁻⁴ 6/2018–5/2025 2536 0.00097 0.00031 3.144 1.69×10⁻³ 0.00097 3.4×10⁻⁴ 2.838 4.57×10⁻³ 6/2019–5/2025 2171 0.00075 0.00031 2.426 1.53×10⁻² 0.00075 3.5×10⁻⁴ 2.132 3.31×10⁻² 6/2020–5/2025 1805 0.00102 0.00035 2.922 3.52×10⁻³ 0.00102 3.9×10⁻⁴ 2.602 9.35×10⁻³ 6/2021–5/2025 1440 0.00067 0.00038 1.772 7.66×10⁻² 0.00067 3.7×10⁻⁴ 1.768 7.73×10⁻² 6/2022–5/2025 1075 0.00062 0.00030 2.062 3.95×10⁻² 0.00062 4.3×10⁻⁴ 1.402 1.61×10⁻¹ source: authors’ data note: rows for 6/2023–5/2025 and 6/2024–5/2025 are omitted from this hac table because, in those short subsamples, the strategy and benchmark returns are nearly collinear and the regression becomes numerically ill-conditioned. the corresponding ols coefficients and test statistics are nevertheless reported in table 1 for completeness. table 6. walk-forward out-of-sample performance (3-year train / 1-year test, june–may years) train start train end test year n_test test cumulative return (strategy) test cumulative return (bm) test annualized return (strategy) test annualized return (bm) 2012 2014 2015 366 1.311 1.311 0.780 0.780 2013 2015 2016 365 3.598 3.598 1.867 1.867 2014 2016 2017 365 7.614 2.367 3.423 1.312 2015 2017 2018 365 1.232 0.169 0.741 0.114 2016 2018 2019 366 0.032 0.032 0.022 0.022 2017 2019 2020 365 5.323 2.942 2.573 1.578 2018 2020 2021 365 -0.036 -0.134 -0.025 -0.094 2019 2021 2022 365 0.381 -0.147 0.250 -0.104 2020 2022 2023 366 1.498 1.498 0.878 0.878 2021 2023 2024 344 0.550 0.550 0.379 0.379 mean test annualized return (strategy) = 1.088 mean test annualized return (benchmark) = 0.673 share of positive test years (strategy) = 9/10 share of positive test years (benchmark) = 8/10 source: authors’ data table 7 below shows all the buy and sell signals, defined by the strategy. note that on the sell signals, the long/sold is also 1, that is due to the signal confirming on the trading day end, executing the sell signal on the following day open. alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 274 table 7. buy and sell signals benchmark + strategy returns benchmark (btc) strategy date close open bm % long/sold strategy % key event 11/6/2012 5.5 5.5 0.73% 1 0.73% bull mkt crossover 5/4/2013 141.8 134.7 5.29% 1 5.29% pi cycle top 2/9/2013 130.2 130.7 -0.38% 1 -0.38% bull mkt crossover 5/12/2013 1,023.9 1,135.0 -9.79% 1 -9.79% pi cycle top 9/6/2014 648.8 658.0 -1.39% 1 -1.39% bull mkt crossover 17/8/2014 496.9 523.5 -5.08% 1 -5.08% bull mkt crossunder 9/2/2015 220.9 223.9 -1.35% 1 -1.35% rsi bottom 16/12/2017 19,187.8 17,478.0 9.78% 1 9.78% pi cycle top 31/12/2018 3,693.3 3,831.0 -3.60% 1 -3.60% rsi bottom 12/4/2021 59,831.7 59,972.3 -0.23% 1 -0.23% pi cycle top 16/8/2021 45,930.5 47,025.0 -2.33% 1 -2.33% bull mkt crossover 5/12/2021 49,463.2 49,240.8 0.45% 1 0.45% bull mkt crossunder 4/4/2022 46,598.2 46,414.9 0.39% 1 0.39% bull mkt crossover 10/4/2022 42,133.9 42,774.9 -1.50% 1 -1.50% bull mkt crossunder 29/8/2022 20,302.0 19,571.0 3.74% 1 3.74% rsi bottom 10/5/2025 104,809.0 102,992.0 1.76% 1 1.76% dataset end source: authors’ data table 8. regression results for the period june 2012 – may 2025 regression statistics multiple r 0.7534 r square 0.5676 adjusted r square 0.5675 standard error 0.0205 observations 4717 anova 6/2012 10/5/2025 df ss ms f significance f regression 1 2.590723 2.590723 6188.022 0 residual 4715 1.974017 0.000419 total 4716 4.564739 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00175 0.00030 5.85111 5.2133e-09 0.00116 0.00233 0.00116 0.00233 x variable 1 0.56662 0.00720 78.66 0 0.55250 0.58074 0.55250 0.58074 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 275 table 9. regression results for the period june 2013 – may 2025 regression statistics multiple r 0.7822 r square 0.6118 adjusted r square 0.6117 standard error 0.0190 observations 4362 anova 1/6/2013 10/5/2025 df ss ms f significance f regression 1 2.479121 2.479121 6870.217 0 residual 4360 1.573308 0.000361 total 4361 4.052428 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00149 0.00029 5.15492 2.64976e-07 0.00092 0.00205 0.00092 0.00205 x variable 1 0.61064 0.00737 82.89 0 0.59620 0.62509 0.59620 0.62509 source: authors’ data table 10. regression results for the period june 2014 – may 2025 regression statistics multiple r 0.8199 r square 0.6723 adjusted r square 0.6722 standard error 0.0170 observations 3997 anova 1/6/2014 10/5/2025 df ss ms f significance f regression 1 2.360475 2.360475 8195.721 0 residual 3995 1.150612 0.000288 total 3996 3.511087 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00128 0.00027 4.74974 2.10827e-06 0.00075 0.00180 0.00075 0.00180 x variable 1 0.67103 0.00741 90.53 0 0.65650 0.68556 0.65650 0.68556 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 276 table 11. regression results for the period june 2015 – may 2025 regression statistics multiple r 0.8447 r square 0.7135 adjusted r square 0.7134 standard error 0.0163 observations 3632 anova 1/6/2015 10/5/2025 df ss ms f significance f regression 1 2.408330 2.408330 9038.519 0 residual 3630 0.967220 0.000266 total 3631 3.375550 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00122 0.00027 4.49184 7.28097e-06 0.00069 0.00175 0.00069 0.00175 x variable 1 0.71226 0.00749 95.07 0 0.69757 0.72695 0.69757 0.72695 source: authors’ data table 12. regression results for the period june 2016 – may 2025 regression statistics multiple r 0.8339 r square 0.6953 adjusted r square 0.6952 standard error 0.0170 observations 3266 anova 1/6/2016 10/5/2025 df ss ms f significance f regression 1 2.150193 2.150193 7448.660 0 residual 3264 0.942214 0.000289 total 3265 3.092406 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00131 0.00030 4.40390 1.09735e-05 0.00073 0.00190 0.00073 0.00190 x variable 1 0.69403 0.00804 86.31 0 0.67826 0.70979 0.67826 0.70979 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 277 table 13. regression results for the period june 2017 – may 2025 regression statistics multiple r 0.8175 r square 0.6683 adjusted r square 0.6682 standard error 0.0177 observations 2901 anova 1/6/2017 10/5/2025 df ss ms f significance f regression 1 1.824587 1.824587 5842.049 0 residual 2899 0.905415 0.000312 total 2900 2.730002 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00135 0.00033 4.11187 4.0337e-05 0.00071 0.00200 0.00071 0.00200 x variable 1 0.66705 0.00873 76.43 0 0.64994 0.68416 0.64994 0.68416 source: authors’ data table 14. regression results for the period june 2018 – may 2025 regression statistics multiple r 0.8442 r square 0.7127 adjusted r square 0.7126 standard error 0.0155 observations 2536 anova 1/6/2018 10/5/2025 df ss ms f significance f regression 1 1.518074 1.518074 6287.112 0 residual 2534 0.611855 0.000241 total 2535 2.129929 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00097 0.00031 3.14394 0.001686206 0.00037 0.00158 0.00037 0.00158 x variable 1 0.71183 0.00898 79.29 0 0.69422 0.72943 0.69422 0.72943 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 278 table 15. regression results for the period june 2019 – may 2025 regression statistics multiple r 0.8763 r square 0.7678 adjusted r square 0.7677 standard error 0.0145 observations 2171 anova 1/6/2019 10/5/2025 df ss ms f significance f regression 1 1.498918 1.498918 7173.241 0 residual 2169 0.453234 0.000209 total 2170 1.952152 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00075 0.00031 2.42628 0.015335382 0.00014 0.00136 0.00014 0.00136 x variable 1 0.76721 0.00906 84.69 0 0.74944 0.78497 0.74944 0.78497 source: authors’ data table 16. regression results for the period june 2020 – may 2025 regression statistics multiple r 0.8218 r square 0.6754 adjusted r square 0.6752 standard error 0.0149 observations 1805 anova 1/6/2020 10/5/2025 df ss ms f significance f regression 1 0.828433 0.828433 3751.438 0 residual 1803 0.398158 0.000221 total 1804 1.226591 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00102 0.00035 2.92183 0.003523064 0.00034 0.00171 0.00034 0.00171 x variable 1 0.67444 0.01101 61.25 0 0.65285 0.69604 0.65285 0.69604 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 279 table 17. regression results for the period june 2021 – may 2025 regression statistics multiple r 0.8045 r square 0.6473 adjusted r square 0.6470 standard error 0.0142 observations 1440 anova 1/6/2021 10/5/2025 df ss ms f significance f regression 1 0.535521 0.535521 2638.808 0 residual 1438 0.291829 0.000203 total 1439 0.827350 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00067 0.00038 1.77202 0.076602273 -0.00007 0.00140 -0.00007 0.00140 x variable 1 0.64687 0.01259 51.37 0 0.62217 0.67157 0.62217 0.67157 source: authors’ data table 18. regression results for the period june 2022 – may 2025 regression statistics multiple r 0.9216 r square 0.8494 adjusted r square 0.8492 standard error 0.0098 observations 1075 anova 1/6/2022 10/5/2025 df ss ms f significance f regression 1 0.577390 0.577390 6049.540 0 residual 1073 0.102411 0.000095 total 1074 0.679801 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0.00062 0.00030 2.06180 0.039467333 0.00003 0.00120 0.00003 0.00120 x variable 1 0.84837 0.01091 77.78 0 0.82697 0.86977 0.82697 0.86977 source: authors’ data alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 280 table 19. regression results for the period june 2023 – may 2025 regression statistics multiple r 1 r square 1 adjusted r square 1 standard error 0 observations 710 anova 1/6/2023 10/5/2025 df ss ms f significance f regression 1 0.474147869 0.474147869 residual 708 2.36968e-32 3.34701e-35 total 709 0.474147869 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0 x variable 1 1 source: authors’ data table 20. regression results for the period june 2024 – may 2025 regression statistics multiple r 1 r square 1 adjusted r square 1 standard error 0 observations 344 anova 1/6/2024 10/5/2025 df ss ms f significance f regression 1 0.240305728 0.240305728 residual 342 0 0 total 343 0.240305728 coefficients standard error t stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0 x variable 1 1 source: authors’ data note: in the periods june 2023–may 2025 and june 2024–may 2025 (tables 19 and 20), the strategy and benchmark returns are almost perfectly collinear, so the regression is degenerate. α = 0 and β = 1 are implied mechanically; residual variance is effectively zero, and standard errors, test statistics and confidence intervals are therefore not reported. alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 281 source: authors’ data figure 12. equity curves $ 1 000 $ 200 001 000 $ 400 001 000 $ 600 001 000 $ 800 001 000 $ 1 000 001 000 $ 1 200 001 000 1 .6 .2 0 1 2 1 .3 .2 0 1 3 1 .1 2 .2 0 1 3 1 .9 .2 0 1 4 1 .6 .2 0 1 5 1 .3 .2 0 1 6 1 .1 2 .2 0 1 6 1 .9 .2 0 1 7 1 .6 .2 0 1 8 1 .3 .2 0 1 9 1 .1 2 .2 0 1 9 1 .9 .2 0 2 0 1 .6 .2 0 2 1 1 .3 .2 0 2 2 1 .1 2 .2 0 2 2 1 .9 .2 0 2 3 1 .6 .2 0 2 4 1 .3 .2 0 2 5 equity curve 6/2012 -5/2025 benchmark strategy $ 1 000 $ 10 001 000 $ 20 001 000 $ 30 001 000 $ 40 001 000 $ 50 001 000 1 .9 .2 0 1 3 1 .5 .2 0 1 4 1 .1 .2 0 1 5 1 .9 .2 0 1 5 1 .5 .2 0 1 6 1 .1 .2 0 1 7 1 .9 .2 0 1 7 1 .5 .2 0 1 8 1 .1 .2 0 1 9 1 .9 .2 0 1 9 1 .5 .2 0 2 0 1 .1 .2 0 2 1 1 .9 .2 0 2 1 1 .5 .2 0 2 2 1 .1 .2 0 2 3 1 .9 .2 0 2 3 1 .5 .2 0 2 4 1 .1 .2 0 2 5 equity curve 9/2013 5/2025 benchmark strategy $ 1 000 $ 1 001 000 $ 2 001 000 $ 3 001 000 $ 4 001 000 $ 5 001 000 $ 6 001 000 1 .6 .2 0 1 4 1 .2 .2 0 1 5 1 .1 0 .2 0 1 5 1 .6 .2 0 1 6 1 .2 .2 0 1 7 1 .1 0 .2 0 1 7 1 .6 .2 0 1 8 1 .2 .2 0 1 9 1 .1 0 .2 0 1 9 1 .6 .2 0 2 0 1 .2 .2 0 2 1 1 .1 0 .2 0 2 1 1 .6 .2 0 2 2 1 .2 .2 0 2 3 1 .1 0 .2 0 2 3 1 .6 .2 0 2 4 1 .2 .2 0 2 5 equity curve 6/2014 -5/2025 benchmark strategy alejandro rabinovich / finance, accounting and business analysis, volume 7, issue 2, 2025 282 source: authors’ data figure 13. equity curves pt 2 $ 1 000 $ 2 001 000 $ 4 001 000 $ 6 001 000 $ 8 001 000 1 .2 .2 0 1 5 1 .9 .2 0 1 5 1 .4 .2 0 1 6 1 .1 1 .2 0 1 6 1 .6 .2 0 1 7 1 .1 .2 0 1 8 1 .8 .2 0 1 8 1 .3 .2 0 1 9 1 .1 0 .2 0 1 9 1 .5 .2 0 2 0 1 .1 2 .2 0 2 0 1 .7 .2 0 2 1 1 .2 .2 0 2 2 1 .9 .2 0 2 2 1 .4 .2 0 2 3 1 .1 1 .2 0 2 3 1 .6 .2 0 2 4 1 .1 .2 0 2 5 equity curve 2/2015 -5/2025 benchmark strategy $ 1 000 $ 21 000 $ 41 000 $ 61 000 $ 81 000 $ 101 000 1 .1 2 .2 0 1 8 1 .5 .2 0 1 9 1 .1 0 .2 0 1 9 1 .3 .2 0 2 0 1 .8 .2 0 2 0 1 .1 .2 0 2 1 1 .6 .2 0 2 1 1 .1 1 .2 0 2 1 1 .4 .2 0 2 2 1 .9 .2 0 2 2 1 .2 .2 0 2 3 1 .7 .2 0 2 3 1 .1 2 .2 0 2 3 1 .5 .2 0 2 4 1 .1 0 .2 0 2 4 1 .3 .2 0 2 5 equity curve 12/2018 5/2025 benchmark strategy $ $ 1 000 $ 2 000 $ 3 000 $ 4 000 $ 5 000 $ 6 000 1 .8 .2 0 2 1 1 .1 1 .2 0 2 1 1 .2 .2 0 2 2 1 .5 .2 0 2 2 1 .8 .2 0 2 2 1 .1 1 .2 0 2 2 1 .2 .2 0 2 3 1 .5 .2 0 2 3 1 .8 .2 0 2 3 1 .1 1 .2 0 2 3 1 .2 .2 0 2 4 1 .5 .2 0 2 4 1 .8 .2 0 2 4 1 .1 1 .2 0 2 4 1 .2 .2 0 2 5 1 .5 .2 0 2 5 equity curve 8/2021 5/2025 benchmark strategy $ $ 1 000 $ 2 000 $ 3 000 $ 4 000 $ 5 000 $ 6 000 4.4.2022 4.4.2023 4.4.2024 4.4.2025 equity curve 4/2022 5/2025 benchmark strategy 166 finance, accounting and business analysis volume 7 issue 2 2025 http://faba.bg/ issn 2603-5324 doi: https://doi.org/10.37075/faba.2025.2.03 the digital shift: covid-19 as a catalyst for mobile payment adoption in malaysia rushaizzad abdul rahim 1 , jaizah othman2* graduate school of management, management and science university, selangor, malaysia1 department of banking and finance, college of business administration, imam abdulrahman bin faisal university, dammam, saudi arabia2* * corresponding author info articles abstract history article: submitted 14 april 2025 revised 20 october 2025 accepted 31 october 2025 purpose: this study aims to investigate the underlying