financial risk and management reviews, 2015, 1(1):1-7 † corresponding author doi: 10.18488/journal.89/2015.1.1/89.1.1.7 issn(e): 2411-6408/issn(p): 2412-3404 © 2015 pak publishing group. all rights reserved. 1 influence internship learning effect in business service sector: using internship self-efficacy as the mediator variable chou, chun-mei 1† --shen, chien-hua 2 1 institute of vocational and technological education, national yunlin university of science and technology, yunlin, taiwan, r.o.c. 2department of business administration, transworld institute of technology, yunlin, taiwan, r.o.c. abstract this study examines 364 tertiary students’ internship learning effect and its influencing factors to serve as a school reference for the development of internship education measures. the results show that students’ internship self-efficacy (ise) has a significant direct effect on ‘internship learning effect (ile)’, and ‘internship awareness (ia) ‘has a significant effect on ‘internship learning effect’ through ‘internship self-efficacy’. the influence pattern and empirical data of ‘internship awareness ‘and ‘internship self-efficacy ’ on ‘internship learning effect’ has a good fit. © 2015 pak publishing group. all rights reserved. keywords: tertiary students, internship learning effect, internship self-efficacy. contribution/ originality this study contributes in the existing literature that students’ internship self-efficacy of internship awareness and internship learning effect have provided them with chances to learn internship competence and attitude, which may be helpful for their future employment. 1. introduction as the domestic unemployment climbs, employment-oriented tertiary education programs urgently need to find the teaching resources for internship education in taiwan (wu, 2011). the difficulty currently faced by tertiary students in their learning careers cannot be solved with a confinement to school internship (chou, 2010). tertiary institutions educate and instruct learners to financial risk and management reviews issn(e): 2411-6408/issn(p): 2412-3404 journal homepage: http://www.pakinsight.com/?ic=journal&journal=89 financial risk and management reviews, 2015, 1(1):1-7 © 2015 pak publishing group. all rights reserved. 2 acquire high levels of knowledge and skills and deliver learning enhanced students’ employability (chou, 2010), (sweitzer and king, 2013). amid industrial structure adjustment in taiwan, smes are mostly concentrated in the service sector, with the proportion being slightly over 80%. 56.72% of smes are sole proprietorships. in terms of the industries, 50.62% of smes are in wholesaling and retailing, followed by manufacturing (10.52%) and restaurant industry (9.68%) (small and medium enterprise (smes) of ministry of economic affairs, 2014). the service sector is the main driver of taiwan’s economy and responsible for the bulk of local job creation, with sector output reaching nt$9.4 trillion (us$32 billion) and accounting for 68.19% gdp in 2012. the industries employed nearly 6.28 million people or 58.6% of the entire workforce in 2012 (liu et al., 2011). the gross gdp ratio of education services industry accounted for between 4.65% -5.95% and aannual rate of change was 1.16％ . business service industrial development is very laborabsorbing effect industry of the knowledge economy and society through the foundation of services and promote industrial restructuring (liu et al., 2011). student acquired internship outcomes also house tertiary-learned skills (internship behavior, internship intention, internship attitude), and these, in-turn, may be linked into business-deployed, tertiary student skills, and into the relevant business types where the graduate students often find their initial internship (chou, 2010). internship education plays the role of helping to reduce the unemployment rate in a country. internship learning effect explores the students’ internship learning result and internship learning attitude on the internship and business field and at the same time providing internship experiences in the process of learning internship and belief in the internship curriculum (gokuladas, 2010), (fugate et al., 2004). some research found students’ experiences of learning internship awareness and internship self-efficacy provided them with chances to learn new internship skills, which may be helpful for their future self-employment (small and medium enterprise (smes) of ministry of economic affairs, 2014), (dupre and williams, 2011; misra and mishra, 2011). internship awareness was cognitive adaptability as the ability to effectively and appropriately change construct than for example career motivation, personal initiative or proactive personality, and in fact subsumed each of these variables, helped individuals cope with work transitions in a turbulent employment market (tomlinson, 2010; brown et al., 2011). research suggests that internship self-efficacy is important to affect internship learning result. it is positively related to student belief, ability, and attitude in contexts that can be characterized as complex, dynamic, and inherently uncertain (edvardsson stiwne and alves, 2010), (gault et al., 2010), (rothwell et al., 2008). from a theory of planned behavior point of view, the readiness to perform a behavior to become internship self-efficacy has been depicted as actively ambition of internship (nam et al., 2011), (wittenkind et al., 2010). the availability of a validated instrument to measure selfevaluation of personality, labor market, school reputation and academic achievement towards ise could be of much help (gokuladas, 2010), (brown et al., 2011), (edvardsson stiwne and alves, 2010). financial risk and management reviews, 2015, 1(1):1-7 © 2015 pak publishing group. all rights reserved. 3 2. purposes of this study the paper, analysis of factors in tertiary students perceived internship awareness and internship learning effect, using internship self-efficacy as a mediator variable, discussed the variables which may influence tertiary students’ internship learning effect and found the relationships among the variables. the purposes of this study are to address the 2 following issues. 1. there is no significant correlation between tertiary students’ internship awareness, internship self-efficacy and internship learning effect. 2. influence models of tertiary students’ internship awareness, internship self-efficacy, and internship learning effect fit the data collected by this study. 3. methodology 3.1. subjects this study treats students from tertiary engineering as the population, and adopts random sampling and cluster sampling for survey. a total of 364 valid samples were collected. 3.2. measures a 41-item survey questionnaire was developed to measure participants’ internship awareness, internship self-efficacy, internship learning effect, and demographic information. the research tool is a ‘questionnaire of factors which influence tertiary students’ internship learning effect.’ the questionnaire includes internship awareness scale, internship self-efficacy scale and internship learning effect scale (small and medium enterprise (smes) of ministry of economic affairs, 2014), (gokuladas, 2010), (fugate et al., 2004), (misra and mishra, 2011), (edvardsson stiwne and alves, 2010), (gault et al., 2010). the scales’ factors, number of questions reliability and validity are shown in table 1. table-1. an overview of factors, number of questions, reliability and validity for tertiary students’ internship awareness, internship self-efficacy and internship learning effect scale. the ‘questionnaire of influence tertiary students’ internship learning effect’ was reviewed by five experts for subject contents’ suitability to ensure the scale’s expert validation. six students were invited to answer the questionnaire to enhance the validity of the scale’s contents. in addition, nine tertiary schools were selected for a pre-test, and 128 students were selected as the pre-test objects in total. the scales used in this study are in self-assessment form, and a likert 5-point scale financial risk and management reviews, 2015, 1(1):1-7 © 2015 pak publishing group. all rights reserved. 4 is used as the scoring method. there are five levels of choices from ‘agree’ to ‘do not agree;’ five equal portions of 5, 4, 3, 2 and 1 are distinguished according to the extent of agreement, and 5 points, 4 points, 3 points, 2 points and 1 point are given in this order. the higher the score an individual receives, the larger extent of agreement the individual has. 3.3. data analysis in processing the survey data used in this study, the collected questionnaires were coded, and statistical package for social science (spss version 12.0) and linear structural analysis (lisrel version 8.5) were used to verify the correlation among the factors of ‘internship awareness,’ ‘internship self-efficacy’ and ‘internship learning effect’ variables and their effects in order to achieve the purpose of this study. in this study, the statistical test level α = 0.05. 4. results the empirical results of tertiary engineering students’ internship learning effect are shown in figure 1, and are analyzed as follows: the estimated value of the direct affecting parameter between ‘internship awareness ‘and ‘internship self-efficacy ’ is 0.73 (t = 3.25, p<.05). this means that ‘internship awareness’ has a significant effect on ‘internship self-efficacy’. the estimated value of the direct affecting parameter between ‘internship awareness ‘and ‘internship learning effect’ is 0.34 (t = 5.183, p>.05). this means that ‘internship awareness’ does not necessarily have a significant effect on ‘internship learning effect’. the estimated value of the direct affecting parameter between ‘internship self-efficacy’ and ‘internship learning effect’ is 0.82 (t = 3.28, p<.05). this means that ‘internship self-efficacy’ has a significant effect on ‘internship learning effect. in summary, in this study of tertiary students’ internship learning effect and its influence pattern, ‘internship awareness’ has a significant effect on ‘internship self-efficacy’, but does not have a significant effect on ‘internship learning effect.’ ‘internship self-efficacy’ has a significant effect on ‘internship learning effect. figure-1. path of tertiary students’ internship learning effect financial risk and management reviews, 2015, 1(1):1-7 © 2015 pak publishing group. all rights reserved. 5 5. discussion students’ ‘internship self-efficacy’ has a significant direct effect on ‘internship learning effect,’ and ‘internship awareness’ has a significant effect on ‘internship learning effect’ through ‘internship self-efficacy.’ the influence pattern and empirical data of ‘internship awareness’ and ‘internship self-efficacy’ on ‘internship learning effect’ has a good fit. the influence effects of ‘internship awareness’ ‘internship self-efficacy ’ and ‘internship learning effect’ shows that for tertiary engineering students, the influence of ‘internship awareness ‘ on ‘internship learning effect’ comes mainly through their awareness of ‘internship self-efficacy .’ in addition, ‘internship self-efficacy’ has a direct and significant effect on ‘internship learning effect.’ from the influence of internship awareness, internship self-efficacy and internship learning effect, we can clearly see that compared with internship awareness, internship self-efficacy has a greater influence on internship learning effect (edvardsson stiwne and alves, 2010), (gault et al., 2010), (wittenkind et al., 2010). regarding the test results, according to the goodness of fit test standard by hair et al, the model in this study has a good overall fit (bentler and bonett, 1980), (hair et al., 2010). in the absolute fitness and incremental fitness tests, all indices meet the standard, and have the best fit. most of the parsimonious fitness indices meet the test standard, and have a good fit. overall, in the internship learning effect and its influence model established in the study based on theories, both the model and the data have a good fit, and in the parameter estimation most of the estimated values are significant. this shows that all the indices of latent variables have their importance, and only the parameter value of ‘internship awareness ‘on ‘internship learning effect’ is low. overall, the empirical data have a good explanatory power. students’ ‘internship awareness’ influences ‘internship self-efficacy ’ and ‘benefits of entrepreneurship’ is an important factor which influences ‘internship self-efficacy’. students’ ‘internship self-efficacy ’ influences ‘internship learning effect’, ‘belief’ and ‘ability’ are important factors which influence ‘internship learning effect’ (bentler and bonett, 1980), (hair et al., 2010), (patel et al., 2008), (chang, 2010) . the results show that among all latent variables in the model, the direct influence of ‘internship awareness ‘ on ‘internship learning effect’ is not significant, indicating that the assumed influence of ‘internship awareness ‘ on students’ ‘internship learning effect’ needs further testing; this is something worthy of a more in-depth study and validation in the future. based on test results, although the overall result is acceptable, the model consistency level is not entirely satisfactory, and its internship awareness has a relatively low explanatory power for internship learning effect. the possible reasons are: the measurement error variance of the three main variables in the model is too large. although in the course of the investigation in this study each step was made following reasonable procedures, in a sample survey there are a survey bias and restrictions on the study objects in answering the questionnaire. these can result in a bias between the survey data and the actual situation (bentler and bonett, 1980), (hair et al., 2010), (chang, 2010). financial risk and management reviews, 2015, 1(1):1-7 © 2015 pak publishing group. all rights reserved. 6 the influence is test of indices and method. currently in the verifying calculation of structural equations, the index value is subject to the sample size, and sometimes the index value may influence each other. when the index is far greater than or much lower than the standard value, the judgment is more accurate; when the index is close to the standard value, we then need to consider the possible influence from the error of the missing scope of variables. although a complete research model was tried to be established in this study based on past researches and theories, there has been little domestic research on the topic of students’ internship learning effect. 6. implication there may be undetected factors which resulted in a low explanatory power, and there are other variables which have not been identified (wu, 2011), (brown et al., 2011). regarding this model’s test results, perhaps in the future a further study can be conducted to find the variables either missing in the theories or can be further added or deleted, or more comprehensive empirical data can be collected for testing to improve the consistency between this model and empirical data. 7. acknowledgement this paper was written while the authors were supported by a grant from the national science council, r.o.c. 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of the use of the content. http://book.moeasmea.gov.tw/book/doc_detail.jsp?pub_serialno=2013a01165&click=2013a01165 http://book.moeasmea.gov.tw/book/doc_detail.jsp?pub_serialno=2013a01165&click=2013a01165 43 + corresponding author © 2016 conscientia beam. all rights reserved. auditing procedures and process in the public sector musa success jibrin 1+ ofor theresa nkechi 2 success blessing ejura 3 1,2accountancy department anambra state university, uli, nigeria 3banking and finance department kogi state university, anyigba, nigeria (+ corresponding author) abstract article history received: 13 october 2016 revised: 14 december 2016 accepted: 18 january 2017 published: 6 march 2017 keywords public resources ulitilisation accountability stewardship accounting officers. this paper examines the impact of auditing in the public sector. it delved into the perspectives of functional auditing in the public sector in view of the continue quest for accountability placed on the accounting officer. the accounting officers must, as a matter of facts and professionalism, carry out his role and responsibility in such a way that affairs of resources placed under his control are properly accounted for and stewardship report rendered periodically to the public for performance assessment. procedure in public sector brings out the essence of accountability in the public sector and the resultant stewardship accounting. the paper commences with the paper keywords, introduction, and the body of the presentation, observations, summary and conclusions in order for the researcher to drive home his point. contribution/ originality: this paper examines the impact of auditing procedures and process in the public sector. it will serve as reference materials for future researchers and update the previous studies as well filling the existing gap in literature. 1. introduction the management and control of public sector fund has been a consistent concern to the masses. in recent times, the number and monetary value of public sector activities have greatly increased (alastair, 2008). with this increase there is an added demand for accountability of the accounting officers. there is need for public officials and employees who manage such resources and activities to render adequate accounts of their stewardship to the public (khan, 2006). the public is to receive reports of accountability so as to assess the performance of those officials entrusted with public resources/fund. accountability is an inherent concept in the governing process of any nation and her public investments is not an exception (alastair, 2008). the need for public accountability has caused demands for more information about public sector programs, projects and services (khan, 2006). in nigeria, the law requires that accountability reports be produced by public officials and other persons entrusted with public resources. the citizens as well as the lawmakers entitled to know whether government resources are handled in compliance to lay down rules and regulations (sen, financial risk and management reviews 2016 vol. 2, no. 2, pp. 43-50 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2016.2.2/89.2.43.50 © 2016 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2016.2.2/89.2.43.50 financial risk and management reviews, 2016, 2(1): 43-50 44 © 2016 conscientia beam. all rights reserved. 1999). not only this, the public also deserves to know whether public expenditures, projects, program and services are carried out economically, efficiently and effectively to achieve stated objectives. internal audit is a large and significant part of the financial control of state and its investment (dike, 2002). auditing is one of the elements of accountability. its practices and procedures will ensure accountability in no small measure. in the public sector, efficiency accuracy and integrity can only be achieved through audit procedure (dye and rick, 1998). this article will attempt to examine the audit procedure in the public sector, its role and suggest improvements. 1.1. what is audit? the term „audit‟ originated from the latin verb audire i.e to hear. audit dates back to ancient time. in fact audit is as old as man. the first audit took place in the garden of eden when god asked man to give account of his stewardship towards god‟s commandment. (gen.3v9-24) and man was driven out of the garden. according to tanzi (1998) auditing is an act, it is defined as the examination by an auditor of the financial record and other evidences from which the financial statements and balance sheet has been prepared so as to be able to form an independent opinion as to whether the accounts under review have given a true and fair view of the organization/entity. the american institute of certify public accountant (aicpa) defined auditing as “an examination intended to serve as a business for an expression of an opinion regulating the fairness, consistency and conformity with accepted accounting principles or statutory prepared by a corporation or any other business entity for submission to the public or to interested pirated. auditing might therefore be seen as the scrutinizing or the examination of both accounts of business entity, including charities, trusts and professional firms in detail by an auditor(s) in other to ascertain whether or not it presents a true and fair view of the policy statement for a given period (world bank, 1997). the person who examines the record is known and called the “auditor”. the auditor is a watchdog of the management and owners or stock holders as the case may be (rose-ackermam, 1999). 1.2. general objective of auditing the primary objective of auditing in any firm is to produce a report by the auditor on the truth and fairness of the revenue accounts and the balance sheet as at a particular date, so that the users of such information can believe in them. however, the amount of such examinations carried out by the auditor depends upon circumstances surrounding each case. 1.3. secondary objectives of audit include i. to show how errors and fraud can be detected ii. to prevent fraud and errors through the deterrent and moral effect of audit. iii. to provide constructive assistance to management. the auditor through his work can make constructive suggestions to the managements which may assist them in improving efficiency and profitability of the business. 1.4. purpose of public sector audit at the public sector level, auditing has the following broad objectives: 1. to determine the truth and fairness of the activities of the state each financial year. 2. it is to promote accountability, stewardship and transparency in discharge of public service. 3. public sector audit helps to install sanity in service by encouraging accountability, efficiency and effective record keeping. 4. it demonstrates the propriety or otherwise of the stewardship. 5. auditing at the government objects into the examination of: financial risk and management reviews, 2016, 2(1): 43-50 45 © 2016 conscientia beam. all rights reserved. a. whether the government is carrying out only those activities or program authorized by the legislature and is conducting them in a manner contemplated to achieve the objectives intended, i.e budgetary provisions adhered to strictly. b. where the program or activities are conducted and expenditure made in compliance with legal stipulations and requisitions. c. whether the resources of the public sector and its agencies including funds, property and personnel are adequately controlled and utilized. d. whether all revenues and receipts arising from the operations under examination are collected and property accounted for and point out areas of weakness and financial loss. e. whether the government‟s accounting system complies with principles, standards and related requirements prescribed by regulations. f. whether report by government to legislature and other appropriate bodies disclose properly the information required for the purpose of the report. g. errors and mistakes in government financial transactions or the disbursement of funds as well as the financial records keeping by the staff are easily identified. 1.5. general audit standards the general audit standard relates to competence, independence, professional care and quality control. i. competence the auditor should possess adequate professional proficiency necessary for carrying out his work. he should have a wide knowledge and skill of the theory and practice of accountancy and should be able to ask intelligent questions from his clients and their staff when faced with transactions of a technical nature. ii. independence the auditor (the audit organization) should be free from personal and external impairments to independence. the auditor should maintain an independent status and attitude in reality and appearance. the aim is to have conclusions, opinions, judgments and recommendations that are partial by knowledgeable persons and third parties. iii. due professional care as much as it depends on him, the auditor should act with due care, skill and diligence in conducting the audit and in preparing the related reports. the auditor is expected to observe the general audit standards and other relevant laws and regulations when carrying out audit work. iv. quality control it is the responsibility of the auditor to adequately plan and control his work. he must consider how the overall quality of the work carried out within the organization can be monitored and maintained. 1.6. audit procedure the audit procedure is influenced by auditing standards which are drawn by the professional accountants and legal regulations. the auditing standards often covers the conduct of auditor, the planning, controlling, recording and reporting of actual audit work. the audit procedure involves: 1. obtaining a detailed and clear understanding of the organization. 2. assessing the quality of financial reporting systems and controls to see whether the underlying accounting records form a reliable basis of the preparation of the statements. this is done by critically reviewing the system of book keeping, accounting and internal control. financial risk and management reviews, 2016, 2(1): 43-50 46 © 2016 conscientia beam. all rights reserved. i. making such checks, tests and inquiries as he considers necessary so as to form an opinion about the reliability of the records as the basis from the preparation of the accounts. ii. comparing the statement of income and expenditure and balance sheet with the underlying records to see whether they are in accordance. iii. verifying the existence, ownership and bases of valuation of the assets and assess whether liabilities are accurately and fully disclosed. 3. checking a sample of transactions and balances in the accounting records to ensure that the accounts have been prepared on sound accounting principles and in accordance with the statements of accounting standards. 4. review of the present results against those of previous years current years‟ expected result and against the results of comparable organizations to ensure whether the result is reasonable and to determine if there are acceptable explanations for any unusual trends in activities/results. 5. discussing with management (executive) and directors on significant issues within the financial statements. 6. in concluding, the auditor use his professional judgment to form opinion on the overall picture where the accounts give the true and fair view of the position of the state of affairs of the council during the accounting period. 1.7. types of audit relevant to public sector 1.7.1. internal audits this type of audit implies that the work of audit is carved out by specially assigned staff (internal auditor); it will normally consist of a reviewing of the operations procedures and records of the business/organization. the main objective of the internal audit is to assure management that the accounting controls are both adequate and working effectively in practice. it is also to secure as much as possible the accuracy and reliability of accounts and to ensure the safeguard of its accounts. although the internal auditor is an employee of the organization, nevertheless, there should be an element of independence as he carries out his duties since the nature of his work requires it. the internal auditor directly reports to the executive of their organization. the major purposes of the internal audit are: 1. to assure management on accounting matters that the internal check and the accounting system are effective in design and operation. 2. to ascertain and report whether the system of accounting and internal check are adequate and being strictly adhered to. 3. to ascertain that there have been proper authorization of transactions and that liabilities can only be incurred by legitimate operation of the business/organization. 4. to prevent and detect fraud and error through continuous day-to-day examination of the accounting records and the operation of the system of internal check. 5. to facilitate and expedient the annual audit and give information to and corporate with the external auditor. 2. financial audit it is a type of audit that is often conducted in the public sector. it involves the audit of the financial statements so as to provide reasonable assurance on whether the financial statements audited presented fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles and applicable laws and regulations, it also evaluates the soundness of internal control system of the audited organization. financial risk and management reviews, 2016, 2(1): 43-50 47 © 2016 conscientia beam. all rights reserved. 3. performance audit it is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of public sector organizations program projects and services in order to improve public accountability. it includes the assessment of the economy, efficiency and effectiveness with which the resources of an entity had been used in achieving results. it is otherwise known as value for money audit. 4. board of survey and board of enquiry the functions of a board of survey are to make a physical examination of stores and stores records to recommend how deficiencies or serviceable stores should be dealt with and to assess their causes. any stores house which is not regularly inspected by a stock verifies should be inspected by a board of survey at least once in each financial year. the senior representative of a ministry in a section is responsible for asking for the convening of board of survey at the appropriate time. when applying for a board of survey, he confirms that stores ledgers, tally cards and other records are properly maintained and are up to date. he also confirms that all supporting documents such as issue and receipt vouchers, loans registers etc. and the particulars of the date of acquisition and the original cost of stores are readily available for inspection. 5. cash survey this is one of the many ways by which audit are carried out. cash survey is the supervision by an auditor on the ways the accountants generally receives or collects revenues on behalf of the state or public sectors. the auditor finds out first and foremost, areas of revenue generation. he (auditor) then proceeds to find out the number of receipts printed by the government and those issued out to the accountants and book keepers (revenue collectors). the auditor investigates into the revenue collector‟s forms in which revenue receipts collected are recorded. the receipts used in collecting revenue are recorded in other columns and the unused receipts are also tabulated in different columns. 5.1. problems of public sector audit the following are the problems facing effective public sector audit: 1. insufficient staffing 2. ineffective and inadequate internal control 3. financial difficulties 4. training incentive 5. operational vehicles materials and equipments 6. accommodation/working environment 7. auditors independence 1. insufficient staffing staff insufficiency is one of the major problems confronting audit at the public sector. many of the state and government haven‟t enough staff and so we have less qualified staff. auditing requires more resources and is labour intensive at a tremendous rate and so, the government will need a large number of qualified audit staffs that are capable of carrying out audit duties. the quality of audit work done depends on the quality of audit staff and that organization. financial risk and management reviews, 2016, 2(1): 43-50 48 © 2016 conscientia beam. all rights reserved. 2. ineffective and inadequate internal control system to assess the efficiency of an accounting system, the auditor must make a detailed study of the methods by which the accounting date are originated and their flow through the system, including the internal control that are incorporated into the procedures. he now issue a report but before he can do so he must satisfy himself that the system of record-keeping maintained by an organization is adequate to ensure that all transactions are correctly recorded, allocated and summarized and that accounting statements prepared from the records are in agreement with such records and correct in principle. internal control system is the whole of controls, financial and otherwise established by the management in order to carry on the acidities of the organization in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records and that it includes internal check and internal audit. in government, there is inadequate plan of the organization which should signify a forum for establishing distinct lines of responsibilities for the staff so as to ensure coordination of efforts. for the auditor to be able to assess the effectiveness and adequacy of internal control system, there should be an efficient managerial supervision and review of the organizations financial operations and position at regular and frequent intervals by means of interim accounts and reports but this is lacking in the public sectors thus indicating a deficiency in the internal control system. also, a good system of internal control should promote operational efficiency this has not been the case with the public sector. 3. financial difficulties for concrete achievement of any organization, financial resources are fundamental. inadequate funding may lead to a break down or cause a temporary disaster of organizational activities. annually, it has been discovered, that the state audit department(s) complains of meager finance for the day to day operations up till this millennium the request for favorable funding have not been met. the problem funding has affected the effectiveness of the audit practice. 4. training incentive training can be regarded as the reaching and practice given to an individual in order to bring a desired standard of behaviors, (performance). training is used to develop and improve both the mental and physical skills of employees to increase their knowledge. despite the fact that people are the most valuable resources of an audit institution and well trained employees and key ingredients to an efficient and effective audit department, very few numbers of officers are sent on courses (heidenheimer et al., 1993). even when they go on courses on their own they are never encouraged many of them will not be permitted to go. this is another contributing factor to the ineffectiveness of auditing practice in the public sector. 5. operational vehicles, materials and equipments at present in most departments, there are no enough vehicles for the auditors who are on out-door work especially when there is need for inspection to the entire unit. there are no adequate adding machines, in some cases the available ones have to be shared between officers and this will be causing delay in work and prompt report. there is lack of working tools and equipment to carry out the audit work. the auditors going out to agencies and units to carry out audit may not be given or fully equipped with their working tools and materials e.g working papers. financial risk and management reviews, 2016, 2(1): 43-50 49 © 2016 conscientia beam. all rights reserved. 6. accommodation/working environment lack of enough accommodation is another problem facing public sector audit. due to this problem many of the officers are not given good office accommodations. even the available office rooms are not partitioned, well equipped and without carpets, vans, cabinets and other things to make the working conditions attractive. 7. independence of auditor the auditor is not an ordinary employee of the organization because he is expected not to have any connection whether financially or otherwise with the organization. but this is not always the case. how independent is the work of somebody on the payroll of the government. 6. conclusion in summary, the significance and need for audit in government department cannot be overlooked.the practice of auditing have not been adequately achieved due to the problems mentioned earlier, however, if the suggestions for improvements in this paper are implemented the merits of audit practice will be enjoyed. public sector auditing allows for guided and effective savings and application of resources for greater benefit of mankind. it‟s not only discovered that effective use and application of best auditing techniques can afford the society the required steawdership and accountability of persons entrusted with public resources, but part of a modern management methodology to help the societies accomplish the desired progress and development in the scheme of things. 7. recommendation it has been discovered in this article that many problems are confronting public sector audit and there is need for improvement. as a matter of necessity and urgency there should be more recruitment of qualified and experience accountants to the government audit department. the working condition should also be attractive. there should be procurement of more motor vehicles, adding machines, and availability of working materials/tools such as audit working paper, audit guideline etc. if these are made available to the auditors this will improve their performance. all these may not be possible without improvement in the funding of the auditor general offices. the government executives should therefore support them financially and otherwise to enhance smooth operation of the audit practice. there should be a provision for training facilities. if proper training is given to the staff it will enhance their efficiency and productivity. it is important to point out that well trained staffs are the key ingredients to an efficient and effective audit system in an organization. auditing staff can be trained going on short courses or full time studies. regarding the problem of internal control system, there are no absolute standards of internal control but in this case, the plan of organization should be defined and procedures involved should be in writing. each member of staff should be clearly made aware of the scope and the limitations of their responsibilities. particular attention should be paid to cash transactions as it is the most readily convertible of assets and thus prone to misappropriation. direct observations should be enforced where necessary, for instance, at the time of stock-taking or payment of wages in other to observe the operation of the prescribed procedures. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. contributors/acknowledgement: all authors contributed equally to the conception and design of the study. financial risk and management reviews, 2016, 2(1): 43-50 50 © 2016 conscientia beam. all rights reserved. references alastair, e., 2008. the role of supreme audit institutions in combating corruption. u4 helpdesk, transparency international. available from aevans@transparency.org dike, v., 2002. corruption in nigeria: a new paradigm for effective control. elliott: washington institute for urban economics. dye, k.m. and s. rick, 1998. pillars of integrity: the supreme audit institutions in curbing corruption. washington: edi, the world bank. pp: 25. heidenheimer, j.a., m. johnston and t.l.v. victor, 1993. political corruption. new jersey: transaction publishers. khan, m.a., 2006. role of audit in fighting corruption. paper prepared for ad hoc group meeting on ethics, integrity, and accountability in the public sector: re-building public trust in government through the implementation of the un convention against corruption, pp: 1-32. rose-ackermam, s., 1999. corruption and government: causes, consequences, and reform. cambridge: cambridge university press. pp: 30-31. sen, a., 1999. development as freedom. new york: anchor books. tanzi, v., 1998. corruption around the world: causes, consequences, scope, and cures. imf working paper: 1-39. retrieved from http://ssrn.com/abstract=882334. world bank, 1997. world development report: state in a changing world: new york: oxford university press. bibliography banfield, e., 1961. the moral basis of backward society. chicago: free press lipset, s.m. and g.l. lenz, 2000. corruption, culture, and markets, in culture matters, lawrence e. harrison, and samuel p. huntington, (eds). new york: basic books. pp: 112. world bank, 1997. corruption and economic development. retrieved from http://www.worldbank.org/. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://ssrn.com/abstract=882334 http://www.worldbank.org/ 1 © 2019 conscientia beam. all rights reserved. profitability of commercial bank on interest rate deregulation tijjani muhammad1+ abatcha melemi2 1department of islamic studies, (islamic banking and finance) federal university, gashua yobe state, nigeria 2department of economic and development studies federal university, gashua yobe state, nigeria (+ corresponding author) abstract article history received: 3 december 2018 revised: 8 january 2019 accepted: 13 february 2019 published: 21 march 2019 keywords commercial bank interest rate deregulation impact profitability lending. jel classification: g18; g28. this study focuses on impacts of deregulation policy of interest rate on the profitability of commercial bank, which will create competition among conventional financial institution for their traditional activities of banks (deposits, loans and other financial institutions activities). the demand and supply will increase to encourage fund mobilization based on interest rate. sanity becomes significant in the financial institution as utilization of fund is been judiciously encouraged and invests it to the most profitable ventures. the study explored the survey questionnaire by selecting five financial institutions and distributes twenty (20) questionnaires for each financial institution to their respective managers (experts) for their input. the simple description analysis and correlation were considered for variables comparison to achieve the research objectives. the research findings indicate that the deregulation significantly contributed to the profitability of commercial financial institution and promote competition among their counterpart. the study also reveals that the deregulation in interest rate leads to an increase in profit maximization. the study recommended the changes in the discount rate will reflect a stipulated range depending on how monetary policy pursued and the relation of a current market economy with interest rate, the sufficient control of the institutions and regulatory bodies to ensure the forces driving the economy as adequately managed and controlled. contribution/originality: this study contributes to the existing literature on the interest rate deregulation. the study uses a new estimation methodology as a structural survey questionnaire which used correlation and descriptive analyses. the study is one of the very few studies based on deregulation of the interest rate on commercial bank. 1. introduction before the introduction of market base policy in 1987, the interest rate management was controlled by the central bank of nigeria, which restricted the minimum and maximum savings rates of lending for financial institutions. after the introduction of market policy banks were allowed to run their activities based on negotiation with customers, the banks were also directed to pay interest on current account deposits by the central bank of nigeria on the deregulation context of the framework. this, obscure the indirect negotiation between the customers and their banks based on the payable interest rate for special purpose deposit held between stipulated periods of time. however, assurance of exploitation on customers is totally expelled, the central bank of nigeria has directed the implementation of reducing balanced method and should be considered and applied on loan charges based on financial risk and management reviews 2019 vol. 5, no. 1, pp. 1-9 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2019.51.1.9 © 2019 conscientia beam. all rights reserved. https://orcid.org/0000-0002-7628-8587 https://orcid.org/0000-0003-4210-2462 https://www.doi.org/10.18488/journal.89.2019.51.1.9 financial risk and management reviews, 2019, 5(1): 1-9 2 © 2019 conscientia beam. all rights reserved. installment agreed payable. the minimum rediscount rate (mrr) continued to regulate the fixed charges by the central bank in line with overall economic conditions. for example, mrr in august 1987 fixed the rate at 15% by december 1987 was reduced to 12.7% with the aim to improve the stimulation investment and attract a foreign direct investment followers and sound monetary policy (vaghefi et al., 1991). the mrr raised flexible interest rate to 13.2% in occurrence of flexible policy in 1989, in same year, the central bank of nigeria (cbn) developed treasury bill and certificate (securities), under the system that authorized dealers’ submission of competitive bids that issued rate emerge. lack of deposit and lending structure concurred the immense responsiveness in market fundamentals which manifested in 1990 declined of inflation that forced the authorities to fix a minimum spread between the cost of commercial funds and merchant fund for their maximum lending rates. therefore, the banks were directed to ensure the minimum deposit rate of 13.5 and lending rate at 21%. the banking considered that as obviously against the government deregulatory posture, however, the reported rate considered within the guideline and was sufficient to prove the essential rate as higher as the policy was largely sideline, and that was removed january 1992 (hien and hanh, 2013). in 1993 the policy was retained in the course of interest rate only volatile and distorted it and raised unpredicted levels. the interest rate behavior was traceable under these factors. the high arising of domestic inflation resulted in huge fiscal deficit of the federal government which central bank of nigeria financed. the interest rate deregulation conferred on the arbitraging activities of the market speculation. the insolvency in cash flow distress borrowing resulting to the weak banking, the system allocation, foreign exchange on both sterilization and indus of a large fund at the cbn. in 1993, high interest prevailing, discourage investments and productive spirit of the economic and the volatile interbank undermined the efficiency of free market activities and steadiness of financial system. in 1994, major regulations were reintroduced in the management of interest rate due to the vast variation of high rate; this policy was maintained and reconsiders some modification for flexibility. furthermore, the situation remains in 1996 and 1997. the regulation of interest rate resulted widening the deposited interest gap under the structural adjustment program (sap). however, some financial institutions argument that the cost of funds will be rising consider payable gap interest rate is not tenable as witness 1989, as regards the payment of current account of the interest rate deposits, financial institutions welcome ideas on competing to mobilizing deposits as objectives deregulation of interest rate under (sap). 2. literature review interest rates are the crucial element in the transmission of monetary policy action for both economics and banking activities, adeniran et al. (2014). the interest rate in nigeria has changed for example within the time frame of the regulated and deregulated regime. however, the impact of this variable on both the banking sector and economy remain controversial (acha, 2011). according to keynes (1923) an interest rate is a reward for not hoarding but for parting with liquidity for a specific period of time. this definition is more focused on the lending rate. adebiyi (2002) an interest rate is a reward or yield on equity or opportunity cost of deferred current consumption into future. lerner and jhingan (2003) interest rate as the price which equates the supply of “ credit” plus the net increase in the amount of money in the period, to the demand for “credit” plus the net hoarding in the period. ibimodo (2005) defined interest rate as the rental payment for the use of credit by the borrower and the return for parting with liquidity by the lender. defined interest rate as the real interest rate at which inflation is stable and the production gap equal to zero. however, allen (1977) state that the interest rate is charged based on reason, but one is to ensure that creditor lower his or her exposure to inflation. inflation causes a nominal amount of money in the present to have less purchasing power in the future. wurgler (2000) said that interest rate deregulation leads to more efficient allocation in the financial market. gan (2007) stated that lending policy affects commercial bankability to grant a loan. amassoma et al. (2011) indicate that deregulation affects the bankability to grand loan. financial risk and management reviews, 2019, 5(1): 1-9 3 © 2019 conscientia beam. all rights reserved. 2.1. management of interest rate in 1962, the interest rate was introduced an instrument of monetary policy after the introduction of the monetary market; interest rate was made competitive to ensure repatriation in and abroad. furthermore, the high government borrowing at that time reduced to the minimum cost of public debt. in the 1960s, interest played a significant and dominant role in enhancing and managing the monetary policy of the federal government. therefore, the structural adjustment programmed (sap) was introduced with comprehensive economic restructuring in 1968. however, the government emphasized the reliance of market forces, which imitated some resolution reforms to structural amendments of monetary policy. the interest rate and foreign exchange were both important in market liberation and the financial institution sector (fischer, 1997). the interest rate has an important role in managing monetary policy as one of the instruments uploaded by the central bank of nigeria that was based on two assumptions; regulation of the interest rate and partial deregulation as interest rate remained one of the instruments of monetary policy of the federal government annual budget document or the monetary/credit policy circular of the central bank of nigeria from time to time. in august 1987, the central bank of nigeria liberalized the interest rate regime and adopted the policy of fixing only its minimum rediscount rate (mrr). this was however modified in 1989 when the central bank of nigeria cbn issues a further directive on the required spread between deposit and lending rate (therrell et al., 2012). partial deregulation was restored in 1992 when financial institutions were required to only maintain lending rates. the central bank of nigeria announced the removal of maximum lending in 1993, the inflation interest rate started rising to an unprecedented level, which made the banks lending rate high and volatile that led to the fiscal deficit of the government and rose of inflation (frankel, 1979). however, the policy to maintain money in circulation is the prior objective that economic growth targeted and maintains the level of interest rate and inflation required. in 1997, the policy of interest rate deregulation retained. then, the beginning of the year was stabled in rate that abolished the statement undermined the power of interest rate fallen that also contributed declined deposit rate in the commercial banks from the 10.1% percent to 7.5% and later to 5.6% at the end of april 1997 (fung and hsieh, 2000). the monetary and other financial system policies were created to manage and maintain the internal and external balance of financial institution and lead to the primarily maintain inflation rate at single digit in order to achieve the objective. similarly, monetary policies focused on dealing with excess liquidity and enhancing the viability of the sector as well as the stability of the financial system. other important objectives of deregulation of interest rate enhancement growth of the economy and drastically reduced unemployment. according to central bank of nigeria (1978) rated the financial performance indicated deposit lending rate fluctuates downwards and liquidity beetle in the financial institution with the reduction percentage of 18% to 14%, liquidity ratio from 40% to 35% and cash reserve ratio (crr). on 5th june 2007, the monetary policy committee (mpc) reviewed the major development and implementation of monetary and fiscal as well as challenges of exchange rate policies in microeconomic performance and satisfaction 2.2. classical theory of interest rate according to the classical theory of interest rate is determined fork circle of the investment demand and saving schedule. this is disclosing the connection between saving and investment to the relation of interest rate. similarly, the solution to the saving and investment were varied to a level of real income and a solution that will not be, if the investment opportunity is not there. keynesian, attack the classical theory of interest rate by signifying the ground of undetermined from the income rise, while the saving schedule will shift to another direction. hence, the determination of the rate of interest will not be, unless the income level is been specified and also the rate of interest, since a lower interest rate attract the larger volume of investment but a higher level of real income, the classical theory fails to offer a solution. financial risk and management reviews, 2019, 5(1): 1-9 4 © 2019 conscientia beam. all rights reserved. 2.3. the keynesian theory of interest rate determination this theory posits that “the rate of interests determined by the intersection of the supply schedule of money and the demand schedule for money. however, this analysis is also undetermined because the liquidity preference schedule will shift up or down with a change in the income level”. thus, money supply and the demand scheduled cannot give the rate of interest unless we already know the income level hence, the same criticism of indeterminacy keynes leveled against the classics is applicable to his theory. 2.4. the loanable theory of interest rate determination according to the loanable funds' theory of dennis h robertson, “the rate of interests is determined by the intersection of the demand and the supply schedule of the loanable funds. here, the supply schedule is compounded of saving plus net addition to loanable funds from the new money and the dishoarding of the idle balance”. however, since the saving portion of the schedules varies with the level of disposable income, it fellow that the total supply schedule of loanable funds also varies with income. 2.5. neo classical theory of interest rate determination in the pigouvian statement, "the interest rate is determined by the intersection of demand schedule of money and the supply schedule of saving”. here the pertinent supply booked is imagined as far as sparing out of current income, i.e. the abundance of aggregate pay from services in accommodating utilization. accordingly, income, utilization, and saving, all apply to a similar period, be that as it may, regardless of whether current income bolstered in past from infusion of new money from the viewpoint of the pigouvian or neoclassical definition. that is income whether it springs from the spending of assets obtained from bank credit assumed a job during the time spent in income creation. in this manner, in the neoclassical or pigouvian theory 'reserve funds' is in actuality indistinguishable thing from loanable assets thus similar reactions apply to them. 3. methodology data for this study were accessed from the primary data through the field survey using a structured questionnaire as a major research instrument. on the other hand, were obtained from relevant stakeholders and expertise in the field of financial institutions for the data collection. as a result of the inability of the researcher to effectively study the whole bank under study, a representative number was chosen as the sample size population. one hundred (100) people were used as the sample size. some number of individuals were been selected from the five (5) different banks (gtbank, first bank, access bank, unity and union bank) and 20 respondents from those banks, which they were classified as expert in the field. one hundred (100) questionnaires were considered as the sample size of the populations. 3.1. method of analysis the data collected was efficiently analyzed for easy management and accuracy. similarly, the analytical tools used for the research was descriptive and correlation those were used to justifies the relationship between the variables as predicted and also reached conclusion for determining the critical value of the research. 4. data analysis, finding and discussion this section explored the study presentation and analysis of the research result as gathered through questionnaires. the data collected from the research were arraigned based on the need and description of the study. the demography and correlation information was presented in the section as adopted to test the research questions. financial risk and management reviews, 2019, 5(1): 1-9 5 © 2019 conscientia beam. all rights reserved. 4.1. demographic analysis table-1. gender of respondents. gender frequency percentage valid percent cumulative percent female 69 69.7 69.7 69.7 male 30 30.3 30.3 100.0 total 99 100.0 100 source: author designed. the table 1 shows in gender distribution of the respondent used for this study. 69 respondents represent 69.7percent of the population are female while the remaining 30 respondents represent 30.3 percent of male. table-2. deregulation of interest rate has something to do with bank profit. stage of acceptance frequency percent valid percent cumulative percent strongly agree 39 39.4 39.4 39.4 agree 50 50.5 50.5 89.9 undecided 2 2.0 2.0 91.9 disagree 3 3.0 3.0 94.9 strongly disagree 5 5.1 5.1 100.0 source: author designed. the table 2 shows that deregulation of interest rate has something to do with bank profit. 39.4 percent have strongly agree that deregulation of interest rate has something to do with the bank profit 50.5 percent agree that as stated by therrell et al. (2012). reported that the all control on interest were removed this indicate that desired interest rate will charge by the bank to get profit. 2.0 percent were undecided 3.0 percent have disagree that deregulation of interest rate has something to do with bank profit. and 5.1 percent have strongly disagree that deregulation of interest rate has something to do with the bank profit. table-3. deregulation of interest rate has increase the commercial bank profit. stage of acceptance frequency percent valid percent cumulative percent strongly agree 49 49.5 49.5 49.5 agree 25 25.3 25.3 74.7 undecided 5 5.1 5.1 79.8 disagree 10 10.1 10.1 89.9 strongly disagree 10 10.1 10.1 100.0 total 99 100.0 100 source: author designed. the table 3 shows that deregulation of the interest rate has increase the commercial bank profit. 49.5 percent strongly agree that the deregulation of the interest rate has increased the commercial bank profit. 25.3 percent agree that deregulation of the interest rate has increased the commercial bank profit. amassoma et al. (2011) interest rate deregulation lead to more efficient allocation in financial market which also is in the view that it increase the commercial bank profit. 5.1 percent were undecided. 10.1 percent have disagree that deregulation of the interest rate has increase the commercial bank profit. 10.1 percent have strongly disagreed that the deregulation of the interest rate has increase the commercial bank profit. table-4. lending policy affects the commercial bank ability to grant loan. stage of acceptance frequency percent valid percent cumulative percent strongly agree 49 49.5 49.5 49.5 agree 30 30.3 30.3 79.8 undecided 5 5.1 5.1 84.8 disagree 10 10.1 10.1 94.9 strongly disagree 5 5.1 5.1 100.0 source: author designed. financial risk and management reviews, 2019, 5(1): 1-9 6 © 2019 conscientia beam. all rights reserved. the table 4 that lending policy affects the commercial bank ability to grant loan. 49.5 per cent strongly agree that lending policy affect the commercial bank ability to grant loan. 30.3 percent agree that lending policy affect the commercial bank ability to grant loan. 5.1 percent were undecided, according to chodechai (2004) as stated that lending policy affect the commercial bank ability to grant loan because interest will be charge based on stated lending rate which affect the bank ability to grant loan. 10.1 percent disagree that lending policy affect the commercial bank ability to grant loan. table-5. interest rate deregulation affects the bank ability to grant loan. stage of acceptance frequency percent valid percent cumulative percent strongly agree 39 39.4 39.4 39.4 agree 50 50.5 50.5 89.9 undecided 2 2.0 2.0 91.9 strongly disagree 5 5.1 5.1 97.0 disagree 3 3.0 3.0 100.0 source: author designed. the table 5 shows that interest rate deregulation affects the bank ability to grant loan. 39.4 percent strongly agree that interest rate deregulation affects the bank ability to grant loan. 50.5 percent agreed that interest rate deregulation affects the bank ability to grant loan (amassoma et al., 2011) says that expert agree while other disagree like ojo (1988) indicated that deregulation affect the bank ability to grant loan, this is because once interest rate was left uncontrolled it will lead to increase in profitability by charging high rate of interest. table-6. government policy on commercial bank affects its ability to grant loan. stage of acceptance frequency percent valid percent cumulative percent strongly agree 39 39.4 39.4 39.4 agree 30 30.3 30.3 69.7 undecided 15 15.2 15.2 84.8 disagree 10 10.1 10.1 94.9 strongly disagree 5 5.1 5.1 100.0 source: author designed. the table 6 shows that government policy on commercial bank affects its ability to grant loan. 39.4 percent strongly agree that government policy on commercial bank affects its ability to grant loan. 30.3 percent agree that government policy on commercial bank affects its ability to grant loan. allen (1977) deregulation of interest rate will cut down borrowing as interest rate will be high, this affects the bank ability to grant loan, 10.1 percent disagree that government policy on commercial bank affects its ability to grant loan. 5.1 percent disagree that government policy on commercial bank affects its ability to grant loan. table-7. government policy on commercial bank should be encouraged. stage of acceptance frequency percent valid percent cumulative percent strongly agree 49 49.5 49.5 49.5 agree 15 15.2 15.2 64.6 undecided 15 15.2 15.2 79.8 disagree 10 10.1 10.1 89.9 strongly disagree 10 10.1 10.1 100.0 source: author designed. the table 7 shows that government policy on commercial bank should be encouraged. 49.5 strongly agreed that government policy on commercial bank should be encouraged. 15.2 percent agreed that government policy on commercial bank should be encouraged. 5.2 were undecided. 10.1 percent disagree that government policy on commercial bank should be encouraged. financial risk and management reviews, 2019, 5(1): 1-9 7 © 2019 conscientia beam. all rights reserved. table-8. matrix correlation result indicating the relationship between the variables. variable (1) (2) (3) (4) (5) (6) (7) (8) (9) sex 1 age .877** 1 academic qualification .585** .713** 1 deregulation of interest .623** .836** .625** 1 deregulation of interest increase commercial bank .858** .948** .691** .823** 1 leading policy affect commercial bank .795** .922** .683** .858** .970** 1 interest rate deregulation ability to grant loan .629** .840** .644** .991** .826** .854** 1 government policy on commercial bank .869** .949 .725** .888** .933** .942** .889** 1 government policy on bank should be encouraged .872** .939** .741** .818** .976** .956** .824** .937** 1 source: designed by the author. the level of the acceptance base on the table above is 0.7> and above, anything below <0.6 will be rejected. the table 8 shows the result of the correlation of the research variable which used to test the significant correlation between the variables on each other. the level of the acceptance based is 0.7 and above while anything below 0.6 is rejected. deregulation of interest rate has something to do with bank profit and lending policy affects the commercial bankability to grant loan and decision shows the significant correlation between the two variables in the research since the level of the significance is 0.85 which is greater than >0.6 level of the rejection. the correlation between government policy on commercial bank should be encouraged the deregulation of the interest rate has increased the commercial bank profit. however, the decision indicates the strong relationship between the two variables at the high level of significance of 0.97 which is greater than the 0.6 rejection level. age of the respondents with their academic qualification of the respondents indicates the strong correlation between the age of the respondents with their academic qualification since the level of the significance is 0.71 which is greater than 0.6 level of the rejection and that show the level of awareness of experts with the policy and activities of financial institutions. 4.2. discussion this study examined the impact of the profitability of commercial bank in nigeria on interest rate deregulation, the author used simple percentage to analyze the research variable and also correlation was used to test the significance of the variable relationships. this study was made to check whether the commercial bank is earning profit from the market base interest rate, this is due to the fact that before 1986 the rate of interest on both the lending and deposit was regulated by the government, which commercial bank has no power on the interest rate determination. but after the deregulation of 1986, the rate to be given and the rate to be charged was based on force in the market. the researcher used the appropriate method to determine and analyses the outcome, the research also reveals that 69% of the respondents are male and which are actively participating in the banking activities and the business that in the one hand or the other has relationships with bank profit on deregulation policy period. it has also observed that the respondent have to see both the era of the regulation and the deregulation of the interest rate which reveal that commercial bank earned profit more during the deregulation of the interest rate because their ability to grant loan has increased. in addition, it has also agreed that deregulation of the interest rate has something to do with bank profit, this is suggesting that commercial bank is earning more profit only during the deregulation period of the interest rate (therrell et al., 2012) when all the control were removed, commercial bank will gain profit, this is because all restriction by the government was removed which lower the profit of the bank. with the deregulation of the rate of financial risk and management reviews, 2019, 5(1): 1-9 8 © 2019 conscientia beam. all rights reserved. interest, then the bank will charge interest base on the level of saving and lending, this proves that deregulation has contributed to the profit of the commercial bank. it has also been observed that deregulation of the interest rate has increased the commercial bank profit, in the sense that the rate of interest will now be determined by the market force. government intervention will be all removed so that the commercial bank will increase the fund by raising the interest on saving so that it will have more to lend to the businesses will, in turn, raise its profit. nwankwo (1989) shows that deregulation leads to more efficient allocation in the financial market which also increase the commercial bank profit, this is also evident that 70% of the respondents agreed that deregulation gas increases the bank profit. the regulation period of interest rate was not beneficial to the commercial bank this is because all the interest rate to be charge are determined by the government authority, gan (2007) also stated that lending policy by government affect the bank to grant loan, since bank will not be in the position to grant loan due to such restrictive policy on the interest, the commercial bank profit is very low, this is also from the research that 79% agreed that government policy reduced the bank profit. this deregulation of interest rate has serious positive effect on the profit made by commercial bank because deregulated rate of interest encourage rate of interest on saving and also lending rate will be raised to make profit from the fund given out for loan, ojo (1988) shows that when interest rate was left to be determined by market, then the bank will charge high-interest rate which will positively increase the profit of commercial bank. it has witnessed that any attempt by the government to control the rate of interest will negatively lead to falling down on interest which will affect the profit of the commercial bank. emphasis should be made on deregulation which enhances the business environment to grow and led to an increase in the bank profit. we can expect that deregulation has a large impact on the real economy only if there are important changes in the structure and efficiency on the banking industry resulting from the reform .although the key changes are as fellows; relaxing the restriction on the bank and expansion of the led to larger bank operation across the country. following such idea of deregulation, we can see that under the deregulation, commercial bank profit increasing more and more but within the regulation period, the commercial bank is earning a low profit when compared to the deregulation period of the interest rate. 5. conclusion based on the study finding, we have seen how deregulation of interest rate contributed to the commercial bank profitability. so the researcher hereby concludes that interest rate deregulation has contributed reflectively to the profitability of the commercial bank. it has also engendered competition in the midst of the bank and other institution of deposit. saving enlistment has been encouraged through demand and supply that resolute the interest rate. perhaps, it’s induced the financial institution to spring for idle funds, and sending to deficit area to gingered loan in advance. sanity is been encouraging in some bank area as they are now beat on sensible used of this available funds and hence allocated to most profitable venture. the research recommended for further research on deregulation on commercial banking under time series, granger causality and financial reports on banking sectors. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. contributors/acknowledgement: both authors contributed equally to the conception and design of the study. references acha, i.a., 2011. does bank financial intermediation causes growth in developing economies: the 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https://doi.org/10.1016/j.ymgme.2012.02.013. vaghefi, m.r., s.k. paulson and w.h. tomlinson, 1991. international business: theory and practice. new york: taylor & francis. wurgler, j., 2000. financial markets and the allocation of capital. journal of financial economics, 58(1-2): 187-214.available at: https://doi.org/10.1016/s0304-405x(00)00070-2. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.cbn.gov.ng/rates/5yearbalancesheet.asp?year=1978 88 † corresponding author © 2015 conscientia beam. all rights reserved. share options, share award and firm’s performance: evidence from malaysian public listed companies nur azizah mohamad parij1 --wan mohammad taufik wan abdullah2† 1universiti multimedia, malaysia 2universiti tenaga nasional, malaysia abstract the main intention of this paper is to examine the impact on firm’s performance once the directors are granted with the share options and share award. this study also intends to briefly identify the shariah compliance impact towards the performance of firms that have granted the share options and share award. earnings per share (eps), operating cash flow over total assets (ocfta) and tobin’s q used to examine seven hypotheses in this paper. the results exhibit share award presented better results in eps and ocfta. on the other hand the share options and the share award revealed significant relationship with tobin’s q when shariah compliance was included in the regression analysis model. keywords: share options, share awards, firm performance, corporate governance, shariah compliance, agency theory and stewardship theory. contribution/ originality this study contributes in the existing literature on the share-based compensation as an important component in the directors’ compensation package and how it can boost the performance of the firms. besides, this study contributes in the existing islamic perspective literature by taking into consideration the implication of shariah-compliance status. 1. introduction east asian faced economy collapse in the second half of 1997 and consequently corporate governance was introduced in malaysia after. due to currency devaluation in thailand, the foreign investors lost their confidence and started to withdraw capital caused the financial crisis to begin and filtered to malaysia. it was realized that the existing initiatives on protecting shareholders were inadequate and as such contributed to the plunge in the value of their investment. according to imf (1999) the reasons of the crisis were weak on the domestic policy financial risk and management reviews 2015 vol. 1, no. 2, pp. 88-101 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2015.1.2/89.2.88.101 © 2015 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2015.1.2/89.2.88.101 financial risk and management reviews, 2015, 1(2):88-101 89 © 2015 conscientia beam. all rights reserved. and one of the emphasized factors was the poor governance and poor risk management. this is supported by shleifer and vishny (1997) who found investors in organizations will receive adequate returns in their investments as assured by the corporate governance mechanisms. meanwhile, doidge et al. (2007) stated that better governance attracts the investors to contribute funds in the firm because these investors expect the firms to be well governed after the funds have been increased. hence, firms will comply with high-quality governance in order to be comfortable and gain funds from the investors after the financial crisis. corporate governance is an illustration on how firms should be directed and managed as defined by koh et al. (2007) and mohd sulaiman and bidin (2002). meanwhile, mohd and noriza (2010) interpreted one of the benefits if firms implemented and complied with the best practices is the shareholders enjoy higher returns from their investment. thus, it concludes that the corporate governance covers the aspects of fairness, transparency, accountability and responsibility in running the organizations. the introduction of corporate governance has attained the accountability of the directors not only on the quality of reporting but also on accountability to maximize corporate value in the long term for the shareholders. additionally, the directors believed they should to be accountable to the shareholders when each idea, strategic succession planning, decisions for risk avoidance and error free decisions are calculated and rewarded by the compensation (abdul rahman and ali, 2006). they identified the advantages of granting share-based compensation. first and foremost, share-based compensation aligns the interest of shareholders and directors through share price. it is granted to reward performance and growth. it also helps to raise the directors’ commitment to the shareholders and the firm. finally, it increases loyalty of the directors. the proponents clarified that when the directors are granted with share-based compensation, the share prices the directors received will bind the directors to align their interest with the shareholders’ interest. subsequently, the directors who are granted share-based compensation are motivated to perform their responsibilities of the highest-quality as they have been rewarded and are accountable to the shareholders. the performance as well the reputation of the firm will increase and the shareholders enjoy the returns. the firm will get more funds from the investors and the shareholders and this makes the capital structure of the firm stronger. according to triki and ureche-rangau (2012) share options is exercised to align shareholders and employees interests as the shareholders enjoy returns of their wealth through the firm’s stock price. fich and shivdasani (2005) found that investors show positive reaction towards the incentive effects of the share options plan granted to outside directors and this could reflect on the impact of investment opportunity. discharging their responsibilities effectively will bring transparency and good governance of the firm and shows the accountability of the directors to the shareholders and the firm. thus, greater use of directors’ incentive compensation in the form of share options and share award will lower the agency costs and lead to superior firm performance. financial risk and management reviews, 2015, 1(2):88-101 90 © 2015 conscientia beam. all rights reserved. 1.1. the development of shariah compliant securities islamic-oriented economic system has taken this opportunity develop in the market as the public and investors lose their confidence in the conventional economic system after corporate scandals and financial crisis occurred. malaysia took the advantage by initiating the so-called islamic economy; a system that islam prescribes for individual and social behaviour in economics, which emphasizes social justice. it is not only to increase the foreign investors’ confidence that was lost after the asian financial crisis of 1997 as well an opportunity to develop economic growth. shariah committee (sc) has established shariah-compliance status which is adaptable with the islamic principles of shariah. wan et al. (2012) found that shariah-compliant firms have significantly higher quality earnings as compared to other shariah non-compliant firms. the researchers provided support for the arguments those shariah-compliant firms: (1) supply higher quality reported earnings to attract foreign investments; (2) have greater reliability for highquality financial reporting due to their shariah compliant status, and (3) are subject to greater scrutiny by regulators and institutional investors. hence, this paper is motivated to establish whether the share-based compensation granted directors’ could enhance the firm’s performance from the islamic perspective. the results could reveal a difference in the use of conventional versus shariah compliant firms. 1.2. agency theory agency theory mainly clarify on the agency relationship between the principal and the agent, whereby the principal engages the agent to perform some services on their behalf and the principal will normally delegate decision making authorization to the agent. this theory demonstrates the shareholders or investors peculiarly desire sensible returns on their investment for instance the capital gained from the share price appreciation or in terms of cash from the distribution of dividends. meanwhile, the directors are more concerned on the compensation that brings possessions to their selves. it can be simplified that the directors are motivated only by tangible monetary-based rewards such as fees and bonuses and long-term compensation plan for example pension plans and share-based or equity compensation. brooks and dunn (2010) deem that to motivate and influence the directors to stay on the right path is by applying the incentive and punishment systems. the incentive system demands ethical acts to the shareholders’ interests and in future avoids conflict of interests. thus, the principal will compensate the agent well enough with rewards if they perform well. 1.3. stewardship theory stewardship refers to the attitudes and behaviours that put the long-term best interest of a group ahead of personal goals that serve an individual’s self-interests (hernandez, 2008). it means the stewards effort to ensure the achievement of firms’ goals with regards to no interference between the personal want and organisational needs. as the steward’s interests are aligned with financial risk and management reviews, 2015, 1(2):88-101 91 © 2015 conscientia beam. all rights reserved. the investors’ interests, there will be less engage in self-serving behaviours (brooks and dunn, 2010). therefore, the stewardship theory can be used to represent the board of directors’ behaviour and it is also a model that presumes a natural motivation for the directors to act in the best interest of the organization as to serve the shareholders. though, to counterbalance the workload and burdens as well as appreciation to the directors as the steward, the entitlement of directors to grants with share options and share awards are alternatives to compensate them. consequently, this will again align the interest of the directors with the shareholders. agency theory’s primary flaw is less concern for human behaviour and is motivated by the extrinsic monetary reward (brooks and dunn, 2010). nevertheless, the stewardship theory is motivated by both intrinsic and extrinsic and thus is more self-actualized. it is the interrelation between the agency and stewardship theory to make it balanced. thus, these two theories are relevant in this study since the agency theory is applicable on the directors’ share-based compensation and firm performance that look into extrinsic reward. meanwhile, the stewardship theory is relevant when the shariah values are incorporated in the firm that leads the leader to be a good and accountable. 2. literature review hillegeist and penalva (2003) studied on the share options and firm performance who found the share options has significant relationship with roa and tobin’s q. the researchers explained the firms with unexpected high level of share options have significant influence to the high level of firm performance. cordeiro et al. (2005) examined the share options and share grants (share award) with the firm performance. the study found share option ratios have stronger impact on firm performance than the share grants. moreover, both directors’ share-based compensation have positive significant relationship with stock returns but only share option has positive relationship with jensen’s alpha. fich and shivdasani (2005) reviewed on the characteristics of firms that implemented share option plans for outside directors. the results showed that firms that granted outside directors with option plans have substantial association with higher market to book ratios and profitability calculation. further, the implementation of share option plans has significant positive correlation with cumulative abnormal stock returns (cars). kato et al. (2005) examined the costs and benefits of executive share options. it was found firms that granted share option plans have more growth opportunities and more intangible assets than non-adopting firms. it was proved from the car that the investors view the adoption share option plans positively average. moreover, these adopting firms also have lower leverage compared to non-adopting firms. the researchers concluded that the results portrayed share option plans adopted by the japan firms are designed to improve managerial incentives and increase the value of the firm. financial risk and management reviews, 2015, 1(2):88-101 92 © 2015 conscientia beam. all rights reserved. cheffou (2007) surveyed and found that the ceo share options could improve the firm’s value. the result of the study recommended the value of share options granted to the ceo does not affects the firm’s accounting performance however it improved the firm’s tobin’s q with this form of compensation. triki and ureche-rangau (2012) conducted study to look into the impact of share option plans adopted on the financial performance based on french firms. the result pointed that the share options has a significant relationship with the return on equity. this study also exposed that the investors agreed with the granted share options as the investors found that the share options granted as an incentive to the employees helps to increase shareholders’ wealth. additionally, most of the prior studies found that the share options bring greater firm performance compared to the share awards by applying different measurement. thus, the researcher is keen to review whether the share options and share award granted still could enhance the firm’s performance. 2.1. previous research with emphasis on shariah compliance this section discusses previous studies that justify strong enough motivation for this current study which compares the performance of shariah-compliant firms with the shariah noncompliant firms. it has been proven that the performances of shariah-compliant firms are much better because of the religious influence in the management; greater accountability of the employee and the directors. bakar et al. (2013) demonstrated that there is positive relationship between intellectual capital (ic) and corporate market value for shariah-compliant firms and industries. besides, the result indicates that consumer shariah-compliant firms/industry have shown greater presence of ic value against other industries within the observations. abdul rahman (2012) the researcher examined the religious ethical values and earnings quality between shariah and non-shariah firms as listed in the bursa malaysia. the study found religious ethical values not only could influence to lower managerial opportunism but also aggressive reporting behaviour and it improved the quality of accounting earnings. mohd saad (2008) the results revealed that firms which have complied well with the code of best practices and shariah principles showed significant association to the firm’s performance. the key result is that shariah compliance seems to create higher returns on profitability while with corporate governance the returns are restricted. shariah compliance requirements also appear to provide better historical returns. shariah compliant rules and regulations must be restricted to the newly classified shariah-compliant securities to ensure better performance and to protect stakeholder’s interest. 3. research objectives  to investigate the relationship between the directors’ share options compensation and the firm’s accounting performance (eps and ocfta) financial risk and management reviews, 2015, 1(2):88-101 93 © 2015 conscientia beam. all rights reserved.  to indicate the relationship between the directors’ share options compensation and the firm’s market performance (tobin’s q)  to determine the association between the directors’ share award compensation and the firm’s accounting performance (eps and ocfta)  to ascertain the association between the directors’ share award compensation and the firm’s market performance (tobin’s q)  to evaluate the influence of shariah-compliant status on the relationship between directors’ share-based compensation and firm’s performance. 4. hypotheses this study examines seven hypotheses to answer research questions, these hypotheses are as follows: h1: there is a significant relationship between the directors’ share options compensation and the firm’s eps. h2: there is a significant relationship between the directors’ share options compensation and the firm’s ocfta. h3: there is a significant relationship between the directors’ share options compensation and the firm’s tq. h4: there is a significant relationship between the directors’ share award compensation and the firm’s eps. h5: there is a significant relationship between the directors’ share award compensation and the firm’s ocfta. h6: there is a significant relationship between the directors’ share award compensation and the firm’s tq. h7: shariah-compliance has an impact on the relationship between directors’ share-based compensation and firm performance. 5. methodology the first regression model is to determine the relationship between directors’ share-based compensation with firm performance. this regression model is to answer the research questions and on the relationship between the directors’ share-based compensation and firm’s performance. . the regression models are as follows: regression model 1 fp : firm performance β1, β2, β3, β4 and β5 : variable coefficients fp= β1 [so] + β2 [sa] + β3 [fs] + β4 [ta] + β5 [rc] + ε financial risk and management reviews, 2015, 1(2):88-101 94 © 2015 conscientia beam. all rights reserved. so : share option ratio sa : share award ratio fs : firms’ sales ta : firms’ total assets rc : compensation committee ε : error term the second regression model is to answer the last research question on the implication of shariah compliance status in the relationship of directors’ share-based compensation and firm performance. regression model 2 fp : firm performance β1, β2, β3, β4, β5, β6, β7 and β8 : variable coefficients sosc : share option ratio × shariah compliance sasc : share award ratio × shariah compliance sc : shariah compliance status fs : firms’ sales ta : firms’ total assets rc : compensation committee ε : error term 6. research sample the sample of share options and share award covered of nine years from 2002 until 2010 and cuts across a wide range of industries. the firm performances measured are observed from 2003 until 2011 as the study analysed the financial performance one leap year from the year that the share-based compensation was granted (see bacha et al. (2009)). the study determined the ideal sample is to begin with year 2002 since the data on the shariah-compliant firms was already available after 1999 as the klse shariah index had been launched (abdul rahman, 2012). on the other part, the emphasis on the improvement of good corporate governance (evidenced by the mccg in march 2000) as well the regulations on granting the share options and share award had been reinforced international financial reporting standard (ifrs 2) after 2001. firms in the banking and finance sector are not excluded in this study since the variables and information gathered are not influenced by the guideline and governance system. fp= β1[sosc] + β2[sasc] + β3[so] + β4[sa] + β5[sc] + β6[fs] + β7[ta] + β8[rc] + ε financial risk and management reviews, 2015, 1(2):88-101 95 © 2015 conscientia beam. all rights reserved. 