factors influencing the behavioural intention of malaysians to adopt mobile payment during the covid-19 pandemic, focusing specifically on the effect of both technological and situational variables, namely perceived usefulness, perceived ease of use, subjective norms, and perceived covid-19 risk. design/methodology/approach: a quantitative research design was employed using a structured online survey to gather data from 393 malaysian respondents. the study extends the technology acceptance model (tam) by integrating constructs from the theory of reasoned action (tra) and situational risk factors related to covid-19. multiple regression analysis was used to test the influence of each variable on the behavioural intention to adopt mobile payment. findings: the results show that all four variablesperceived usefulness, perceived ease of use, subjective norms, and perceived covid-19 risk significantly influence the behavioural intention to adopt mobile payment. among these, perceived usefulness exhibited the strongest effect. these findings suggest that malaysians' adoption of mobile payment is driven more by functional utility and ease of use, with situational awareness of health risk also contributing positively. practical implications: the findings imply that banks and e-wallet providers should focus on enhancing the perceived usefulness and ease of use of their platforms while also highlighting the health and safety benefits of cashless transactions. policymakers and stakeholders may also use these insights to promote broader digital payment adoption as part of national financial inclusion and health safety agendas. originality/value: this study contributes to the field by including situational risk variable, perceived covid-19 risk, into the extended tam framework. it offers timely insights into consumer technology adoption behaviour under public health crises, specifically within the malaysian context. keywords: mobile payment; technology acceptance model; perceived usefulness; perceived covid-19 risk; subjective norms; malaysia; digital finance; behavioural intention paper type: research paper. keywords: mobile payment; technology acceptance model; perceived usefulness; perceived covid-19 risk; subjective norms; malaysia; digital finance; behavioural intention jel: d83, g21, o33, l86, i18 * address correspondence: e-mail: rush7@live.com 1 jothman@iau.edu.sa2 http://faba.bg/ https://doi.org/10.37075/faba.2025.2.03 https://orcid.org/0009-0001-3039-3488 https://orcid.org/0000-0001-8106-4484 rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 167 introduction throughout the year 2020, the covid-19 pandemic had caused countries worldwide to implement lockdowns to contain the virus which the international monetary fund called the great lockdown. this lockdown has caused an economic slump globally with businesses restricted from operating their brick-andmortar setups. however, this has also caused for a shift in consumer behaviour where consumers are more accepting of digital technology and online transactions. the growth of digital technologies did not start due to the covid-19 pandemic considering the existence and use of various innovative technologies such as the autoteller machines or atm, cheques, debit and credit cards, qr payments and online payments. with the advent of covid-19 however, the adoption of mobile payment technologies was essential for malaysia to navigate through the covid-19 pandemic where the government of malaysia had used designated e-wallet services to disseminate helicopter money and generate income for the people as an effort to boost the economy (malay mail 2020). with a move by the malaysian government to support e-wallet services, this may potentially affect the banking industry as well in which banks may be forced to provide better mobile payment services to customers. the mobile payment services in malaysia are offered by banks and e-wallet players which is being overseen and mandated by bank negara malaysia, bnm, to use a shared payment infrastructure as part of the interoperable credit transfer framework, ictf, (bank negara malaysia 2019) which is provided by payments network malaysia sdn bhd, paynet. paynet provides banks and e-wallets access to use the retail payments platform and the shared atm network to provide services such as duitnow transfer, duitnow qr, interbank giro, jompay and financial processing exchange. banks and e-wallets have emphasized on mobile payments which had caused malaysia to see a higher number of cashless payments as compared to other countries within southeast asia as reported by mastercard (bernama 2020). mastercard had also reported that the use of cash by malaysians declined by 64% while the uptake of credit and debit cards saw an increase by 22% and 26% respectively. despite the covid-19 pandemic and the movement control orders issued by the government of malaysia, cash is still the main medium used for payment, though declining with consumers shifting to cashless payment options such as debit card, credit card, and qr payments (bank negara malaysia 2021). the covid-19 that has plagued people across the globe is an infectious disease which threatens not just the health and lives of humans but also adversely affecting the global economy (tang et al. 2020; popkova 2021, rahman et al. 2022, faramarzi et al. 2024). due to the dangers posed by covid-19, the malaysian government had enacted the movement control order, mco, on march 18, 2020 as a measure to control the spread of covid-19 in the community by conducting a complete lockdown of the economy with limited operations allowed only for essential services and restrict the movement of people to confine them within their home vicinity (new straits times 2020). aside from the mco, several other efforts were performed such as social distancing measures, mandatory wearing of face masks in public areas, online education and banning gatherings. this perceived risk of contracting covid-19 had caused for a shift in consumer behaviour where consumers are leaning towards digital channels as their preferred channels for shopping, payments and even banking services (deloitte 2022). the mco imposed by the malaysian government may cause for the shift in consumer behaviour in malaysia. e-wallets would require for a e-money license issued by bnm to operate in malaysia. to date, there are 47 non-bank e-money issuers (bank negara malaysia n.d.) in malaysia, however, the growth of cashless payment is still being widely regarded to be low (hajazi et al. 2021; norulhuda et al. 2020). on the adoption of online banking and mobile banking, there has been various researches being conducted with most of these researches had adopted the technology acceptance model, or tam, as the main theoretical model where perceived usefulness, pu, and perceived ease of use, peou are considered as part of the study (davis 1989) or an extended version of it where various other theories were integrated with tam to form an extended tam model. these studies had extended the variables to cover perceived trust (ahmad adzri et al. 2019), perceived self-efficacy and amount of information (ahmad iqbal and mohd shahrulnizam 2018), perceived risk (lim et al. 2019; owais 2020; syed et al. 2018; zahoor and fazal 2020), customer attitude (owais 2020; syed et al. 2018), compatibility, trialability, trust (kusumawati and rinaldi 2020; nguyen 2020) perceived behaviour control and social norms (syed et al. 2018), social influence, rewards, personal innovativeness (hajazi et al. 2021), hedonic motivation and perceived credibility (syuhaili and tan 2020). over the years, there has been various research that has been presented on the topic of mobile payments which includes the adoption of mobile payment services from the perspective of consumers. similar to the research on online banking and mobile banking, this research had mainly utilized tam as the main theoretical model and various other theories were integrated with tam to form an extended tam model (yeow et al. rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 168 2017; natarajan et al. 2018; balakrishnan and nor liyana 2021). these extended models would include other variables such as perceived credibility and social influence (yeow et al. 2017), perceived risk and perceived motivation (natarajan et al. 2018), as well as optimism, innovativeness, lack of awareness, cashless readiness, risk, intrinsic motivation and adoption (balakrishnan and nor liyana 2021). there were also studies conducted on the adoption of mobile payments from the perspective of age categories or generations where millennials or gen y would have a stronger affinity in adopting mobile payments (yeow et al. 2017; natarajan et al. 2018). the current literature on mobile payment has been focused on approaching the areas of study from a consumer perspective specifically in the areas of tam. however, despite the decades of scholarly research conducted, there have been limited studies found on the adoption of mobile payments with a market situation driver being used. as consumer behaviour has shifted because of the covid-19 pandemic, the perceived risk of covid-19 would be a market situation driver that can be studied. considering the above, the problem of this research is the lack of study on the behavioural intention to adopt mobile payment with the market situation driver being used as a variable. the study on the behavioural intention to adopt mobile payment will involve malaysians only to provide a malaysian context to the study with surveys being conducted in an online setting specifically to malaysian individuals. these respondents will provide the malaysian perspective and whether perceived covid-19 risk which was used as the market situation driver could be used for this study. the overall objective of the research is to study the factors influencing the behavioural intention to adopt mobile payment with the presence of covid-19 in malaysia. this objective is supported by several other objectives formulated to support this research which are as follows: a. to investigate as to whether subjective norms affect the behavioural intention to adopt mobile payment. b. to investigate as to whether perceived usefulness affects the behavioural intention to adopt mobile payment. c. to investigate as to whether perceived ease of use affects the behavioural intention to adopt mobile payment. d. to investigate as to whether perceived covid-19 risk affects the behavioural intention to adopt mobile payment. the research questions were formulated to address the overall aim of the study which are as follows: a. do subjective norms affect the behavioural intention to adopt mobile payment? b. does perceived usefulness affect the behavioural intention to adopt mobile payment? c. does perceived ease of use affect the behavioural intention to adopt mobile payment? d. does perceived covid-19 risk affect the behavioural intention to adopt mobile payment? to achieve these objectives, this study employs a quantitative research design utilizing primary data collected from malaysian respondents through an online survey. the remainder of the paper is organized as follows: section 2 provides a comprehensive review of the relevant literature and introduces the conceptual framework and research hypotheses. section 3 details the research methodology, including the sampling strategy and analytical techniques. section 4 presents empirical findings and analysis. finally, section 5 concludes the study with key policy implications and suggestions for future research directions. literature review development of the e-wallet and mobile payment industry in malaysia the malaysian mobile payment landscape is serviced by banks and e-wallets. malaysia has 47 non-bank e-money issuers (bank negara malaysia n.d.a) where these e-money issuers provide either an e-wallet service via their mobile application or via a prepaid card where the card functions as a store of value. since bnm incorporated all payment players through ictf in 2018 which is an extension to the financial sector blueprint 2021-2020 published by bnm to further transform the malaysian financial and banking industry towards incorporating technologies that can increase the financial sectors’ efficiency (mohamad and kassim 2017; norulhuda et al. 2020), e-wallets are able to provide a more robust ecosystem by payment services similar to how banks would be able to provide coupled complementary services such as food ordering which can be seen via the grab mobile application. a large number of banks and non-bank participants in the malaysian payment systems have contributed to the growth of the payment market. in 2020, the malaysian total usage of e-payment services increased by rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 169 14.5% to 5.5 billion transactions as compared to 2019. cashless payment specific growth based on the number of transactions specifically, increases by 32.4% while cash withdrawal from atm decreases by 12% in the same period (bank negara malaysia 2021) which provide an early indication to our research that consumers are shifting from heavy usage of cash to cashless payments and specifically, shifting consumers behaviour to wider acceptance and usage of e-payments in their daily activities. despite the malaysian e-wallet industry was further catapulted by maybank in 2016 when it introduced its payment services via its mobile banking application that allows customers to make card-based payments using mobile phones, the growth of cashless payment is still being