7. results and interpretation 7.1. correlation analysis table 1 demonstrates there are insignificant relationships between the share options with the eps, ocfta and tq since the p-values are more than 0.05. however, share award shows positive significant relationship with eps (p-value = 0.0011 < 0.05). table-1. covariance analysis iv dv share options share awards eps 0.1202 0.0011 ocfta 0.6303 0.0233 tq 0.2497 0.0030 fs 0.0976 0.0023 ta 0.1055 0.0464 rc 0.0007 0.1435 share award also shows positive significant association with ocfta (p-value = 0.0233 < 0.05). meanwhile, the share award has strong positive relationship with tq (p-value = 0.0030 < 0.05). the share options and share award are compensated as an incentive for the directors to increase the firm’s and shareholder’s wealth. however the equity form compensated has reflected to the above results. share options entitle the granted directors to have firm’s share but they would have to pay the price of shares after the vested period if they would like to exercise the share options. this creates the granted directors unwilling to exercise their share options as they have to use their own money even though the share price granted is lower than the market price. thus, the share options granted demotivates the directors to double up their effort and this leads to no improvement in the firms’ performance. as for the share award, the directors would receive the firm’s shares after the vesting period without any payment. 7.2. regression analysis on share-based compensation and firm performance based on the table 2, the share options showed insignificant results with eps (p-value = 0.8628). however, the share award has significant finding with eps (p-value = 0.0014 < 0.05). share award is granted individually to the directors as a token of appreciation for their contribution in enhancing the reputation of the firm. besides, it is to tie the directors with the firm and to ensure the directors maintain excellent performance. when the directors are treated well with the firm’s shares awarded to them, they feel the sense of belonging and are enthusiastic financial risk and management reviews, 2015, 1(2):88-101 96 © 2015 conscientia beam. all rights reserved. to perform much better. therefore when the awarded directors performed their jobs effectively, the fs and ta of the firm will increase which lead the firm’s performance to increase too. it interprets that the share award granted significantly affects the eps. this is supported by hillman and dalziel (2003) who found that equity compensation motivate boards of directors to be better monitors and align the interests of shareholders and directors. this is supported by lin and liu (2005) found that eps is a good indicator for the directors to increase the profit. table-2. regression analysis (model 1) variables t-statistic prob. r² adjusted r² prob(fstatistic) eps fs 3.167960 0.0020 0.240245 0.204743 0.000016 ta 2.388890 0.0187 rc -3.311483 0.0013 so -0.173257 0.8628 sa 3.289011 0.0014 ocfta fs 2.467269 0.0152 0.138914 0.098676 0.006235 ta 2.740613 0.0072 rc 2.744860 0.0071 so 1.069676 0.2872 sa 2.361312 0.0200 tq fs 5.413489 0.0000 0.522145 0.499815 0.000000 ta 3.534952 0.0006 rc -1.794274 0.0756 so -0.612167 0.5417 sa 6.220957 0.0000 significant at α=0.05 further, it is showed that the share award has significant relationship with ocfta since the p-value is 0.0200. meanwhile, share options do not bring implications to the ocfta (p = 0.2872 > 0.05). this demonstrates the effects when the directors are more accountable due to the share awards that have been granted to them, they will improve their responsibilities in safeguarding the firm’ assets especially the business money so that they will be not misappropriated. this proves that incentives could influence the decision of directors in providing resources for instance advising and counselling, besides monitoring effectively (hillman and dalziel, 2003). additionally, when a firm awarded the directors with the shares of the firm, there is no cash flow involved. this drives the cash operating profit to increase as the cash operating expenses are reduced because the directors’ compensation on the share award is excluded from the cash operating expenses. subsequently, the firm is able to use the excluded cash flow portion to purchase assets in order to increase the firm’s sales, which explains why the ta and the fs have significant relationship with ocfta. according to triki and ureche-rangau (2012) the cost financial risk and management reviews, 2015, 1(2):88-101 97 © 2015 conscientia beam. all rights reserved. does not show in the balance sheet and, accordingly, they do not reduce the firm’s profit. a successful business uses its assets to produce strong operating cash flow. thus, the significant result concludes that the awarded directors are accountable in managing the firm’s assets efficiently to generate the firm’s strong operating cash flow. table 2 demonstrates favourable explanation of fs, ta, rc and share award on the total variation of tq as the r-squared is 52.21%. the study found share award has robust relationship with tq (p-value = 0.000). once the firm’s shares are awarded to the directors, it means the directors’ interests are aligned with the shareholders. thus, the shareholders perceive the directors are accountable to boost the performance of the firm and lead them to acquire more shares of the firm. this would result in a higher market value of the equity. the finding is similar with the result of pasternack and rosenberg (2003) and abdul rahman and mohamed zawawi (2005) which found a strong evidence of a positive relationship between both incentive effects and firm value (tq). nevertheless, there exists no correlation between share option and tq. table 2 revealed there were significant relationship between the directors’ share award compensation and the firm’s eps, ocfta and tq. thus the h4, h5 and h6 were supported. accordingly, h1, h2 and h3 were rejected. 7.3. regression analysis on shariah compliance table-3. regression analysis (model 2) variable t-statistic prob. r-squared adjusted r-squared prob(f-statistic) eps fs 2.807183 0.0060 0.246480 0.188517 0.000191 ta 1.915441 0.0582 rc 3.159890 0.0021 so 0.812542 0.4183 sa 0.993514 0.3228 sc 0.641559 0.5226 sosc 0.799375 0.4259 sasc 0.647065 0.5190 ocfta fs 1.706064 0.0910 0.157882 0.093103 0.018585 ta 1.352361 0.1792 rc -2.565021 0.0117 so 1.251803 0.2134 sa 1.473646 0.1436 sc 1.534026 0.1281 sosc 1.273523 0.2057 sasc 1.230207 0.2214 tq fs 4.470453 0.0000 0.585550 0.553669 0.000000 ta 2.183862 0.0312 rc -1.436679 0.1538 so 2.718949 0.0077 sa 4.193106 0.0001 sc 2.603134 0.0106 sosc 2.689531 0.0083 sasc 3.614342 0.0005 significant at α=0.05 financial risk and management reviews, 2015, 1(2):88-101 98 © 2015 conscientia beam. all rights reserved. as referred to the table 3, sosc and sasc do not exhibit correlation with the eps. as discussed earlier, eps is evaluated on the return of individual basis. nevertheless, granting share options and share awards do not sway the directors’ conduct to increase the individual returns due to reflection of persevere shariah principles in a firm. this is supported by zainal et al. (2013) whereby the directors’ conduct and behaviour align with the islamic teaching; the wealth or profit is distributed not only for the individuals but also contributes more to the ummah or the society. further, the sosc and sasc do not display association with the ocfta. even though the concept is alike there is no cash outflow on the directors’ share-based compensation, but in the shariah-compliant firms, a portion of the returns is used to pay for the shariah committee and the shariah advisory. these committees are established to clinch the firm do comply with the shariah principles and ground. even so, the fs is significant relationship with ocfta which shows that the directors strive to increase the firm’s sales after being awarded with the firm’s shares. it is controlled effectively by the sc and rc as these committees are complementary on monitoring the directors’ compensation and to ensure the business operation complied with the shariah principles (abdul rahman, 2012). on the next dependent variable, sosc resulted in a positive significant relationship with tq (p-value = 0.0083 < 0.05). exceeding the expectation, the sasc as well showed positive significant relationship with tq with the p-value = 0.0005. it reveals that the application of shariah principles has a substantial implication on the directors’ behaviour to be more accountable and this enhances the firm’s performance. once the directors are awarded with the firm’s shares, the directors feel it is an obligation to them to be more accountable in increasing the firm’s performance. in enhancing the firm’s performance, the directors do not emphasis basically on the operation revenue as the business operation is restricted to shariah principles where the revenue is normally lower than non-restricted firms. besides, kumar et al. (2011) found religious beliefs, through their influence on gambling attitudes could have an impact on investors’ portfolio choices, corporate decisions, and stock returns. an alternative action for the shariah-compliant firm is to boost the market value of the firm in order to attract the potential investors to be more confident to invest in the shariah-compliant firms. hence the shareholders’ interest will not be jeopardised as it in line with the directors’ interest along with the consideration of the shariahcompliance. this finding is similar with the recent study done by mat isa et al. (2013) who found that the shariah-compliant firms capable to enhance its market performance through leverage. in a nut shell, h7; shariah-compliance has an impact on the relationship between directors’ share-based compensation and firm performance is supported since both share options and share award have significant relationship with firm performance as compared to results in table 2. 8. conclusion this study contributes findings on the effects of the firm’s performance once the directors are granted with share options and share award. besides, it accomplishes the research objectives that financial risk and management reviews, 2015, 1(2):88-101 99 © 2015 conscientia beam. all rights reserved. examined the relationship between the directors’ share-based compensation on share options and share award with the firm’s performance. the result shows the share award granted has significant impact towards the firm’s performance compared to share options. the malaysian directors prefer the share award grant rather than share options grant as it is more beneficial to them. the rationale is the directors do not have to pay for exercising the share award and there is no special tax treatment upon the share award granted. this is consistent with the agency theory as the agents are motivated with extrinsic values in order to align with the shareholders’ interests. besides, it supports brooks and dunn (2010) on how incentive system reflects the behaviour to act ethically on the shareholders’ interests and reduce the conflict of interests. on top of everything, the effect on the shariah compliance implementation is most vital. this study found that shariah-compliant firms could boost the market performance, tobin’s q, when the directors are granted with share options and share award. the result highlighted that even though both shariah-compliant and shariah non-compliant firms granted share options and share award to their directors, however share options and share awards are significant with tobin’s q in shariah-compliant firm’s analysis. meanwhile in normal regression analysis, only share award is significant to tobin’s q. it revealed that the directors of shariah-compliant firms not only conform to the stewardship theory as they play steward role but also attempt to reach firms’ goals with no intervention from self-serving and organizational needs. they also conform to the islamic teaching on accountability. the study recommends that religious ethical values could be a monitoring mechanism in reducing managerial opportunism especially in the management of earnings (abdul rahman, 2012). besides, shariah principles do insist on accountability from the individual and the individual controls the organisation to be accountable. these stipulated shariah principles upholds the ethical conduct and thus promotes justice and welfare in the ummah or society. in a nutshell, the finding was able to answer the research objective on whether islamic value, shariah, affects the firm’s performance differently in shariah-compliant firms and shariah non-compliant firms. moreover, the behaviour of the directors in the shariah-compliant firms do not deviate from the religious codes and thus are good stewards as in the stewardship theory. this study deliberated only on the directors’ effort and commitment in order for the firm to grant the share options and share award. thus, further study to include economic conditions and enforcement of new regulation which are not within the control of directors that can affect the granting of the share options and the share award is necessary. future studies are recommended to compare the firm’s performances before and after the adoption of this compensation plans. on the other hand, future study is recommended to compare the shariah-compliant firms and shariah non-compliant firms in focus industries so as to determine which industry is more affected by the shariah principles. financial risk and management reviews, 2015, 1(2):88-101 100 © 2015 conscientia beam. all rights reserved. references abdul rahman, r., 2012. religious ethical values and earnings quality: some evidence from malaysia. unpublished doctoral dissertation, massey university, albany, new zealand. abdul rahman, r. and f.h.m. ali, 2006. board, audit committee, culture and earnings management: malaysian evidence. managerial auditing journal, 21(7): 783-804. abdul rahman, r. and s.n.h. mohamed zawawi, 2005. is there a relationship between directors remuneration and firm performance. international journal of board, role, duties and composition, 1(2): 39-48. bacha, o.i., s.r.s.m. zain, m.e.s.m. rasid and a. mohamad, 2009. granting employee stock options (esos), market reaction and financial performance. asian academy of management journal of accounting and finance, 5(1): 117-138. bakar, r., a. jasmon, h. rahmani and s.m. ali, 2013. intellectual capital (ic) value of shariah-compliant companies/industries listed in bursa malaysia. paper presented at the 4th international conference on business and economic research, bandung, indonesia. brooks, l.j. and p. dunn, 2010. business and professional ethics for directors, executives and accountants. 5th edn., canada, usa: south-western cengage learning. cheffou, i.a., 2007. les stock-options en faveur des dirigeants: déterminants d’octroiet impact sur la performance des entreprises, le cas français. working paper no. 1-35, affi , bordeaux, france. cordeiro, j.j., r. veliyath and d.o. neubaum, 2005. incentives for monitors: director stock-based compensation and firm performance. journal of applied business research, 21(2): 37–53. doidge, c., g. andrew karolyi and m. stulz rene, 2007. why do countries matter so much for corporate governance. journal of financial economics, elsevier, 86(1): 1-39. fich, e.m. and a. shivdasani, 2005. the impact of stock-option compensation for outside directors on firm value. the journal of business, 78(6): 2229-2254. hernandez, m., 2008. 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[accessed 11th 12th june 2012]. zainal, d., n. zulkifli and z. saleh, 2013. corporate social responsibility reporting in malaysia: a comparison between shariah and non-shariah approved firms. middle-east journal of scientific research, 15(7): 1035-1046. bibliography elson, c., 1995. director compensation and the management captured board—the history of a symptom and a cure. southern methodist law review, 50(september/october): 127-174. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 53 † corresponding author © 2015 conscientia beam. all rights reserved. stock market index prediction with neural network during financial crises: a review on bist-100 şakir sakarya1 --mehmet yavuz2† --aslan deniz karaoğlan3 --necati özdemi̇r4 1balikesir university, department of business administration, cağiş campus, balıkesir, turkey 2necmettin erbakan university, fakulty of science, department of mathematics-computer sciences, meram, konya, turkey 3balikesir university, department of industrial engineering, cağiş campus, balıkesir, turkey 4balikesir university, department of mathematics, cağiş campus, balıkesir, turkey abstract predetermining the future value of a variable is both quite important and rather difficult process in financial markets. in this context, especially in the last 15 years, artificial neural networks (anns) are widely used in order to resolve various kinds of financial problems such as performing portfolio construction, stock index, and bankruptcy prediction. this study examines the predictability of daily and weekly returns of borsa i̇stanbul (bist)-100 index during global crisis period (july 2007-december 2009) by using ann. it differs from other similar studies in the literature as it: i) covers global crisis period, ii) predicts index value of the next day and next week and finally iii) uses seven different economic parameters (variables) as input. the results obtained suggest that ann can be used quite successfully in this area and foresee correctly the value for next day and next week with an accuracy margin error of less than 5% even for unknown samples. the ann model in this study is developed using matlab r2008b. keywords: financial crises, artificial neural networks, index forecasting, bist-100 index. 1. introduction in recent years, artificial neural networks (anns) are widely used in the solution of financial problems. for instance to measure the performance of stocks, to determine exchange rates direction, to predict company bankruptcy, to forecast financial crisis, to detect manipulative operations, to estimate stocks and indices, and to optimize portfolio, etc. there are two approaches that are widely used in prediction of stock market indices with ann. the first one is an analysis of the relationship between stock prices, dividends, and trading volume and the other one is testing the relationship between the stock market index and other financial risk and management reviews 2015 vol. 1, no. 2, pp. 53-67 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2015.1.2/89.2.53.67 © 2015 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2015.1.2/89.2.53.67 financial risk and management reviews, 2015, 1(2):53-67 54 © 2015 conscientia beam. all rights reserved. macro-economic variables. as daily price movements in the financial markets are dynamic and fluctuating, computer-based learning algorithms, such as neural networks, are quite appropriate in predicting financial markets’ direction (oh et al., 2006). as there is not yet a method that determines exact stock prices, working on algorithms for the prediction of these stock prices is among the prior interest areas of financial communities. in addition, high uncertainty and volatility in the stock prices show that investing in these carries a great risk. besides, high returns of stocks have attracted the attention of many researchers, investors, and other relevant people. moreover, the influence of many macro-economic factors, such as political events, firm policies, general economic conditions, investor expectations, institutional investor preferences, other stock market operations, and the psychology of investors etc. has an impact of the stock market prices (wang et al., 2011). financial crises disturb the macro-economic equilibrium and affect capital markets adversely. the financial crises in turkey also have left deep scars and have negatively affected the macroeconomic factors. one of these macro-economic factors that are affected by the financial crisis is istanbul stock exchange (ise) (gençtürk, 2009). it is remarkable that studies on stock index prediction are quite few in turkey. the purpose of this study is to show bist-100 index predictability with feed forward neural network during the global financial crisis. 2. literature review studies about stock index prediction with neural networks have been performed about for 25 years. kimoto et al. (1990) study on topix (tokyo stock exchange prices indexes) was one of the first studies performed on stock index prediction. they developed a number of learning algorithms and prediction methods for the topix prediction system. they compared the neural network (nn) and multiple regression analysis (mra) and as the result of their study they observed that nn learned the data well enough to show a very high correlation coefficient (0.991) and mra even a lower correlation coefficient (0.543). this shows nn is more effective than mra. yoon and george (1991) studied stock price forecasting and compared neural networks to multiple discriminant analysis (mda). they obtained that the mean success rate during the testing phase for the four-layered network was 77.5% as compared with mda technique 65%. this result shows that nn method significantly enhanced the mda model’s stock price predictive power yoon et al. (1993) compared neural networks to discriminant analysis (da) and they found that the accuracy of ann is 91%, whereas the accuracy of da is 74%. mallaris and linda (1996) studied s&p 500 index in order to present a neural network which accurately forecasts the volatility most often used by traders using black-scholes formula to calculate implied volatility. the overall proportion of correct direction predictions was 0.794. the correlation between the neural network forecast and the future implied volatility was 0.8535 with a significance level of 0.0001. mizuno et al. (1998) predicted buying and selling signals of tokyo financial risk and management reviews, 2015, 1(2):53-67 55 © 2015 conscientia beam. all rights reserved. stock exchange prices index (topix) with an accuracy of 63% using the neural network system that they had developed. phua et al. (2000) used the neural networks and genetic algorithm (ga) in order to estimate the singapore exchange (sgx) and examined 360 data between august 1998 and january 2000. they also considered the trading volume, opening price, closing price, the highest price and the lowest price of sgx and thus predicted sgx trend with an accuracy of 81%. o’connor and michael (2005) evaluated the effectiveness of using external indicators, such as commodity prices and currency exchange rates, in predicting dow jones industrial average (djia) index movements. basing trading decisions on a neural network trained on a range of external indicators resulted with a yearly 23.5% profit while the djia index grew by 13.03% per annum. li and liu (2009) study on shanghai stock exchange (sse) proved that the back propagation (bp) network based on levenberg-marquardt (lm) algorithm can provide effective short term predictions after providing the network with the necessary training. guresen et al. (2011) evaluated the effectiveness of nn models known to be dynamic and effective nasdaq stock exchange index predicators. the models analyzed are mlp, dynamic artificial neural network (dan2) and the hybrid neural networks using generalized autoregressive conditional heteroscedasticity (garch) to extract new input variables. they concluded that mlp is a powerful and practical tool for forecasting stock movements due to its small error rate (0.54%). aghababaeyan et al. (2011) used the neural network standard feedforward back propagation (ffb) in order to predict the tehran stock exchange (tse). they found that their prediction model can notify the direction of stock price movements with an accuracy of 83% when upcoming news is released. wang et al. (2011) proposed a new approach to forecast shanghai composite index (sci) stock prices via the wavelet de-noising-based back propagation (wdbp) neural network. to show the advantage of this new approach for stock index forecast, the wdbp neural network was compared with the single back propagation (bp) neural network using real data set and concluded that their wdbp model was more effective. desai et al. (2012) presented a computational approach for predicting the s&p cnx nifty 50 index. for this approach they used a neural network based model in predicting the direction of the movement of the closing value for the next day with an accuracy of 82%. in turkey, anns are used primarily in predicting the financial failure (yıldız, 2001). diler (2003) predicted bist100 index trend for the next day up to 60.81% using ann with error back propagation (bp) method. in a similar study, yildiz et al. (2008) estimated the trend of bist-100 index for the next day with a 74.91% accuracy using a nn model. vural barış (2007) estimated the daily closing prices of bist index with 3% error in his prediction study by developing an ann model. akel and bayramoğlu (2008), using a multi-layer perceptron (mlp) network, demonstrated that bist index prediction after and before period was possible during 2001 february crisis. their model also generated a 73.68% signal about index decrease and increase. financial risk and management reviews, 2015, 1(2):53-67 56 © 2015 conscientia beam. all rights reserved. kutlu and bertan (2009) developed a feed forward neural network to predict daily bist-100 index direction. they compared the results obtained with moving average (ma) and nn. ann model (55.1%) was found to be significantly better than ma model (50.4%). kara et al. (2011) developed two efficient models and compared the models’ performances in predicting daily bist-100 index direction. their models were based on two classification techniques, ann and support vector machines (svm). ten technical indicators were selected as inputs of the proposed models. two comprehensive parameter setting experiments for both models were performed to improve their prediction performances. experimental results showed that average performance of ann model (75.74%) was significantly better than svm model (71.52%). 3. constraints of the study global economic crises affect the real and financial markets of all countries at different rates. one of the basic constraints of the present study is that it is based on bist-100 index data during the 2007-2009 crisis. another constraint is related with the variables used in the present predictive ann model since there is not a gold standard about the variables to be employed. 4. materials and methods in this study it is aimed to predict the status of bist-100 index both for the next day and next week by the aid of ann in the global economic crises terms. for this purpose feed forward back propagation networks are used. for training, a set of data that is obtained from 30 months (july 2007 – december 2009) is used. these data is obtained from turkish central bank database composed of the variables namely gold price, oil price, interest rate, consumer price index (cpi), exchange rate, money supply and bist volume. the summarized data are presented in table-8. the training data set is composed of 12 months (july 2007 – june 2008) and the test data set that is composed of 18 months (july 2008 – december 2009). the topology of the network is composed of 1 input layer, 2 hidden layers and 1 output layer. the number of neurons at each layer are 7, 9, 7, and 2 respectively and given in figure 1 (öztemel, 2003; karaoglan, 2011). figure-1. mlp network topology for the index prediction financial risk and management reviews, 2015, 1(2):53-67 57 © 2015 conscientia beam. all rights reserved. for the neurons of input layer purelin function is used as the activation function while tangent sigmoid function is used for the other neurons at each layer. the structures of these functions are presented in figures-2(a) and 2(b). figure-2(a). purelin function figure-2(b). tangent sigmoid function purelin fuction can be defined in two different types such as, 1 n i i i u x w     or 1 n i i i u x w     and  y f u au  , where a is constant,  is the threshold value and u is the sum of the net input. tangent sigmoid can be represented as   1 1 tanh 1 1 2 2u u y f u e              . all the columns are divided to their max value and by this way the data is coded as the biggest value of each column is 1. gradient descent is used as the training algorithm. to find the suitable network topology, response surface methodology (rsm) is used. rsm is one of the wellknown designs of experiment technique which is used for modeling the relationship between the input variables (factors) and the output variable (response) by using minimum number of experimental results. by this way it is possible to optimize the system parameters or to predict the response of unpracticed combinations of different factor levels (demirtas and aslan deniz, 2012). by using rsm the optimum combination of learning coefficient (lr) and the momentum coefficient (mc) that has the minimum square error (mse) is searched. the training of the ann is performed by using matlab r2008b. the pseudocode for the given ann is coded as: by preliminary experiments learning coefficient (lr) is decided to be between 0.01 – 0.009 and momentum coefficient (mc) is between 0.2 – 0.9 ranges. by using these ranges the experimental design that is composed of 9 experimental runs is designed by using central composite face centered design with 1 center point by the aid of minitab statistical package. for financial risk and management reviews, 2015, 1(2):53-67 58 © 2015 conscientia beam. all rights reserved. the each combination of lr and mc, the ann is trained and the mse values of each training run is recorded and presented in table-1. the mse column represents the mse value observed after the matlab training, and the fitted mse represents the predicted mse value by using the mathematical equations given in equation (1). table-1. design of experiment for lr ve mc coefficients number of experimental run lr mc mse fitted mse 1 0.0090 0.200 0.00254 0.002496 2 0.0100 0.200 0.00291 0.002928 3 0.0090 0.900 0.00360 0.003068 4 0.0100 0.900 0.00248 0.002010 5 0.0090 0.550 0.00360 0.004176 6 0.0100 0.550 0.00341 0.003862 7 0.0095 0.200 0.00507 0.005096 8 0.0095 0.900 0.00392 0.004922 9 0.0095 0.550 0.00743 0.006402 equation (1) represents the mathematical relationship between the factors (lr, mc) and the response (mse) that is calculated by using the values given in table-1 with the aid of rsm.            2 2 0.87 181.99 0.03 9533.33 0.01 2.13 mse lr mc lr mc lr mc        (1) define the input matrix (p0) and calculate its transpose (p) define the output matrix (t0) and calculate its transpose (t) define the number of neurons of the input layer (s0) define the number of neurons of the hidden layers (s1, s2) define the number of neurons of the output layer (s3) construct the network topology and start to traing by using the given code below: [pn,minp,maxp,tn,mint,maxt] = premnmx(p,t); [net = newff(minmax(p), [s0,s1,s2,s3],(!!! invalid citation !!!), 'traingd'); net.trainparam.epochs = 80000; net.trainparam.goal = 0.001; net.trainparam.show = 5000; net.trainparam.mc = ; %will be determined by rsm net.trainparam.lr = ; % will be determined by rsm net.trainparam.lr_inc = 1.01; net = train(net,p,t); eğitim sonucunu kaydet financial risk and management reviews, 2015, 1(2):53-67 59 © 2015 conscientia beam. all rights reserved. the r2 value (coefficient of determination) is calculated as 83.75 % and this means that the lr and mc highly explains the variation at mse. the surface plot of equation (1) is given in figure3. figure-3. surface plot for mse when the figure-3 is examined it is observed that it is possible to reduce the mse by reorganizing the minimum and maximum levels of lr and mc. for this purpose factor levels for lr and mc are shifted to [0.05-0.09] and [0.2-0.05] respectively. the default of central composite design is used for experimental design is performed. the results and the mathematical equation derived from these results are given in table-2 and equation (2) respectively. table-2. second design for lr and mc coefficients number of experimental run lr mc mse fitted mse 1 0.0500 0.050 0.00182 0.001660 2 0.0900 0.050 0.00100 0.000750 3 0.0500 0.200 0.00136 0.000930 4 0.0900 0.200 0.00254 0.002020 5 0.0417 0.125 0.00100 0.001276 6 0.0983 0.125 0.00100 0.001404 7 0.0700 0.019 0.00100 0.001149 8 0.0700 0.231 0.00100 0.001531 9 0.0700 0.125 0.00111 0.001110            2 0.005372 – 0.079667 0.026644 0.287500 2 0.020444 0.333333 mse lr mc lr mc lr mc     (2) the surface plot for equation (2) is given in figure-4. in this stage it is required to find the optimum lr and mc values those gives the minimum mse value. for this purpose minitab response 0,8 0,002 0,6 0,004 0,4 0,006 0,0090 0,0095 0,2 0,0100 mse mc lr surface plot of mse vs mc; lr financial risk and management reviews, 2015, 1(2):53-67 60 © 2015 conscientia beam. all rights reserved. optimizer module is used for optimization. this module uses gradient descent method for searching the target value. 0,20 0,15 0,001 0,10 0,002 0,04 0,003 0,05 0,06 0,08 0,10 mse mc lr surface plot of mse vs mc; lr figure-4. surface plot for mse by using equation (2) the optimum values for lr and mc are calculated as 0.0417 and 0.2311 and given in figure-5. figure-5. result of response optimizer for optimization according to figure-5 it is clearly observed that the mse value is minimized and predicted to be 0.0007 for the calculated optimum factor combination. this value is lower than the target mse of 0.001. for the optimum values of mc and lr the training performance of the ann is given in figure-6. financial risk and management reviews, 2015, 1(2):53-67 61 © 2015 conscientia beam. all rights reserved. figure-6. performance of the ann for the optimum lr and mc values. according to the figure-6, it is observed that the training is completed successfully at 18000 iterations. in the next section, the trained ann is tested for the test data set. 5. test results and the discussions in this study the ındex values observed between july 2008 – december 2009 are used as the test values. the trained network is tested for the values given in table 8 and for the values of 7 factors (gold price, oil price, interest rate, cpi, exchange rate, money supply and bist volume) measured at the end of the month; the index is predicted for the next day and next month at the crisis environment. the test results are given in table-3. table-3. bist-100 index prediction at the crisis environment y e a rs months (a) ise–100 index (value of the next day) (b) predicted value of ise–100 index with ann (for the next day) (c) =|ab|/a error (d) ise–100 index (value of the next week) (e) predicted value of ise–100 index with ann (for the next week) (f) =|de|/d error 2 0 0 8 july 42984.66 43145 0.00373 41627.66 42254 0.01505 august 39456.77 38348 0.02810 39115.63 37952 0.02975 september 34553.00 35643 0.03155 30772.63 31926 0.03748 continue october 27987.65 27548 0.01571 26648.17 26147 0.01881 november 24331.78 24326 0.00024 24034.70 23845 0.00789 december 27005.63 26982 0.00088 27892.65 26748 0.04104 2 0 0 9 january 25270.81 25168 0.00407 26735.21 26145 0.02208 february 23699.93 22645 0.04451 23220.02 22148 0.04617 march 25943.57 24982 0.03706 26377.63 25124 0.04753 april 32170.71 31963 0.00646 32842.61 32315 0.01606 may 36001.65 36521 0.01443 34750.19 35345 0.01712 june 37245.86 38345 0.02951 36758.82 38446 0.04590 july 44613.74 45458 0.01892 44767.58 45645 0.01960 august 46935.62 47852 0.01952 45273.98 46254 0.02165 september 47804.39 48956 0.02409 49466.05 50732 0.02559 october 47456.11 45932 0.03212 46969.89 45145 0.03885 november 46083.95 48052 0.04271 49915.76 52148 0.04472 december 53368.16 52874 0.00926 54972.94 54387 0.01066 mean error 0.02015 mean error 0.02811 financial risk and management reviews, 2015, 1(2):53-67 62 © 2015 conscientia beam. all rights reserved. the predictions are performed for july 2008 and december 2009. in this time window the crisis was hard for the second quarter of 2008 and the first quarter of 2009. also the crisis was getting ease off at the last third quarter of 2009. the prediction errors between the observed values are given in (c) and (f) columns. when this error values are examined the overall error rate for the 18 month period is lower that 5%. this results shows that the trained ann has the ability of accurate prediction for the samples that is not used at training phase. the prediction errors for the index values of next day is ranged between 0.00024 0.04451; and the prediction errors for the index values of next month is ranged between 0.00789 0.04753. also the overall mean prediction error for the next day and next month are calculated as 0.02015 (2.02%) and 0.02811 (2.81%) respectively. 6. predicted values compatibility test using real data sets. in order to test the compatibility with real data and the predicted value with ann intended for bist-100 index, ibm spss 20 package program t-test was used in the present study. kolmogorov-smirnov (k-s) test had been used earlier in order to show normal distribution of the data sets compared. k-s test of the next day index value for the real data sets is 0.790 and for the estimated values with ann 0.749. as these significance values are higher than 0.05, both data sets compared have a normal distribution (table-4). according to the t-test results, t-statistic is 0.453 and the significance value corresponding to this value is 0.656 (table-5). these results indicate that there is no statistically significant difference in predicted values and real values averages at a significance level of 5%. table–4. kolmogorov-smirnov normality test for the next day value of the index hypothesis test summary null hypothesis test sig. decision the distribution of index value _for_the_next_day is normal with mean 36.828,56 and standard deviation 9.650,30. one-sample kolmogorov-smirnov test ,790 retain the null hypothesis continue the distribution of obtained value_with_ann_for_day is normal with mean 36.930,00 and standard deviation 9.987,43. one-sample kolmogorov-smirnov test ,749 retain the null hypothesis asymptotic significances are displayed. the significances level is ,05. financial risk and management reviews, 2015, 1(2):53-67 63 © 2015 conscientia beam. all rights reserved. table–5. comparison between the estimated value and the next day value of the index pair 1 paired differences t df sig. (2-tailed) 95% confidence interval of the difference lower upper bist-100 value that estimated with ann for the next day -573.82922 370.93922 -.453 17 .656 k-s test of the next week index value for the real data sets is 0.846 and for the estimated values with ann 0.727. as these significance values are higher than 0.05, both data sets compared have a normal distribution (table-6). according to the t-test results, t-statistic is 0.114 and the significance value corresponding to this value is 0.911 (table-7). these results indicate that there is no statistically significant difference in predicted values and real values averages at a significance level of 5%. table-6. kolmogorov-smirnov normality test for the next week value of the index hypothesis test summary null hypothesis test sig. decision the distribution of obtainedvalue_with_ann_for_week is normal with mean 36.817,00 and standard deviation 10.579,90. one-sample kolmogorovsmirnov test ,727 retain the null hypothesis the distribution of indexvalue _for_the_next_week is normal with mean 36.785,67 and standard deviation 10.076,12. one-sample kolmogorovsmirnov test ,846 retain the null hypothesis asymptotic significances are displayed. the significances level is ,05. table–7. comparison between the estimated value and the next week value of the index pair 2 paired differences t df sig. (2-tailed) 95% confidence interval of the difference lower upper bist-100 value that estimated with ann for the next week -612.18191 549.52857 -.114 17 .911 financial risk and management reviews, 2015, 1(2):53-67 64 © 2015 conscientia beam. all rights reserved. in figure-7(a), it is obvious that the averages of predicted values and real values for the next day are very close to each other. this implies that anns are quite successful in estimating the index value of the next day. similarly, in figure-7(b), it is obvious that the averages of predicted values and real values for the next week are very close to each other indicating that anns are quite successful in estimating the index value of the next week. in general, anns can predict the direction of bist-100 index for the next day and the next week during and after the economic crisis. 7. conclusions and future works in this study, bist-100 index predictability during july 2007-december 2009 crisis has been investigated using ann. according to the results, ann is quite successfully in predicting index direction. the results obtained also suggest that ann can foresee next day and next week values with an accuracy margin error of less than 5% even for unknown samples. future studies may focus on next month predictability. moreover, different studies can be considered by increasing the number of input variables or/and by using different input variables. if the findings of the present study are assessed with other related studies; ann model in predicting bist-100 index demonstrated that the results obtained were quite close to the real market results. this outcome is very important for investors, especially in periods huge economic fragility like financial crises. hence, especially institutional investors and portfolio managers can use neural networks in their investment in their portfolio preferences. references aghababaeyan, r., k. najeeb ahmad and s. tamanna, 2011. forecasting the tehran stock market by 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index futures using a neural network. the proceedings of the third annual international conference on artificial intelligence applications on wall street: pp: 63-72. şenol, d. and ö. meltem, 2010. stock price direction prediction using artificial neural network approach: the case of turkey. journal of artificial intelligence, 1(2): 70-77. appendix-1. table–8. table of data y e a rs months independent variables (inputs) dependent variables (outputs) g o ld p ri c e s o il p ri ce s in te re st r a te c p i e x c h a n g e r a te m o n e y s u p p ly t ra d in g v o lu m e b is t -1 0 0 i n d e x (a ft e r a d a y ) b is t -1 0 0 i n d e x (a ft e r a w e e k ) 2 0 0 7 july 664.00 72.56 22.30 138.67 1.307 23735838 1961542.4 51299.3 50708.2 august 665.87 69.70 22.08 138.70 1.331 23897573 1887848.2 49936.9 49050.4 september 724.34 77.43 22.03 140.13 1.216 24476332 1661433.1 54198.0 56792.9 october 759.72 84.76 21.66 142.67 1.192 25161002 2242536.5 57371.3 56076.4 november 803.30 85.72 21.00 145.45 1.190 24655080 1898404.0 54320.0 56490.5 financial risk and management reviews, 2015, 1(2):53-67 67 © 2015 conscientia beam. all rights reserved. december 805.25 90.70 21.03 145.77 1.170 26072505 575205.6 54708.4 52569.5 2 0 0 8 january 886.56 87.92 21.15 146.94 1.178 25154851 1404939.5 44452.0 41866.4 february 931.60 96.35 21.22 148.84 1.182 24773441 1601604.2 43343.5 42523.8 march 959.00 98.63 21.12 150.27 1.283 26581454 1253735.4 40674.1 42277.1 april 908.38 107.33 21.12 152.79 1.284 27611879 1296326.7 42664.3 43272.4 may 887.95 121.68 21.62 155.07 1.221 26991182 168143.0 40121.1 39645.5 june 895.88 136.03 22.66 154.51 1.230 27790336 926565.9 33208.2 35010.0 july 943.56 122.48 23.05 155.40 1.191 28236378 2717498.2 42984.6 41627.6 august 841.70 111.23 22.97 155.02 1.188 27776260 815395.3 39456.7 39115.6 september 832.56 90.32 23.86 155.72 1.238 31974600 476729.3 34553.0 30772.6 october 791.26 57.43 24.98 159.77 1.504 30600476 1908962.7 27987.6 26648.1 november 768.06 47.22 25.67 161.10 1.573 31196449 1336259.8 24331.7 24034.7 december 803.75 35.58 25.68 160.44 1.520 30468001 972079.3 27005.6 27892.6 2 0 0 9 january 870.15 42.02 20.32 160,90 1.619 29049120 885158.1 25270.8 26735.2 february 947.38 43.23 18.29 160.35 1.689 30579954 927823.4 23699.9 23220.0 march 935.50 46.65 18.17 162.12 1.696 31909720 1107188.5 25943.5 26377.6 april 894.33 50.36 17.49 162.15 1.605 31759158 2668675.4 32170.7 32842.6 may 942.94 63.71 17.36 163.19 1.570 31302568 2543817.1 36001.6 34750.1 june 944.19 69.56 17.42 163.37 1.538 32137996 2147340.2 37245.8 36758.8 july 934.75 68.59 17.01 163.78 1.484 31248103 3277447.2 44613.7 44767.5 august 954.38 70.37 16.84 163.29 1.497 31994514 1971392.2 46935.6 45273.9 september 1000.19 65.55 16.55 163.93 1.489 34843833 2667545.1 47804.3 49466.0 october 1040.55 75.56 15.67 167.88 1.489 33256841 3023312.2 47456.1 46969.8 november 1113.67 76.21 15.62 170.01 1.490 38915183 886238.1 46083.9 49915.7 december 1130.19 77.16 15.67 170.91 1.513 35251149 2617335.5 53368.1 54972.9 views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 67 © 2021 conscientia beam. all rights reserved. risk management and financial performance of manufacturing firms in nigeria gideon tayo akinleye1 comfort temidayo olanipekun2+ 1,2department of accounting, ekiti state university, ado-ekiti, nigeria. 1email: gideon.akinleye@eksu.edu.ng tel: 08036677803 2email: comfort.olanipekun@eksu.edu.ng tel: 08030414641 (+ corresponding author) abstract article history received: 8 september 2021 revised: 23 november 2021 accepted: 13 december 2021 published: 28 december 2021 keywords risk risk management financial performance manufacturing firm risk management cycle liquidity risk market risk. jel classification: g32. the current study investigated risk management and financial performance of manufacturing firms. specifically, the study analyzed liquidity risk and market risk effect on after tax profit of manufacturing establishment in nigeria. the study employed panel data over the period spanning from 2010-2019 across 10 firms. secondary data were gathered through the annual reports of the selected firms. correlation analysis and panel-based estimation techniques were used. the outcome showed that liquidity risk positively and significantly affect profit after tax while market risk (measured by interest rate risk) negatively and insignificantly affect profit after tax of sampled firms quoted in nigeria. this study concluded that efficient and effective risk management will positively affect performance of quoted firms in nigeria, most specially management of internal risk such as the liquidity risk. hence, firms should build an internal control system flexible in nature to harness the benefit of internal risk management and also normalize the negative effect of external risk such as the interest rate on performance. contribution/originality: the primary contribution are findings that liquidity risk positively and significantly affect profit after tax while interest rate risk negatively and significantly affect profit after tax of quoted manufacturing firms in nigeria. 