widely regarded to be low when compared to the country’s mobile telecommunications proliferation (norulhuda et al. 2020). in another research, ishak (2020) argued that the measurement of cashless adoption on the national level can be performed using 5 criteria which are (i) number of near field communication (nfc) enabled cards being offered, (ii) average growth of cashless payment, (iii) volume of cashless payment transactions, (iv) number of card-based products holdings per capita and (v) mobile payment awareness. in the case of malaysia, its cashless payment industry has a direct impact to 2.6% of its gdp which is the second lowest among developing asian countries (ishak 2020). however, the utilization of mobile payment would be reliant on the hardware used to perform such payment and this would include the use of an online and mobile banking application or an e-wallet. the method of making a payment via a mobile banking application and an e-wallet would be very much the same as both would require the use of qr code or the use of nfc technology. the online purchase would also need to be taken into consideration with the very mention of mobile payment as online purchases are also made via mobile. thus, studies on consumer adoption of online and mobile banking as well as e-wallets will need to be taken into consideration for consumers to adopt mobile payment. consumer adoption of online and mobile banking looking at the various studies conducted on online banking and mobile banking applications in malaysia, most of which had the tendency to adopt the technology acceptance (tam) model (davis, 1989) where peou and pu are used as independent variables. these studies had extended the model to incorporate other variables such as perceived trust (ahmad adzri et al. 2019), perceived self-efficacy and amount of information (ahmad iqbal and mohd shahrulnizam 2018), perceived risk (lim et al. 2019; owais 2020; syed et al. 2018; zahoor and fazal 2020), customer attitude (owais 2020; syed et al. 2018), compatibility, trialability, perceived behaviour control and social norms (syed et al. 2018) as well as social influence, hedonic motivation and perceived credibility (syuhaili and tan 2020). internet banking and mobile banking are constructs where banking services are provided without requiring consumers from visiting bank branches using a web browser or mobile application respectively. ahmad iqbal and mohd shahrulnizam (2018) had studied on the factors that would influence gen y in malaysia to adopt mobile banking using tam where four variables were studied which are peou, pu, perceived selfefficacy, and amount of information. the results can be deemed as astonishing considering that only the peou and the amount of information have been identified as the influencing variables. zahoor and fazal (2020), who had studied gen y as well had found differing results where pu, peou and perceived risks which were introduced as an extended variable would have an impact on consumers’ behavioural intention to adopt mobile banking. owais (2020) had added perceived risk and customer attitude variables in a similar study but on internet banking and found that peou and customer attitude to have influential power on the adoption of internet banking while the pu was found to not have any significant correlation on the contrary, studies conducted by lim, fakhrorazi and rabiul (2019), syed et al. (2018), syuhaili and tan (2020), and zahoor and fazal (2020) found pu as one of the influencing variables. lim, fakhrorazi and rabiul (2019) had also found that perceived risk as one of the influencing factors and peou to be the most influential variable that would determine consumer adoption of internet banking. syed et al. (2018) had extended the tam construct where it is fused with the theory of planned behaviour or tpb, and the theory of diffusion of innovation or doi (rogers 1995). in the study conducted by syed et al. (2018), it was found that peou, relative advantage, which is similar to pu, compatibility, trialability, attitude, perceived behaviour control, social norms and perceived risks to have influence on consumers’ adoption of mobile banking. syuhaili and tan (2020) supports the variables of social influence and attitude in their study while adding in hedonic motivation and perceived credibility which is another way to indicate perceived risk as part of the extension to tam in their study. their study found that all variables had influences over the students’ behavioural intention to adopt and use mobile banking applications. ahmad adzri et al. (2019) instead, had studied the use of tam in a real world setting by performing a self-administered questionnaire on rhb mobile banking users. the findings are consistent with previous studies where pu and peou are deemed to be rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 170 important variables for users to adopt mobile banking along with perceived trust which was added as an extended key construct to tam in their study. aside from online and mobile banking, digital banks are expected to incur extreme levels of pressure and competition within the financial services industry where recent studies conducted in vietnam (nguyen 2020) and indonesia (kusumawati and rinaldi 2020) found that the adoption of digital banking by consumers are driven among others by the pu and trust of the digital banking application. in malaysia, a similar study was conducted prior to the issuance of the digital bank license by bnm where it was found that peou is the main influencing factor towards the adoption of digital bank in malaysia (tiong 2020). these two factors will help build the foundation for a potential customer’s interest in using the application and set a certain expectancy on the performance and benefits. pu, on the other hand, may be driven by the fact that digital banks are mostly formed either through a consortium of multiple businesses which is seen from the grab-singtel partnership in singapore. consumer adoption of e-wallets and mobile payment there has been various research conducted which examined the acceptance of e-wallets, focusing on demographics specifically in asia which could have similarities to malaysia. trivedi (2016) and phuong et al. (2020) studied on factors which affected the acceptance of e-wallets among gen y in india and vietnam respectively with both studies found that peou and pu to be the most critical factors towards e-wallet acceptance. in addition, phuong et al. (2020) had highlighted the use of advertisements, quality of the mobile application and the underlying security to be key factors to be considered as well. a good mobile application will increase peou, while security builds trust in customers towards the e-wallet service. the security component was also found to be a contributing variable based on a study conducted in thailand (intarot and beokhaimook 2018). in malaysia, several studies have been conducted on the adoption of e-wallets with mostly opting for tam as the common model used to provide a better understanding of a user’s intention of using the new technology. one of the studies in malaysia (teoh et al. 2020) found that perceived expectation, effort expectation and social influence to be the determinants to customers’ intention of using an e-wallet. however, the study also found that the frequency and transaction of usage is relatively low which would point to the fact that users are not adopting e-wallets as their main method of making payment despite having used e-wallets before. another study conducted (karim et al. 2020) was specifically studying the young adult group on their adoption of ewallets which identified pu, peou, privacy and security as influencing variables. norulhuda et al. (2020) had studied the factors that influence user acceptance towards cashless society and angled the study to scope it to public universities. it was found in the study that performance expectancy, social influence, facilitating condition and trust are strong factors that would influence e-wallet acceptance. on the adoption of mobile payments in malaysia, studies on the factors that would influence their adoption of mobile payment services were conducted (yeow et al. 2017; natarajan et al. 2018) which had used the extended tam model. it was found that pu, peou which made up the tam model as well as perceived credibility, social influence (yeow et al. 2017), perceive risk, perceived enjoyment and satisfaction (natarajan et al. 2018) to influence the adoption of mobile payment services. balakrishnan and nor liyana (2021) had approached the study of cashless adoption in a different manner where instead of using tam, they had used the unified theory of acceptance and use of technology 2 (utaut2) and the technology readiness index 2.0 as the main theories for their study. the construct would still be similar to tam where peou and pu are included in the study but other variables such as optimism, innovativeness, lack of awareness, cashless readiness, risk, intrinsic motivation and adoption are also considered. in their study, it was found that peou, pu, innovativeness, optimism and lack of awareness are key influences on the adoption of cashless payment. recent malaysian evidence supports persistent post-pandemic uptake of digital payments. tian and chan (2024) report that perceived usefulness, perceived ease of use, and perceived quality drive behavioral intention, and trust strengthens the intention–use link in an extended tam model. balakrishnan (2023) finds that malaysians’ readiness and intention to adopt mobile payments reflect strong roles for usefulness, ease, and trust. merchant-side evidence also points to durability of use, with continuance intention shaped by expectation confirmation, service, and network effects in malaysia (mohd reza et al. 2024). complementary results from a national gen z sample show convenience, security, innovativeness, and social influence as significant predictors of digital payment adoption (al-qudah et al. 2024). together, these studies indicate that utility, ease, quality, and trust remain central in malaysia’s post-covid context, which supports integrating situational health-risk perceptions, such as perceived covid-19 risk, into an extended tam to explain variation in intention under rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 171 crisis conditions (tian and chan 2024). hypothesis development there have been various studies conducted using several theoretical models in the factors influencing the adoption of technology which include the innovation diffusion theory (rogers 1995), tam (davis 1989), tpb (ajzen 1991), and theory of reasoned action or tra (hill 1977). davis (1989) had not included any other predictors aside from peou and pu in tam, however, ventakesh and davis (2000) had included sn taken from hill’s tra (1977). the same variables were included together with several studies related to covid-19 such as by daragmeh et al. (2021) in hungary, baber (2021) who studied the acceptance of e-learning during the pandemic of covid-19 in south korea, sukendro et al. (2020) who attempted to understand students’ use of e-learning in indonesia during the covid-19 pandemic. interestingly, only daragmeh et al. (2021) had studied the perceived risk of covid-19 and integrated it into their research framework. this study adopted tam and extended this model to include a part of tra which is on subjective norms or sn. tam has mainly been accepted by researchers as a viable model to evaluate the acceptance of consumers on mobile payments, mobile banking and technology in general based on the amount of research utilizing the model and this has mainly been used to assess the adoption by individual consumers (ajibade 2019; zhang et al. 2018). the inclusion of perceived covid-19 risk extends the technology acceptance model (tam) by incorporating a situational factor that captures external health threats capable of altering perceived usefulness and ease of use. unlike conventional risk constructs such as security or privacy, perceived covid-19 risk represents a temporary yet powerful behavioral trigger under crisis conditions. this variable explains how individuals’ health safety concerns translate into higher perceived utility and reduced resistance toward cashless technology. similar extensions were used by daragmeh et al. (2021), who confirmed that perceived covid-19 risk significantly affects digital payment intention during the pandemic, and by baber (2021), who found comparable effects in technology adoption under health emergencies. integrating this situational risk enriches tam with a socio-environmental dimension relevant to public health contexts. perceived usefulness and perceived ease of use and adoption of mobile payment perceived usefulness (pu) would refer to the perception of consumers on whether the technology would be useful to them in terms of increase in productivity whereas peou would refer to the perception of consumers on the comfortability and confidence of consumers in adopting technology as they are learning and using them (davis 1989). various studies were conducted over the years on the adoption of mobile banking, mobile payment and cashless acceptance in which all of it had found that both pu and peou contributes to the overall adoption of mobile banking, mobile payment and cashless acceptance respectively based on the studies conducted (ahmad adzri et al. 2019; ahmad iqbal and mohd shahrulnizam 2018; balakrishnan and nor liyana 2021; lew et al. 2020; lim et al. 2019; natarajan et al. 2018; owais 2020; syed et al. 2018; syuhaili and tan 2020; yeow et al. 2017; zahoor and fazal 2020). thus, based on the previous literature, the two variables which are pu and peou would be relevant to be included for this study. subjective norms and adoption of mobile payment subjective norms (sn) would refer to the extent of which a consumer is influenced by their social environment such as through their family, friends, experts and celebrities in the adoption of technology (flavián et al. 2020). while the original tam had ignored sn in totality where only the pu and peou are considered, ventakesh and davis (2000) had included sn as a predictor that would affect the intention of consumers in adopting technology. sn has been used in both tpb (ajzen 1991), and tra (hill 1977) in which various research has used as an extension to tam. flavián et al. (2020), daragmeh et al. (2020) and ramos de luna et al. (2023) had conducted their studies on mobile payment adoption and had used sn as part of their theoretical construct. in both studies, sn were found to have significant influence on the intention of consumers to accept and adopt mobile payments. based on the previous literature, sn would thus be relevant to be included in this study. building on prior work by daragmeh et al. (2021) and baber (2021), this study integrates perceived covid-19 risk as a situational construct that complements perceived usefulness, perceived ease of use, and subjective norms in explaining behavioral intention to adopt mobile payment services. perceived covid-19 risk and adoption of mobile payment bauer (1960) had introduced the concept of perceived risk having an influence on consumer behaviour. in this study, the perceived risk is tied to a situational element which is on covid-19 and study its impact on the adoption of mobile payment by consumers. however, there have been limited studies conducted which rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 172 utilizes the perceived risk of covid-19 on the use of mobile payments. since there has been a study conducted that there is a risk of being infected by covid-19 due to the use of cash, coins and banknotes as covid-19 can last on common surfaces such as glass, stainless steel and banknotes for up to 28 days (riddell et al. 2020), the world economic forum (2020) had suggested for countries to adopt digital payment to help countries cope with covid-19. daragmeh et al. (2021) had included the study of perceived risk in their study on covid-19 and ewallet usage intention and had found a positive correlation between the two variables. based on the previous literature and current market situation, the perceived covid-19 risk would thus be relevant to be included for this study. methods theoretical framework some of the identified variables include pu, peou, sn and risk perceived that covid-19 presents, all of which would enhance the proposed overall objective of this research that is on influencing the adoption of mobile payment where the inferring factor is the presence of covid-19 in malaysia. figure 1. theoretical framework of the study according to what has been stated, a theoretical framework of the study was established as illustrated in figure 1 above. in the figure it can be observed that the dependent variable (dv), which is on the variable of adoption of mobile payment, is influenced by four independent variables (iv) pu, peou, sn and the perceived risk of taking covid19. research hypotheses from the theoretical framework structured in figure 1 and the hypotheses development set out in the literature section, a set of hypotheses could be formed which are as follows: h1: subjective norms would affect the behavioural intention to adopt mobile payment h2: perceived usefulness would affect the behavioural intention to adopt mobile payment h3: perceived ease of use would affect the behavioural intention to adopt mobile payment h4: perceived covid-19 risk would affect the behavioural intention to adopt mobile payment data collection the population of the study would involve malaysians aged 18 years old, and above which falls within above the age of minority who otherwise would not have the ability and capacity to contract (agc 2006). the population of the study is 23.6 million (world population review, 2021). the sampling size, however, is taken from the population of study based on a confidence level of 95% along with a 5% margin of error is used in this study where the relationship between the sample size and total population has a diminishing relationship and remains relatively constant at slightly above a quantity of 380. the table included in the study by krejcie and perceived usefulness perceived ease of use subjective norms perceived covid-19 risk behavioural intention to adopt mobile payment independent variable dependent variable rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 173 morgan (1970) states that for a total population of 1 million people and above, only 384 respondents are required as the sample size. the study used a probability sampling method in which all malaysians aged 18 and above have a probabilistic chance of being selected as sample subjects. probabilistic sampling design is the most logical approach to be used as the study would require wider generalization to provide a better representation of the population. there were 400 responses gathered by use of an online questionnaire of which 393 were analysed after excluding the invalid responses. the 7 omitted responses failed to fit the expected age-bracket. the analysis of the data was carried out based on the data that has already been coded by utilizing statistical package for social sciences, or spss, version 26. the data analysis procedure that was carried out and categorized under statistical method entailed carrying out a descriptive analysis of the demographics, a reliability test, correlation test, and a multiple regression analysis. results and discussion descriptive statistics four questions were asked with regards to demographics involving gender, age, education level and employment status. these demographics were analysed and presented as per table 1. table 1. demographic profile demographics frequency percentage (%) gender male 156 40 female 237 60 age 18-29 years old 98 25 30-39 years old 85 22 40-49 years old 172 44 50-59 years old 33 8 60 years old and above 5 1 education level mce/spm 29 8 diploma / foundation / matriculation 76 19 bachelor’s degree / professional degree 216 55 postgraduate degree 72 18 employment level employee 273 69 self-employed 62 16 unemployed 58 15 source: compiled by authors. the demographic profile of the study has been summarized in table 1 above as a tabulation of the gender, age, level of education and their employment status of the respondents. the table shows a gender breakdown of the respondents whereby out of the 393 total respondents 237 respondents, a majority of the sample population or 60 percent are the females, and the 156 respondents or 40 percent are male. in addition, out of the total respondents, about 90% of the respondents are below the age of 50, with 47% between 18 to 39 years old and 44% between 40 to 49 years old. it is interesting to note that the age group mix would have an almost even distribution between those aged between 18 to 39 years old who are assumed to be more technologically adapted and with those aged between 40 to 49 years old. 73% of the respondents have a bachelor’s degree (55%) or higher (19%) with 69% of the total respondents are employed. a higher level of education and employment may indicate better capability, openness and exposure to adopting newer technologies such as mobile payment which may provide relevant data for this study. reliability analysis reliability analysis is a decision tool to provide a scale of measurement to evaluate the consistency over time or stability over a variety of conditions (drost 2011). cronbach’s alpha is used to determine the internal consistency based on the alpha value (george and mallery 2003). rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 174 table 2: reliability statistics cronbach's alpha n of items sn 0.886 4 peou 0.860 3 pu 0.879 4 perceived covid-19 risk 0.922 3 source: compiled by authors. table 2 indicates that the value of cronbach alpha of sn (independent variable) is 0.886 or 88.6 percent. according to george and mallery (2003), this alpha indicates good internal consistency. the four questions in sn section are termed to be consistent and reliable. the cronbach alpha value of peou (independent variable) is 0.860 or 86 percent. referring to the same scale, the 0.86 alpha value is considered good which can qualify the three items in peou as consistent and reliable. the 4 items revolving around pu (independent variable) obtained 0.879 or 87.9% alpha value which is considered as good. thus, the 4 items are qualified as consistent and reliable. the final variable in this study is the “perceived covid-19 risk’ which has an excellent alpha value of 0.922 or 92.2%. thus, the 3 questions used for this independent variable are consistent and reliable in this study. correlation analysis table 3. correlation analysis of research variables behavioural intention sn peou pu perceived covid-19 risk behavioural intention pearson correlation 1 0.401*** 0.610*** 0.746** 0.385*** sig. (2-tailed) 0.000 0.000 0.000 0.000 n 393 393 393 393 393 sn pearson correlation 0.401*** 1 0.362*** 0.386*** 0.350*** sig. (2-tailed) 0.000 0.000 0.000 0.000 n 393 393 393 393 393 peou pearson correlation 0.610*** 0.362*** 1 0.670*** 0.244*** sig. (2-tailed) 0.000 0.000 0.000 0.000 n 393 393 393 393 393 pu pearson correlation 0.746*** 0.386*** 0.670*** 1 0.312*** sig. (2-tailed) 0.000 0.000 0.000 0.000 n 393 393 393 393 393 perceived covid-19 risk pearson correlation 0.385*** 0.350*** 0.244*** 0.312*** 1 sig. (2-tailed) 0.000 0.000 0.000 0.000 n 393 393 393 393 393 ***. correlation is significant at the 0.01 level (2-tailed). source: compiled by authors. correlation analysis of each variable in the research is presented in table 3 with a significant value determined in the 393 respondents. the correlational strength between dependent variable and independent variables in terms of pearson correlation (r-value) is determined in the above table to determine the proximity of two variables in terms of the value of correlation coefficient which ranges between -1 and +1 (pearson 1895). this gives the finding that the four independent variables sn, peou, pu, and perceived covid-19 risk show positive correlation relationship with the dependent variable of behavioural intention. it implies that, by raising the value of independent variables, it would be at the expense of rising the value of dependent variable. perceived covid-19 risk has weak positive correlation with the dependent variable whereas sn and peou have moderate positive relationship with the dependent variable. the highest positive correlation (r = 0.746) between the dependent variable and a variable in this research is pu. independent variables used in the analysis have its p-value of 0.000 as depicted in table 3 as sig. (2-tailed). it shows that the correlation or r-value is to be extremely significant. hence, null hypotheses are rejected for each independent variable. rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 175 regression analysis table 4. model summary model r r square adjusted r square std. error of the estimate 1 0.778a 0.606 0.602 0.45410 a. predictors: (constant), sn, peou, pu, perceived covid-19 risk source: compiled by authors. table 4 depicts the model summary of the regression process. r squareor r2 is the percentage of the variance of the dependent variable that can be explained by the four independent variables in this behavioural research project: sn, peou, pu and perceived covid-19 risk. it is worth noting that r2 is 0.606 or 60.6 percent. the r2 value shows that 60.6 percent of the dependent variable variance can be estimated using the independent ones. that is, the transformation of the four independent variables can explain 60.6 percent of the dependent variable in this study. nonetheless, 39.4 percent was not affected by the differences in the independent variable. table 5. anova model sum of squares df mean square f sig. 1 regression 123.067 4 30.767 149.207 0.000b residual 80.007 388 0.206 total 203.074 392 a. dependent variable: behavioural intention b. predictors: (constant), sn, peou, pu, perceived covid-19 risk source: compiled by authors. analysis of variance is used to obtain the probability that there is a relationship between none of the independent variables in the regression model and the dependent variable that is more than what would be expected as a result of chance alone because of a sampling error. as per the table 5, significance statistics of the regression model reveals, f-test points to the fact that there is virtually no possibility that the correlation between the four independent variables and the dependent variable can be the result of random sampling error. table 6. coefficients model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 0.088 0.179 0.494 0.622 -0.264 0.441 sn 0.061 0.030 0.073 2.012 0.045 0.001 0.120 peou 0.188 0.046 0.178 4.097 0.000 0.098 0.278 pu 0.631 0.051 0.554 12.454 0.000 0.531 0.730 perceived covid-19 risk 0.098 0.024 0.144 4.136 0.000 0.051 0.144 source: compiled by authors. table 6 gives regression coefficients of partial regression, each of the independent variables in regression model and tests of significance of each