1. introduction risk management as part of business management function is argued to be an essential element to be considered in the contemporary business world. according to ugwuanyi and ibe (2012) the method of planning, leading, organising and directing the operation of a firm to be able to reduce the outcome of risk on a firm’s performance is very essential. mugenda, momanyi, and naibei (2012) also is of the opinion that prioritizing and managing risks is becoming increasingly important to a firm has it assist in the ability to adjust to an ever-changing and global business environment. risks are now amplifying as a result of globalisation and it management is indispensable to the success of a firm (ironkwe & osaat, 2019). a firm cannot function without taking measured risks. not all risk is bad, some degree of risk must be considered in order to growth or avoid stagnation. in as much there is risk, its management will be is required. effective management of risk tend to maximize the benefit of a risky circumstances and minimizing the adverse consequence of such risk. a firm is profitable, when the income generated surpass the direct and indirect costs expended in generating income. the wealth of a shareholder is maximized when the firm witnessed growth and financial risk and management reviews 2021 vol. 7, no. 1, pp. 67-77. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.67.77 © 2021 conscientia beam. all rights reserved. mailto:gideon.akinleye@eksu.edu.ng mailto:comfort.olanipekun@eksu.edu.ng https://www.doi.org/10.18488/journal.89.2021.71.67.77 financial risk and management reviews, 2021, 7(1): 67-77 68 © 2021 conscientia beam. all rights reserved. stability in dividend payment or capital gain arising from increase in the wealth of the firm’s market share, ajibola, wisdom, and qudus (2018). understanding the business risks help in guiding firm assets and reducing avoidable costs is very vital in a business. a business risk is a firm’s risk on capital, earnings, incidental losses and also operational, financial, strategic and other risks. effective management of risk can be regarded as one means of providing assurance of a sound investment to stakeholders. risk management major purpose is the evading of a significant surprise or a result that the firm did not project either good or bad. organization is able to achieve its financial targets through risk management. effective management of risk intermittently evaluate and identifies risks and bringing down trauma that can affect the firms. coleman (2006) emphasized that the ability to excellently manage risk is the only and most important feature separating manufacturing firm that are feasible, productive and viable in the long run from firms that are not feasible. an efficient risk management scheme, which includes but not limited to risk monitoring, education on cyber security programs, internal audit can as well help the firm to recognize and prepare by using analytics to ascertain violation patterns and investigating cyber-controls in a rhythmic flow (miller, huelsman, clark, & sokolovic, 2015). risk management should follow risk management cycle, in risk management procedure, one must master the strategic objectives then keep up with the present situation of the organization, this will help in identifying inherent risk of the organisation. afterward, risk assessment which comprises of risk analysis and evaluation is carried out followed by risk reporting (threat and opportunity), decision, risk treatment, residual risk reporting and monitoring (farrah, 2011) organizations are to be proactive in managing risk, monitor continually and consciously in a way it relates with the firm strategic objectives. the management of risk is a requisite fragment of the business, it tends to boost the chances of accomplishment and likewise lessen losses possibility and chances of not attaining the overall organisation goal (alarm, 2002). manufacturing firm is essential in achieving new invention, processes, and technologies (coleman, 2006). manufacturing firms have been involved in risk management earlier than the industrial revolution each era this has brought new threat and opportunities (miller et al., 2015). financial risk can cripple manufacturing company ability to realise enough returns to its shareholders. to check against financial risk in an organization, the management must understudy and be aware of his area of susceptibleness. a number of studies have assessed the effects of risk management on financial risk of manufacturing firms in nigeria. most of these studies focused largely on the banking sector of the economy. for instance, adeusi, akeke, adebisi, and oladunjoye (2013); yahaya, lamidi, kutigi, and ahmed (2015) assessed the correlation between risk management practices and bank financial performance in nigeria, in addition majority of the studies does not incorporate the uniqueness across sampled firms in their analysis, as most of the study do not fully explore panel data analysis. hence, this study is to analyze the effect of risk management on financial performance of manufacturing companies in nigeria. precisely, the study is to analyzed the: (i) impact of liquidity risk on profitability of manufacturing firms in nigeria. (ii) impact of market risk on profitability of manufacturing firms in nigeria. 2. literature review and hypotheses development 2.1. conceptual review 2.1.1. risk management gallati (2003) defines risk as a situation whereby an organization is liable to disaster, or a situation where chances of divergence from a desired result is high. acerbi (2008) describes risk as anticipation for danger, negatively unexpected predicament to occur. it can also be referred to as negative digression from the plan. in relation to business, risk is the chance that a situation either predictable or not may lead to unsuitable overall effect on the objectives of the organisation. risk management involve embracing an efficient and dependable method in financial risk and management reviews, 2021, 7(1): 67-77 69 © 2021 conscientia beam. all rights reserved. managing organization risk. res, sa, and gemechu (2016) are of the opinion that risk management consists of several steps, that allow for constant progressive decision by pinpointing, communicating, tracking risks and investigating variance in an organization. stanton (2012) suggests a comprehensive method like identifying threats, unequivocal examination of possible action either to eradicate, accept or alleviate the identified danger. management of risk call for a process of organizing business activities in such a way that gives positive result while guiding against the unfavourable and unexpected suitation that could hinder the desirable result. mugenda et al. (2012) explained that risk management focus on optimum risk tradeoff and organisation perpetually seek type of risk to be reduced or increased and measures to curtail such. as stated by njogo (2012), management of risk involves identifing, measuring, ranking and managing available resources to reduce and check the effect of such unfavourably situation (njogo, 2012). risk management is the ability to foresee risks and embark on proactive measure to mitigate against business main objective working toward returns maximation and costs reduction (madembu, namusonge, & sakwa, 2015). risk management includes activities that business carried out which aims at minimizing or eliminating all categories of risks (ezeosa, 2011). kassi, rathnayake, and edjoukou (2019) and erin, emoarehi, jonah, and ame (2017) identifies liquidity risk, market risk, reputational risk, credit risk, strategic and operational risk as common risk to all businesses. 2.1.1.1. liquidity risk it involves anticipation of negative influence on the interests of shareholders, customers and other stakeholders of an organisation arising from the inability to fulfill current cash obligations in a timely and cost-efficient way (muriithi, 2016). this is the inability of the organisation to meet it financial obligation due to insufficient revolving cash. according to yousfi (2014), the likelihood that the firm’s will be helpless in fulfilling its duty as well as inability to reinvest on assets at maturity and still avoiding undesirable expenses is called liquidity risk. 2.1.1.2. market risk it is the prospect which a firm experiences loss due to adverse global price movement in the financial markets. market risk is a vital part of financial risk since it is systematic in nature which cannot be discount by diversification of investment but can be abated using suitable hedging tactics (kassi et al., 2019). koch and macdonald (2006) is of the opinion that risk includes variables associated with financial market like risk on interest rate, risk on foreign exchange and risk on stock price. it is an adverse change due to uncertainty in the economy. 2.1.2. risk management cycle the risk management cycle also called continuous risk management procedure involves the presentation of risk management process in a continuous manner. antonio and barbara (2013) defined risk management process as a concept of identifying, treating and then managing risk. this is an ongoing process and actions needed to be taken to reduce adverse effect of risk on an organization (farrah, 2011). van staveren (2009) and farrah (2011) listed five stages of managing risk: defining the objectives; recognizing the risks; appraising the risks; bearing in mind replacements and choosing means of treating the risk; executing and revising stage. there are still other common views on the risk management cycle that explained it identification, evaluation, ranking, treatment and monitoring (antonio & barbara, 2013). figure 1 below explained the risk management cycle from the risk identification, risk evaluation, risk ranging, risk treatment and monitoring. financial risk and management reviews, 2021, 7(1): 67-77 70 © 2021 conscientia beam. all rights reserved. figure-1. risk management cycle, designed by the authors. 2.1.2.1. risk identification this involves identifying the threats and uncertainties associated with organization objective. it entails cataloging likely risks by using breakdown structure, arranging them with the details and entered into a project risk log or risk register. with this, it is easier the related team to recognize and measure potential threat to the organization. 2.1.2.2. risk evaluation this is the estimation of possibility and consequences of each risk to figure out the area of utmost need. factors such as time lost, decrease in returns, image loss and stringency of influence are all importantly considered in risk evaluation. risk can be classified into high and low risk. as identified base on their effect those that placed organization on standstill and those with minor effect. also, this step includes the outline of risk to documents, policies, procedures and business procedures. this help to discover shared problem across board and restrategise for a better future management purpose. 2.1.2.3. risk ranking this involves arranging the analyzed risk by weighting both the possibility of its manifestation and the potential consequence on the organization. this means that the risk with highest probability and potential effect takes the most priorities while the risk with the lowest likelihood and potential effect takes the least priority. as such, the process helps in determine where the areas to be focused by the team. also, it allows organization to have a general view of the risk exposure of the whole organization 2.1.2.4. risk treatment this involves exploring the team wealth efficiently in either unravelling or at least mitigating the risk. it requires discovery the desirable means, like “men and money”, and essential leverage needed by the organisation. information dissemination and training should not be left out. also, meetings instituted that everyone can discuss regarding risk and the solution proffers. 2.1.2.5. risk monitoring at this stage, the proposal must have been established it functionality and effectiveness. notable fluxes or revision required must have been recognised. under the manual system, monitoring happens through industrious financial risk and management reviews, 2021, 7(1): 67-77 71 © 2021 conscientia beam. all rights reserved. worker who keep close watch on total risk components. but, in a computerized environment, whole risk framework is being watched by the digitalised system. any change is immediately noticeable to all. therefore, the team may need to work over or sometimes a new process may be needed if the implemented tactic is not effective. 2.1.3. financial performance performance entails the capability of an organisation to increase and manage its funds in diverse positive ways so as to develop competitive advantages (iswatia & anshoria, 2007). firm performance can also be described as how healthy an organization can apply its assets in other to generate revenue (samina & ayub, 2013). it defines the technique that firms’ resources, man, material, machine and money are utilized in other to maximizing organization objectives. sometimes, performance and profit are used interchangeably, but there is clear difference between them. while profit is the overall revenue earned by an organization, performance refers to the capability of the organization to realize return on all the resources employed in business. firm’s performance is a concept that explains the proficiency of an organisation to be profitable in its dealing. it measures level of efficiency of a firm by using the available fund to achieve the projected profit goal. 2.1.4. risk management and performance a poor firm performance results from inability of organisation to reduce, regulate, and evaluate risk. practically, a good risk management capability will enhance performance, regular it valuations, and change in customers assumption, muneer (2020). risk management enabled business organisation to recognize, overview and control the exposures to risk from diverse area in other to enhance firm performance. risk management also maximizes the organization value and guarantee that the benefits surpass the costs. the performance of the firm is strengthened by risk management strengthen performance by reducing in unforeseen cost and positive development in risk culture of the organization (teece, peteraf, & leih, 2016). studies available on risk management and performance showed different opinions on the effect of firm performance on risk management. for instance, ugwuanyi and ibe (2012) assessed enterprise risk management and performance of nigeria’s brewery industry using primary data analyzed with simple percentages and z-statistics and found that 93% of respondent strongly agreed or agreed that business risk management could effectively enhance the operations of firms in nigeria. muneer (2020) also investigated enterprise risk management and performance of pakistan manufacturing firms using primary data and concluded that organizations become enterprise risk management enhances organizational skill on operational and strategic decision making which as well increase performance. other studies that found positive impact of risk management on performance among others include mugenda et al. (2012); yahaya et al. (2015); madembu et al. (2015) and soliman and adam (2017). 2.2. theoretical review 2.2.1. liquidity asset theory santomero (1984) viewed states liquidity risk theory as the theory that express risk arising from a firm having inability to convert asset to cash to meet it present obligation or demand as they fall due. liquidity was also considered a financing crises risk. the credit in this situation means the possibility of lack of funding caused by inevitably situations or unexpected occurrence, such as huge charges off, hopelessness sell-off or currency crises. this theory explains that liquidity risk as a crisis arising due to funding problem. 2.3. empirical review olaniran, namusonge, and muturi (2016) analyzed role of risk-taking on performance of firms on nigerian stock exchange. 60 sampled firms listed in nigerian data were analysed using regression models including the hausman specification test. the study showed a negative relationship between risk-taking and returns on assets financial risk and management reviews, 2021, 7(1): 67-77 72 © 2021 conscientia beam. all rights reserved. likewise on risk-taking and returns on equity. therefore, it was concluded that, nigeria, risk-taking has widely implemented and used by entrepreneurial orientation dimension, but has not yet affect roa and roe positively. muneer (2020) investigated enterprise risk management and performance of pakistan manufacturing firms. primary data collected through questionnaire from 335 respondents was employed. the study then analyzed data using sem-pls. the study revealed a positive correlation between risk culture, innovativeness, and risk management information system and firm performance. therefore, it was concluded that emr has enhanced organizations operational and strategic decision making likewise performance by reduction of contingency losses. mugenda et al. (2012) assessed risk management practices and it effect on financial performance of sugar manufacturing enterprises in kenya. specifically, the causal link between risk management and financial performance adopted by sugar producing firms were assessed. primary data collected was analyzed using pearson correlation coefficient and analysis of variance. the result showed a significant variation in risk management practices within. also, the study revealed above an average positive link om risk management practices and performance. yahaya et al. (2015) evaluated the correlation between financial performance and risk management. the study particularly investigated the effect of business risk, firm risk, leverage, liquidity and firm size and age on return on asset and return on equity. the study employed panel data on 15 listed banks extracted for the period 2005-2014. the study analyzed data using regression analysis. the study revealed that the bank risk management mechanisms and liquidity policies positively affect organizational performance. a negative connection between bank financial leverage, size, age and financial performance was also shown. therefore, it was concluded that risk and liquidity management policies are important for high financial performance. onuora and ifeacho (2017) checked credit management effects on profitability of manufacturing firm in nigeria. impact of credit management mechanism: credit policy, liquidity management and debtors’ turnover on return on asset was assessed. the study utilized five manufacturing firms’ data from 2010 to 2014. regression analysis was used in analysing the study. result showed negatively significant correlation between credit policy and liquidity management and profitability proxy by return on assets also debtors’ turnover has a significant and positive effect on return on assets. madembu et al. (2015) assessed role of risk management on financial performance of small and medium enterprises in kenya. particularly, impact of financial risk management, strategic risk management and operational risk management were investigated on financial performance of smes in kenya. secondary data collected from financial reports of 100 smes were analysed using discursive method. the study then showed that sme risk management practices has effect on financial performance. soliman and adam (2017) investigated enterprise risk management and firm performance. the study measured performance model by the return on average equity (roae), share price return (spr) and firm value (fv). the study employed secondary data on ten listed companies and regression analysis was employed to analyse data.a positively strong link between enterprise risk management implementation and performance in the sector was discovered. therefore, study concluded that firms that take on enterprise risk management achieve more than firms that have not taken it on. ajibola et al. (2018) examined risk management and financial performance of deposit money banks in nigeria. the study specifically investigated the impact of risk management (credit and liquidity) on financial performance of money deposit banks in nigeria. the study employed panel data for 10 deposit money banks within nigeria. the study analyzed data using panel regression. the study revealed a positive relationship exist between risk and financial performance of money deposit banks and risk management. olalekan, mustapha, irom, and emily (2018) evaluated corporate board size, risk management and financial performance of listed money banks in nigeria. the study particularly examined effect of corporate board size, risk management on roe and eps of listed deposit money banks in nigeria. fourteen money bank data extracted over the period 2011-2016 was employed. the study analyzed data using panel regression. the study showed that variables significantly but negatively affect roe and eps respectively. furthermore, it also revealed a negative but insignificant effect of roe and eps on liquidity risk in nigeria banks. financial risk and management reviews, 2021, 7(1): 67-77 73 © 2021 conscientia beam. all rights reserved. efuntade and akinola (2020) checked firm attributes and financial performance in listed manufacturing organisations in nigeria. the study adopted data collated over the period 2005-2018. the study analyzed data using panel regression analysis. the study showed that firm size, firm age, liquidity, sales growth and leverage strongly and collectively have effect on return on asset of manufacturing firms in nigeria. therefore, the study concluded characteristics of firm related significantly with the return on asset. erin et al. (2017) evaluated enterprise risk management and financial performance in the nigerian financial sector. forty companies’ data between 2012 to 2016 were adopted. the study analyzed data using regression analysis. it was found that value at risk, board size, firm size and institutional ownership have positive effect on performance while leverage negatively affect performance. ironkwe and osaat (2019) investigated risk asset management and financial performance of insurance companies in nigeria. the study employed secondary data collated between 1986-2016. johansen co-integration and error correction model were used to analysed data. the study showed in both short and long run roe, roa and leverage risk are all imperative factors in determining risk asset management in nigeria 3. data and methods ugah (2020) model was adopted for this study to assesses financial risk management and the profitability of firms. the study specified return on asset (roa) as a function of liquidity risk (lqr), credit risk, interest rate risk (intr) and inflation rate risk (infr) as presented in equation 1. (1) where y represents profitability measured in terms of return on asset, while x is a vector of risk management variables such as liquidity risk, credit risk, interest rate risk and inflation rate risk. given the focus of this study on the manufacturing firms the model specified in equation 1 was modified by replacing return on asset with profitability in view of tracking the financial performance of the operation of the selected firms, while risk management variables captured as liquidity risk and interest rate risk (intr) (replacing market risk), while firms size was included in the model as a control variable. hence model estimated for the study is presented in equation 2. (2) where pat stands for profit after tax, lqr is liquidity risk intr is interest rate risk and fz is firm’s size 3.1. scope, sources of data and method of analysis this captured quoted manufacturing firms in nigeria stock exchange. ten (10) manufacturing firms were purposively selected and data were collected from their annual reports between 2010 to 2019. panel-based estimation techniques such as pooled ols, fixed effect estimator, random effect estimator and evaluation for the most consistent estimator was done via restricted f-test and hausman test to analysed data. while other post estimation test such as panel homoscedasticity test, autocorrelation test and cross-sectional dependence test were conducted to ascertain the fitness of the estimated model table-1. correlation matrix. pat lqr intr fz pat 1.00000 lqr -0.5484 1.00000 intr 0.0178 -0.1657 1.00000 fz 0.7376 -0.4743 0.1522 1.00000 financial risk and management reviews, 2021, 7(1): 67-77 74 © 2021 conscientia beam. all rights reserved. 4. data analysis and discussions of findings 4.1. correlation analysis table 1 showed that there is positive correlation between interest rate risk and profit after tax but a negative correlation between liquidity risk and profit after tax of quoted firms selected in the study. the implication of this is that risk management has positive correlation with performance through the interest rate but negative correlation in terms of liquidity risk. in terms of magnitude, the result showed that the correlation between interest rate and profit after tax is weak, reflecting a weak level of movement of risk management and profit after tax of quoted firms. on the other hand, the result showed that correlation between liquidity risk and profit after tax, reflecting a strong level of movement of risk management and profit after tax of quoted firms selected in the study. table-2. estimation result. coefficient pooled prob fixed prob random prob c -52.82031 0.065 -50.99452 0.002 -55.3316 0.001 lqr -7.072336 0.000 3.200952 0.005 3.124137 0.006 intr -2.842544 0.062 -.0820459 0.887 -.399781 0.501 fz 6.594997 0.000 2.874586 0.004 3.787349 0.000 r-square=0.6094 adj r-square=0.5972 f-statistics=49.92 prob(f-stat)= 0.0000 r-square=0.9608 adj r-square=0.9554 f-statistics= 177.54 prob(f-stat)= 0.0000 r-square=0.5903 wald chi2(5)= 17.5 prob> chi2 =0.000 restricted f-test= (p= < 0.05) hauman test =12.41 (p= 0.0061 < 0.05) note: * connote significance at 5% level of significance. table 2 revealed estimations result of pooled ols, fixed effect and random effect techniques, alongside restricted f-test and the hausman test. in terms of reliability and proficiency it was established that of all the models used the most reliable and proficient is the fixed effect estimation, as such discussion shall be centered on the fixed effect estimation. as reported in table 2, risk management in terms of liquidity risk positively and significantly affect performance of selected firms measured in terms of profit after tax. this result implies that one naira increases in current asset relative to current liability (or a naira decrease in current liability relative to current asset) will lead to about 3.20billion naira increase in profit after tax of quoted firms selected in the study. furthermore, result presented showed that risk management in terms of interest rate has negative effect on performance in terms of profit after tax, a unit percent rise in interest rate will result to about 0.08billion increases in performance of quoted firms selected. table 2 also presented r-square result of 0.6094, reflecting that about 61% systematic variation in the performance of selected quoted firms clarified by risk management variables considering firm size, therefore, confirming the fitness of the model. table-3. post estimation test. wald test null hypothesis statistics probability panel homoscedasticity 1.2731 0.2633 pesaran test null hypothesis statistics probability no cross sectional dependence 0.288 0.7731 wooldridge test null hypothesis statistics probability no ar(1)panel autocorrelation 1.5840 0.2399 table 3 result revealed that there is enough indication to reject null hypothesis on panel homoscedasticity, null hypothesis of no cross-sectional dependence and null hypothesis of no ar (1) panel autocorrelation, due to the statistics of 0.2633 > 0.5 for wald test, 0.7731 > 0.5 for pesaran test and 0.2399 > 0.5 for wooldridge test. financial risk and management reviews, 2021, 7(1): 67-77 75 © 2021 conscientia beam. all rights reserved. therefore, it can be exerted that expectations of equal variance of residual terms, cross sectional independence and nonappearance of serial autocorrelation for the predictable panel-based model is valid. 4.2. discussion of findings the result showed that liquidity risk exerts positively significant effect on the performance of quoted firms in the study sampled measured in relations to profit after tax. this reflects that increase in a unit increase in liquidity risk will lead to about 3.20billion increase in profit after tax as measure of performance. the study was in agreement with the conclusion of ajibola et al. (2018). most of these firms have access to more current asset relative to current liabilities which make them avoid the risk of insolvency and encourage operational efficiency. the higher proportion of current asset relative to current liabilities especially through the cash and bank balances help these firms to have access to sufficient income required in the daily running of the business. the study showed that interest rate risk has negative effect on the performance of selected firms measured in terms of profit after tax. this showed that a percent rise in interest rate will lead to about 0.08 billion naira decrease in profit after tax in essence the result reflects that volatility in interest rate will dampen the prospect of increase level of profitability of manufacturing firms in the country, other things held constant. 5. conclusion and recommendations risk management measures utilized in the study liquidity risk and interest rate risk have positive and negative effect on profit tax as measure of performance of the sampled quoted firms, but the effect of interest rate was found to be insignificant. while the liquidity can be directly influenced by the firm based on certain decisions, the interest rate can only be leveraged as it is autonomous to the firm. therefore, this study concludes that efficient and effective risk management will positively and significantly affect performance of firms through effective and efficient management of liquidity in the quoted firms. thus, this study recommends that manufacturing firms should device proper risk management structure that favours higher current asset. also firms should build an internal control system flexible in nature to harness the benefit of internal risk management and also normalize the negative effect of external risk such as the interest rate on performance. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references acerbi, c. 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(2014). risk management practices and financial performance in jordan: empirical evidence from islamic banks. international shari’ah research academy for islamic finance, 6(5), 1–24. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 1 + corresponding author © 2017 conscientia beam. all rights reserved. investment climate rating evaluation: the case of ukrainian economy svitlana kuznetsova1+ maria vakulich2 1professor, dr., ph.d., department of international finance and banking, alfred nobel university, dnipropetrovsk, ukraine 2ph.d., department of international finance and banking, alfred nobel university, dnipropetrovsk, ukraine (+ corresponding author) abstract article history received: 16 january 2015 revised: 21 january 2016 accepted: 28 november 2016 published: 16 march 2017 keywords investment climate investment attractiveness rating evaluation. jel classification e62, f21, g15, o41. methodical approaches to the investment climate evaluation have been formed. methodological tools for assessing the investment attractiveness of the economy have been classified. to create a database to select the most important methods of assessment of the investment climate should undertake a comparative analysis on the target group of potential investors, the depth of research, the frequency of assessment of the investment climate, purpose assessment of the investment climate. international ratings are effective tools that help reduction information asymmetry, and a large number of methods of ranking permit the investor to receive information on all aspects of the investment attractiveness of the state. rankings are shaping the image of the state, and ignoring the results of the ratings can lead to financial isolation of the state. information on the methodology of the ratings in most cases is transparent, so the domestic state institutions have the ability to affect the future results of the ratings in the case of related reforms. however, there is no unified model of investment climate evaluation of the national economy, which directly affects the state of the investment climate of ukraine's economy and the volume of foreign capital in the state. rating evaluation of the investment climate for the ukrainian economy has been offered. contribution/ originality: this study uses new estimation methodology of investment climate in the national economy, which based on analysis and classification of approaches and tools that are used to investment climate, investment attractiveness, business environment rating evaluate, and are directed to information sparseness reduction, target orientation of investment climate management. 1. introduction one of the important conditions of stable development of the national economy is to improve investment climate management at the macro level. in ukraine the problem of intensification of investment processes is subject to ongoing scientific discussions related to the research of factors affecting the investment climate, diagnostics development of the state management of investment climate, analysis of individual aspects of the investment process at the macroand microlevels. financial risk and management reviews 2017 vol. 3, no. 1, pp. 1-12 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2017.31.1.12 © 2017 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89.2017.31.1.12 financial risk and management reviews, 2017, 3(1): 1-12 2 © 2017 conscientia beam. all rights reserved. the effective functioning of the investment policy in modern conditions of instability and chaotic economic environment requires the improvement of all organizational-economic mechanism of investment, including the development of an integrated concept for investment climate management in the national economy. therefore, the deepening of theoretical, organizational and methodological bases of management of investment climate in ukraine's economy deserves special attention. modern stage of development of ukraine’s economy is characterized by the pursuit of an ambitious goal to ensure sustainable economic growth at the expense of system technological upgrading and economic restructuring. the financial crisis, the consequences of which are felt around the world, demonstrated the unwillingness of most companies to work in the unstable conditions of the external economic environment kuznetsova (2012). the basis for investment climate management in ukraine's economy should be based on the principles of state regulation, expressed in state financial support for the development of: price, competition policy, infrastructure development, search directions of anti-crisis structural investment policy in ukraine. however, a complete scientific study of the problems of investment climate management in an unstable economic environment has not been carried out. so, a poorly designed question remains regarding the conduct of rating evaluation of state management of investment climate in the national economy. scientific and theoretical and practical significance of the decision of the question led to the choice of the topic of the article. domestic experts devote considerable attention to investment cooperation with germany, the netherlands, considering these states as an effective mechanism for the integration of ukraine into the european economic space (computed results based on compiled data from report doing business, 2015) (figure a).increased direct investment countries with developed banking systems – virgin islands – on 218.9 mln.us dollars, netherlands – 270.6 mln. us dollars, and switzerland – 158.5 mln.us dollars (figure b). the main objective of the world states is to support ukraine's integration into the european community. shaping the investment climate is a sole-source basis to enhance the role of foreign investment in the development of ukraine and its integration into the world economy. along with the importance of monitoring research it should be noted that when decisions management are not sufficiently used indicators of social and economic development of the state for lack of an acceptable methodology for calculating the integrated evaluations (ratings, indices) investment development of the state. therefore, the relevance and importance of the development and implementation of integrated approaches to the evaluations of the investment climate of ukraine's economy is obvious and indisputable. openness, instability, dynamics and selforganization of the global and domestic economy and the unpredictability of climatic conditions require adequate information provision, which is possible if the revision of traditional approaches to the preparation of the financial statements (kuznetsova, 2011). figure-a. dynamics of foreign investments in ukraine, mln.us dollars financial risk and management reviews, 2017, 3(1): 1-12 3 © 2017 conscientia beam. all rights reserved. figure-b. the distribution of investments into ukraine according to the main countries investors in 2012,mln.us dollars modern processes of development of the national economy objectively indicate that solutions to complex management challenges, including in the field of investment is impossible without a comprehensive study of the economy and optimal management strategies development for the long term. 2. literature review urata and ando (2011) analyzed the fdi climates of the asean countries faced by japanese and non-japanese foreign firms conducting operations in asean, with a view of identifying impediments to fdi not only in the policies but also in their implementation and enforcement and providing useful information to policy makers interested in attracting fdi. direct barriers to fdi, however, still remain, and further efforts to reduce them by asean countries are necessary. at the same time, the reduction of indirect barriers to fdi or the promotion of fdi facilitation is also indispensable. escribing and pena evaluated the performance of ica method in the context of tfp estimation in extended production functions using icss from four countries: india, south africa, tanzania and turkey (escribano and pena, 2009). they find that the ica method is very robust and performs reasonably well even under different assumptions on the nature of the mechanism generating missing data. the main condition for further innovative development of ukraine’s economy is searching for new ways of attracting investments for ukraine’s future economic development. the issue of investment image and investment attractiveness of ukrainian economy formation was considered in the works of gavrilyuk (2011) the formation of the concept of improving the ukraine’s investment climate and innovative paradigm of activities management was analyzed by rossoha (2009). kuznetsova formulated the fundamental features that characterize modern evolution of economic systems and determine the investment position of the state; methods of increasing the information level of investors have been proposed (kuznetsova, 2012). many works devoted to calculation of efficiency, but special attention is paid to the production efficiency or effectiveness of the activity. appropriate models allow us to implement a comprehensive monitoring of the investment climate for rapid response and early warning of possible threats and risks when making management decisions regarding the investment climate at the micro-, and macrolevels, are presented in vakulich (2014). in conditions of high level of globalization and integration of national economies, world comparison of countries by economic performance is one of the most common tools for assessing the efficiency of public management and social development, as well as the definition of the state management analysis of investment climate in ukraine's economy. under investment climate we understand the indirect state value of the investment environment over a long period of time determined by the statistical range of economic indicators and factors that affect its formation. it is established that the identification of the terms «investment attractiveness» and http://scholar.google.com/citations?user=lhh5ivsaaaaj&hl=en&oi=sra financial risk and management reviews, 2017, 3(1): 1-12 4 © 2017 conscientia beam. all rights reserved. «investment climate» leads to contradictions in developed methods for their evaluation. dedicated and systematic determinants of the investment process through the coverage of components (investment attractiveness of the investment environment and investment climate), which makes possible the distinction between the essence of these concepts. 3. methodology 3.1. approaches to investment climate evaluation. evaluation of the investment climate of ukraine's economy and its impact on the dynamics of flows of international investment has gained relevance given the transformational nature of the economy, multi-vector and impermanence development strategies. there are three most typical approaches to the evaluation of the investment climate (figure c). figure-c. methodical approaches to the national economy investment climate evaluation the first approach is narrowed; it is based on an evaluation of the aggregate macroeconomic indicators. however, this method ignores the objective correlation of investment with other resource development factors, though attracted by the comparative simplicity of the analysis and calculations. narrowed approach to the assessment of the investment climate states is not possible to obtain objective information about the actual state of development of the national economy. in addition, this approach is not devoid of subjectivity, which to some extent distorts the actual picture of the investment climate of the state. the second approach to the analysis of the investment climate factor meets most of the methodological requirements and is based on evaluation of a set of factors (zakharovа, 2009). in the framework of factor approach, the authors propose to calculate individual evaluation of investment potential and investment risk, allowing you to fully determine the significance of individual factors in the implementation of the project. this approach is based on the identification of any factor, characteristic, which determines the investment attractiveness of the state: «the market reaction of the state», «state image» and so on, it is versatile and it can be used to analyze systems of different levels. the advantages of this approach include: the interaction of many factors, i.e., a differentiated approach when determining the investment climate. however, this approach has the disadvantage, such as opacity, the methods of isolation of factor characteristics of the investment climate. the third approach is risk. under this approach considers two components: investment potential and investment risk. investment potential is estimated on the basis of macroeconomic performance and investment risks are assessed from the standpoint of the probability of loss of investment income. the advantage of this approach is to estimate the component of risk that is not present in the previous two approaches. financial risk and management reviews, 2017, 3(1): 1-12 5 © 2017 conscientia beam. all rights reserved. 