statistic. the amount of sn change, 1 unit increase (in a 5 point-likert scale), is correlated with a 0.061 unit change in the outcome variable at the same time other attributes will hold constant. therefore, this model postulates that a one unit increase in the sn answers will boost the behavioural intention of the respondent in terms of adoption of mobile payment with a unit of 0.061. if the values of peou, pu and perceived covid-19 risk are raised by one unit each holding others constant, it will have an impact of raising the dependent variable by 0.188, 0.631 and 0.098 units respectively. the standardized coefficient in the ‘beta’ column of table 6 reports the effects of each independent variable on the dependent variable based on standard deviations. the ‘beta’ section would hence be interpreted as: for a one standard deviation increase in sn, a 0.073 standard deviation increase in the dependent variable rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 176 would be expected. a similar case for peou, pu and perceived covid-19 risk can be seen as well. thus, among the four independent variables, pu is reported to be the most important and strongest influence on the dependent variable with a standardized beta of 0.554 followed by peou, perceived covid-19 risk and sn. the tests of significance for each predictor or independent variables have been assessed and the results yield that the partial correlation between the independent variables peou, pu and perceived covid-19 risk against the dependent variable is not due to chance, which is sampling error (sig. = 0.000). however, for sn, there is a 4.5% chance that the variable is correlated due to sampling error. summary of hypotheses analysis table 7. summary of hypotheses analysis hypothesis alternative result h1 subjective norms would affect the adoption of mobile payment significant h2 perceived usefulness would affect the adoption of mobile payment significant h3 perceived ease of use would affect the adoption of mobile payment significant h4 perceived covid-19 risk would affect the adoption of mobile payment significant source: compiled by authors. based on table 7 above, all hypotheses are accepted based on the four independent variables of sn, peou, pu and perceived covid-19 risk. the result of the regression analysis with the dependent variable has confirmed that the four independent variables would highly influence the behavioural intention of malaysians to adopt mobile payments. thus, the null hypotheses for all four independent variables are rejected since the significant value for all variables is 0.000. with this, all the research objectives in this study are met and concluded effectively. there is substance to the researcher's theoretical framework based on the research questions and hypothesis results. an extended tam model which fuses the concepts proposed in tpb and tra were used to include pu, peou, sn and perceived covid-19 risk. according to the findings of this study, the four independent variables were found to be statistically significant in its influence users’ intentions to accept and use mobile payments. conclusion the purpose of this empirical study was to study the factors influencing the behavioural intention to adopt mobile payment with the presence of covid-19 in malaysia. the effects of the independent variables which consist of sn, peou, pu and perceived covid-19 risk have been analysed based on their influence on the behavioural intention of malaysians to use mobile payments from the 393 responses collected. majority of the respondents are female with the biggest age group are those aged between 40-49 years old. most of the respondents hold a bachelor’s degree or a professional degree and based on their employment status, most of respondents are currently employed. based on the regression analysis, it was found that all variables had a significant effect on malaysians’ behavioural intention to use mobile payments during the covid-19 pandemic with pu having the highest degree of influence for malaysians to adopt mobile payment. after testing and analysing the data obtained using reliability, correlation, and multiple regression, it was found that all variable in the theoretical framework is significantly related to the hypothesis testing result and the research questions which on malaysians’ behavioural intention to use mobile payments during the covid-19 pandemic. this study has thus contributed by providing insights and input into the future development of the mobile payment industry where pu was seen as the biggest influencer to the behavioural intention to adopt mobile payment. the inclusion of perceived covid-19 risk as part of the market considerations within tam provides a theoretical and practical contribution to the studies expanding the theory. this would therefore open up for other researchers to include market considerations as part of their study to assess the behavioural intention of people to adopt technology. the findings highlight the need to sustain fintech innovation and trust-driven adoption beyond the pandemic. in malaysia, recent evidence shows that user trust remains a necessary condition for continued use of mobile payments, confirming its central role in shaping digital financial behavior (mohd reza et al. 2024; tan et al. 2024). this aligns with bank negara malaysia’s financial sector blueprint 2022–2026, which emphasizes digital inclusion and a secure cashless ecosystem (bank negara malaysia 2022). in indonesia, studies reveal that micro, small, and medium enterprises (msmes) increasingly adopt qr-based mobile payments, with perceived ease of use, trust, and merchant readiness emerging as key determinants (irianto and rushaizzad a.rahim and jaizah othman / finance, accounting and business analysis, volume 7 issue 2, 2025 177 chanvarasuth 2025). similarly, in vietnam, institutional support, perceived convenience, and trust drive mobile money adoption, reflecting the growing maturity of the fintech ecosystem (nguyen et al. 2025). these patterns suggest that across asean, digital payment adoption is reinforced by trust, usability, and supportive regulatory environments. policymakers should continue promoting financial literacy and equitable access to digital finance, while industry practitioners strengthen risk communication and service quality to sustain consumer confidence in the post-pandemic period. one of the recommendations that can be provided is for e-wallet and banks to angle marketing activities on mobile payments based on pu as the main criteria. given that this study had found that the pu would play the most influential role for users to adopt mobile payments, banks and e-wallets can angle their marketing activities based on the multitude of benefits and functions that are included as part of their mobile payment ecosystem. the perceived covid-19 risk, despite not having the highest degree of influence, would still contribute to the overall adoption of mobile payment. thus, banks and e-wallets can also angle their marketing efforts on the safety and security of using mobile payment while hindering the risk of covid-19. as the covid19 pandemic continue to shift consumer behaviour, bnm as the central bank of malaysia, can take this opportunity to reinforce and focus its efforts in driving cashless payments. this would see bnm to be able to assess the country’s cash in circulation to a better degree. in addition, the adoption of mobile payment by malaysians would also prepare the country for greater financial inclusion and potentially adopt a central bank digital currency if bnm considers adopting it. this study focused on the perceived covid-19 risk without consideration of other risks such as security and privacy risks, or even other market conditions such as inflation rate and consumer price index. in addition, this study did not examine the different perspectives of the various actors involved in mobile payments which include the mobile payment providers such as banks and e-wallets, as well as the merchants who will be the ones accepting mobile payments. the adoption of mobile payments may potentially be impacted depending on the degree to which merchants adopt and accept mobile payments which were not included in this study. another consideration for future 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info articles abstract history article: submitted 19 february 2025 revised 19 may 2025 accepted 22 may 2025 purpose: this study aims to examines advanced portfolio management techniques using long short-term memory (lstm) networks, the study was applied to investing in cryptocurrencies whose markets are characterized by high-frequency trading, and using behavioral finance models based on the concept of return-risk and deep learning based on the work of artificial neural networks (ann) and long-term memory (lstm) algorithms design/methodology/approach: this study adopts quantitative approach. moreover, a random portfolio consisting of 25 cryptocurrencies was selected based on the database of the website: https://finance.yahoo.com/crypto/ during the period 2021-2024 ad and programming the python language. and an attempt to evaluate the performance of the models used in accurately predicting the optimal relative weights of the investment portfolio, which proved the relative effectiveness of deep learning models by estimating the values of the mean square error (mse) at a level of 0.0218% to predict the optimal portfolio weights for 5 days based on training 80% and testing 20% of the study data. findings: the second hypothesis of this study was accepted, which states the effectiveness of deep learning algorithms to predict the weights of optimal portfolios with a return estimated at 1.7239% and a risk of 1.1219% and a sharpe index value estimated at 1.5365%, while the markowitz return-risk model portfolio came with a return rate estimated at 31.15% and a risk of 39.05%. with no diversification of investment on all portfolio assets and a sharpe index value of 0.7978%. practical implications: this study provides important insights that machine learning offers significant advantages in portfolio optimization, from improved forecasting of asset returns to dynamic rebalancing, better risk management, and automation. the ability to handle high-dimensional, non-linear, and nonstationary data makes ml an ideal tool for optimizing portfolios in complex and fast-moving markets; especially in cryptocurrency markets. however, challenges like data quality, overfitting, and interpretability must be addressed to ensure effective deployment of ml in real-world portfolio. originality/value: this study provides an original and timely contribution to understanding the use of deep learning for portfolio optimization represents a significant advancement over traditional financial models by offering several original and valuable benefits. these include the ability to capture complex nonlinear relationships, dynamic rebalancing in response to real-time data, processing of unstructured data (like sentiment analysis), advanced risk management, and the integration of high-dimensional data. the combination of these capabilities enables more accurate, adaptive, and robust portfolio optimization, ultimately enhancing portfolio performance and reducing risk. paper type: research paper keywords: markowitz model, deep learning, portfolio optimization, cryptocurrencies, lstm neural networks jel: c38, c4, c45, c5, c58, g1, g11. * address correspondence: e-mail: habib.zouaoui@univ-relizane.dz1 meryemnadjat.naas@univ-relizane.dz2 http://faba.bg/ https://doi.org/10.37075/faba.2025.1.07 mailto:meryemnadjat.naas@univ-relizane.dz https://orcid.org/0000-0001-7694-2473 https://orcid.org/0009-0004-4018-1261 habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 83 introduction portfolio optimization is a cornerstone of modern finance, focusing on the strategic allocation of capital across various assets to achieve specific investment objectives, such as maximizing returns or minimizing risk. traditional methods, such as the markowitz mean-variance model, rely on statistical assumptions and linear relationships, which may not adequately capture the complexities of financial markets. given that these markets often exhibit non-linear dynamics and intricate interdependencies, deep learning (dl) emerges as a compelling alternative for portfolio optimization. this literature review explores the application of dl techniques in optimizing portfolios, highlighting their capacity to model non-linear relationships and enhance predictive accuracy. we examine various dl architectures, including neural networks and reinforcement learning, and their efficacy in addressing the limitations of traditional models. the review also discusses practical implications, such as feature selection and data preprocessing, and identifies future research directions to further integrate dl methods into portfolio optimization frameworks. ultimately, this review underscores the potential of deep learning to revolutionize portfolio management in an increasingly complex financial landscape (zhang et al. 2025). however, artificial intelligence is one of the sciences that the world has begun to rely on in various areas of life due to the ability of this science to collect and analyze big data (big data) and make decisions and reach accurate results that exceed the ability of the human element. as for the field of financial markets, with the increasing complexities of financial globalization that have increased the conditions of future