3.2. investment climate evaluation tools the tools that are used to evaluate varying degrees of investment climate in the state, can be divided into: 1) credit ratings; 2) economic indexes. ratings are used for financial investors guide regarding the reliability of the investments in debt obligations of companies, municipalities or governments, stock on investments in corporate law firms. this allows investors to generate a high-quality investment portfolio and quickly manipulate assets in the event of a change in rating. at first glance, the ratings have nothing to foreign investment. in fact, foreign investment can be divided into direct and portfolio. ratings are formed solely for portfolio investment and do not take into account the trends of direct investment. however, this view is unjustified because portfolio investments are more mobile, their implementation is associated mainly with the market, macroeconomic and political risks. at the same time, foreign direct investments are exposed to the same risks, as well as optional: industrial, commercial, construction, etc. therefore, the market portfolio is an important indicator for investment decisions and in the field of direct investment. the ratings also apply to state and municipal loans. trust portfolio investors to securities of states projected on the trust direct investors to invest in real business of its businesses. economic indices and rankings are different in nature. for example, economic indexes differ from the ratings of the objects of study and consumers. unlike ratings, economic indexes consist, as a rule, only for individual states. they characterize certain aspects of the national economy, such as: competitiveness, economic freedom and corruption. these indexes are strategic investors in the implementation of their strategy of investing abroad, in particular in the field of foreign investment. although ratings and indexes differ, however, a significant correlation indicates the position of the states in them. in fact, almost never occurs a situation in which the state was ranked as the highest positions, and index is the lowest, or vice versa. evaluation of investment attractiveness of ukraine only international institutions has, in comparison to the state as a whole and its individual indicators with other countries, and also some areas of concern. certain problems can be attributed to the lag effect, which manifests itself in long time intervals, which are technologically based rating and which, as a rule, amount to several months or more. that is, it should be understood that any rating of the current year is based on main statistical indicators of the last or last year. the same applies to the components of the rating, based on the expert survey. the problem of collecting statistically correct data for most countries in the world only exacerbates these problems by increasing the time intervals. in conditions of high level of global competition, there is no possibility to use the data of the world rankings to build a ranking of states from the perspective of the objectives of the national system of public administration as a result of their time delay. foreign investors rely on the evaluation of numerous consulting firms that continuously monitor the investment attractiveness in many countries around the world, including in ukraine. however, evaluation by foreign experts without the participation of ukrainian biased. 3.3. methods of economic investment attractiveness evaluation the developed technique rating of investment attractiveness of the are divided into three groups:  the methods based on different experts;  the methods based on the statistical information;  the combined methods based on expert-statistical calculations. analyzing the state of the investment attractiveness of the country and its position in the rankings, it is necessary to pay special attention to the individual components of such evaluation. in fact, the increase in ratings is solely under the influence of changes in individual indicators evaluation. methods for the determination of the indices also vary and are based on the measurement of the points, shares, rate of change etc., however, common to most methods is that in the end, the objects of evaluation (state sector) are ranked according to the degree of financial risk and management reviews, 2017, 3(1): 1-12 6 © 2017 conscientia beam. all rights reserved. deterioration of the investment attractiveness (from best to worst) and are grouped in several rating group («leaders», «the pursuers», «main array», «objects with insufficient level of attractiveness» and «outsiders»). ratings of national and international agencies is the effective tool for analysis of indicators of investment attractiveness of countries and have a large influence on the decisions regarding the investment and distribution of the global flow of foreign investment. in the economic literature there are different approaches to the evaluation of investment attractiveness of the national economy, which differ depending on the purpose of the study, the number of analyzed parameters and their qualitative characteristics, and on the selection of indicators: methodology for the assessment standard & poors (official website of standard & poors, 2015) price water house coopers (official website of pricewaterhouse coopers, 2015) moody’s investors service (official website of moody’s investors service, 2015) journal «euromoney» (official website of journal euromoney, 2015) «the doing business» (report doing business, 2014). financial and statistical practice has developed (malyutin, 2011) several methodological approaches to the estimation of investment attractiveness, systematization which made it possible to combine them into three approaches:  statistical  expert  rating the statistical approach is based on statistical analysis of actual data on investment and is based on the assumption that high levels of certain indicators showed high investment attractiveness of the economy. however, it should be noted that the method is formal and based on the specific social economic indicators. in addition, the statistical approach allows taking into account only the fact of the investment and does not take into account many factors, taken by investors in mind. the method of expert evaluation is the expert in the evaluation of different development indicators: expert their own reasons and their own experience to select the most important indicators, analyzes their development dynamics and forms conclusions regarding the investment climate. it should be noted that this method often turn to foreign investors. the advantage of using an expert approach is the adaptation of parameters and factors that are studied, for the needs of a particular investor or an in-depth analysis of the attractiveness of certain sectors of the economy. however, substantial disadvantages of using the method of expert evaluations should include the subjectivity of the assessment and the dependence of the conclusions from the position of expert. rating approach includes two varieties rating-analytical approach and rating-based approach polls. ratinganalytical method is the analysis of various aspects of economic development, the creation on their basis of analytical indicators, further grouping and consolidation and the formation of an integral index, which is based rating of the state and is determined by its position in the ranking. this approach has the most widespread use. the advantages of the approach include the ease of use and ease of interpretation of results, and the disadvantages significant dependence on macroeconomic indicators, the opacity of the indicators, which are grouped, not taking into account regional specificities. as a result, the obtained value rating only indicates the location of the national economy in the rating, but says nothing about specifics of the region and priorities for investment. however, there are no studies related to the assessment of the investment climate of the state. preliminary study (vakulich, 2014; kuznetsova and kuznetsov, 2015) revealed the following shortcomings of the existing approaches to the assessment of the investment climate for the economy of ukraine:  applied assessment tools designed to assess, primarily financial rather than real investments;  borrowed methods with respect to real investment, designed for a stable economy, which clearly manifested all economic laws and are not adapted to the real economic situation in ukraine; financial risk and management reviews, 2017, 3(1): 1-12 7 © 2017 conscientia beam. all rights reserved.  most methods are based on the analysis of haphazard sets of indicators of the financial condition of the company, there is retrospective in nature, while investor interest in future performance;  the vast number of methods based on expert judgment and of the nature of uncertainty because they reflect the subjective opinion of experts. 3.4. classification of rating evaluation of investment attractiveness to provide the opportunity for effective evaluation of the investment climate of the state proposed to rely on the classification of rating methodologies of estimation of investment attractiveness, as one of the components of the investment climate in the national economy, which is based on compiled data (handbook on constructing composite indicators, 2011) and is represented in figure d. figure-d. classification of rating evaluation of investment attractiveness of the national economy to create a database to select the most important methods of assessment of the investment climate should undertake a comparative analysis on the following criteria:  the target group of potential investors,  the depth of research,  the frequency of assessment of the investment climate, purpose assessment of the investment climate. determinants that determine the specificity of such selection in a chaotic environment can be considered determinants offered for financial monitoring: the dynamism and the pressure of the external environment; the specifics of the business and staff (kuznetsova, 2014). in the system of investment climate management it is advisable to put an investment partnership that would contribute to the alignment of interests and actions of the subjects of investment relations. the basis for creating a positive investment image is the creation of effective organizational and economic framework for the investment climate in ukraine's economy management. a key element of this concept is coordinating and regulating the nature of the impact of the management subsystem to manage, which is ensured through the use of evidence-based approaches, principles, methods and management tools. in the economic literature the investment attractiveness is considered as a generalized characteristic of the advantages and disadvantages of the investment object. when you study the investor is a subjective evaluation of the macroeconomic situation in the country. financial risk and management reviews, 2017, 3(1): 1-12 8 © 2017 conscientia beam. all rights reserved. investment attractiveness is determined by the compromise of the interests of the investor and recipient of investment. its level increases with the rapid achievement of mutual understanding between subjects of the investment process. the most actively used criteria for evaluation of investment attractiveness (official website of world bank, 2015); (owsp, 2015); (owmis, 2015) are presented in table 1. table-1. the main criteria of investment attractiveness evaluation evaluation criteria standard & poor’s world bank group moody’s investors service investment attractiveness investment attractiveness investment attractiveness 1) transparency and information openness; 2) budgeting; 3) long-term investment planning and financial planning; 4) income and expenditure management; 5) debt management; 6) cash and liquidity management; 7) transparency of the politicaladministrative system; 8) external risks management. 1) business operations; 2) construction; 3) access to electricity; 4) registering property; 5) getting credit; 6) protection the investors rights; 7) taxation; 8) international trade; 9) execution of contracts; 10) degree of solvency; 11) employment of the labor force. 1) background and history of the issuer; 2) industry/circular trend; 3) national political and regulatory environment; 4) quality control, experience, track record and attitude to risk; 5) management structure; 6) key operational and competitive position; 7) corporate strategy and philosophy; 8) debt structure; 9) financial position and liquidity sources. it is established that there is no single approach to the investment attractiveness evaluation of the national economy, and no evaluation of the investment climate of the national economy. when rating an investment climate evaluation, consider the following issues:  reducing the use of expert evaluation;  complex external economic factors in the evaluation;  the analysis based on various sources of information. 4. results the results of researches on the problem given the opportunity to clarify the essence of the investment climate and to consider this category as a complex feature, which gives grounds for victory in the competition for investment resources on the market on the basis of the interests of investors. on the country's investment climate significantly affects not only the general state of its economy, but also the business environment, in particular, the degree of state intervention in the economy and the level of corruption. the world bank rating doing business ease of doing business in ukraine (table 2). table-2. compare of countries positions in the rating «doing business» state doing business 2012 doing business 2013 doing business 2014 change state doing business 2012 doing business 2013 doing business 2014 change singapore 1 1 1 0 kazakhstan 56 49 52 +3 hong kong 2 2 3 +1 belarus 60 58 57 -1 new zealand 3 3 5 +2 azerbaijan 66 67 80 +13 usa 4 4 4 + kyrgyzstan 69 70 71 +1 denmark 5 5 4 -1 mongolia 88 76 63 -13 georgia 12 9 15 +6 moldova 86 83 86 +3 germany 18 20 18 -2 russian federation 118 112 62 -50 japan 20 24 29 +5 ukraine 152 189 96 -93 armenia 50 32 33 +2 tajikistan 147 141 144 +3 source: crbcdrdb (2015) financial risk and management reviews, 2017, 3(1): 1-12 9 © 2017 conscientia beam. all rights reserved. ukraine, despite a significant deterioration in the economic situation since the beginning of the year, became the first hundred in the ranking of ease of doing business «doing business – 2015», developed by experts of the world bank and the international finance corporation, rising to 16 positions and ranked 96th place (table 3). table-3. ukraine’s rating regarding the business environment for 2010 – 2014 indices years change 2014 to 2013 2010 2011 2012 2013 2014 complexity of doing business, general evaluation 147 149 152 137 98 39 for sub-indexes:  business opening 136 118 116 50 47 3  the connection to the mains supply 168 169 170 166 41 145  obligations under the contract 43 44 44 42 40 2  bankruptcy 145 158 158 157 97 98  the loan 30 21 23 24 13 11  the licensing system in construction 181 182 182 183 162 21  the foreign trade 139 136 144 145 148 -3  the investor protection 108 108 114 127 128 -1 source: crbcdrdb (2015) ukraine entered the hundred countries in the world bank ranking on the ease of doing business «doing business – 2015», improving over the year, its position at once by 16 points and ranked 96th place out of 189. the data presented in the report of the experts of the owwb (2015) and the international finance corporation (ifc). according to estimates ukraine is in transition stage from development due to the factor advantages to development through efficient use of capacity. in other words, the domestic economy still operates mainly due to extensive development, which is due to the priority value of the ukrainian traditional forms of economic activity, and low investment and weak public support for high-tech sectors and those that create high added value. trambik noted that іn 2013 – 2014 in ukraine were implemented significant reforms in the three regulatory areas (starting a business, paying taxes, registering property) that allowed her to become one of the world's top ten economies that are most actively reformed (trambik, 2013). the analysis will begin with a review of the ratings, which are compiled research organizations the global competitiveness report 2014-2015 (n.d); official website of imd (2015); official website of cato institute (2015); official website of the research center brookings institution (2015) (table 4). table-4. research organizations that assess the economic and social development of the state, 2014 organization basic rating the place of ukraine institute of management development (imd) the competitiveness rating 54 from 59 the cato institute the economic freedom rating 161 from 183 research center brookings institution the index of state weakness, countries 104 from 141 other influential rating of this group is the index of competitiveness of economic growth, which is calculated by the world economic forum. a feature of this rating is that it evaluates the ability of the economy to maintain stable economic growth in the medium and long term. table 5 provides a list of such organizations and the place of ukraine in the relevant ratings (gcr2014-2015, n.d); (owwb, 2015); (official website of world economic forum in davos, 2015); (official website of program of human development un, 2015); (owpc, 2015); (owimd, 2015); (official website of unesco, 2015); (official website of the european bank for reconstruction and development, 2015). financial risk and management reviews, 2017, 3(1): 1-12 10 © 2017 conscientia beam. all rights reserved. table-5. international organization that evaluate the economic and social development of the state organization basic rating the place of ukraine 2014 the world bank business operation rating 137 from 183 the world economic forum in davos rating of countries involvement in international trade 71 from 121 program of human development un human development rating 69 from 169 price water house coopers ranking of countries according to the level of complexity of the tax system 177 from 178 the international monetary fund macroeconomic indicators unesco rating of expenditure on research and development the european bank for reconstruction and development macroeconomic indicators the index growth competitiveness allows you to determine how competitive advantages of the investigated state and specific weaknesses. the third group of subjects who are able to reduce information asymmetry in the global investment market, are the rating agencies. table 6 lists the most influential of them and the prediction for ukraine. priority directions of scientific-technical progress should be targeted for investment and innovation activities and resources. table-6. the list of news agencies that evaluate the investment attractiveness of the world countries, 2014 news agency the basic rating (index) the place of ukraine journal «euro money» (great britain) country risk rating 89 from 186 journal «news week» (usa) ranking of the best countries (newsweek's «the world's best countries») 49 from 100 journal «forbes» (usa) ranking of countries with the most favorable conditions for business («best countries for business») 105 from 134 journal «economist» (great britain)) rating of the attractiveness of the entrepreneurial 70 from 82 journal «foreign policy» (usa) globalization index 42 from 72 failed states index («failed states index») 110 from 177 journal «international living» (usa) ranking of countries according to the level of life (quality of life index») 73 from 192 journal «business insider» (usa) ranking of countries with the threat of default 6 from 18 journal «institutional investor» (usa) assessment of the creditworthiness of countries 90 from 178 source:computed results based on compiled data from gcr2014-2015 (n.d); owje (2015); official website of journal newsweek (2015); official site of journal forbes (2015); official website of journal economist (2015); official website of journal foreign policy (2015); official website of journal international living (2015); official website of journal business insider (2015); official website of journal institutional investor (2015). on the development of modern and future high-tech industries can claim only those states that are able to provide a high level of science, technology, education, culture, organization, management and labor discipline. speaking about foreign investment, it is necessary to take into account world experience, which shows that the greatest success in attracting foreign investment to reach those states that, first, set this goal as a priority in its economy, and secondly, using the largest possible set of events. 5. conclusions it is revealed that the methodical approaches to the evaluation of investment attractiveness have several disadvantages: valuation techniques based on the analysis of a particular haphazard statistics, are disparate and unacceptable for a comprehensive diagnosis of the investment climate; they mostly reflect the subjective opinion based on expert judgment. financial risk and management reviews, 2017, 3(1): 1-12 11 © 2017 conscientia beam. all rights reserved. there are two key tools that are used to evaluate the investment climate in the state: credit ratings and economic indexes. they characterize the components, indicators and management factors of the investment climate, which limits the level of sparseness of the information and provides the target orientation of rating assessment of the needs of the subjects of management of investment climate in the national economy. international and national rating agencies evaluation of investment activity in the economy, and not the investment climate, as such. this stresses the importance of establishing an effective system of state management of the investment climate of the national economy to ensure sustainable long-term strategic development of the investment climate and growth in the inflow of foreign investment capital. funding: this study received no 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http://www.weforum.org/reports/global-competitiveness-report-2014-2015 http://www.weforum.org/reports/global-competitiveness-report-2014-2015 24 © 2018 conscientia beam. all rights reserved. incorporating islamic ethic elements into marketing mix paradigm nazree shafin1+ rozilah kasim2 1,2faculty of technology management and business, universiti tun hussein onn malaysia, batu pahat, johor, malaysia (+ corresponding author) abstract article history received: 8 october 2018 revised: 14 november 2018 accepted: 5 december 2018 published: 2 january 2019 keywords marketing mix islamic marketing mix islamic ethic elements/saft (siddiq,amanah,fathanah,tabligh) islamic ethic 4p‟s (product, price, promotion, place) jel classification: m31. to consider the extent to which the dynamism of ethic elements from four commendable characteristics of prophet muhammad (pbuh) fits within existing marketing mix framework thinking in strengthening marketing mix approach of islamic business. this can be achieved through analyzing selected elements of islamic ethic features, that are derived from the four (4) commendable characteristics of the prophet muhammad (pbuh): siddiq (truthfulness), amanah (trustworthiness), fathanah (wisdom), and tabligh (advocacy), abbreviated as “saft to be incorporate as a catalyst to strengthen the marketing mix approach and thus propose a practical islamic marketing mix as a competitive marketing tactic. analytical and comparative analyses are used and study reveals four ethic elements in islamic perspective that can be potential elements in developing a practical islamic marketing mix for any business whether islamic or non-islamic. contribution/originality: this paper contributes in the developing theories pertaining to islamic religious teaching of moral behavior (ethics) within business in practicing marketing mix approach – at the heart of which is the idea that incorporating islamic ethic in business‟ marketing mix approach could make the approach more efficient. 1. introduction the marketing approach and activities of a given firm will differ depending on which paradigm, or view of what marketing is, this firm applies (grönroos, 1991). in the muslim market, businesses are expected to operate in compliance with syariah or islamic principles, including especially in conducting their marketing strategy. thus, it is necessary for businesses to develop appropriate marketing strategies for this kind of industry (abdullah et al., 2015). as the first represent the broad market and the latter directly point out at specific target market. these two views of marketing mix paradigm amplified on how a business should construct its marketing strategy framework based on how the business positions itself in the market. as the first represent the general market and the latter directly point out the specific target market. distinguishing these two marketing approaches for different type of market is vital as the latter distinctly utilize religiosity to differentiate. obviously, operating marketing activities in islamic market where consumers were concerned about halal (permissible) or non-halal (non-permissible) products and services, islamic values could provide an advantageous value added helps in consumer‟s decision making. in delivering marketing strategy, the right tactics are one of the most important. refining businesses‟ marketing mix approach were one of the phases in applying the right tactics. in the wake of numerous calls for financial risk and management reviews 2018 vol. 4, no. 1, pp. 24-33 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2018.41.24.33 © 2018 conscientia beam. all rights reserved. https://orcid.org/0000-0001-5669-5145 https://www.doi.org/10.18488/journal.89.2018.41.24.33 financial risk and management reviews, 2018, 4(1): 24-33 25 © 2018 conscientia beam. all rights reserved. practicing ethical business, islamic businesses should not be too complacent of the need to device an appropriate marketing tactic in influencing their consumers‟ decision making and in gaining competitive edge in their target market. the intended focus of discussion for this paper is about determining the right marketing mix approach to differentiate, van waterschoot (2000) “the marketing mix as a creator of differentiation”, as well as to distinguish islamic business from its conventional peer based on religiosity, it is essential to incorporate its marketing mix approach with islamic precepts; by means of islamic precepts is by incorporating the doctrine of al-quran and sunnah. explained by palmer (2012) a company must ensure that customers can immediately recognize its distinctive products in the marketplace. the significance influences of religious teaching particularly islam in every aspect of its practitioners live is very outstanding. this phenomenon should be seriously considered by every marketer who were targeting on consumers of islamic based goods and services. it is a long-term phenomenon that is supposed to be thoroughly studied and understood in depth (rice and al-mossawi, 2002; fam et al., 2004; yousaf, 2014). in the process of making purchasing decisions, islamic consumers usually will be more cautious in making decisions based on their religious literacy and the level of sensitivity to the halal status of a product or service acquire. delener (1990) concluded that religious individuals tend to perceive higher risks in their purchase decisions. accordingly, alam et al. (2011) confirmed that religiosity acts as a full mediating role in the relationship between relative and contextual variables, and purchase behavior of muslim consumers. islamic business differs from its conventional counterparts in these details as they are in a religious-based environment. thus, in order to distinguish the marketing mix approaches between conventional and islamic business, authors deem necessary that the differentiating should contemplate with ethically business practice, to be precise, with islamic ethic. having good ethical in operating a business produce valuable consequences in realizing desired long-term success. in contrast, poor ethics resulted in the collapse of business. practicing good ethics helps business in sound decision making that resulted in positive value of branding; building trust with customers; retaining talent and reduce staff turn-over. islam highly recommends its believers to get involve in business or entrepreneurship as it is considered as „ibadah‟ (worship) to god. with respect to that, when a business practicing good ethical business culture, it is as well been considered as performing „ibadah‟. in islam, the two main sources of references are from al-quran and hadiths. explained by saeed et al. (2001) in defining islamic marketing, islamic ethics are based on al-quran commandments and leave no room for ambiguous interpretation by marketing executives to suit their individual whims and desire. there are several verses in al-quran and sunnah (from collection of hadiths), highlighted and emphasized the virtuous of conducting ethical business activities. indeed, in al-quran, from verse of ar-rahman (55:9): “and establish weight in justice and do not make deficient the balance.” understandably from the above stated verse, god command that when making scales of business‟s goods, business should be fair, honest and do not lie which are the features of ethic. correspondingly, as a fact, al-quran recommends every human being to emulate the faith and ethics of prophet muhammad (pbuh). as evident in verse an-nur (24:54): say, "obey allah and obey the messenger; but if you turn away then upon him is only that [duty] with which he has been charged, and upon you is that with which you have been charged. and if you obey him, you will be [rightly] guided. and there is not upon the messenger except the [responsibility for] clear notification." furthermore, prophet muhammad (pbuh) himself also did emphasized of having good ethics in doing business. for instance, narrated by al-nawawi on the authority of abu hurayrah (may allah be pleased with him) who said: the messenger of allah (peace and blessings of allah be upon him) said, “do not envy one another, and do not inflate prices for one another, and do not hate one another, and do not turn away from one another, and do not undercut one another in trade, but [rather] be slaves of allah and brothers [amongst yourselves]. a muslim is financial risk and management reviews, 2018, 4(1): 24-33 26 © 2018 conscientia beam. all rights reserved. the brother of a muslim: he does not oppress him, nor does he fail him, nor does he lie to him, nor does he hold him in contempt. taqwa (piety) is right here [and he pointed to his chest three times]. it is evil enough for a man to hold his brother muslim in contempt. the whole of a muslim is inviolable for another muslim: his blood, his property, and his honor.” [muslim]. from this hadith, we can understand that the solemnity of the prophet muhammad (pbuh) in prohibiting us from deceiving in doing business; deceive, cheat, and lie in business activities are ultimately unethical practice. muslim look upon prophet muhammad (pbuh) as the most ethical human being ever live. according to nooh (2015) cited ahmed (2001) in describing prophet muhammad is a person which having the highest ethics and morals as he was widely known as al-amin, “the honest one”. prophet muhammad, since he was young, he was well known for his honesty and truthfulness among arab communities and throughout centuries, from the muslim point of view, is the symbol of perfection of both human person and society (qamihah, 1996; nasr, 2003). noted by dekmejian (1987) for generations of muslims, however, the prophet became uswa hasana--"the beautiful model” -whose exemplary character and behavior made him a primary focus of veneration by the faithful. again, it is revealed clearly in the al-quran, verse al-ahzaab (33:21): “ye have indeed in the messenger of allah, an excellent exemplar, for him who hopes in allah and the final day, and who remember allah much”. considering that al-quran stated the importance of being ethical in business and emphasized on human being to emulate the good character of the prophet, this paper examined the dimension of islamic ethics derivate from the four (4) commendable characteristics of prophet muhammad (pbuh). this derivate ethic elements are the features of the prophet when he is called „al-amin‟ during his entrepreneurship era before his prophethood. siddiq (truthfulness), amanah (trustworthiness), fathanah (wisdom) and tabligh (advocacy) (saft) were the derivate islamic ethic elements to be put forth as potential incorporated elements into marketing mix approach of a business. since marketing is one of the vital aspects of a business activity, this paper will delve into the significance of islamic ethical values in marketing mix approach of an islamic business. relatively, few academic articles have suggested how islamic marketers might use this subject understanding to build an actionable approach to marketing activities (saeed et al., 2001; hassan et al., 2008; arham, 2010; abuznaid, 2012; abdullah et al., 2015). these endeavors, though constructive, all dearths an integrated approach for making islamic ethic part of the strategic marketing planning process. discussed by housby (2013) the claim that „islamic‟ and „ethical‟ are synonymous is rarely seriously examined, and nor is the claim that there exists a consistent and generally understood definition of „ethical‟ practice. hence, the purpose of this paper is to offer one way of whether formulating, constructing or developing marketing mix activities for accomplishing an ethical marketing mix practices by incorporating the derivate islamic ethic elements into the marketing mix activities of the business (figure-1). figure-1. flow of proposed incorporating saft into 4p‟s marketing mix sources: al-quran; hadiths; and mccarthy (1964) financial risk and management reviews, 2018, 4(1): 24-33 27 © 2018 conscientia beam. all rights reserved. incorporating islamic ethic elements (saft) started from the beginning of business execution. according to hunt (2012) business execution is about having the employees required to support a company‟s strategy and making sure they are doing what the company needs them to do to achieve its strategic goals. in decision making level, there are strategic and tactical decisions which focus on long-term and short-term goals. provided in figure 1: a broad, general description of an approach for incorporating islamic ethic elements into the marketing decisions process as proposed. the 4p‟s of marketing mix were used as it is the foundation of marketing mix framework since it was introduced fifty years ago. this is where the tactical phase arises which a business delves into its marketing mix elements in developing an effective marketing strategy. the goal is in influencing consumer‟s buying decisions or demand by incorporating the derivate islamic ethics elements as proposed. kotler (2003) argued, “the four p‟s represent the sellers‟ view of the marketing tools available for influencing buyers”. in addition, according to kotler and armstrong (2010) the marketing mix is the set of controllable, tactical marketing tools that the firm blends to produce the response it wants in the marketplace. to establish the points of significance in incorporating saft into marketing mix of 4p‟s, it is important to discuss at both marketing mix paradigm; conventional marketing mix and islamic marketing mix. 2. marketing mix paradigms marketing mix is a combination of controlled elements by organization to influence target population to purchase its products or services. it has been a phenomenon tool for decades, which has shaped the ways to plan for a successful products and services offering and to help understand what the products and services can offer. marketing mix as a tool, in certain ways has revolutionize the nature and pattern of marketing strategy across the world; most commonly executed through the 4ps and 7ps of the mix. marketing mix has been extremely influential in informing the development of both marketing theory and practice (möller, 2006). the tools can be used to develop both long-term strategies and short-term tactical programs (palmer, 2012). the study of marketing mix worldwide has been extensively researched on the frameworks and models, management paradigm, relationship and consequences. however, the traditional 4ps (mccarthy, 1964) of product, price, promotion and place has been criticized by numbers of studies; lauterborn (1990); möller (2006); popovic (2006) and fakeideas (2008). constantinides (2006) disclosed that even though 4p‟s framework has been dominant as marketing management paradigm, current markets developments, environmental changes, and trends, as well as changing academic attitudes likely to affect the future of the mix as theoretical concept and also the favorite management tool of marketing practitioners. furthermore, suggested by constantinides (2006) that marketing scholars should focus their efforts in formulating the conceptual foundations and marketing methodologies that better address the needs of today‟s and tomorrow‟s marketers. in significant, western scholars of marketing particularly, has been arguing on the traditional 4p‟s. several prominent scholars even proposed alternative framework and modified versions of marketing mix, with some added new elements (booms and bitner, 1981; ohmae, 1982; kotler, 1984; lauterborn, 1990; robins, 1991; doyle, 1994; grönroos, 1994; vignali and davies, 1994; aldridge et al., 1997; mosley-matchett, 1997; yudelson, 1999; melewar and saunders, 2000; beckwith, 2001; healy et al., 2001; schultz, 2001; constantinides, 2002) to name a few. in common, all these previous studies agreed to the extent that 4p‟s marketing mix framework need a paradigm shift that can meet management and planning needs, while upholding the mix‟s essential features, namely simplicity, applicability and richness. however, less attention has been paid to the significance of religiosity in marketing mix, particularly within islamic marketing paradigm. islamic marketing mix islam as a religion that has masses followers, the application of islamic values in the field of marketing is still less visible even though islamic-related business has been ranked one of the top categories in world business. financial risk and management reviews, 2018, 4(1): 24-33 28 © 2018 conscientia beam. all rights reserved. accordingly, as marketing is also an important part of a business, it is very appropriate if the value of islam also been applied in marketing activities. noted by arham (2010) religious teachings, at least islam, could be applied in the realm of modern marketing theory. according to ahmed and rahman (2015) conventional marketing strategies satisfy the customers based on the current needs of the customer, whereas, islamic marketing strategies satisfy the customers based on the human values, marketing cultures, and islamic rules and regulations (shariah laws). apart from conventional marketing strategies, the islamic marketing strategies more focus on religious rules and ethics which do not exist in conventional marketing. in addition, el-bassiouny (2014) islam is a global religion and way of life that goes beyond geo-political confines, and “because the islamic ideology is a paradigm that transcends all acts of life, muslim believers naturally expect that business conduct, and hence marketing as well, will be impacted by the precepts of their faith. if marketers are to relate more effectively to muslim consumers, then some study of the distinctive aspects of islam is warranted”. nevertheless, understanding the pedigrees of the traditional marketing mix is critical to understand the paradigm distinction between conventional and islamic proposed in this paper. review on literatures related to islamic marketing mix found some facts that have been produced by researchers on islamic marketing mix. for instants, abuznaid (2012) attempted to conceptualize and clarifies the various elements of marketing mix from islamic point view with strong emphasis on islamic business culture. the author, abuznaid, added two new elements “promise” and “patience” into the already existing conventional seven ps of marketing mix. in addition, abdullah et al. (2013) attempts to identify critical factors in conducting islamic marketing mix activities and their relative importance by using combination of both qualitative and quantitative research method, authors proposed that businesses can adopt the strategies in engaging with muslim customers through their marketing mix activities by consistently conforming to syariah, exhibiting distinctive characteristics, instilling insurance, embedding morality and conscience and lastly embracing a „customer oriented‟ approach. a direct suggestion by hashim and hamzah (2014) since there are arguments from scholars that islamic marketing is significant in contemporary commercial activities, the concept of 7p‟s in marketing should be incorporated with islamic principles. there are several scholars‟ studies in islamic marketing which proposed extended or new framework for islamic marketing mix (table 1). table-1. previous scholars on islamic marketing mix authors/year proposition/suggestion argument saeed et al. (2001) 5ps: product; price; promotion; place; and people. islam emphasizes the importance of “free” and “independent” judgment on the part of the customer. wilson (2012) add another 7ps to existing: pragmatism; pertinence; palliation; peer-support; pedagogy; persistence; patience. the new wave of reciprocity-based and consumer driven marketing requires much more. especially in the case of islamic marketing. abuznaid (2012) add 2 new elements in services marketing i.e. “promise” and “patience”. promise is element for building relationship; patient is in dealing with customer. abdullah et al. (2015) „customer oriented approach‟. proposed 5cs: commitment; characteristic; conformity; conscience; and customer centric. suggest that muslim consumer consider five critical factors that must be emphasized by businesses in conducting their marketing mix. source: literature review (saeed et al., 2001; abuznaid, 2012; wilson, 2012; abdullah et al., 2015) 3. methodology abdullah and ismail (2010) called for many viable islamic guidelines for business, specifically in conducting marketing mix activities. in addition, ahmad and santhapparaj (2012) found out similar vein, calling for more studies to be carried out on marketing from an islamic perspective especially on pricing strategy. hence, to financial risk and management reviews, 2018, 4(1): 24-33 29 © 2018 conscientia beam. all rights reserved. understand the true position of the islamic ethic with regards to islamic marketing mix and to clearly distinguish between conventional marketing mix and islamic marketing mix by means of islamic ethic dimensions and to establish the need for a shift from contemporary marketing approach to a more islamic approach which is relatively a new paradigm in islamic business perspective, more than two hundred academic papers and materials were reviewed from the background of marketing mix and islamic marketing mix from which fifty-nine was found to be more relevant to the phenomenon understudy. therefore, the review involved about fifty-nine academic writings and materials including reference from al-quran and hadiths. 4. the needs for incorporating islamic ethic into marketing mix paradigm in satisfying needs and wants of customers, marketers must also look and analyze on ethics side. the call for a more ethical business practices is becoming a priority for business participants as well as academic scholars. practicing and operating marketing activities also needs to be ethical. yussuf (2018) argued, “good ethics play a significant role in your business decisions, staffing, branding, motivation, customer retention and so much more. having a strong ethical core to your business can directly affect the strength of your company as a whole, and its future.” each element in marketing mix framework could be manipulated to deceive consumers. for instance, a misleading promotion activity being used in hiding their products and services faulty or problems. there have been numerous cases of unethical marketing practices such as in 2013 when samsung was fined by fair trade commission (ftc) for practicing unfair marketing strategy. the unethical marketing practice performed by samsung was said to be a deceptive practice. indeed lantos (2015) stated, in the wake of numerous openly exposed scandals in the business and marketing worlds, modern marketers are concerned not just with doing well through effective and efficient marketing strategy; they are also focused on doing good through ethical marketing tactics. a paper by cadogan et al. (2009) noted that sales teams are less likely to engage in unethical behavior when the teams have strong ethical standards. kertajaya and sula (2006) stated, “ethic” as one of the four characteristics for islamic marketing. it is also argued by arham (2010) “this ethical conduct, must follow the teachings of al-quran and hadith. therefore, it is necessary to refer this kind of ethics as islamic ethics.” cited from hussnain (2011). “i believe marketing practices, embedded in a strong ethical doctrine, can play a vital role in raising the standards of business conduct worldwide, while in no way compromising the quality of services or products offered to customers, or surrendering the profit margins of businesses. adherence to such ethical practices can help to elevate the standards of behavior and thus of living, of traders and consumer alike”. the ethical approach of islamic proposition development would reap rewards not only by both muslims and non-muslims. within the islamic context, the existence of a well-defined framework of ethical values of marketing mix is a pre-requisite in ensuring the actualization of international marketing ethics (ishak and abdullah, 2012). as accordingly by abuznaid (2012) islamic-marketing mix is based on value-maximization demand empathy and mercy of god‟s creatures which implies refraining from doing harm to others and preventing the spread of unethical marketing practices. several works on islamic marketing particularly mentioning ethics in marketing mix from an islamic perspective have made these characteristics as compulsory in their literature review (hassan et al., 2008; arham, 2010) to name a few. however, no multidimensional study which investigated the saft i.e. the four commendable characteristics of prophet muhammad (pbuh)) that correlate with marketing mix approach had ever been reported. according to saeed et al. (2001) it is not surprising to learn, therefore, that marketing ethics merit special attention in islam and constitute a separate discipline underpinned by documented practices of the prophet (pbh). nooh (2015) concluded, ethics and moral from islamic perspective is akhlaq or the state of feelings that shapes financial risk and management reviews, 2018, 4(1): 24-33 30 © 2018 conscientia beam. all rights reserved. human behavior. thus, to shape the akhlaq of one self, he or she have to practice the characteristic of the prophet such as siddiq, amanah, fathanah, and tabligh. in discussing islamic ways of doing business, islamic business or entrepreneur cannot abscond from associating with ethics. from reviewed literatures, there are several authors relates islamic ethic with business practicing, but none specifically investigate saft dimension as significant elements in islamic marketing mix activities. as for this paper, islamic ethic transpired by saft, will be incorporated into entrepreneur‟s business activities in influencing consumer‟s buying decisions or demand. concluded by hassan et al. (2008) given the key importance of customer trust in the islamic banking and financial services sector, it is recommended that islamic banks should emphasize frontline employees‟ islamic ethical behaviors that particularly lead to customer trust. put simply, they need to be honest and implement low-pressure selling techniques. in describing and defining muslim entrepreneur, some writers inserted ethics in their statement as if it were synonymous with islamic business. „muslim entrepreneur‟ termed by sandıkçı (2011) as a new class of business people, located both in muslim-majority and minority societies who successfully blend islamic ethical principles and values with capitalist business practices. in addition, in pursuing their entrepreneurial goals they seek to combine religious and economic activities through islamic ethical values and norms (sandıkçı, 2011). whereas, osella and osella (2009) in observing business behavior of muslim entrepreneur in kerala, india, stated that, by promoting modern education among muslims, entrepreneurs (muslim entrepreneur) seek to promote economic development while also embedding economic practices within a framework of ethics and moral responsibilities deemed to be „islamic‟. 