uncertainty and high risks, asymmetry of circulating information and problems of fear and panic among investors, and in light of the emergence of the fourth industrial revolution, automation of financial services and high-frequency trading, more than 80% of daily global stock market trading has become trading done through artificial intelligence (ai) and algorithmic trading, as they are trading done without any human intervention. artificial intelligence enables investors to trade by creating, examining and testing data and making investment decisions automatically through machine learning. machine learning is programmed through algorithms and placing orders according to specific criteria such as average daily trading and comparing them with trading averages in past periods, price changes, offered quantities, market fluctuations as a whole, price changes in the derivatives market and the future outlook of the economy, taking into account, for example, news related to stimulus packages or any news affecting the market by decision makers, in order to study and analyze them and reach a final result by machine learning, which leads to the implementation of a specific investment order. trading in this innovative method results in objectivity in the investment decision. behavioral finance is predominant in humans during trading, meaning that they are more likely to be affected behaviorally by the environment and economic changes, which leads to a change in the investment decision that was previously taken, and this change in behavior and investment decision may result in unexpected losses. one of the benefits of this innovative trading method is the speed of executing trading orders, as an investment opportunity is searched for, information about it is collected, and a huge amount of data is analyzed accurately, and the appropriate investment decision is made through machine learning. this entire process is completed in a matter of seconds. as the human being’s ability to search for a similar opportunity and implement the appropriate investment decision regarding it takes longer, which may lead to wasting the investment opportunity. generally, our study will try to test the following hypotheses: h1: the dl models provides the forecasting of cryptocurrencies portfolio optimization with higher accuracy than mpt model. h2: the mpt model provides the forecasting of cryptocurrencies portfolio optimization with higher accuracy than dl models. literature review table below is a summarized comparison of results from recent studies (2020–2025) on portfolio optimization using deep learning models versus harry markowitz's modern portfolio theory (mpt) model. these results highlight the key findings and performance metrics from the studies. however, mpt remains a cornerstone of portfolio optimization due to its simplicity and effectiveness in diversification. however, its limitations in handling dynamic and complex markets have led to the rise of alternative approaches like deep learning (dl) models (e.g., lstm, gru), which offer superior adaptability and predictive power. hybrid models combining mpt and dl are emerging as a promising direction for robust portfolio optimization habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 84 table 1. reviewed previous studies authors/year studytitle methodology key findings heydarpour et al. (2024) robust portfolio optimization using lstm-based stock and cryptocurrency price prediction: an application of algorithmic trading strategies vlma, flma, ema, and sma algorithms based on the lstm's predicted price lstm and rnn capture temporal dependencies, outperforming mpt in dynamic markets. lstm/rnn adapt better to timeseries data; mpt assumes static correlations. yu (2023) mean-variance portfolio optimization by lstm-based predictions lstm model and based calculated the predicted returns on a rolling basis hybrid model which combine the stock price forecasting with asset allocation can indeed bring excess returns xu et al.(2022) lstm-mpt based quantitative portfolio decision model, combining markowitz meanvariance model, monte carlo algorithm, and lstm prediction price curve a comparative analysis with the four commonly used portfolio model strategies shows that the lstmmpt decision model is valid and reliable for long-term investments cui et al. (2023) portfolio constructions in cryptocurrency market: a cvarbased deep reinforcement learning the cvar risk measure and a deep reinforcement learning optimization unfolding that cvar measure with deep learning outperforms the traditional portfolio construction technique xu et al. (2025) cryptocurrency portfolio optimisation based on lstm time series forecasting combining long short-term memory (lstm) time series forecasting with traditional portfolio optimization methods the results indicate that the lstmenhanced portfolio optimization method yields higher returns and better risk management compared to traditional methods zhang )2025(et al. portfolio optimization with lstm-based return and risk information deep learning-based portfolio strategy with prediction-based return as well as prediction-based risk information lstm and rnn capture temporal dependencies, outperforming mpt in dynamic markets durall (2022) asset allocation: from markowitz to deep reinforcement learning mpt, and on ml approaches based on deep reinforcement learning drl method has the potential to construct a promising investment strategy sebastian et al. (2024) deep learning for stock price prediction and portfolio optimization lstmmpt. meanvariance optimization the study hence concludes that combining forecasting theory with portfolio selection could improve portfolio returns source: authors’ analysis from literature review (2025). broadly, the integration of deep learning techniques into cryptocurrency portfolio optimization has garnered increasing attention due to the unique challenges posed by the highly volatile and non-linear nature https://ieeexplore.ieee.org/author/37089994028 https://www.researchgate.net/scientific-contributions/zhihan-xu-2310944930?_sg%5b0%5d=nshxw2tzfs_nlqlgcz6xzaexlsztzphyk7yyktuhhfgwykz-6xli54nklpasjn5sk6wyszm.cr3p79x3re5v8zarcoqkkrfrx1_7uiuzoekmlbwtmx5lviqjhc_xdoltc7pngi-yc9nlgkzn7xn5kq_sawhqcq&_sg%5b1%5d=-qo9dnqhyd-cudf6f7ri50_zuzec_iwjsnfl5sent-1nsgnjxlzlfobvtbjwqjrrl4h9nng.i3p6f0lebdaywuwi5lg2tluf8w4dnr79jz4gcfxdxumkjctvcmuhj4-art06vgjjzr3rgcuzpddxcx4vjahrla&_tp=eyjjb250zxh0ijp7imzpcnn0ugfnzsi6inb1ymxpy2f0aw9uiiwicgfnzsi6inb1ymxpy2f0aw9uiiwicg9zaxrpb24ioijwywdlsgvhzgvyin19 https://papers.ssrn.com/sol3/cf_dev/absbyauth.cfm?per_id=5176908 habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 85 of cryptocurrency markets. this literature review systematically examines recent advancements in applying deep learning methods for optimizing cryptocurrency portfolios. we analyze various architectures, including recurrent neural networks (rnns), convolutional neural networks (cnns), and reinforcement learning, assessing their effectiveness in predicting price movements and enhancing portfolio performance. the review highlights key findings on the ability of deep learning models to capture complex relationships and patterns within cryptocurrency price data, leading to improved risk-adjusted returns. additionally, we discuss the implications of feature selection, data preprocessing, and model evaluation metrics critical for successful implementation. the review concludes by identifying gaps in the current literature and proposing directions for future research, particularly in the areas of model interpretability and the incorporation of macroeconomic factors into deep learning frameworks for cryptocurrency portfolio optimization. (ashy et al. 2024). materials and methods modern portfolio theory (mpt) model modern portfolio theory (mpt) provides a rigorous, quantitative framework for portfolio construction that emphasizes diversification and the tradeoff between risk and return. while it has become a cornerstone of modern investment theory, its assumptions of normal returns and constant correlations can limit its practical application in volatile or non-normal market conditions. however, mpt continues to serve as a benchmark, and modern variations (e.g., black-litterman model, dynamic mpt) have been developed to address some of its shortcomings (zouaoui and naas 2021). furthermore, we should present the mpt mathematical model, moreover, we consider a more general case with n risky securities notations: for i = 1,..., n, 𝐖 = (𝑤1, … , 𝑤𝑛) : is the vector of portfolio weights. 𝐑 = (𝑅1, … , 𝑅𝑛) : is the vector of asset returns. �̅� = (�̅�1, … , �̅�𝑛) : is the vector ofasset returns expectations. 𝐞 = (1, … ,1) : is the vector with all components equal to 1. 𝐕 = [𝜎𝑖𝑗] 1≤𝑖,𝑗≤𝑛 : is the (n × n) variance-covariance matrix of returns. the matrix v is supposed to be invertible. denote by w' the vector deduced from transposition of the vector w. for each given expected return, we have to determine the minimal variance portfolio. therefore, following the markowitz approach to determine optimal weights of portfolio, we have to determine the set of portfolios which minimize the variance for given expected returns 𝔼[𝑅𝑃]. this leads to the following quadratic optimization problem (prigent 2007): minww′⋁w, 𝑤𝑖𝑡ℎ w′. r̅′ = 𝔼[𝑅𝑃] w′. e = 1 (1) the first constraint corresponds to the fixed expectation level. the second constraint is simply that w is a vector of weights. however, short selling is allowed and no other specific constraints are introduced. the expected return of any portfolio p with weights w is given by: 𝔼[𝑅𝑃] = ∑ 𝑤𝑖𝔼[𝑅𝑖] 𝑛 𝑖=1 = w. r̅′ (2) the variance of the return of p is equal to: σ2(𝑅𝑃) = w′v w = ∑ ∑ 𝑤𝑖𝑤𝑗𝜎𝑖𝑗 𝑛 𝑗=1 𝑛 𝑖=1 = ∑ ∑ 𝑤𝑖𝑤𝑗𝜎𝑖𝑗 + ∑ 𝑤𝑖 2𝜎𝑖 2 𝑛 𝑖=1 𝑛 𝑗=𝑖+1 𝑛 𝑖=1 (3) the previous relation shows the decomposition of the variance of the portfolio return into two components. this relation proves that the marginal contribution of a given asset to the risk of the whole portfolio is not reduced to its own risk (its variance), but also takes account of its potential correlations to other securities. this latter property induces the diversification effect. habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 86 from relation below, the partial derivative with respect to any weight wi is deduced: ∂σ2(𝑅𝑃) ∂𝑤𝑖 = 2 ∑ 𝑤𝑖𝜎𝑖𝑗 𝑛 𝑗=1 (4) denote by σip the correlation coefficient between asset i and portfolio p. then: ∑ 𝑤𝑗𝜎𝑖𝑗 𝑛 𝑗=1 = ∑ 𝑤𝑗 𝑛 𝑗=1 𝐶𝑜𝑣(𝑅𝑖 , 𝑅𝑗) = 𝐶𝑜𝑣 (𝑅𝑖, ∑ 𝑤𝑗 𝑛 𝑗=1 . 𝑅𝑗) = 𝐶𝑜𝑣(𝑅𝑖 , 𝑅𝑗) = 𝜎𝑖𝑃 (5) and finally: ∂σ2(𝑅𝑃) ∂𝑤𝑖 = 2𝜎𝑖𝑃. (6) deep learning (dl) models this section is devoted to briefly describe the basic principle of four non-linear machine learning models or deep learning models that will be used later for cryptocurrency forecasting namely rnn, lstm (zouaoui and naas 2023). recurrent neural networks (rnn) forecasting with recurrent neural networks (rnns) is a common application in time series analysis, where the goal is to predict future values based on past observations. rnns are particularly well-suited for sequential data due to their ability to capture temporal dependencies. here's a general guide on how to use rnns for forecasting (ibri and slimane 2022): a. data preparation: o collect and preprocess the time series data (e.g., normalize or standardize the data). o create input-output pairs by sliding a window over the sequence. for example:  input: (xt,xt+1,…,xt+n−1)  output: xt+n (the value to predict). b. model design: o choose the rnn architecture (e.g., lstm, gru). o define the number of layers, hidden units, and activation functions. o add a dense layer at the end to produce the final output (e.g., a single value for univariate forecasting or a vector for multivariate forecasting). c. training: o use a loss function like mean squared error (mse) or mean absolute error (mae) to measure the difference between predicted and actual values. o optimize the model using backpropagation through time (bptt) and an optimizer like adam or sgd. d. evaluation: o evaluate the model on a test set using metrics like rmse, mae, or mape. o visualize the predictions against the actual values to assess performance. e. forecasting: o use the trained model to predict future values by feeding it the most recent sequence of data. longshort-term memory (lstm) model lstm (long short-term memory) is a specialized type of recurrent neural network (rnn) that is capable of learning long-term dependencies. it was introduced by hochreiter & schmidhuber in 1997 to address the vanishing gradient problem encountered by traditional rnns. lstm achieves this by using gates that regulate the flow of information in the network (brown et al. 2023). moreover, the lstms are highly effective for tasks involving sequential data, such as time series forecasting, natural language processing (nlp), speech recognition, and more (zeroual et al. 2020). furthermore, figure 1 shows a complete diagram of lstm, similar to figure1 with rnn. the lstm has four components: input gates, forget gate, cell state, and output gate. habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 87 figure 1. schematic diagram of lstm model o input gate (rt) &candidate cell state(dt):the input gate decides which new information to store in the cell state: 𝑟𝑡 = σ(𝑊𝑓 . [ℎ𝑡−1, 𝑥𝑡]) + 𝑏𝑓 (7) the candidate cell state represents the new information that could be added to the cell state. dt = tanh(𝑊𝑑 . [ℎ𝑡−1, 𝑥𝑡]) + 𝑏𝑑 (8) o forget gate: the forget gate decides how much of the previous memory should be discarded from the cell state: ft = σ(𝑊𝑖 . [ℎ𝑡−1, 𝑥𝑡]) + 𝑏𝑖 (9) when: σ = sigmoid function that outputs values between 0 and 1 (0 means “forget” and 1 means “retain”). o cell state update: the new cell state is updated based on the forget gate and input gate decisions: 𝐶t = ft. 