5. conclusion islam and marketing are two terms that, until recently, seldom came together (sandikci and ger, 2011). islamic business competes in the market like any other business, but they use religiosity influences to achieve their objectives and making impact commonly in muslim‟s consumers market. islamic businesses are also looking for business profits, but in doing that, complying with islamic teaching is necessary as they consider it to be „ibadah‟ in achieving „maqasid al shariah‟. conducting dealing and transactions ethically in business are considered doing „ibadah‟ or obedient to god‟s order. this makes islamic business distinct from their conventional peers. accordingly, yousaf (2014) from an islamic perspective, even trade and all functions related to it, e.g., marketing, are considered as religious service, „ibadah‟. practicing marketing in islamic markets needs a suitable approach which really reflects islamic features. thus, it is a challenging step in designing the right marketing mix. being ethical is one way of acquiring distinction in marketing mix approaches. argued by arham (2010) in marketing sense, islamic marketers must make themselves ready. they must be “purified” before commencing their marketing activities. the term “purified” refers to any attempt of “self‐cleansing” before serving the markets. for instance, companies must train their marketers so that all marketing activities could be done in ethical standard set by islamic teaching. ethical islamic marketing mix as one of marketing management tool is a new way in optimizing the applicability and efficiency of marketing mix approach for islamic business. an implication of this significance paradigm is a need to improve strategic and tactical approach to meet new challenges in doing business within islamic market context. however, if the islamic businesses are willing to take up this challenge, they have to move away from their conventional approaches of supporting the marketing objectives and towards more shariah compliance objectives that is producing pure and lawful (halal) products and services by accordingly follow the teaching of al-quran and sunnah, that is, by blending their marketing mix with islamic ethic elements, siddiq; amanah; fathanah; and tabligh (saft). this paper will lead to a more comprehensive and scientific understanding the significance of islamic ethic in marketing management tool especially in developing a practical islamic marketing mix model for business operating in islamic market. financial risk and management reviews, 2018, 4(1): 24-33 31 © 2018 conscientia beam. all rights reserved. funding: this study received no specific financial support. competing interests: the authors declare that they have no 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marketing education, 21(1): 60-67. available at: https://doi.org/10.1177/0273475399211008. yussuf, t., 2018. 5 reasons why your business needs good ethics. available from www.smallbizdaily.com. other references online al-quran. https://quran.com/ views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.smallbizdaily.com/ https://quran.com/ 40 © 2019 conscientia beam. all rights reserved. correlation between financial difficulties and financing strategies among market stallholders in batangas city amor a. ilagan department: college of accountancy, business, economics and international hospitality management batangas state university, main campus i batangas city, philippines. abstract article history received: 15 january 2019 revised: 28 february 2019 accepted: 9 april 2019 published: 1 july 2019 keywords debt financing financial difficulties financing strategies internal financing market stallholders pecking order theory. jel classification: g20, g21. the aim of this study was to determine the correlation between financial difficulties and financing strategies among market stallholders in batangas city. specifically, the study sought to determine the profile of the respondents in terms of age, sex, civil status, highest educational attainment, market section, number of years in operation, average monthly business income and stall location. the researcher also assessed the financial difficulties experienced by market stallholders and the extent of utilization of financing strategies in terms of internal financing and debt financing. moreover, the researcher also determined the correlation between financial difficulties and financing strategies, the significant difference on the financial difficulties experienced by market stallholders and extent of utilization of financing strategies of the respondents when grouped according to profile variables. the findings of the study revealed that there is a correlation between financial difficulties and internal financing and another correlation between financial difficulties and debt financing utilized by market stallholders. an extension activity was proposed as an output of this study so that market stallholders would understand the different financing strategies banks and other microfinancing institutions are offering. contribution/originality: this study contributes to the existing literature on the financial difficulties of market stallholders. the study uses a new estimation methodology as a survey questionnaire in determining the correlation between financial difficulties and financing strategies. this study is one of the very few studies about financing strategies utilized by market stallholders. 1. introduction micro, small and medium enterprises, or msmes, are widely recognized as being the major contributors to economic growth, job creation and economic activity in most developed countries. as such, encouraging growth and success of msmes is vital to the success of the philippine economy. based on 2015 statistical data provided by the philippine statistics authority (psa), there are 900,914 establishments in the philippines. of these, 99.5% (896,839) are micro, small and medium enterprises (msmes) and the remaining 0.5% (4,075) are large enterprises. msmes are defined as any business activity/enterprise engaged in industry, agri-business/services whether single proprietorship, cooperative, partnership or corporation whose total assets inclusive of those arising from loans but exclusive of the land on which the particular business entity’s office, plant and equipment are situated. financial risk and management reviews 2019 vol. 5, no. 1, pp. 40-54 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2019.51.40.54 © 2019 conscientia beam. all rights reserved. https://orcid.org/0000-0002-6937-6802 https://www.doi.org/10.18488/journal.89.2019.51.40.54 financial risk and management reviews, 2019, 5(1): 40-54 41 © 2019 conscientia beam. all rights reserved. and from that definition, market stallholders fall under the micro entrepreneur’s category because of its capitalization. market stallholders are an integral part of urban economies around the world, offering easy access to a wide range of goods and services in public spaces. they sell everything from fresh vegetables to prepared foods, from building materials to garments and crafts, from consumer electronics to auto repairs to haircuts. it also adds vibrancy to urban life and in many places and it is considered a cornerstone of historical and cultural heritage. for example, market stallholders who sell “kakanin” is an important part of philippines’ cultural heritage. moreover, market stallholders provide the main source of income for their households, bringing food to their families and paying school fees for their children. however, market stallholders do experience different financial difficulties. the main reason of financial difficulty faced by small businesses is the access to affordable credit over a reasonable period. another challenge is that the market stallholders have limited start-up capital or seed money which leads to low earnings. in addition, market stallholders have to face high costs of credit and are usually unable to identify their key competitive strengths to maintain product standards and quality. because of this, knowledge to finance is a topic of continued interest among researchers in both developing and developed economies. despite the fact that these market stallholders have been identified as an integral part of our economy, there are several constraints serving as bottlenecks to them in accessing financing strategies. market stallholders used different financing strategies such as internal financing, debt financing and equity financing. mejorada (2009) defined internal financing as funds that comes from within the business such as personal funds, working capital, retained profits, funds from family and friends and selling of assets. meanwhile, debt financing are funds raised by a company by selling bonds, bills or notes to individual and/or institutional investors. in return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal or interest. on the other hand, equity financing refers to the sale of an ownership interest to raise funds for business purposes. with this, the researcher got interested in conducting the study because the researcher wants to know the financing strategies used by market stallholders and how they are utilizing it when they experience financial difficulties. the researcher believes that this study will help market stallholders acquire knowledge and consider the different financing strategies that could unravel their financial difficulties. this study also aims to provide them significant information that will help their business continue and grow. 1.1. statement of the problem the study aims to correlate financial difficulties and financing strategies among market stallholders in batangas city. specifically, the study aims to know: what is the profile of respondents in terms of: a. personal 1.1. age; 1.2. sex; 1.3. civil status; and 1.4. highest educational attainment? b. business 1.5. capitalization; 1.6. market section; 1.7. number of years in operation; 1.8. average monthly business income; and 1.9. stall location? 2. how do the respondents assess the occurrence of financial difficulties experienced by market stallholders? 3. to what extent do the market stallholders utilize the following financing strategies in terms of: financial risk and management reviews, 2019, 5(1): 40-54 42 © 2019 conscientia beam. all rights reserved. 3.1. internal financing; 3.2. debt financing? 4. is there a significant correlation between the financial difficulties and financing strategies? 5. is there a significant difference on the financial difficulties experienced by market stall holders when grouped according to profile? 6. is there a significant difference on the extent of utilization of financing strategies when grouped according to profile? 7. based from the findings, what extension activity may be proposed? 2. theoretical framework a theoretical framework guides research by determining what variables to measure and what statistical relationship to look for. the theoretical framework that is presented here under shows the researcher’s objective to identify the correlation between financial difficulties and financing strategies among market stallholders in batangas city. for the first variable which is financial difficulties, the researcher has identified the different financial difficulties experienced by market stallholders. then, the respondents assessed the occurrence of these financial difficulties on their business. according to naidu (2012) msme’s is the main engine behind economic growth. but these msme’s experienced problems regarding the lack of finance to sustain the economic growth of the business. additionally, singh and wasdani (2016) posited that financial challenge has been a concern for all stakeholders including entrepreneurs, financial institutions and government organizations. moreover, aruna (2015) states small businesses often face a variety of problems related to their size. a frequent cause of bankruptcy is undercapitalization. this is often a result of poor planning rather than economic conditions. it is a common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. hence, the researcher felt that this theory would support her claim. the second variable for this study is the financing strategies. this study utilized the traditional pecking order theory which was first introduced by donaldson (1961) and popularized by myers and majluf (1984). in the traditional pecking order, businesses prefer internal financing when available, and debt is preferred over equity if external financing is required. according to estwick (2013) the fact that the pecking order theory is based on assumptions of information asymmetry which are high in most, smaller, start-up firms, is a good reason to expect that it should also apply to small businesses, and not just too large companies. however, although this original pecking order theory generally applies to smes, it was later found that it did not hold for all firms, especially small high growth firms. this could be attributed to different reasons, including capital market development, a desire to maintain control, and cultural preferences. as a consequence, variations of the traditional pecking order sprouted throughout the years. as a matter of fact, paul et al. (2007) suggested that the hierarchy of financing sources starts with internal financing, followed by equity financing, then debt financing. furthermore, padachi et al. (2012) suggested a constrained pecking order for small businesses where equity financing is not considered as a financing source. additionally, hussain and matlay (2007) assert that small firms strive for external financial sources only if the internal sources are exhausted. small firms try to meet their financial needs with a pecking order of personal and retained earnings, debt and issuance of new equity. the pecking order theory can be easily applied in small firms because they borrow based on investment needs rather than the attempt to achieve an optimal capital structure. the researcher believed that this theory supported this study because it showed the different financing strategies particularly internal, debt and equity financing which were used by businesses to suffice their needs. also, this theory revealed some of reasons why businesses preferred particular financing strategy over the other. financial risk and management reviews, 2019, 5(1): 40-54 43 © 2019 conscientia beam. all rights reserved. however, the researcher did not include equity financing because most of them do not have stocks to sell, hence, it is not applicable for market stallholders. 2.1. research hypotheses ho1: there is no correlation between financial difficulties and financing strategies. ho2: there is no significant difference on the occurrence of financial difficulties experienced by market stallholders when grouped according to profile. ho3: there is no significant difference on the extent of utilization of financing strategies when grouped according to profile. 3. methodology this study is concerned with the correlation between financial difficulties and financing strategies among market stallholders in batangas city. to attain such concern, the method used in the study is the descriptive method. according to calderon (2008) descriptive method also known as statistical research, it describes data and characteristics about the phenomenon or population being studied. this research method is used in frequencies, averages and other statistical calculations. this method is used to gather information in order to test hypothesis or to answer questions concerning the current status of the subject of the study. 3.1. area of the study the area of the study is the public market i and ii located at batangas city, philippines. 3.2. population and sample size of the study the total population for the study is 1,259 market stallholders in which 295 respondents were used. in addition, the study utilized raosoft calculator to determine its sample size. 3.3. research instrument the researcher utilized a self-constructed questionnaire using the five-point likert scale format of always, often, seldom and never for financial difficulties and great extent, moderate extent, least extent and no extent for financing strategies. 4. data presentation and analysis the data gathered in this study were presented in simple table frequency. pearson r, independent t-test and one-way analysis of variance were used to test the hypotheses. 4.1. personal profile of the respondents the personal profile of the market stallholders considered in this study are age, sex, civil status and highest educational attainment. 4.1.1. age in terms of age as shown in table 1, 36 to 55 years old got the highest frequency of 210 or 71.2 percent of the total responses. this was followed by 18 to 35 years old with 65 or 22.0 percent of total responses. lastly, 56 years old and above got the lowest distribution of 20 or 6.80 percent of total responses. financial risk and management reviews, 2019, 5(1): 40-54 44 © 2019 conscientia beam. all rights reserved. table-1. distribution of respondents in terms of age. age frequency percentage 18-35 65 22.0 36-55 210 71.2 56 and above 20 6.8 total 295 100 this manifested that most market stallholders were dominated by the age of 36 to 55. according to erikson (1965) “theory of psychosocial development”, at this age, respondents have stable mindset to raise their family and support their children at the same time. hence, they are trying to maintain the stability and growth of their business in order for them to support their family financially. moreover, they are on the stage of fulfilling their dreams so they are eager to make their business grow. 4.1.2. sex table 2 below shows that there are 199 female respondents which correspond to 67.5 percent of the total number of responses. on the other hand, male respondents have a total of 96 which is equivalent to 32.5 percent. table-2. distribution of respondents in terms of sex. sex frequency percentage male 96 32.5 female 199 67.5 total 295 100 based on the result, it turned out that female have a bigger number of population than male. it can be implied that female have longer patience and more approachable than male. as a market stallholder, you have to deal with many kinds of people that usually test your patience. usually, female stallholders have enough tolerance to deal with persistent and annoying customers. they are good in communication rather than male because male is usually a one-word person. according to angulo (2017) in her study regarding entrepreneurial culture of malvar, batangas that women entrepreneurs who are successful do not give up when faced with obstacles and do whatever it takes to make it their dreams happen. 4.1.3. civil status table 3 shows that married market stallholders have the highest frequency of 242 that is equivalent to 82.0 percent. it was followed by the single market stallholders who have a frequency of 33 that is equivalent to 11.2 percent. next is widowed/widower market stallholders who have a frequency of 14 which is 4.7 percent of the total percentage. lastly, separated market stallholders got the lowest frequency of 6 or 2 percent. table-3. distribution of respondents in terms of civil status. civil status frequency percentage single 33 11.2 married 242 82.0 separated 6 2.0 widower 14 4.7 total 295 100 as seen from the result, majority of the market stallholders were married. the researcher observed that married market stallholders are very careful when it comes to managing the business because they do want to earn profit. that is why they are vigilant when it comes to handling the business since they need to earn for the sake of financial risk and management reviews, 2019, 5(1): 40-54 45 © 2019 conscientia beam. all rights reserved. their family. moreover, married market stallholders are not afraid of their obligations with regard to borrowing or acquiring loans because they have a partner who will help them deal with it. according to mahoney (2010) maintenance of the family unit and the rearing of children have been major responsibilities of married women. additionally, married women are income earners and food provider. that is the reason why married women will always find ways on how to earn money. moreover, unemployment of the husband whether caused by illness, economic fluctuation, or labor disputes is a threat to family economic security. just as he hypothesizes that there is an inverse relationship between labor force participation of married women and family income, so expect a greater likelihood of employment associated with unemployment of the husband. 4.1.4. highest educational attainment table 4 shows that high school graduates have the highest frequency of 223 with a percentage of 75.6. it was followed by vocational with frequency of 48 and a percentage of 16.3. college graduates is next with a frequency of 12 equivalent to 4.1 percent. next are the elementary graduates who got a frequency of 11 which is equivalent to 3.7 percent. the lowest frequency goes to others with 1 equivalent to 0.3 percent. table-4. distribution of respondents in terms of highest educational attainment. highest educational attainment frequency percentage elementary graduate 11 3.7 high school graduate 223 75.6 vocational 48 16.3 college graduate 12 4.1 others 1 0.3 total 295 100 the result implies that majority of the respondents are high school graduates. this suggests that most of the respondents are unskilled and non-degree holders. during the researcher’s interview, they stressed that they do not have the means to go to higher education because of lack of money. hence, it is difficult for them to have a decent job. however, even though they lack in higher education, they have the means to survive in this competitive world and put up a small business. the respondents also told the researcher that their business started with a low capital and as the years passed by it became successful. they exerted all their effort, hard work and determination to achieve their dreams. according to alfie (2014) poverty and lack of useful employment in the rural areas and the smaller towns drive large number of high school graduates to the cities for work and their employment. these high school graduates usually own low skills and lack in the level of education required for better paid jobs in the formal sectors. and those who do not have economic powers and those who were left-out add on to the statistics of unemployment. hence, in order for these individuals to survive in the competitive world, they sort working in the informal sector of the society. and one of the means of livelihood is market vending, as it requires minor financial input and the skills involved are low. 4.2. business profile of the respondents the study determined the business profile of market stallholders in terms of market section, number of years in operation, average monthly business income, and stall location. 4.2.1. market section table 5 shows that more than half of the respondents are in the dry section with a frequency of 194 and percentage of 65.8. meanwhile, wet section has a frequency of 101 and percentage of 34.2. the result revealed that most of the market stallholders are selling in the dry section part of the market. this dry section is associated with financial risk and management reviews, 2019, 5(1): 40-54 46 © 2019 conscientia beam. all rights reserved. selling dry goods. meanwhile, wet section pertains to the selling of goods that are associated with water. fish, meat, fruits and vegetables are example of wet goods. this means that most market stallholders prefer to sell dry goods since it is more convenient for them. table-5. distribution of market stalls in terms of market section. market section frequency percentage dry 194 65.8 wet 101 34.2 total 295 100 according to georgiou (2016) the business that will rule the business world belong to those selling dry goods such as grocery store, bakery, specialized services to style men’s hair versus women’s hair but with modern twists like changing technologies. as mentioned above, these businesses were included in dry section of the market. 4.2.2. number of years in operation table 6 shows that 6 – 10 years have the highest frequency with 147 or 49.8 percent. market stallholders who operate within 1 to 5 years have the second number of respondents with 111 respondents or 37.6 percent. followed by 11 to 15 years with 24 respondents or 8.1 percent. the lowest frequency came from 16 and above which have 13 respondents only or 4.4 percent. table-6. distribution of market stalls in terms of number of years in operation. number of years in operation frequency percentage 1-5 111 37.6 6-10 147 49.8 11-15 24 8.1 16 and above 13 4.4 total 295 100 the researcher observed that majority of the respondents are in business for 6 – 10 years. this can be an implication that majority of the market stallholders have stable business. it also shows that even if a tight competition exists, they are able to continue, maybe because of the way they manage their business or how they manage their finances. furthermore, the researcher believed that the longer they operate the more knowledge they acquire which they can use to secure the survival of their businesses. according to potts (2017) entrepreneurs of small businesses 5 years and up implement measurable financial strategies that contributes to the profitability and success of the business. 4.2.3. average monthly income table 7 shows that p10,001-p20,000 have the most number of frequency with 121 or 41 percent of the total. it was followed by p10,000 and below with 118 or 40.0 percent. next is the p20,001-p30,000 with the frequency of 46 or 15.6 percent. lastly, p30,00 and above have the lowest frequency of 10 or 3.4 percent of the total respondents. the result shows that majority of the market stallholders earn p10,001-p20,000 monthly. this is a good amount considering that they have a wide competition in the market. however, this can also be an implication that they will have financial difficulties such as difficulty in meeting their obligations. even though they are earning, there are still so many things that they need to pay. things such as inventories, taxes and even their personal interests take part in their income. since there is possibility of meeting such financial difficulties, market stallholders tend to use some financing strategies such as debt financing which involves borrowing of money and internal financing which involves the additional capital from the owner’s personal savings. financial risk and management reviews, 2019, 5(1): 40-54 47 © 2019 conscientia beam. all rights reserved. according to the research of gutierrez et al. (2014) on the level of utilization of funds sourced from informal money lenders among selected vendors in batangas city, there are times that market stallholders cannot avoid borrowing funds. it also doesn’t mean that if you have stable business you will not be experiencing financial difficulties. table-7. distribution of respondents in terms of average monthly income. average monthly income frequency percentage p10,000 and below 118 40.0 p10,001-20,000 121 41.0 p20,001-30,000 46 15.6 p30,001 and above 10 3.4 total 295 100 4.2.4. stall location table 8 shows that majority of the respondents are located in public market 2 with a frequency of 158 or 53.6 percent. those stalls located in public market 1 have a frequency of 137 or 46.4 percent. it is known that public market 1, also known as lumang palengke, is situated at the heart of the city. it is a common ground where people easily interact, alive with social and economic activity. table-8. distribution of market stalls in terms of location. stall location frequency percentage public market 1 137 46.4 public market 2 158 53.6 total 295 100 according to fox et al. (2007) location is a mantra for retail success. store location is a retailer’s most costly and long-term marketing mix decision. unlike a bad pricing or promotional decision, a poor store location adversely affects the business. 4.3. financial difficulties experienced by market stallholders most businesses face some financial difficulties every day. many eager micro entrepreneurs start a business with limited capital, assuming they will earn big. however, it is rare that small business turns profit overnight. having enough cash to cover the expenses is critical for the success of any business. micro entrepreneurs often find it difficult to access the working capital they need to cover day-to-day operations. with so much responsibility resting on the owner’s shoulders and so many issues to deal with on a daily basis, they will start securing loans and lines of credit provided by banks, financing institutions and informal lenders. based on the result of table 9, the composite mean is 3.01 with a verbal interpretation of to a moderate extent. this shows that market stallholders often experience the financing difficulties presented in the table. this is no surprise because surveys have shown that the lack of available financing from financial institutions is one of the biggest problems facing small businesses today. this analysis found support from gumel (2017) which pointed out that financing a small business has become one of the main challenges that negate small business success in nigeria. the capital to invest is critical to the growth small businesses’ sustenance and survival. in addition, gbandi and amissah (2014) found out that the failure of small businesses to access long-term financing is the main source of failure of small businesses in nigeria. similarly, dlabay and burrow (2008) stated that there is no guarantee that growth will assure the success of a business. large businesses run into financial difficulties that may lead to bankruptcy. even the large businesses encounter financial difficulties how much more are those small businesses with lower income. financial risk and management reviews, 2019, 5(1): 40-54 48 © 2019 conscientia beam. all rights reserved. table-9. financial difficulties experienced by market stallholders. financial difficulties weighted mean verbal interpretation 1.incurred losses due to the lack of business skills and education. 3.20 moderate extent 2. shortage of money for the purchase of products to be sold. 3.04 moderate extent 3. lack of access to credit institutions. 3.06 moderate extent 4. insufficient storage facilities. 2.75 moderate extent 5. banks are ready to lend money but market stallholders cannot meet their requirements. 2.87 moderate extent 6. unforeseen expenses. 3.21 moderate extent 7. limited capital. 3.08 moderate extent 8. expenses incurred is higher than the profit. 2.93 moderate extent 9. unpaid debts of the customers. 3.01 moderate extent 10. poor financial management of the business. 2.81 moderate extent 11. low profit. 3.12 moderate extent composite mean 3.01 moderate extent 4.4. extent of utilization of financing strategies among market stallholders often the hardest part of starting and operating a business is raising the money for its continuous growth. the business owner might have a great and clear idea of how to turn it into successful business. however, if sufficient capital cannot be raised, it is unlikely that the business will get off the ground. businesses need money to operate. it is always a desirable situation for any small business that the company revenue will be enough to sustain the organization, but that is always not the case. the proactive small business owner is constantly searching out sources of finance to fund new projects and ongoing operations. in this regard, the study assessed the extent of utilization of financing strategies among market stallholders with regards to internal financing and debt financing. 4.4.1. internal financing internal financing is getting necessary things done using what you have right now or taking advantage of the resources available in the business. it is like cash drawn from a company’s operating budget or capital income to fund a project or expansion and maybe the simplest form of financing strategy. moreover, this allows the company to make decisions quickly while avoiding the wait for financing approval and avoiding the cost of paying interests or dividends. table-10. extent of utilization of internal financing by market stallholders. internal financing weighted mean verbal interpretation 1. reinvests profits. 2.87 moderate extent 2. sells surplus inventories. 2.99 moderate extent 3. sells idle fixed assets. 2.74 moderate extent 4. accelerates collection of trade receivables. 3.08 moderate extent 5. delays payment of trade payables. 3.02 moderate extent 6. utilizes government grants and subsidies. 3.07 moderate extent composite mean 2.96 moderate extent table 10 has a composite mean of 2.96 which reveals that internal financing is being utilized by market stallholders to a moderate extent. this is of no surprise because as katz and green (2014) pointed out, internal financing is common among small business start-ups either because external equity capital is not available for most small business start-ups; banks basically do not loan to start-up businesses; owners often do not want to share ownership; owners usually want to be their own bosses; or because owners typically do not want to be responsible to others for losses of the business. through the use of internal financing, business owners have the advantage of planning more carefully and make more judicious decisions. financial risk and management reviews, 2019, 5(1): 40-54 49 © 2019 conscientia beam. all rights reserved. the table shows that the market stallholders accelerate the collection of their receivable to a moderate extent which shows the highest weighted mean of 3.08. this shows that the market stallholders view chasing credit customers as an ideal way of releasing funds for reinvestment in the business. hisrich et al. (2013) noted that collecting bills more quickly is indeed a method of generating funds internally and advised key account holders not to be irritated by implementation of this practice, as certain customers have established payment practices. collection procedures include but are not limited to collection processes such as sending a letter of demand, follow up calls, collection agency, and legal action (moyer et al., 2009). 4.4.2. debt financing the most common source of capital for established ongoing small business is debt financing. this is the case for several reasons, including the simple fact that small businesses do not have easy access to new equity. table 11 presents the extent financing strategies are utilized in terms of debt financing. based on the result, the composite mean of 2.91 expresses that market stallholders has moderate extent of utilization of debt financing strategy. this is an indication that majority of market stallholders are trying to avoid debt financing or borrowing of money as much as possible. the researcher believed that majority of the market stallholders are afraid to rely on debt financing or borrowing but every time they have financial difficulties, they resort in borrowing money to support their business operations and their everyday life. this is supported by hussain et.al as cited by obuya (2016) which states that debt financing aimed at improving business earnings, first to recover its cost, then benefit the proprietors and retain surplus. it is also utilized by both startups and existing enterprises to get out of tough economic conditions. in addition, cuñat and emilia (2012) asserted that debt financing may be necessary when msme’s face cash inflows problems that hampers the growth of the business. table-11. extent of utilization of debt financing by market stallholders. debt financing weighted mean verbal interpretation 1.utilizes trade credit. 2.94 moderate extent 2. lends from loan sharks. 2.99 moderate extent 3. loans from another owner. 2.96 moderate extent 4. loans from family members and friends. 3.09 moderate extent 5. avail loans from a commercial bank. 2.93 moderate extent 6. avail loans from a non-bank financial institution. 2.91 moderate extent 7. lends from government agencies that grants loan. 2.93 moderate extent 8. loans from other businesses. 2.85 moderate extent 9.consider loans from employees that are not owners. 2.72 moderate extent 10. consider loans from other persons not associated with its management. 2.73 moderate extent 11.borrows money from friends in exchange of valuable items as collateral. 2.98 moderate extent composite mean 2.91 moderate extent 4.5. correlation between financial difficulties and financing strategies table 12 presents the correlation between financial difficulties encountered by market stallholders and financing strategies used by the respondents. looking on the p-values, both internal financing and debt financing strategies have p-values of 0.000 which is less than the 5 percent level of significance. with this, the null hypotheses were rejected. this connotes that there is correlation between financial difficulties and internal financing and another correlation between financial difficulties and debt financing utilized by market stallholders. specifically, the computed r-value of internal financing of .397 signifies that there is positive relationship between financial difficulties and internal financing encountered by market stallholders. this may be implied that as they encountered financial risk and management reviews, 2019, 5(1): 40-54 50 © 2019 conscientia beam. all rights reserved. financial difficulties, the more they utilized the internal financing. it is similar to the findings of dugguh (2013) which stated that small businesses in nigeria are faced with numerous challenges that resulted to their failure. small businesses must develop strategies that will mitigate challenges and sustain operations. table-12. correlation between financial difficulties and financing strategies. financing strategies p-values computed r-values decision on ho verbal interpretation internal financing <.001 0.397 reject significant debt financing <.001 0.567 reject significant furthermore, the computed r-value of debt financing equal to .567 indicates that there is moderate positive relationship between financial difficulties and utilization of debt financing strategies. this implied that as the market stallholders encountered financial difficulties the more they utilize debt financing strategies in moderate basis. this observation was supported by the study of gorodnichenko and schnitzer (2013) which states that whenever small businesses meet financial constraints related to financial difficulties, most businesses would resort to external finance to finance their investments. this means that there is a positive correlation between financial difficulties and financing strategies among small businesses. 4.6. significant difference on financial difficulties experienced by market stallholders in terms of profile table 13 shows that the financial difficulties with p-values of .01 for sex, .000 for educational attainment, .008 for years in operation, and <.001 for stall location were lower than .05 level of significance, then the computed values of -2.486, 5.65, 4.011, and 4.04 revealed that there is significant difference on the assessment of market stallholders on financial difficulties when grouped according to sex, educational attainment, years in operation and stall location. thus, the null hypothesis was rejected. this reflects that the assessment of male and female, those degree holders and not, new and established stalls, and whether located in new and old market differ on financial difficulties. this could mean that in operating a business, sex and education is important. moreover, the experience of market stallholders in managing their business also signifies vitality to the business. meanwhile, location proved to be the mantra of success in business. the researcher also interviewed the market stallholders and they revealed that education and business experience do matter and if you have determined to reach your goal then you will succeed. according to ademola and michael (2012) education and professional qualification, skills and experience of owners and managers contribute to the success of nigerian small businesses. table-13. difference in the financial difficulties experienced by the market stallholders in terms of profile. variables p-values computed f-values decision on ho verbal interpretation age .78 .25 failed to reject not significant sex .01 -2.486 reject significant civil status .60 .62 failed to reject not significant highest educational attainment <.001 5.65 reject significant market section .37 -0.894 failed to reject not significant numbers of years in operation .008 4.011 reject significant income .34 1.14 failed to reject not significant stall location <.001 4.04 reject significant *t-values. 4.7. difference in the extent of utilization of financing strategies table 14 shows that the extent of utilization of financing strategies with p-values of .039 for sex, <.001 for civil status, <.001 for educational attainment, .004 for years in operation, .004 for income, and <.001 for stall location financial risk and management reviews, 2019, 5(1): 40-54 51 © 2019 conscientia beam. all rights reserved. were lower than .05 level of significance, then the computed values of -2.076, 8.18, 5.43, 4.51, 4.58, and 6.166 revealed that there is significant difference on the assessment of market stallholders on the extent of internal financing strategies when grouped according to sex, civil status, educational attainment, years in operation, income, and stall location. thus, the null hypothesis was rejected. this reflects that the assessment of male and female, single and married, degree holders and not, new and established stalls, low and high monthly income, and whether in old or new market differ with regards to internal financing. this could mean that when it comes to the utilization of internal financing, sex, civil status, educational attainment, number of years in operation, average monthly business income and stall location is important. in terms of sex, udofot and john (2017) stated that women have innovativeness, perseverance, problem-solving ability and the ability of empathy with their customers than men owners and managers in nigeria. further, they found out that women are aware of ethical issues in small business management and always act to minimize ethical problems. table-14. difference in the extent of utilization of internal financing in terms of profile. variables p-values computed f-values decision on ho verbal interpretation age .066 2.75 failed to reject not significant sex .039 -2.076 reject significant civil status <.001 8.18 reject significant educational attainment <.001 5.43 reject significant market section .12 -1.57 failed to reject not significant number of years in operation .004 4.51 reject significant income .004 4.58 reject significant stall location <.001 6.166 reject significant on the other hand, the table presents that the extent of utilization of internal financing strategies with p-values of .066 for age and .12 for section were both higher than .05 level of significance, then the computed values of 2.75 and -1.57 revealed that there were no significant differences on the assessment of the market stallholders on the utilization of financing strategies when grouped according to age and section. thus, the study failed to reject the null hypothesis. this implies that the assessment of young and old owners and wet or dry section on internal financing do not differ. this could be because whether the market stallholders are young or old, they could still be successful in business. according to lee et al. (2016) age is one of the contributing factors that influence the success of the business in seoul, korea. meanwhile, as shown on table 15, extent of utilization of debt financing strategies with p-values of .002 for sex, .004 for civil status, .044 for educational attainment, .02 for market section, .000 for years in operation, and .000 for stall location were all lower than .05 level of significance, then the computed values of -3.177, 4.58, 2.48, 2.34, 7.42, and 6.77 revealed that there is significant difference on the assessment of the market stallholders on the utilization of debt financing when grouped according to sex, civil status, educational attainment, market section, number of years in operation and stall location. thus, the null hypothesis was rejected. this reflects that the assessment of male and female, single and married, degree holders or not, wet and dry section, new and established stalls, and old or new market differ with regards to utilization of debt financing. this could mean that sex, civil status, educational attainment, market section, number of years in operation and stall location are factors to consider utilizing debt financing during financial struggles. according to gumel (2017) educational qualification of owners and managers play a role in the success of small business, but their experience is more important in determining the success of operations. financial risk and management reviews, 2019, 5(1): 40-54 52 © 2019 conscientia beam. all rights reserved. table-15. difference in the extent of utilization of debt financing in terms of profile. variables p-values computed f-values decision on ho verbal interpretation age .06 2.85 failed to reject not significant sex .002 -3.177 reject significant civil status .004 4.58 reject significant highest educational attainment .044 2.48 reject significant market section .02 2.34 reject significant number of years in operation <.001 7.42 reject significant average monthly business income .34 1.14 failed to reject not significant stall location <.001 6.77 reject significant *t-values meanwhile, the table presents that the extent of utilization of debt financing with p-values of .06 for age and .34 for monthly income were both higher than .05 level of significance, then the computed values of 2.85 and 1.14 revealed that there were no significant differences on the assessment of the market stallholders on the utilization of debt financing when grouped according to age and monthly income. thus, the study failed to reject the null hypothesis. this implies that the assessment of young and old and low or high income on debt financing do not differ. according to gumel (2017) the age of owners and managers who recorded success are above twenty years. he also revealed that age has no significant relationship with the success of the business. moreover, davydov et al. (2014) states that debt financing is a key element in a firm’s choice of its capital structure. by generating revenues that would not have been reached without additional funding, external financing in a form of debt or equity capital allows firms to increase firm value, which is traditionally considered an ultimate goal of every business. 4.8. proposed extension activity to market stallholders while micro business may not generate as much money as large corporation, they are a critical component and major contributor to the strength of local economies. micro business present new employment opportunities and serve as building blocks of the largest corporations in the country. market stallholders being categorized micro entrepreneurs have been of big help to the economy of the philippines. it is therefore important to analyze and give emphasis to their weaknesses as shown in this study. after reviewing the information gathered from the study, the researcher proposed an extension program that will augment the market stallholder’s weaknesses and improve their knowledge on how to handle their business as shown in table 14. the researcher believes that an extension program will enlighten them and enhance their knowledge on how to handle their finances effectively. this extension program will cover the tackled issues of the study as well as weaknesses discovered by the researcher. the objective of this extension program is to educate these market stallholders about financial management and the advantages of borrowing additional funds to banks and other financing institutions. moreover, the topics on the areas of financial management, swot analysis and banking and financial institutions will serve as their guide in choosing the right financing strategy when they experience financial difficulties. funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. references ademola, i.s. and a.a. michael, 2012. small scale businesses as a remedy to unemployment problem in nigeria. international journal of scientific & engineering research, 3(11): 1-6. financial risk and management reviews, 2019, 5(1): 40-54 53 © 2019 conscientia beam. all rights reserved. alfie, 2014. mangalore: kankanady market merchants association want street vendors out of their area. available from https://www.researchgate.net/deref/http%3a%2f%2fwww.mangalorean.com%2fnews.php%3fnewstype%3dbroadc ast%26broadcastid%3d454689. angulo, g., 2017. entrepreneurial culture of women entrepreneurs in malvar, batangas. a research proposal presented in batangas state university, philippines. aruna, n., 2015. problems faced by micro, small and medium enterprises a special reference to small entrepreneurs in visakhapatnam. iosr journal of business and management (iosr-jbm), 17(4): 43-49. calderon, j.f., 2008. methods of research and thesis writing. national bookstore, mandaluyong city, philippines. cuñat, v. and g.a. emilia, 2012. trade credit and its role in entrepreneurial finance. in cumming, d. 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conscientia beam. all rights reserved. depositors’ confidence and mergers and acquisitions: the nigerian banking sector experience anthony nzeribe nwaubani1+ vincent n. ezeabasili2 1department of banking & finance, michael okpara university of agriculture, umudike nigeria and department of banking & finance, nnamdi azikiwe university, awka nigeria. 2department of banking and finance, chukwuemeka odumegwuojukwu university, igbariam nigeria (+ corresponding author) abstract article history received: 15 october 2018 revised: 21 november 2018 accepted: 24 december 2018 published: 7 january 2019 keywords mergers and acquisitions depositors’ confidence nigerian banking sector deposit liabilities shareholders’ funds and bank distress. jel classification: g28. nigeria implemented major financial reforms between 2004 and 2005 in which mergers and acquisitions became an imperative option for most of the deposit money banks to meet the new and hiked minimum capital base requirement. this study examined the impact of mergers and acquisitions (m&as) on depositors’ confidence in the nigerian banking sector. an ex-post facto research design was used with secondary data collected for twenty years. the study covered all the deposit money banks in nigeria within the period 1995-2015 with 2005 as a base year separating pre and post merger periods. multiple regression and paired student t-test approaches were employed to analyze the data with the aid of spss (20) software. the output yielded mixed findings. while m&as as proxied by dummy merger showed mostly positive and insignificant impact on confidence of depositors, they indicated positive significant impact when measured by shareholders’ funds an alternate proxy. the paired student t-test yielded significant positive impact on depositors’ confidence. overall, the findings suggest that the mergers and acquisitions have positively and significantly impacted on depositors’ confidence in the nigerian banking sector. it is recommended inter-alia that banks should endeavor to further enhance their shareholders’ funds while partnering actively with monetary authorities in pursuit of aggressive financial inclusion via innovative product offerings for cheap deposits and financial stability. this will further enhance the depositors’ confidence in the banking system. contribution/originality: the work is one of the very few studies which have examined the impact of mergers and acquisitions on depositors’ confidence in nigeria banking sector and also of those whose findings suggest that mergers and acquisitions have positive significant impact on confidence of depositors in the nigerian banking system. 1. introduction the banking sector is considered as one of the leading contributors to the growth of global economy (narwal and pathneja, 2015). according to nwaubani and ezeudu (2015) the sector is the engine of growth in any economy. in the opinions of adegboyega (2012) and owolabi and ajayi (2013) banks are the cornerstone of the economy of a country as they play a crucial role in propelling the entire economy. the sector is also seen from its essential role of intermediation which involves resource mobilization and allocation in an economy and, its position as the most important segment of the financial system in developing economies, accounting for the bulk of the financial transactions and assets (moyo et al., 2014);(ogunbiyi and ihejirika, 2014). the industry has equally been described financial risk and management reviews 2018 vol. 4, no. 1, pp. 34-48 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2018.41.34.48 © 2018 conscientia beam. all rights reserved. https://orcid.org/0000-0002-4767-6759 https://www.doi.org/10.18488/journal.89.2018.41.34.48 financial risk and management reviews, 2018, 4(1): 34-48 35 © 2018 conscientia beam. all rights reserved. as critical to the success of global economies (iacobelli, 2017). thus, it is imperative that the banking system should be healthy in order to fulfill its varied roles. nigeria implemented major financial reforms between 2004 and 2005. the reforms incorporated mergers and acquisitions as a strategy to enable deposit money banks to meet their new and hiked regulatory minimum paid capital base under banking reforms component. prior to those banking reforms the nigerian banking system was faced with a lot of serious challenges namely:distress, illiquidity, board squabbles, insiderdealings, rumors of one bank or the other going distress and fears that some banks would be liquidated among others (afolabi, 2011; adebayo and olalekan, 2012). those challenges obviously eroded depositor’s confidence and created doubt and fear among the depositors and general public on the ability of many the banks to continue as going concerns (appah and john, 2011). the depositors were living in fear of loss of their funds in the banking system. indeed a banking system which depositors could trust was clearly missing as the existing system was very unstable and marginal (soludo, 2004). a banking system which depositors can trust is very crucial to a sustainable banking system because banking business is majorly driven by public confidence the absence of which breeds crisis of confidence and bank runs (eboreime, 2009). in a bid to turn around the nigerian banking system to one which would command the confidence of the general public and the depositors, the banking reforms were implemented with the banks being required to raise their capital base from 2billion naira (us $17.7 million) to 25 billion naira (us $184 million) by 31 december 2005 or merge their operations with those of other banks (panapress, 2004). mergers and acquisitions were extensively employed by the deposit money banks to raise the new minimum paid capital base. the number of banks was trimmed from 89 to 25 at the end of the 2015 (soludo, 2006). some empirical studies have been carried out on various aspects of the mergers and acquisitions. the problem is that most of the studies focus on synergy and efficiency achieved by the banks in the post merger era. studies on impact of the mergers and acquisitions on depositors’ confidence are very scanty and with conflicting findings. for instance while (appah and john, 2011) finding is that despite the mergers and acquisitions of banks in the country, some of the merged banks are still facing the challenges that led to the 2005 consolidation, the outcome in ugwuanyi (2014) is suggestive that the 2005 banking reform has corrected the erosion of public confidence witnessed before the reform. also some years after the mergers and acquisitions, about 65% of cash in circulation is said to be still outside the banking system by 2011 (cbn, 2011). again we still have rumors and speculations that ―some banks in the country may have gone or may be going into distress‖ (cbn, 2011). the rumors are so strong that central bank of nigeria has to issue a press release to deny that some banks are going distress. again according to enhancing financial inclusion access, efina (2015) 39.7% of the adult population in nigeria by 2012 has no formal access to banking services. these facts raise doubt about the impact of the mergers and acquisitions on the confidence of the depositors and the general public in the nigerian banking sector and thus constitute the key motivations for this study. 2. overview of mergers and acquisitions: world perspective in recent decades the concept of mergers and acquisitions has dominated national and international fora. in a simple sense, a merger refers to a combination of two or more companies into one larger organization (ailemen and oyero, 2013; olugbenga and olusola, 2014). it is can also be seen as the coming together of two entities to form a completely new company (uremadu, 2004). a merger can equally be explained as the result of a process whereby two or more previously autonomous concerns come under common control (odetayo et al., 2013) while acquisition takes place where entity a acquires all the shares of entity b and a continues to exit while b disappears (mcclure, 2014). the terms mergers and acquisitions are usually used interchangeably to refer to transactions involving the combination of at least two independent firms to form one. in this study the terms are used interchangeably. on the other hand consolidation occurs when two companies combine to form a new enterprise altogether, and neither financial risk and management reviews, 2018, 4(1): 34-48 36 © 2018 conscientia beam. all rights reserved. of the previous companies remains independently while a merger via absorption according (pandey, 1998) is a combination of two or companies into an existing one with all the existing companies except one losing their individual identities. at the global level mergers and acquisitions activities have been on the rise though the global volume declined by 17% in 2016 with total value of $3.6 trillion as against $4.34trillion in 2015 (roumelioti and lewis, 2016) china recorded the highest cross-border deals worth $221billion in 2016. according to the authors, some of the notable deals documented in 2016 include: at&t and time warner $86 billion on october 22, 2016; qualcomm and nxp semiconductors $47 billion on october 27, 2016; shire and baxalta $32 billiona announced in january 2016 but completed in june 2016; abbott laboratories and st. jude medical$30.6 billion in april 2016; microsoft and linkedin $26.2 billion on august 1, 2016 among others. 2.1. mergers and acquisitions: the nigerian perspective some of the early merger and acquisition deals in independent nigeria dates back to early1980s. according to ogbochie (2011) between 1982 and 1988, the securities and exchange commission (sec) supervised 13 mergers including the mergers of lever brothers nig ltd and lipton nigeria ltd, scoa nigeria ltd and nigeria automotive components ltd, john holt ltd and john holt investment ltd though two of them were unsuccessful. also in 2002, there was a merger of two important petroleum companies; agip nigeria plc and unipetrol plc to form oando plc (ogbochie, 2011). the economic recession and challenges faced by nigeria in 2016 in particular slowed down the tempo of mergers and acquisitions activities in nigeria. before 2016, the mergers and acquisitions activities in nigeria were remarkable. for instance, according to egwuatu (2015) nigerian breweries plc confirmed that its merger with consolidated breweries plc had been finalized. also shareholders of lafarge wamco approved a $1.35billion deal combining its nigerian businesses with lafarge south africa. the new entity would be called lafarge africa plc. according to chima (2013) kpmg consulting reported that, mergers and acquisitions (m&as) in nigeria for 2012 was worth $7.415 billion – a 379 percent rise from 2011’s figure of $1.548 billion. however it may be noted that it was the 2004/2005 regulatory induced banking consolidation that popularized the concept of mergers and acquisitions in nigeria (ogbochie, 2011). 3. review of the nigerian banking system before the 2004/2005 mergers and acquisitions a review of the period before the 2004/2005 bank consolidation makes for better appreciation of factors that necessitated the employment of mergers and acquisitions in the nigerian banking sector meanwhile, evolution of banking in nigeria may be traced through phases covering an era of free banking to the era of strict regulations. however, in nzotta (2014) view, evolution of modern banking in nigeria could also be classified into ten different phases as shown in table 1below. table-1. evolution of banking in nigeria phase date era first up to 1952 free banking era second 1952-1959 pre central banking era third 1959-1970 banking legislation era fourth 1970-1976 indigenization era fifth 1977-1985 post okigbo era sixth 1986-1992 deregulation era seventh 1993-2001 era of banking distress eighth 2002-2004 universal banking era ninth 2004-2009 bank consolidation era tenth 2009-date segregated banking era source: nzotta (2014) financial risk and management reviews, 2018, 4(1): 34-48 37 © 2018 conscientia beam. all rights reserved. according to appah and john (2011) the evolution is seen via the following phases: embryonic, expansion, consolidation/reform and post consolidation era. the embryonic phase dates back to 1892 when the african banking corporation of south africa established a branch in lagos followed by the british bank of west africa in 1894 while barclays bank dco (dominion, colonial and overseas) and the british and french bank were established in 1925 and 1949 respectively. indigenous banking in nigeria commenced with the establishment of national bank of nigeria limited in 1933, agnonmagbe bank limited in 1945 and the african development bank limited in 1948. the expansion era commenced with the establishment of rural banking scheme in 1977, peoples bank in 1989 and community banks in 1990. the consolidation phase began with the in 2004/2005 mergers and acquisitions of banks which trimmed the number of banks 89 to 25. the post-consolidation kicked off with the quest of the nigerian banks to assume the status of mega and pan-african banks via cross border expansion and penetration. the expansion phase was a bag of mixed blessings for the nigerian banking sector because of the crises that followed it. during the mid 1990s, there was growth in the number of banks and in addition to that, the financial sector witnessed the boom and bust cycle, which was characterized by financial liberalization with deregulation of interest rate and the loosening of credit allocation quotas. consequently, there came the emergence of massive entry of new banks with specialized in foreign exchange operations and taking advantage of the price disparity between official and black market rates (ailemen and oyero, 2013). the banking sector then was characterized by distress, illiquidity, board squabbles, inside dealings and fears that some banks were going to be liquidated and a myriad of challenges (soludo, 2004; afolabi, 2011; okpanachi, 2011; ugwuanyi, 2014). the beginning of the challenges could be traced to the financial deregulation in 1987 in nigeria subsequent to the adoption of a structural adjustment program (sap) in 1986. the deregulation brought about high competition in terms of size and number of banks in operation. however, the increased competition, amidst political instability and financial policy inconsistencies on the part of the financial regulators led to rapid decline in profitability of the traditional banking activities (ailemen and oyero, 2013). thus, in a bid to survive and remain profitable in the face of political and policy instability, banks started taking excessive risks which led to frequent bank failures and related financial shocks in the economy and the country suggesting an urgent call for a well thought out and comprehensive policy response. 4. the 2005 mergers and acquisitions: the cbn intervention the review of genesis of the challenges points to a serious need for government intervention in the nigerian banking sector. consequently, consolidation of the banks’ operations through mergers and acquisitions was the preferred option. the choice of mergers and acquisitions was based inter-alia on the fact that mergers and acquisitions especially in the banking industry have enjoyed global acceptance (soludo, 2004). soludo gave instances of a merger in france in 1998 that resulted in a new bank with a capital base of us$688 billion, while the merger of two banks in germany in the same year created the second largest bank in germany with a capital base of us$541 billion. he equally touched on emerging markets, including argentina, brazil and south korea where consolidation had also become prominent, as banks strive to become more competitive and resilient to shocks as well as reposition their operations to cope with the challenges of the increasingly globalized banking systems. thus, the 2004/2005 mergers and acquisitions wave in the nigerian banking industry(which started in october, 2003 under professor soludoa former governor of central bank of nigeria) was seen as the long awaited fundamental policy response to the numerous challenges confronting the banking sector in nigeria. 5. empirical review boboye and obisesan (2016) evaluated the effect of mergers and acquisitions on the performance of selected deposit money banks in nigeria for the period 20012014. profit after tax was used as the independent variable while shareholder’s fund, total asset, loan and advances, and total deposit were the explanatory variables. the financial risk and management reviews, 2018, 4(1): 34-48 38 © 2018 conscientia beam. all rights reserved. error correction model showed that long-run equilibrium relationship exits among the variables and that merger and acquisition has no significant impact on banks’ performance of the selected banks in nigeria. njogo et al. (2016) evaluated the impact of mergers and acquisitions on the performance of deposit money banks in nigeria using a sample of ten (10) banks. secondary data obtained from the bank’s annual reports covering a period of 2001-2010 were analyzed using paired t-test. the relevant variables were return on assets, return on equity, net profit margin, asset utilization, equity multiplier, earnings per share, debt equity ratio, debt asset ratio and leverage ratio. findings showed significant positive impact with respect to roa, roe and lr but displayed no significant impact when measured in terms of the other selected variables. ugwuanyi (2014) used aggregate deposit liabilities of all the banks in nigeria over a period ten years (2001 to 2010). the deposit liabilities were decomposed to their individual components of time deposits, demand deposits and savings deposits. to test for a significant difference the contributions of the decomposed deposit liability of demand, savings and fixed deposits to the total deposit liability of the nigerian banking industry were evaluated for pre and post performances for the nigerian banking industry using the parametric statistical pooled variance t-test model. findings revealed that though there was no significant difference in the contribution of the demand deposit to the total deposit liability of the nigerian banking industry after the 2005 banking sector reform, significant differences were observed in contributions of the time deposits and savings deposits to total deposit liabilities following the 2005 banking reform. the study therefore, concluded that the 2005 banking reform had restored public confidence in the nigerian banking industry. olayinka and farouk (2014) evaluated the impact of consolidation on the performance of banks in nigeria using secondary data obtained on four banks for the period 2000 2011. the findings indicated that consolidation has significant positive impact on the performance of banks in nigeria. olugbenga and olusola (2014) investigated the synergistic effect of the 2005 bank mergers and acquisitions in nigerian banking industry against the position of economic theory which cited synergy as one of the many possible reasons why mergers might take place. using data from three access bank, ecobank and fcmb from 2006 to 2012, the authors analyzed the data employing model and technique. their result showed that of the three banks only one showed evidence of synergy in the growth of shareholders funds while others showed no such growth. ailemen and oyero (2013) employed panel data ordinary least squares approach to investigate effect of mergers and acquisitions on performance of banks inn nigeria using return on assets, asset base, deposit growth rate, the loans to deposit ratio and total value of shareholders funds as the critical indicators. the selected banks were: access bank plc, diamond bank plc, first city monument bank, fidelity bank plc, first bank plc, intercontinental bank plc, oceanic bank plc, united bank for africa, union bank, wema bank plc. the evidence showed that mergers created synergy. the authors recommended that merger being a relatively new phenomenon in the nigerian banking environment should be given more encouragement by the regulatory authorities. odetayo et al. (2013) carried out an empirical analysis of the impact of merger on nigerian banks’ profitability using secondary data of access bank and united bank for africa (uba) between 2005 – 2012. the study concluded that the 2005 mergers and acquisitions did not have significant impact on post merger profits of the two banks. it may be note that this finding might have been influenced by the very small sample size of only two banks out of 24 banks then. nwidobie (2013) examined impact of mergers and acquisitions on shareholders wealth maximization in nigeria. the study used dividend per share and earnings per share from a sample of six commercial banks in nigeria from 2003 to 2009 as proxies for shareholders’ wealth. findings from the paired t-test analysis showed that the mergers and acquisitions of 2005 created more wealth to the shareholders. adebayo and olalekan (2012) assessed the implications of mergers and acquisitions on profitability of commercial banks in nigeria using survey design combining 95 questionnaires and secondary data/audited accounts of 10 randomly select banks. from the ttest analysis, it was found out that the mergers and acquisitions have significantly influenced profitability of financial risk and management reviews, 2018, 4(1): 34-48 39 © 2018 conscientia beam. all rights reserved. commercial banks, earnings per share and dividend per share of shareholders. based on the findings, the study concluded that the mergers and acquisitions have significantly improved the overall performances of banks. adegboyega (2012) evaluated the impact of mergers and acquisitions on performance of banks in nigeria using pre-merger and post merger financial statements of two consolidated banks. simple regression model was employed to express the relationship between consolidation proxied by shareholders funds(x) and performance represented by total assets(y). finding showed that there was strong relationship between shareholders funds and total assets in both banks leading to the conclusion that the bank consolidation in the nigerian financial system increased shareholders’ funds, investor’s confidence, financial stability and operational efficiency of the banks. owolabi and ajayi (2013) examined the financial efficiency of banks in nigeria in the post mergers and acquisitions period. the findings suggested that the post-mergers and acquisitions period was more financially efficient. okpanachi (2011) made a comparative analysis of the impact of mergers and acquisitions on financial efficiency of banks in nigeria. the study used gross earnings, profit after tax and net assets of access bank plc, first bank of nigeria plc and wema bank plc as indices to determine financial efficiency by comparing the pre-mergers and acquisitions’ performance with the post-mergers and acquisitions’ indices for the period of 2002 to 2008. the findings revealed that the post-mergers and acquisitions’ period was more financially efficient than the pre-mergers and acquisitions period. however, to increase banks financial efficiency, the study recommended that banks should be more aggressive in their profit drive. umoren et al. (2007) examined the impact of consolidation on performance of the mega banks and considered whether there had been considerable improvement on their profitability, liquidity and solvency. the sample consisted of intercontinental bank plc, access bank plc, fidelity bank plc, ibtc-chartered plc, oceanic bank plc, bank phb plc and united bank of africa plc. performance ratios of the banks were analyzed and on average, the findings showed that bank consolidation resulted in improved performance. it was therefore suggested that the bank management should embrace broad product strategies, which could help in generating more income for the banks. elsewhere outside nigeria, yeboah et al. (2015) evaluated impact of mergers and acquisitions on service quality of consolidated banks in ghana. a descriptive and explanatory design was adopted to describe customer perceived service quality and to also explain the relationship between m &as and service quality. anova and t-tests techniques were used to analyze collected primary and secondary data. findings revealed that mergers and acquisitions have had positive impact on overall service quality. masud (2015) examined the impact of mergers and acquisitions on the financial performance of selected banks in egypt namely: allied bank, nib bank and faysal bank. secondary data for the period 2000 -2012 were used while ratio analysis and paired t-test were employed for the analysis. the chosen performance indicators were roa, roe and eps. the analysis yielded mixed findings while some banks showed positive and significant impact others displayed negative impact. badreldin and kalhoefer (2009) examined the impact of mergers and acquisitions on performance of egyptian banks for the period 20022007. the study employed extensive ratio analysis of selected performance indicators of the different categories of banks involved in mergers and acquisitions. findings indicated that mergers and acquisitions have not had a clear effect on the profitability of banks in the egyptian banking sector. 6. research methodology the research design adopted in this work is ex-post facto and the population is the entire deposit money banks in nigeria within the period covered by the study. secondary data collected from 2015 statistical bulletin of central bank of nigeria were used. the relevant data were annual aggregate deposit liabilities of the nigerian banking sector decomposed to private sector deposits and public sector deposits respectively for the period covering 1995 to 2015. for the purpose of the paired student t-test, the period is categorized into pre mergers era of 10 years from 1995 to 2004 and post mergers period of 10 years from 2006 to 2015 with 2005 as the base year. multiple regression approach (with ordinary least square method for estimating parameters) was employed in addition to the financial risk and management reviews, 2018, 4(1): 34-48 40 © 2018 conscientia beam. all rights reserved. paired student t-test with the aid of statistical package for social sciences version 20 spss (20). the adopted models follow the approach adopted in ailemen and oyero (2013) and odetayo et al. (2013) respectively for the multiple regression analysis and the approach in okpanachi (2011) for the paired student t-test. the general equation for multiple regression is given as follows: yi = 0+1ix1i+2x2i +…nxni + µi. (gujarati, 2006; osuala, 2010) …………………….(1) where: yi = the dependent variable(s) xi = the independent variables 0 = the intercept i = the slope (beta) associated with xi µi = error/disturbance term this translates to an econometric equation expressed as follows: dci = 0+1dm +2sfi + µi ….(2) where: dc = the dependent variable representing depositors’ confidence dm = dummy merger dummy (ailemen and oyero, 2013) sf = shareholders’ funds (odetayo et al., 2013) this implies that, depositors’ confidence is a function of merger and acquisitions: dc = (mergers and acquisitions) where mergers /acquisitions is proxied by dummy merger and shareholders’ funds translating to: depositors’ confidence = . depositors’ confidence is measured by the aggregate private sector deposits, aggregate public sector deposits and overall deposits held by the deposit money banks in nigeria (ugwuanyi, 2014). 6.1. paired student t-test model under this second model, hypotheses were tested using paired student t-test for unequal variances. the relevant paired student t-test model for unequal variances used in this study is given as (3) ………………………………………………………………………...(3) where: t = the t-test statistic s = the standard deviation for the paired data, n = the sample size/number of years and ȳ are the respective means of the pair of data in x and y group/periods, and in the case of this study: pre merger period and post merger era respectively. a paired t-test is used to compare two population means where there are two samples in which observations in one sample can be paired with observations in the other sample (shier, 2004). 7. data presentation and analysis a look at table 2 clearly shows an upward trend among the categories of deposit liabilities and the shareholders’ funds particularly from 2006 following successful mergers and acquisitions completed in 2005. figure 1 above graphical confirms this trend. however, pud(green) exhibits a nose-dive in 2014 most likely financial risk and management reviews, 2018, 4(1): 34-48 41 © 2018 conscientia beam. all rights reserved. because of governments campaign/electionrelated spending for the 2015 general elections in nigeria while 2015 is affected by treasury single account policy took off from 2015. table-2. categories of deposit money bank deposits, total deposit liabilities and shareholders’ funds in nigeria (1995-2015) (all figures except dm are in =n= billions). year prd pud tdl dm* sf 1995 166.3 8.7 182.4 0 43.2 1996 205.1 9.6 220.4 0 55.6 1997 257.2 17.5 280.1 0 73.9 1998 291.6 26.2 327.1 0 101.4 1999 420.7 61.2 516.8 0 142.0 2000 454.2 119.7 775.9 0 196.7 2001 872.8 55.7 975.5 0 364.3 2002 1,000.7 100.0 1,209.7 0 500.8 2003 1,170.8 123.7 1,417.1 0 537.2 2004 1,429.4 176.7 1,778.7 0 688.1 2005 0 0 0 0 0 2006 2,836.8 240.0 3,379.3 0 1,389.0 2007 4,379.7 401.8 5,256.0 0 2,225.0 2008 6,629.7 669.0 8,252.7 0 3,365.0 2009 7,254.1 903.5 9,601.8 0 4,931.0 2010 7,676.2 1,428.6 10,610.0 0 2,218.0 2011 7,368.2 2,798.7 12,136.0 0 3,682.0 2012 9,585.1 1,933.1 14,245.0 0 3,638.0 2013 9,329.0 3,968.3 16,699.0 0 3,870.0 2014 11,743.5 1,245.2 16,824.0 0 4,334.6 2015 12,233.9 1,610.2 18,201.1 0 4,901.9 source: 2015 cbn statistical bulletin. note: prd stands for all private sector deposits, pud ►public sector deposits, tdl ► total deposit liabilities of the banks and sf ► shareholders funds. * values of 1s and 0s were assigned to the dummy mergers (dm). figure-1. trends of private sector(prd), public sector(pud), total deposits(tdl) and capital base(sf) before and after m &a. source: spss (20) graphics, 2017 financial risk and management reviews, 2018, 4(1): 34-48 42 © 2018 conscientia beam. all rights reserved. table-3. categories of total depositpre merger and post merger periods pre – merger period post –merger period private sector (prd) =n=bn public sector (pud) =n=bn total deposit (tdl) =n=bn year private sector (prd) =n=bn public sector (pud) =n=bn total deposit (tdl) =n=bn 1995 166.3 8.7 182.4 2006 2,836.8 240.0 2,379.3 1996 205.1 9.6 220.4 2007 4,379.7 401.8 5,256.0 1997 257.2 17.5 280.1 2008 6,629.7 699.0 8,252.7 1998 291.6 26.2 327.1 2009 7,254.1 903.5 9,601.8 1999 420.7 61.2 516.8 2010 7,676.2 1,427.6 10,610.2 2000 454.2 119.7 775.9 2011 7,368.2 2,797.7 12,131.5 2001 872.7 55.7 975.5 2012 9,585.1 1,933.1 14,245.1 2002 1,000.7 100.0 1,209.7 2013 9,329.0 3,968.3 16,699.4 2003 1,170.8 123.7 1,417.1 2014 11,743.5 1,245.2 16,824.0 2004 1,429.4 176.7 1,778.7 2015 12,233.9 1,610.2 18,201.1 average 626.9 69.9 768.4 average 6,227.6 1,301.3 8,781.1 as % of tdl 81.6% 9.1% as % of tdl 70.9% 14.82% source: authors’ computations from 2015 cbn statistical bulletin from table 3 private sector deposit (prd with average volume of n626billion constituted 81.6% of the total deposit liability of the deposit banks in the pre mergers and acquisitions period while the contribution declined in the post merger period by 10.7% to stand at 70.9% . though in absolute terms, prd average volume shot from less than n1trillion in the pre merger era to over n6trillion in the post merger period( 893% jump), the reduced contribution to total deposit should be a source of concern to the banks and the monetary authorities. private sector provides the right platform for the much needed domestic savings for stable and relatively cheap funds thus the gap in their contribution to total deposit should be of concern to the banks and the monetary authorities in nigeria. this concern appears stronger in view of federal government treasury single account (tsa) by which all governments’ funds are swept to and maintained by central bank of nigeria from september 2015. the rise in the contribution of public sector deposits to total deposits in the post merger era to 14.82% from 9.1% in the pre merger period (5.7% change) seems not sustainable in view of the tsa. it appears that the private sector have not been encouraged enough by the commercial banks via innovative product offerings to meet their pre merger quota. it may be noted that generally, before the tsa policy, public sector deposit balance was affected by occasional sweeping of government funds from deposit money banks to central bank of nigeria as part of monetary policy measures of the central bank of nigeria. the pre merger average balance must have been affected by the withdrawal of the funds of the three tiers of government from the deposit money banks in july 2004 before the banking consolidation. overall, the negative impact of the 2007/2009 global financial meltdown on the post merger balances should as well be taken into account. table-4. schedule of shareholders funds: pre and post merger periods year pre-merger (=n=billion) year post-merger (=n=billion) 1995 43.20 2006 1,338.90 1996 55.60 2007 2,225.40 1997 73.90 2008 3,364.70 1998 101.40 2009 4,930.60 1999 142.00 2010 2,217.80 2000 196.70 2011 3,682.10 2001 364.30 2012 3,637.70 2002 500.80 2013 3,869.70 2003 537.20 2014 4,334.60 2004 688.10 2015 4,901.90 average 270.32 average 2,888.14 source: authors’ computations from 2013 cbn statistical bulletin financial risk and management reviews, 2018, 4(1): 34-48 43 © 2018 conscientia beam. all rights reserved. table-5. summary of regression results of the variables of the study dependent variables independent prd pud tdl pud2 variables (hypothetical) dm-t statistic 0.824 0.421 0.280 -0.839 dm prob (t-statistic) 0.421 0.679 0.783 0.413 dm beta 0.127 0.150 0.051 -0.249 sf t-statistic 5.437 1.713 4.917 3.527 sf prob ( t-statistic) 0.000 0.104 0.000 0.002 sf beta 0.841 0.608 0.894 1.046 r squared 0.915 0.555 0.883 0.689 adjusted 0.906 0.506 0.870 0. 655 f-statistic 97.443 11.224 68.052 19.97 prob (f-statistic) 0.000 0.001 0.000 0.000 durbin watson 1.896 1.594 1.320 1.045 source: result of regression analysis using spss (20). where: prd, pud, and tdl are private sector deposit, public sector deposit and total deposit liabilities respectively. note: the full details of the regression results are on tables6 9 below. from table 4.3 above, it could be seen that average shareholders’ funds jumped sharply from n270.32 billion to about n2.89 trillion in the post-merger period. this represents about 968% increase and is attributed to increased recapitalization consummated through the mergers and acquisitions. the performance obviously would have been better than this without the negative effect of the 2007-2009 global financial crises. table-6. results of the multiple regression analysis for private sector deposit(prd) private sector deposits (prd) model summaryb model r r square adjusted r square std. error of the estimate durbinwatson 1 .957a .915 .906 1305.38817 1.896 a. predictors: (constant), sf, dm b. dependent variable: prd anovaa model sum of squares df mean square f sig. 1 regression 332088539.519 2 166044269.759 97.442 .000b residual 30672688.993 18 1704038.277 total 362761228.511 20 a. dependent variable: prd b. predictors: (constant), sf, dm coefficientsa model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 89.565 403.384 .222 .827 -757.913 937.043 dm 1060.142 1287.223 .127 .824 .421 -1644.212 3764.497 sf 1.955 .360 .841 5.437 .000 1.199 2.710 a. dependent variable: prd source: spss (20) output, 2017 financial risk and management reviews, 2018, 4(1): 34-48 44 © 2018 conscientia beam. all rights reserved. table-7. results of the multiple regression analysis for public sector deposit(pud) with election spendinges (2014) and treasury single account-tas(2015) public sector deposits (pud) with es & tas model summaryb model r r square adjusted r square std. error of the estimate durbinwatson 1 .745a .555 .506 754.54458 1.594 a. predictors: (constant), sf, dm. b. dependent variable: pud anovaa model sum of squares df mean square f sig. 1 regression 12780234.939 2 6390117.470 11.224 .001b residual 10248075.313 18 569337.517 total 23028310.252 20 a. dependent variable: pud. b. predictors: (constant), sf, dm coefficientsa model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) -23.953 233.165 -.103 .919 -513.815 465.909 dm 313.467 744.044 .150 .421 .679 -1249.712 1876.647 sf .356 .208 .608 1.713 .104 -.081 .793 a. dependent variable: pud source: spss (20) output, 2017 table-8. results of the multiple regression analysis for total deposit liabilities (tdl) total deposit liabilities (tdl) model summaryb model r r square adjusted r square std. error of the estimate durbinwatson 1 .940a .883 .870 2319.46909 1.320 a. predictors: (constant), sf, dm. b. dependent variable: tdl anovaa model sum of squares df mean square f sig. 1 regression 732231386.747 2 366115693.373 68.052 .000b residual 96838863.506 18 5379936.861 total 829070250.252 20 a. dependent variable: tdl. b. predictors: (constant), sf, dm coefficientsa model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) -73.340 716.749 -.102 .920 -1579.175 1432.494 dm 640.654 2287.192 .051 .280 .783 -4164.557 5445.866 sf 3.141 .639 .894 4.917 .000 1.799 4.483 a. dependent variable: tdl source: spss (20) output, 2017 financial risk and management reviews, 2018, 4(1): 34-48 45 © 2018 conscientia beam. all rights reserved. table-9. alternative (hypothetical) regression result on public sector deposit-pud without election spending( es) and treasury single account in 2014 and 2015 respectively pub without es & tsa model summaryb model r r square adjusted r square std. error of the estimate durbin-watson 1 .830a .689 .655 882.03275 1.045 a. predictors: (constant), sf, dm b. dependent variable: pud anovaa model sum of squares df mean square f sig. 1 regression 31068016.980 2 15534008.490 19.967 .000b residual 14003672.038 18 777981.780 total 45071689.018 20 a. dependent variable: pud b. predictors: (constant), sf, dm coefficientsa model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) -147.015 272.561 -.539 .596 -719.644 425.614 dm -729.393 869.759 -.249 -.839 .413 -2556.688 1097.902 sf .857 .243 1.046 3.527 .002 .346 1.367 a. dependent variable: pud source: spss (20) output, 2017 table-10. results of analysis under paired student t-test paired samples test paired differences t df sig. (2-tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper pair 1 prdprm – prdpom -7276.75000 2546.55516 805.29145 -9098.44582 -5455.05418 9.036 9 .000 pair 2 pudprm – pudpom -1452.74000 1114.38454 352.39933 -2249.92268 -655.55732 4.122 9 .003 pair 3 tdlprm – tdlpom 10651.74000 4703.16267 1487.27063 14016.17990 -7287.30010 7.162 9 .000 note: prdprm→private sector deposit(pre merger), prdpom→( prd in post merger); pud→ public sector deposit, tdl→total deposit liability source: spss(20) output, 2017 8. discussion of results in all the regression results, dummy merger (dm) exhibited positive but insignificant impact on the confidence of the three categories of depositors at 5% significance level. however, m&as as proxied by shareholders funds (a joint proxy for m&as) indicated strong significant and positive impact on confidence of both private sector depositors and total depositors. the paired t-test results (table 10) confirm this across board. the strong and significant impact indicated by shareholders funds as an alternate proxy for m&a meets a prior expectation in view of the initial jump in the capital base of the commercial banks from about n2billon to minimum of n25billion (over 1000% hike). the initial insignificant positive impact of m&as on confidence of public sector depositors may be linked to occasional withdrawal of government deposits from central bank of nigeria before 2014 and the campaign/election spending in 2014 for the 2015 general elections. another possible reason for the insignificant outcome is the negative effect of the treasury single account which came into effect in september 2015. when these negative factors were adjusted for in pud2 (table 9), the impact becomes significant with p-value of 0.002. financial risk and management reviews, 2018, 4(1): 34-48 46 © 2018 conscientia beam. all rights reserved. in the adjustment, pud figures for 2014 and 2015 were taken to be slightly higher than the figure for 2013 assuming there were no such negative intervening factors. the insignificant outcomes associated with dummy mergers (dm) may require further research efforts for better insight into the actual reasons behind them. meanwhile, the initial hiccups that greeted the introduction of the cashless policy of central bank of nigeria-cbn could be part of the reasons. the initial challenges which trailed the cashless policy could discourage some depositors particularly the rural depositors from patronizing the deposit money banks. another possible reason may be traced to the nature of business of majority of the traders who ordinarily prefer to keep their cash in their vault so that they could easily take advantage of quick business opportunities. the adjusted for the three categories of deposit which stands at 90.5%-prd, 50.6%pud, 65.5%-pud2 and 87.0%-tdl, suggests that the mergers and acquisitions mainly account for the improved level of confidence of the depositors in the nigerian banking sector. the overall model appears to have fitted the data well as it is very significant with f-statistic p-value for prd, pud and tdl of 0.000 respectively. 