𝐶𝑡−1 + 𝑟𝑡 . 𝑑𝑡 (10) the forget gate ct scales the previous cell state ct−1, and the input gate rt scales the candidate cell state dt. o output gate: the output gate controls what part of the cell state to output as the next hidden state ht: 𝑜t = σ(𝑊0. [ℎ𝑡−1, 𝑥𝑡]) + 𝑏0 (11) ℎt = 𝑜ttanh 𝐶t (12) the output gate decides how much of the cell state should be passed to the next time step. performance metrics table below summarizing the key risk-adjusted performance metrics in portfolio optimization: sharpe ratio, sortino ratio, variance (var), and conditional value at risk (cvar). moreover, this table highlights how these metrics are used in portfolio optimization to balance risk and return, such as purpose in optimization and interpretation of results. habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 88 table 2. key risk-adjusted performance metrics in portfolio optimization metric formula purpose in optimization interpretation sharpe ratio sharpe ratio = 𝔼[𝑅𝑃] − 𝑅𝑓 𝜎𝑃 maximize risk-adjusted return relative to a risk-free rate higher values indicate better risk-adjusted performance. sortino ratio sortino ratio = 𝔼[𝑅𝑃] − 𝑅𝑓 𝜎𝑑𝑜𝑤𝑛 maximize risk-adjusted return, focusing only on downside risk. higher values indicate better performance with less downside risk. variance (var) 𝑉𝑎𝑟(𝑅𝑃) = ∑ ∑ 𝑤𝑖𝑤𝑗 𝑛 𝑗=1 𝐶𝑜𝑣(𝑅𝑖, 𝑅𝑗) n 𝑖=1 minimize the dispersion of returns around the mean (reduce volatility). lower variance indicates less risk and more stable returns. conditional value at risk (cvar) cvar = 1 1 − c ∫ 𝑥𝑝(𝑥)𝑑𝑥 var −∞ minimize the average loss in the worst α% of cases (reduce tail risk). lower cvar indicates less exposure to extreme losses. source: prigent (2007). results and analysis data description this study constructs an optimal investment portfolio for high-frequency, high-risk cryptocurrency markets by conducting a comparative analysis between traditional markowitz mean-variance optimization and advanced deep learning models. by evaluating their performance across key metrics—such as riskadjusted returns, volatility resilience, and scalability—we aim to identify the most effective strategy for algorithmic cryptocurrency trading. our findings will provide actionable insights for quantitative investors, hedge funds, and automated trading systems operating in ultra-volatile digital asset environments. therefore, the study was applied to real data of time series of daily prices of a financial portfolio consisting of twenty-five (25) cryptocurrencies with high market values and the most traded in the market, during the period between (08/15/2021-08/16/2024) at 1093 observations based on the database of the website: https://finance.yahoo.com/crypto/ and python programming. however, the following figure shows the development of the returns of the portfolio assets during the study period. source: based on python code github/https://github.com/dimasthoriq/dl-portfolio optimization/blob/main/experiment.ipynb/ yahoo, https://finance.yahoo.com/markets/crypto/all figure 2. the returns of cryptocurrency portfolio assets the cryptocurrency market witnessed many fluctuations during the study period, especially with the beginning of the covid-19 crisis, which was a difficult and harsh year, until 2022, when cryptocurrencies https://www.amazon.com/jean-luc-prigent/e/b001joencm/ref=dp_byline_cont_book_1 https://finance.yahoo.com/crypto/ habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 89 faced more than one dilemma that caused them to face the largest wave of losses since the corona crisis. the losses are not only due to the return of central banks around the world to warn against this market, which has no controls yet. but with central banks moving to tighten monetary policy and raise us interest rates to high levels, 2022 witnessed a mass wave of investors fleeing risky asset markets, including "crypto" and stocks, to hold the us dollar. due to the waves of mass exodus of investors, some platforms failed to return customers' dues, which is what happened with the "ftx" platform, which declared bankruptcy and is currently being investigated, and its ceo is scheduled to appear before an investigation committee in the us congress. in terms of trading during 2022, the combined market value of cryptocurrencies fell by 614 percent, losing about $1,340 billion after their total value fell from $2,182.5 billion at the beginning of the year’s trading to about $842.5 billion at the end. during 2023, the market value of cryptocurrencies witnessed mixed developments, as the total market value of cryptocurrencies increased from about $800 billion at the beginning of the year to nearly $1.1 trillion by the end of 2023, an increase of 37.5%. bitcoin (btc) maintained its position as the largest cryptocurrency in terms of market value, reaching $450 billion by the end of the year, followed by ethereum (eth), which came in second place with a market value of $300 billion. thus, the gap between bitcoin and ethereum narrowed during the year, as it was about $250 billion at the beginning of 2023 and decreased to $150 billion by the end of the year. other cryptocurrencies such as ripple (xrp) and coin lite (ltc) recorded growth in their market value, but at lower rates than bitcoin and ethereum. in general, the cryptocurrency market witnessed a remarkable growth in total market value during 2023, with bitcoin and ethereum dominating the sector. the analysis of these fluctuations is linked to several reasons, including the occurrence of many fraud operations through cryptocurrencies, which led to tarnishing their reputation. moreover, the occurrence of more than one hacking operation on cryptocurrency platforms. the declaration of bankruptcy by some platforms, the most famous of which was the largest platform, ftx, which was declared bankrupt. furthermore, the exit of cryptocurrency platforms and their cessation in some major countries due to tightening restrictions and their move to other less powerful markets. the rules and laws began to be tightened more in some countries, perhaps the most prominent of which is the united states of america, which was the opposite of the year 2022. some political unrest and geopolitical factors around the world also boosted the rise in the price of bitcoin in particular, which recorded record increases exceeding 100 percent (but it has not reached peak levels yet), which analysts attributed to technical and economic effects, in addition to the impact of recent geopolitical tensions (the russian-ukrainian war and the war on gaza), so that its price exceeded forty thousand dollars. in 2024, cryptocurrency markets are witnessing a noticeable decline during today's trading, with the prices of many major digital currencies declining. bitcoin, the largest cryptocurrency by market value, recorded a 0.83% decline to reach $64.8 thousand, after approaching the $70,000 barrier in the past weeks. ethereum was not immune to these declines, as it fell by 0.80% to reach $3,514, and other currencies such as tether, bnb, and solana also declined by varying percentages, as these currencies fell by 0.04%, 0.49%, and 0.68% respectively, reflecting a general downward trend in the market until august. broadly, the period from 2021 to 2024 has been marked by extreme volatility and varying returns in the cryptocurrency market. understanding these dynamics is crucial for effective portfolio management and optimization strategies. investors should continuously monitor market conditions and adjust their strategies accordingly. application of the mpt model before applying the mean-variance model and finding the optimal portfolio weights as well as the return and risk of the investment portfolio, we calculated the model inputs for the cryptocurrency prices to be invested in, including calculating the returns and standard deviation and extracting the variancecovariance matrix that gives us an idea of the effectiveness of diversification in maximizing the objective function as shown in the tables below: o download study data using jupyter notebook: using yfinance in jupyter notebook, you can easily download financial data from yahoo finance for analysis. this approach is particularly useful for portfolio optimization studies, where you need historical price data, returns, and other financial metrics. by automating the data download process and organizing your data efficiently, you can streamline your analysis workflow: habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 90 #import libraries import math importnumpy as np import pandas as pd importtensorflow as tf fromtensorflow import keras fromkeras.models import sequential fromkeras.layers import dense fromkeras.layers import lstm importmatplotlib as mpl importmatplotlib.pyplot as plt importseaborn as sns importplotly.express as px importplotly.graph_objects as go import plotly.io as pio importrandom importos importyfinance as yf importdatetime data = yf.download(dji_stocks, start=start_date, end=end_date) stocks_df = data['close'] [*********************100%%**********************] 25 of 25 completed source: based on python code github/https://github.com/dimasthoriq/dl-portfoliooptimization/blob/main/experiment.ipynb o heatmap correlation matrix a heatmap of the correlation matrix (appendix 1) is a valuable tool for portfolio optimization. it helps investors identify diversification opportunities, manage risk, and make informed decisions about asset allocation. by combining this visualization with tools like modern portfolio theory (mpt) or deep learning (dl), you can build robust and efficient portfolios (figure 6). fig = px.imshow(returns_df.iloc[:,0:25].corr(), text_auto=true, aspect="auto",title='correlation heatmap') fig.write_image("correlation_heatmap.png") fig.write_html("correlation_heatmap.html") fig.show() the table below summarizes the statistical characteristics of the mpt framework allows for effective risk-return trade-offs, enabling investors to construct optimized portfolios tailored to their investment goals. understanding these metrics is crucial for effective portfolio management and decision-making. table 3. characteristics of statistics for mpt optimization stocks p-weights (cvar) p-weights (sortino) p-weights (variance) p-weights (sharpe) ada-usd 0 0 0 0 bnb-usd 0 0 0 0 btc-usd 0 0 0 0 dai-usd 0 0 0 0 doge-usd 0 0 0 0 eth-usd 0 0 0 0 link-usd 0 0 24.09 4.21 ltc-usd 0 0 0 0 usdt-usd 0 0 0 0 xrp-usd 0 0 0 0 xlm-usd 0 0.67 0.08 40.03 bch-usd 0 0 0 0 https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.researchgate.net/figure/descriptive-statistics-for-cryptocurrencies-portfolios_tbl3_343861353&ved=2ahukewi93iejtcglaxxf2wihhzfuhouqfnoecbwqaq&usg=aovvaw20zz_uzngmqfukcawmj1zw habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 91 stocks p-weights (cvar) p-weights (sortino) p-weights (variance) p-weights (sharpe) weth-usd 0 0 0 0 wbtc-usd 0 0 0 0 avax-usd 0 0.2 0 16.39 shib-usd 0 0 0 22.9 dot-usd 0 0 0 0 leo-usd 15.38 0.86 25 4.78 sol-usd 43.79 0 25.4 4.69 usdc-usd 0.24 0.2 0 0 steth-usd 40.58 98.07 25.42 7.01 aave-usd 0 0 0 0 vusdt-usd 0 0 0 0 rare11294-usd 0 0 0 0 vbtc-usd 0 0 0 0 annualized return 0.39 1.26 0.27 31.15 annualized volatility 0.47 0.63 0.96 39.05 skewness -16.88 -29.22 -245.2 65.63 kurtosis 2905.05 3066.74 20780.99 678.6 max drawdown -0.34 -0.55 -1.19 -59.42 count data 1093.00 1093.00 1093 1093 sharpe ratio 0,8331 2.0032 0.2781 0.7978 cvar 1.16 2.29 1.84 95.38 sortino ratio 100.42 257.00 29.22 122.77 variance 0.00 0 0.01 15.25 source: based on python code github/ https://github.com/dimasthoriq/dl-portfolio optimization/blob/main/experiment.ipynb this study investigates the optimal relative weights derived from the markowitz mean-variance model, focusing on a comprehensive summary of statistical characteristics for each optimal portfolio. we implemented various strategies to enhance the objective function, utilizing performance evaluation indicators such as the sharpe ratio, sortino ratio, variance, and conditional value at risk (cvar). the analysis highlights the benefits of markowitz diversification in managing risk through an examination of the correlation matrix between the returns of the portfolio's assets (zaki 2021). furthermore, we compare the performance of these traditional optimization approaches with those derived from deep learning algorithms (dl). by assessing the strengths and weaknesses of both methodologies, this research aims to provide insights into the effectiveness of deep learning in enhancing portfolio optimization, ultimately contributing to more robust investment strategies in an increasingly complex financial environment (yifu et al. 2024). application of the deep learning (dl) models in order to create this type of portfolio, which consists of assets with different risk levels, a comprehensive analysis was conducted. unlike previous portfolios that were created based on historical data only, this portfolio will leverage the predictions of the lstm model to predict the optimal combination of assets that will generate the highest returns over 5, 10, 15, and 30 days. the process followed to build this diversified portfolio involves a series of sequential steps. the figure below illustrates and summarizes the general approach taken to create the model (li and liu 2023). https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.researchgate.net/figure/descriptive-statistics-for-cryptocurrencies-portfolios_tbl3_343861353&ved=2ahukewi93iejtcglaxxf2wihhzfuhouqfnoecbwqaq&usg=aovvaw20zz_uzngmqfukcawmj1zw https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.researchgate.net/figure/descriptive-statistics-for-cryptocurrencies-portfolios_tbl3_343861353&ved=2ahukewi93iejtcglaxxf2wihhzfuhouqfnoecbwqaq&usg=aovvaw20zz_uzngmqfukcawmj1zw habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 92 figure 3. portfolio construction process therefore, splitting the data into training and testing or splitting it into training, validation, and testing is common in supervised machine learning projects (espiga-fernández et al. 2025) the training set is used to fit and train the model while the test set is used to evaluate the trained model to get a better idea of how well the model will perform on new data and how it will behave in a production environment. therefore, the test data should be similar to what is expected to be seen in a production environment. another common splitting technique is splitting the data into three datasets: training, validation, and testing. the validation dataset will be used to choose the best hyperparameters for each model (ketkar et al. 2021): n = len(returns_df) # split the data train_data = returns_df[:int(0.8*len(returns_df))] val_data = returns_df[int(0.8*len(returns_df)):int(0.2*len(returns_df))] test_data = returns_df[int(0.2*len(returns_df)):] train_data.shape, val_data.shape, test_data.shape ((874, 25), (0, 25), (875, 25)) we proceeded to build an lstm model algorithm. to build the rnn to accurately predict the returns of cryptocurrencies and from there build an optimal portfolio based on return and risk and evaluate its performance using the sharpe ratio, some modules had to be imported from keras. after that, an lstm layer and other dropout layers were added. regarding the lstm layer, the dimensions of the output space were set to 50 units. 20% of the layer was selected to be dropped and a dense layer with a single unit output was added. adam was chosen as the optimizer for the model clustering and the loss was set to be the mean square error (mse). after that, the model was fit to 100 epochs, a batch size of 32, a learning rate of 0.001, and a neural network of 200 cells (nafia et al.2023): #model 1 (5-day window) model1 = tf.keras.models.sequential([ lstm(64, return_sequences=true, input_shape=(5, stocks_df.shape[1])), lstm(32, return_sequences=true), dense(units=stocks_df.shape[1])]) history1 = compile_and_fit(model1, window1.train_ds, window1.val_ds) perf_v=}{ perf= }{ perf_v['5 days'] = model1.evaluate(window1.val_ds) perf['5 days'] = model1.evaluate(window1.test_ds, verbose=0) habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 93 table 4.the effectiveness of lstm models for predicting optimal portfolio returns validation performance test performance time date loss mae loss mae epochs/time 5 days 0,0016 0,0230 0,0012 0,0218 14/14--1s 29ms/step 10 days 0,0016 0,0233 0,0011 0,0219 13/13--1s 42ms/step 15 days 0,0017 0,0246 0,0012 0,0222 12/12--2s 110ms/step 30 days 0,0018 0,0255 0,0012 0,0228 10/10--0s 4ms/step source: based on python code github/ https://github.com/dimasthoriq/dl-portfoliooptimization/blob/main/experiment.ipynb we noted from the outputs of the application of the lstm model to predict the returns of the cryptocurrencies that make up the portfolio assets, (junhuan et al. 2024) where we note the superiority of the lstm model in predicting for 5 days to the last day in the series of subsequent returns with the lowest mean square error rate estimated at 0.0218 for the test (test_loss) and 0.0230 for the verification (val_loss). thus, the algorithm of this model can be adopted to estimate the optimal portfolio and extract the ratios for financial investments in the cryptocurrency assets that make up the investment portfolio, and then compare them to the space of previous solutions for the markowitz model and trying to compare them based on the sharpe index to evaluate the quality of the performance of the extracted portfolio (das et al. 2024). o the efficient frontier of cryptocurrency optimal portfolio # plot efficient forntier and our portfolio fig = go.figure() fig.add_trace(go.scatter(x=portfolio_volatilities,y=portfolio_returns,mode='markers',marker=dict(size=5,c olor='blue',opacity=0.5),name='random portfolios')) fig.add_trace(go.scatter(x=[sigma],y=[portfolio_return],mode='markers',marker=dict(size=6,color='red',s ymbol='x'),name='calculated portfolio')) fig.update_layout(title='efficientfrontier',xaxis_title='risk',yaxis_title='return',showlegend=true,hoverm ode='closest') fig.write_image("efficient_forntier.png") fig.write_html("efficient_forntier.html") fig.show() source: based on python code github/ https://github.com/dimasthoriq/dl-portfoliooptimization/blob/main/experiment.ipynb figure 4. efficient frontier results and discussion through the previous simulation of time series of cryptocurrency returns using one of the traditional behavioral finance models (markowitz model) and deep learning models using the lstm algorithm based on the sharpe index in evaluating the quality of the solution (optimal portfolio performance), (tamuly et al. 2024).the outputs of the comparative study were summarized in the following table: https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 94 table 5. the performance comparison of mpt-lstm models stocks p-weights(sharpe) p-weights(lstm) ada-usd 0 0.014606 bnb-usd 0 -0.05918 btc-usd 0 -1.44428 dai-usd 0 -4.74505 doge-usd 0 4.70012e-05 eth-usd 0 2.26891 link-usd 4.21 0.0689542 ltc-usd 0 0.0518116 usdt-usd 0 0.57744 xrp-usd 0 0.0210249 xlm-usd 40.03 -0.0330404 bch-usd 0 -0.035509 weth-usd 0 -2.70253 wbtc-usd 0 1.41132 avax-usd 16.39 0.00331112 shib-usd 22.9 0.00729518 dot-usd 0 -0.0759262 leo-usd 4.78 0.0481682 sol-usd 4.69 0.033132 usdc-usd 0 -0.315186 steth-usd 7.01 0.443353 aave-usd 0 0.0234812 vusdt-usd 0 5.36088 rare11294-usd 0 0.00904898 vbtc-usd 0 0.0679007 annualized return 31.15 0.017239 annualized volatility 39.05 0.011219 count data 1093 1093 sharpe ratio 0.7978 1.5365 source: based on python code github/ https://github.com/dimasthoriq/dl-portfoliooptimization/blob/main/experiment.ipynb source: based on python code github/ https://github.com/dimasthoriq/dl-portfoliooptimization/blob/main/experiment.ipynb figure 5. cumulative returns comparison of crypto10 vs lstm https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 95 through the results shown above and according to the distribution of optimal weights for the investor's expected investments during the year 2024 ad for the next 5 days, we note the effectiveness of the deep learning model using the lstm algorithm (alzaman 2024) with an expected rate of return for the optimal portfolio estimated at: 1.7239%, the highest and lowest risk level estimated at 1.1219% compared to the outputs of the markowitz model, which estimated the rate of return for the optimal portfolio at 31.15%, and a relatively higher risk rate estimated at 39.05%. the results confirm the validity of the second hypothesis, which states that deep learning algorithms can benefit better from the investment diversification method. as for the markowitz portfolio weights, investment in most cryptocurrencies was not employed and only seven (7) were used, namely link-usd, xlm-usd, avax-usd, leo-usd, sol-usd, steth-usd, due to the limited operation of the model-based on the correlation coefficient and generating a limited number of possible portfolios, which achieved an average sharpe index that is not motivating for investment according to the selected portfolio, estimated at 0.7978%. in contrast, the deep learning model that trains a large number of predicted portfolios gave an excellent sharpe index estimated at 1.5365% for the performance of the selected optimal portfolio. this means that this may be an ideal investment decision. while adding a new asset class to the portfolio increases risk, the sharply higher ratio indicates that it is a risk worth taking. the high risk of cryptocurrency price fluctuations can also be explained by the global conditions that the world has gone through, especially since the study period coincided with the repercussions of the corona pandemic (covid-19) and political factors (the us elections) and geopolitical factors (the ukraine war, the war on gaza), where cryptocurrency trading platforms experienced several collapses due to investors' fears for their assets. however, the results of the study remain relative, especially in the field of deep learning, which raises the issue of the transparency of big data that depends on its training in the field of making investment decisions in financial markets, with the possibility of changing the basic parameters in building the lstm model to reduce errors and even the possibility of adding gru and bilstm algorithms in future studies to increase the power of deep learning in the investment process in high-risk markets (the cryptocurrency market) while increasing the number of observations to become big data that helps in training and testing (xu et al. 2025). conclusion this study has highlighted the transformative potential of deep learning techniques in the realm of cryptocurrency portfolio optimization. traditional methods often fall short in capturing the inherent complexities and non-linear dynamics of cryptocurrency markets. deep learning approaches, including neural networks and reinforcement learning, demonstrate a superior ability to model intricate relationships among assets, leading to enhanced predictive accuracy and improved risk-adjusted returns. the review also underscored the importance of data preprocessing, feature selection, and the evaluation of model performance metrics, which are critical for effective implementation. despite the promising results, several gaps remain in the literature, particularly concerning the interpretability of deep learning models and their adaptability to changing market conditions. therefore, future research should focus on integrating macroeconomic factors and exploring hybrid models (das et al. 2024) that combine traditional financial theories with advanced machine learning techniques. additionally, empirical studies assessing the long-term performance of deep learning-based portfolios could provide valuable insights. ultimately, leveraging deep learning in cryptocurrency portfolio optimization represents a significant advancement in investment strategies, offering a more nuanced approach to navigating the complexities of modern financial markets however, the integration of long short-term memory (lstm) neural networks with mpt for cryptocurrency portfolio optimization presents a compelling solution to these challenges. lstm, a deep learning model designed for sequential data, can effectively capture the time-series dependencies inherent in cryptocurrency prices, which fluctuate based on factors like market sentiment, regulatory news, and macroeconomic trends. when combined with mpt, lstm can address many of the limitations of traditional portfolio optimization methods by incorporating dynamic forecasting, non-linear relationships, and the ability to adapt to changing market conditions. furthermore, based on current results, future research can anticipate substantial performance enhancements by further optimizing the parameters of deep learning models. fine-tuning these parameters is expected to increase the accuracy of predictions and overall portfolio performance. additionally, exploring hybrid approaches that combine deep learning with traditional financial models could yield new insights and strategies for effective portfolio management. finally, as the cryptocurrency landscape continues to evolve, continued investment in developing robust, data-driven optimization techniques will be essential for navigating its inherent volatility and complexity. this ongoing exploration promises to advance both theoretical frameworks and practical applications in the field of finance. 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https://www.researchgate.net/scientific-contributions/meihe-yu-2269871777?_sg%5b0%5d=ipekxuqz-yjl5z0t1onuzgxvbsbn8i3wmykzv3myc2azwxvqkut4u7qkigeihzbl7lgis60.zftgrfng9sdt_luoceun1-vwh3n4emoh_ypxz1jk-4pwrujabl2n61h7wxi8dc7gwqodvqob_njfbcshmtl7pa&_sg%5b1%5d=-xtip0w_tsxll6t6ism41v6rgxp7ihluhbtx1wcl8umuzz_avozvlnoqcf4_uzlcmh05q9s.mbwbvot-d3snr2v5q-m1vnoeqr3pxgcd_ihg4vzkw_jpkeqshidvt6og7dqlsdzel4thtkesexo4e7duioftvw&_tp=eyjjb250zxh0ijp7imzpcnn0ugfnzsi6inb1ymxpy2f0aw9uiiwicgfnzsi6inb1ymxpy2f0aw9uin19 http://dx.doi.org/10.54254/2754-1169/61/20231061 https://ssrn.com/abstract=4215299 habib zouaoui, meryem-nadjat naas / finance, accounting and business analysis, volume 7, issue 1, 2025 97 zouaoui, h., and m. n. naas. 2021. loans portfolio optimization of commercial banks using genetic algorithm: a case study of saudi arabia. international journal of banking, risk and insurance, 9(1): 2027. zouaoui, h., and m. n. naas. 2023. option pricing using deep learning approach based on lstm-gru neural networks: case of london stock exchange. data science in finance and economics, 3(3): 267– 284. https://doi.org/10.3934/dsfe.2023016. https://search.proquest.com/openview/1c0d91780d64bbd1b1c86f26c705155a/1?pq-origsite=gscholar&cbl=2043515 https://search.proquest.com/openview/1c0d91780d64bbd1b1c86f26c705155a/1?pq-origsite=gscholar&cbl=2043515 https://doi.org/10.3934/dsfe.2023016 98 appendix 1 source: based on python code github/https://github.com/dimasthoriq/dl-portfolio-optimization/blob/main/experiment.ipynb figure 6.heatmap of the correlations matrix 