9. conclusion and recommendations 9.1. conclusion this study examined the impact of mergers and acquisitions (m&as) on depositors’ confidence in the nigerian banking industry for the period 1995-2015. multiple regression approach (with ordinary least square for estimating the parameters) and paired student t-test method were employed in analyzing the data under pre and post mergers and acquisitions periods. findings show that while m&as as measured by dummy merger (dm) indicated mostly positive insignificant impact on depositors’ confidence, they exhibited positive significant impact on the depositors’ confidence when proxied by shareholders’ funds an alternate proxy. the paired student t-test yielded significant positive impact on depositors’ confidence. based on these outcomes, this study concludes that mergers and acquisitions have positive significant impact on depositors’ confidence in the nigerian banking sector. 9.2. recommendations (i) banks should be run profitably to ensure enhanced shareholders’ funds through earnings retention. (ii) other strategies for improving capital base of banks such as right issues, initial public offers, business-induced mergers and acquisitions should be exploited whenever necessary.(iii) the banks should partner actively with monetary authorities in pursuit of aggressive financial inclusion for cheap deposits and financial stability via innovative product offerings. this will enhance financial stability and the depositors’ confidence in the banking industry. (iv) sudden changes of policies on banking and hasty implementations of new ones should be minimized by the regulatory and supervisory authorities as these acts could lead to another crisis of confidence in the banking industry in nigeria. (v) the cashless policy of the central bank of nigeria should be subject to occasional review and fine tuning for maximum benefits. references adebayo, o. and o. olalekan, 2012. an analysis of the impact of mergers and acquisitions on commercial banks performance in nigeria. pakistan journal of social sciences, 9(3): 139-146. available at: https://doi.org/10.3923/pjssci.2012.139.146. adegboyega, o.i., 2012. merger and acquisition and banks’ performance in nigeria. journal of research in national development, 10(2): 338-347. afolabi, j.a., 2011. mergers and acquisition in the nigerian banking system: issues and challenges. nigeria deposit insurance corporation publication. available from www.ndic.gov.ng/files/challenge. ailemen, o. and b.l. oyero, 2013. the effect of merger on deposit money banks performance in the nigerian banking industry. journal of applied finance & banking, 3(4): 1-7. http://www.ndic.gov.ng/files/challenge financial risk and management reviews, 2018, 4(1): 34-48 47 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deals-corporate makeovers drive corporate takeovers in 2016 m&a bonanza. available from https://www.reuters.com/...deals/deals-corporate-makeovers-drive-corporate-takeovers-i. shier, r., 2004. paired t-test. available from http://www.statstutor.ac.uk. soludo, c.c., 2004. consolidating the nigerian banking industry to meet the development challenges of the 21st century. being an address delivered by the cbn governor at the special meeting of the bankers’ committee, held on july 6, at the central bank of nigeria headquarters abuja. soludo, c.c., 2006. the outcome of the banking sector recapitalization and the way forward for the undercapitalized banks. being press conference by governor of central bank of nigeria, at the cbn headquarters abuja on january 16 to convey the outcome of the banking recapitalization. ugwuanyi, g.o., 2014. banking distress and the erosion of public confidence in the nigerian banking system. european journal of business and management, 6(9): 118-126. umoren, a., d.t. adetula and f. olokoyo, 2007. mergers and acquisition in nigeria: analysis of performance pre and post consolidation. lagos journal of banking, finance & economic issues, 1(1): 151-166. uremadu, s.o., 2004. financial management (concepts, analysis and applications). enugu nigeria: precision publishers limited. yeboah, j., e.k. asirifi and s. ampadu, 2015. the impact of mergers and acquisitions on service quality of banks in ghana: case study of ecobank and access bank ghana. international journal of business and management, 10(12): 167. available at: https://doi.org/10.5539/ijbm.v10n12p167. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.panapress.com/nigeria-raises-banks--capital-base-to-25-billion-naira--13-551092-17-lang1-index.html http://www.panapress.com/nigeria-raises-banks--capital-base-to-25-billion-naira--13-551092-17-lang1-index.html http://www.reuters.com/...deals/deals-corporate-makeovers-drive-corporate-takeovers-i http://www.statstutor.ac.uk/ 68 † corresponding author © 2015 conscientia beam. all rights reserved. the role of strategic planning on the management of organizational change evangelia fragouli1† --joana kwaw yankson2 1,2university of dundee, uk abstract strategic planning is very crucial in a successful change management. this is because a successful change management is a catalyst to the survival of any organisation in the face of continuously competitive business environment. however, the introduction of these changes, tends to be problematic and part of a puzzle. the present study seeks to illustrate the importance of strategic planning as a fundamental tool in a successful management of change in overcoming the complexities that accompany change. it is a literature review based study which concludes that the focus on change implementation in change processes alone is not enough to provide robust results of change goals. consequently, organisations which adopt strategic planning as a fundamental tool at the early stages of their change processes tend to gain an advantage of achieving change goals. keywords: influence, strategic planning, change and change management. contribution/ originality the present study reviews issues of types and drivers of organizational change, resistance to change and reasons of failure of if, change management models and management of organizational change, focusing on the importance of strategic planning in change management processes concluding that strategic planning is a fundamental tool of change success. 1. introduction change is a factor that does not cease to exist in business operating environments especially in the 21st century (burnes, 2004). according to this author, an organisation’s ability to survive in its long-term goal may be judged on its ability to manage change in the face of competitively changing environments. luecke (2003) supports this assertion by saying that a successful change management is crucial for survival, sustenance and competitive advantage. however, most organisations are concerned with budgeting, evaluation of rate of return and current balance financial risk and management reviews 2015 vol. 1, no. 2, pp. 68-87 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2015.1.2/89.2.68.87 © 2015 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2015.1.2/89.2.68.87 financial risk and management reviews, 2015, 1(2): 68-87 69 © 2015 conscientia beam. all rights reserved. sheet rather than giving attention to the effectiveness of change in their organisations (luecke, 2003). today’s working environment ‘obligates’ organisations to adopt to changes in order to remain in competiveness and can therefore be risky for any organisation that does not respond to its internal and external environmental dynamics (beach, 2006). a number of internal and external factors serve as catalysts for change in organisations. according to buelens et al. (2002) and balogun and hailey (2004) external factors include globalisation, demographics, technological advancement, social, government legislation and political pressures. internal factors such as organisational structure, human resource requirements such as high demand of knowledge workers and managerial decisions also account for change in organisations in order to gain sustainability in the face of changing conditions (burnes, 2004; carnell, 2007; wood et al., 2010). these factors cause uncertainty about the future since they are constantly changing and unpredictable. technological advancement for instance may result in the installation of more efficient facilities which in most cases may replace most human resources resulting in providing more efficiency through layoffs (down-sizing) graetz (2000). high demand of knowledge workers for instance has brought managerial changes in organisations today (senior, 2002). the characteristics of these workers such as ‘well-educated’, ‘qualified’, ‘intellectual thinkers’ and complicated problem solvers have brought changes to leading and management approaches making traditional leadership methods of ‘command and control’ questionable as they require onally, a ‘system of persuasion’ to work effectively (alvesson, 2004). additionally, most organisations operate in areas where much competition exists and this has resulted in virtual organisations with much emphasis on mobility of the international labour market (martin and osberg (2007) as cited by jones (2010)). it is in this bid that luecke (2003) points that in order to gain success for survival in such dynamic environments, organisations must look into change factors and adopt strategic measures to respond accordingly. the argument therefore is, how do organisations implement and manage change to ensure long-term successes in alignment with organisational goals and objectives without evoking employee resistance to change? managers and employees therefore have different view point about change (strebel, 1996). strategic planning (sp) is often seen as an influential tool in managing change (boddy, 2011; johnson et al., 2011). it is in this bid that burnes (2004) argues that, due to the fact that an organisation’s life is characterised by change at all levels of operations, there is the need for organisations to envisage their desired future position and plan how to get there, taking into consideration how those changes can be managed. perhaps, the reason to the successes and failures of organisations can be attributed to strategic planning of change (poter, 1996). therefore, change management and sp go hand in hand (rieley and clarkson, 2011). the end of sp should not only entail implementation of strategic plans but management of change as well. top managers and stakeholders must be aware of the impacts of sp in the management of the financial risk and management reviews, 2015, 1(2): 68-87 70 © 2015 conscientia beam. all rights reserved. change. this would help management to gain judgemental evidence whether the allocated resources directed towards implementing a change strategy is indeed worthwhile or not (johnson et al., 2011). it is worth noting that, the evaluation of the influence and roles of sp should not only focus on quantitative outputs such as financial indicators, but attention must be given to the qualitative impacts such as behavioural outputs. due to this reason, the research has stimulated the evaluation of qualitative roles that sp plays in change management. today’s trends are constantly changing the shape of organisations because drivers of change continue to exist within and outside organisations. currently, most organisations are facing complexities in achieving organisational goals due to the inability of looking deeply into how change must be introduced and managed (buelens et al., 2002; todnem, 2005). literature on financial outputs on performance of sp continue because of the focus of many researchers in the area (falshaw et al., 2005; ridwan and marti, 2012). the evaluation of the qualitative influence of sp in change management will therefore help bridge the gap in knowledge. sp entails series of managerial decisions for the long-term survival of the organisation. it particularly deals with strategic decisions with regards to the strategic position of the organisations (johnson et al., 2011). consequently, sp in change management monitors and evaluates opportunities and threats in business contexts. this is to determine strengths and weaknesses surrounding business’ capacity to respond to change. the effect is the capitalisation of the strengths and opportunities to overshadow organisational weaknesses to achieve change goals. it is a fundamental tool of every organisation even if not explicitly shown and formulated to respond proactively to changing environments (johnson et al., 2011) notwithstanding, pro-activeness must be a mark of every organisation in this changing times. the dictatorship of drivers of change propels organisations to strategize measures to respond and deal with changing times. it has therefore become a competitive edge for organisations to act proactively toward change by using strategic planning as a tool. this is to say, size or location of an organisation must not be a stumbling block in the development of strategies for change. however, the influence and roles of sp in managing organisational change must be taken into consideration. the focus of this research is to evaluate the impacts resulting from strategic planning in the management of change in organisations. the thrust of this study is to contribute to knowledge in the specified study area. it will also produce information to top management and stakeholders to assess and value the various resources allocated to strategic planning in managing change in their organisations. financial risk and management reviews, 2015, 1(2): 68-87 71 © 2015 conscientia beam. all rights reserved. 2. strategic planning and the management of organisational change 2.1. brief background of strategic planning (sp) the idea of sp has a historic significance of ‘defence values’ from the military when they planned stratagems to defeat the enemy (wall and wall, 1995; johnson et al., 2011). the ultimate aim of sp was to gain competitive advantage over the enemy. the process of sp crept into business organisations as an important management tool to set direction for change. there are some factors that triggered sp during that period; high rate of globalisation when europe and japan had started to gain economic grounds again after second world war, as well as growth of information technology and changes in transportation (schendel and hofer, 1979). consequently, in the 1980’s, sp begun to operate in the public sector, a period of increased management thinking due to the emergence of liberal market philosophy (streib and poister, 2002). from the 1965, sp has since gained prominence of a standard management tool for change implementation and management (schendel and hofer, 1979). 2.2. strategic planning and change against the background of growing knowledge workers, high rate of advanced technology and a shift of customer demands, change has become a permanent phenomenon that persists in organisational life (burnes, 2004). nonetheless, while the need for change is regarded by most organisations, about 70% of change programmes does not give desired results (balogun and hailey, 2006). the concepts of sp and change are historically connected with its theoretical and its practical application. to have a clear understanding of sp, it is essential to look at what planning means. boddy (2011) defines planning as ‘the iterative task of setting goals, specifying how to achieve the goal, implementing the plan and evaluating the results’. it may be synthesised from this definition that planning is the analysis and anticipation of future environments, the selection of what is to be achieved (objectives) and the determination of necessary approaches to achieve a goal. bryson (2010) and brammer et al. (2010) provide a definition of sp in the context of change when they argue that sp involves all formal processes and efforts that guide organisations to produce both long-term and short-term objectives that will aid the organisation in identifying its change goals and vision. this view is supported by young (2003) when he says that sp in the context of change involves flexible processes to determine the current position of an organisation and where it wants to be in future by responding to changing environments. johnson et al. (2011) hold a different view about sp in this context when they argue that sp entails a ‘systemised, stepby-step procedures to develop an organisation’s strategy’ of change implementation. dye and sibony (2007), support this assertion when they point out that sp process for the purpose of change entails formalized processes that contribute to the success of goal change goal. financial risk and management reviews, 2015, 1(2): 68-87 72 © 2015 conscientia beam. all rights reserved. however, some scholars disagree with the formalised processes of sp in implementing and managing change goals. peters in his research in 2007 (peters 2007 and schmidtlein, 2010 as cited by jones (2010)) came with conclusions that formalised processes of sp in change management tend to cause ‘‘death of a thousand initiatives’’, killing innovativeness to change strategies. others are of the view that following formalised processes tend to ignore the culture and context of the organisation undergoing a change, which later results in resistance to change (mintzberg, 1994). consequently, bryson (2010) is of the view that, sp is worthless unless it produces a strategic change. dye and sibony (2007) support this view when they emphasize that sp is a success factor in the implementation of change goals. however, implementation of change strategies must not be the end. to ensure the success of a change strategy, the process must involve monitoring set objectives by measuring outputs (antheil and spinelli, 2011). 2.3. strategic planning processes for change literature suggests that sp in both theory and practice involves formalised steps in order to implement a change goal. this is explored by the works of young (2003) and johnson et al. (2011). it therefore involves the following processes; i. vision formulation: this establishes the fundamental purpose for change in an organisation. values and the need for change for the future including its boundaries for the change are defined. ii. organisational analysis: here, emphasis is placed on stakeholder analysis which entails analysis of employees and other groups within the organisation whose interest play vital roles in the whole change process. it includes employee attitude and readiness to change in the organisation as well as other stakeholders. iii. formulation of specific goals and objectives: here, specific change goals and targets to be achieved are developed. it also sets the performance measuring tools to guide change progress. this process involves scenario planning or forecasting for both internal and external drivers for change. this purpose is to prepare how to respond to change and how to evaluate employee attitude towards change. iv. specification of strategic action: this involves the various responsibilities each employee and employer must perform in order to accomplish change goals. v. implementation stage: this is where operational plans and strategies for change response are put into action guided by change goals. vi. evaluation: a component designed for monitoring the level or progress of change strategies are performed at this stage. this gives room for necessary revision of change strategies if the need unfolds. in contrast to the strategic process views proposed by some scholars, khakee and stromberg (2011) argue that sp for change should not always take a strict linear approach, but must be cyclical. this is because change is a continuous effort on the long-term and not an instant process. financial risk and management reviews, 2015, 1(2): 68-87 73 © 2015 conscientia beam. all rights reserved. brammer et al. (2010) however disputes the view of khakee and stromberg (2011) by arguing that sp as a tool in managing change when used at earlier stages of a change process can yield short – term results. dutton and duncan (1987) are of different views when they comment that the longterm and short term results of a sp for change are dependent on stakeholder’s attitude towards change. 2.4. strategic planning models this section of the research focuses on sp models used in examining the micro and macro environments of an organisation. this would be achieved by the works of johnson et al. (2011) and boddy (2011). the tools to be examined are poters’ five forces framework, swot analysis, pestel framework and scenario planning. these models provide broader view of what the key drivers of change are which enable organisations to build scenarios to find possible success and failure factors to change strategies. 2.5. overview of organisational change (oc) in a bid to understand and justify the purpose of the study, it is essential to put organisational change into retrospection. according to hughes (2006), oc cycle of today is more uncertain and complex as compared to oc of yesterday. what therefore is oc? many top management gurus have defined this term in different ways and its literature ‘encompasses a vast and diverse body of work that encompasses micro and macro views’ (frahm, 2007, as cited by ridwan and marti (2012)) mentioned by hughes, (2012 as cited by (deloitte, 2013)). while there is the acknowledgement of ambiguity on oc, change management gurus are of the view that much has not been done to illuminate the meaning of oc (stickland, 1998) mentioned in hughes, (2010 as cited by deloitte (2013)). some scholars are therefore of the view that this problem does not emerge solely from academics but in practices too (stickland, 1998). according to hughes (2010 as cited by deloitte (2013)), there is no common definition as far as oc is concerned. the reason being that ‘the word change is characterised as a container concept, and searching for the word’s underlying values results in a whole range of meanings’ de and vermaak (2003) mentioned in hughes, (2010 as cited by deloitte (2013)). however, there has been a broader definition which embraces a wider range of understanding of oc. jones (2010) mentioned by hughes (2010, as cited by deloitte (2013)) defines oc as the ‘process by which organisations move from their present state to some desired future state to increase their effectiveness’. according to boddy (2011), oc ‘is a deliberate attempt to prove organisational performance by changing one or more aspects of the organisation’ in the area of its technology, business processes or structure. carnell (2007) however argues that the meaning of oc should be based on how desired outcomes are achieved through implementation. financial risk and management reviews, 2015, 1(2): 68-87 74 © 2015 conscientia beam. all rights reserved. 2.6. types of organisational change there are different types of changes that occur in organisations. a fair idea of the type of change helps in the response approach to change. the types of change would be examined by the works of balogun and hailey (2007) mentioned by johnson et al. (2011) who discovered four basic types of change illustrated in figure 1 below; extent of change figure-1. types of change source: balogun and hailey (2007) mentioned by johnson et al. (2011) 2.7. drivers of organisational change today, the nature of competitive business environment has put much pressure on demand for change. the point is that the pace of change nowadays has become faster and unpredictable (burnes, 2004; senior and fleming, 2006). this ascertains the importance of top management to be self-conscious of the factors that drive change in their organisations (senior and fleming, 2006). these drivers of change, apart from compelling top management of organisations to be self-conscious, also influence organisational change strategies. the ambition or drive for change is said to originate from both internal and external sources (buelens et al., 2002; balogun and hailey, 2004; carnell, 2007). according to some authors, external factors that trigger change may include technology advancement, legislative pressures and market changes such as internationalisation, mergers, acquisitions, and recessions. shifts in social demographics such as ageing population and gender also drive change (buelens et al., 2002; dawson, 2003). internal drivers of change may include new discoveries, strategic direction, human resource diversification and managerial decisions (carnell, 1990; burnes, 2004; wood et al., 2010). hughes (2010 as cited by deloitte (2013)) however holds a different opinion and argues that the ambition of some organisation to strive for change is usually triggered by the organisation itself after going through pain and decides to initiate a change. this supports the idea that change itself may be triggered when organisations go through crisis of environmental loss (luecke, 2003; nelson, 2003). contrastively, boddy (2011) attributes the main cause of change to external environments and argues that it is these external factors that ‘prompt internal change to one or more elements in the organisation’ thus, financial risk and management reviews, 2015, 1(2): 68-87 75 © 2015 conscientia beam. all rights reserved. ‘change depends on the interaction between the external and internal environments of the organisation’ boddy (2011). from the view of these authors, change is required when the current performance or position of an organisation is not in consonance with current competitive business environments (lanning et al., 2000). this rapid rate of change is an indication that change competence (capability to choose and adopt change strategies that is parallel to the organisation) must also change to handle change implications (nonas, 2005). senior and fleming (2006) hold a different view. they argue that for a change process to be performed, a personality in the organisation is expected to have the power of influence to impact the change (leader). power in this context denotes the person who impacts the influence of changing behaviour in the organisation. according to these authors, this power can be formal, that is position centred or personal which is based on the person’s abilities of interpersonal relationships, skills. however, burke (2008) is of the view that the beginning of a change occurs when leaders respond to change itself in the external environment. 2.7.1. diagnosis of change failure/ resistant to change literature suggests it is essential to identify the factors that blocks change in order to put management in a better position to reduce those forces (deloitte, 2013). there are various models used in identifying blockage to change, however the research adopts lewin’s forcefield analysis to achieve this purpose. the model describes the type of equilibrium that exists between drivers of change and the restraining forces that defacilitate a change. it also evaluates forces that influence process of change. under this model, forces are divided into two; namely, driving forces (pushing forces); forces that facilitate change and restraining forces; thus forces that make change processes difficult to be achieved, counteract with the drivers of change which eventually lead to resistance to change. according to deloitte (2013), restraining factors differ in organisations. the model helps in identifying the current situational factors that may cause a barrier and how it can be removed. it also helps in identifying the current situation that might help in facilitating change in a preferred direction and their reinforcement, including the factors that need to be introduced to facilitate change. force field analysis model is shown in figure 2 below; figure-2. force field analysis source: johnson et al. (2011) financial risk and management reviews, 2015, 1(2): 68-87 76 © 2015 conscientia beam. all rights reserved. scholars have researched the causes of change failure and the works of deloitte (2013) and johnson et al. (2011) are acknowledged. according to deloitte (2013), the increasing challenges surrounding today’s competitive business environments puts more demands on approaches to change. thus, approaches to the management of change are changing. however, some organisations face the problem of change failure due to the reason that approach to change is not adapt well to survive challenging times. consequently, failure in change programmes results in wastage of time, money and other resources (deloitte, 2013). their research identifies three major causes of change failure. firstly, they argue that even though change programmes involve the application of specific tools, the core business issue that is the drivers of change are commonly ignored by most organisations. consequently, such organisations tend to receive failure on their change programmes since the target behind the need for change is ignored. failure to understand and identify drivers of change results in the dead end of change in the generation of business values (deloitte, 2013). secondly, deloitte (2013) identifies that a cause of change failures persist as a result of more attention given to the end users of change as opposed to people who are capable of driving the change. they identified these key people as change leaders and recognised that they tend to be proactive in change programmes when they are involved in decision-making processes. they argue that ‘a change accelerates or stalls largely because of those who lead it-or, more critically, fail to lead it’ deloitte (2013). thirdly, deloitte (2013), again argues that a cause of change failure in most organisations is as a result of the unsustainability of change process as most organisations fail to execute continuous appraisals and feedbacks of change programmes. therefore, most organisations terminate their change programmes and its associated investments at a point where sustainability could have occurred. johnson et al. (2011) present different views on the causes of change failures. a cause of change failure these authors attributes to, is lack of strategic planning. they referred to this cause as ‘death by planning’ to reemphasise the gravity of the danger associated with implementing change without strategic planning (johnson et al., 2011). they argue that instead of adopting strategic planning on how to deliver the change programme, most organisations tend to focus on planning the programme itself. change is not usually a ‘one go’ process; but a continuous process, sometimes over several years depending on the type of change. however, most organisations lose the focus as change processes are perceived as rituals rather than the central aim of establishing new ways of behaviour (johnson et al., 2011). furthermore, these management gurus identified reinterpretation as a cause to change programme failure. this happens when change intentions are reinterpreted in connection to old ways of doing things. this denotes lack of effective communications in change programmes. another contributory factor according to johnson et al. (2011), is when change programmes are introduced to employees outside or disconnectedly of their realities. a typical example is when financial risk and management reviews, 2015, 1(2): 68-87 77 © 2015 conscientia beam. all rights reserved. employees are reshuffled to perform different roles in the organisations. hence, without effective management of this change, this may be perceived as out of line by employees and may resist this change. mere compliance to changes in organisations instead of buying into the new change may cause failure of change programmes as employees may superficially just be complying with company’s regulations (johnson et al., 2011). finally, one of the commonest causes of change failures, hence resistance to change in many organisations is the violation of employee psychological contract (boddy, 2011). psychological contract is defined as ‘the expectations and beliefs that employees hold about the mutual obligations between themselves and their organisation’ (martin, 2006 as cited by jones (2010)). therefore, if top management fail to lay on the table honest presentations of the need, expectations and direction for change, employee psychological contract may be broken resulting in loss of trust, demotivation and resistance to change. 2.8. management of organisational change; an overview organisational change management is said to be an important and powerful tool in bringing positive transformations into an organisation. it also assists employees in coping with change to ensure that positive results come out from a change process (bridges and mitchell, 2000). in the works of anon in 2006, it is observed that the popularity of concept is rooted in the science of psychology where the concept was applied to assist people who are going through emotional problems occurring as a result death of loved ones. the concept crept into business environments in the 1990’s when business process engineering pushed in much effort to accomplish set goals (gattermeyer and al-ani, 2001). however, according to anon (1948), the process failed to address the issue of resistant to change. change management therefore identified employee resistance as a key problem which involves the coding of information that occurs on the emotional level and not the intellectual level. therefore, it is essential not to fight resistance but rather tackle it as a process. doppler and lauterburg (2000) ascertains that resistant to change can be paused to achieve a change aim only that it might delay the process. they further points out that the inability to solve resistance problems is risky and may resurface sometime in the process which may result in even more organisational problems. it is in this bid that hughes (2010 as cited by deloitte (2013) supportes the view of frahm (2007 as cited by ridwan and marti (2012)) of revisiting ‘traditional themes’ in order to appreciate modern thinking about organisational change. according to hughes (2010 as cited by deloitte (2013)), managing change from the old to the new is certainly full of uncertainties. he suggests that in order to manage change effectively, some level of attention must be given to the old or the known patterns. he highlights that ‘the legacy of the past is too often unacknowledged or misinterpreted’ and must be given considerable reference). (hughes, 2010 as cited by deloitte (2013)). other scholars support this assertion and suggest that effective management of change is financial risk and management reviews, 2015, 1(2): 68-87 78 © 2015 conscientia beam. all rights reserved. achieved when the past is given a considerable level of reference (pettigrew et al., 2002; witzel, 2003). 2.9. change management models haven discussed what management of change process is, it is pertinent to discuss the tools necessary for the management of change. these models are usually used alone; however, johnson et al. (2011) suggest that a combination of models may be used for complex changes. 2.9.1. lewin’s model of change management one of the renowned models for managing change is the kurt lewin’s change management model. it is used to identify how change is implemented and managed in organisations. the model comprises of three processes in managing change which includes; unfreezing, moving and refreezing. according to the author, these three levels occur before change becomes a stake in any organization. lewin’s change management model is shown in appendix a. 2.9.2. kotter’s 8 step model kotter’s research on more than hundred organisations proposed factors that contribute to failures of change programmes. consequently, he devised the 8 step model to aid in avoiding mistakes in the change management process. he therefore justifies that the steps entail motivation for subduing resistance to change (kotter, 1996). the 8 step model include, ‘‘establishing a sense of urgency’’, ‘‘creating the guiding coalition’’, ‘‘developing a vision and strategy’’, ‘‘communicating the change vision’’, ‘’empowering employees for broad-based action’’, ‘’generating short term wins’’, ‘’consolidating gains’’ and ‘producing more change and anchoring new approaches in the culture ‘’(kotter, 1996) the model is shown in appendix b. 2.9.3. carnall’s organisational change model literature on change management has since focused on the identification of resistant to change and approaches that can be used in solving it carnell (2007). he further concludes on change management by pointing out that adequate data of an organisation and organisational learning is the most essential aspect of change implementation and management. he further argues that, management of change which does not involve organisational learning is bound to face crises. therefore, learning in the process of change is central in carnall’s approach and suggests is a catalyst for effective change management. therefore, leaders of change must support the change system by providing supportive systems which will help in the development of employee capabilities. carnall’s organisational change management model is illustrated in appendix c. johnson et al. (2011) provides a modern framework for managing change which dwells on lewin’s force field model. they argue that management of change is about coping with financial risk and management reviews, 2015, 1(2): 68-87 79 © 2015 conscientia beam. all rights reserved. complexities that come along with change. four elements are worth considering when it comes to the management of change, which are, ‘diagnosis’, levers for change’, leading and managing change’ and managing change programmes (johnson et al., 2011). these authors emphasise that change diagnosis entails the analysis of the type of change required and its context as well as the application of lewin’s model. furthermore, in order to unfreeze (lewin’s model), there is the need to change routines to challenge the status quo. leading and managing change according to the authors entail the role of the strategic leader and other management techniques. finally, management of change programmes must dwell on turnaround strategies based on the types of change required. a summary of this model is shown in appendix d. 2.10. strategic planning and change management having gained insight of what sp and change management are and the various models and processes used, the crux of this section is to enable the reader to get a better understanding of existing studies related to the relationship between sp and change management, focusing on the influences that sp imparts on change management when used effectively at the early stages of the change process. it is therefore necessary to explain what influence means. boddy (2011) defines influence as ‘the process by which one party attempts to modify the behaviour of others by mobilizing power resources’. this is to say, influence has abilities to transform, adjust, inspire, stimulate and change. the focal point is the power sp has on change management processes in transforming, adjusting, modifying and changing belabours to achieve change goals. as to what scholars have done in the study area in the past, it is important to note that before the 1970s, organisational strategies to change were just extrapolations based on past performances. however, the emergence of globalisation, high technological advancement and other drivers of change made this previous approach meaningless in terms of long term change goals (rosenberg and schewe, 1985; kieche iii, 1989). according to these scholars, organisations begun to adopt a systematic approach to respond to change proactively in dealing with threats, opportunities, strengths and weaknesses of the organisation. one of the scholars in the study areas are wilson and eilertsen (2010) who conducted a research survey on various organisations’ staff professionals and line managers on the role sp played during the financial crises. as part of their findings were conclusions that organisations who adopted sp at the early stages of change management won the support of their employees in their response to change. this is because the employees had perceptions of fairness (psychological contract) when they were involved in the decision-making process of the change. they also found that, organisations that adopted sp during that turbulent period of change had greater opportunity of developing change strategies considering the threats, opportunities, strengths and weaknesses of change strategies and their impact on change itself. rieley and clarkson (2011) and burnes (2004) suggest in their research that because of the complexities of change management and its associated outcomes, both negative and positive, change management cannot be separated financial risk and management reviews, 2015, 1(2): 68-87 80 © 2015 conscientia beam. all rights reserved. from sp as every process in change management must involve sp. they suggest that sp must be a fundamental tool in change processes to ensure effective change strategies. sp for the purpose of change management sets the platform for better understanding and communication for the need for change (moran and brightman, 2011). according to these authors, when sp is applied at the early stages of change processes, employees get an in-depth knowledge of the key drivers of change and the necessity to respond to them. this is because sp evaluates the best channels of communication considering strengths and weaknesses of communications channels or approaches to change (boddy, 2011). the influence is that old behaviour is motivated to be replaced by new patterns of behaviour (the level of moving in lewin’s model of change, where there is the abandoning of old behaviour and the replacement of new patterns of behaviour). it is in this bid that the proposer of lewin’s model argues that when change is not strategically planned and introduced, may result in misinformation and mistrust. martin (2007, as cited by jones (2010)) supports this assertion when he points out that understanding and having clear communication of the need for change improves the psychological contracts of both the employee and employer as they become aware of what is expected of them as well as other opportunities that come with it.furthermore, sp for the management of change plays an instrumental function of providing performance programme through forecasting of uncertainties that come with change (johnson et al., 2011). this means that decision-makers are able to embrace change because sp illuminates all factors critical for the survival of the organisation in the environment of change. the influence is that, sp points out strategic issues such as developments and trends an organisation is to adopt that have the potential of achieving change goals. dutton and duncan (1987) support this assertion when they argue that the identification of these critical factors through strategic planning produces strategic issues in alignment with the visions of the organisation and how to achieve them. another contribution is made by dutton and duncan (1987) who studied on the impact of sp on change are of the view that for a successful change to be achieved, a sp system must be the fundamental and first point of call when designing a change programme. they therefore suggest that when sp is used at the earlier stages of change, it aids in formulating strategic issues which in turn leads to the effective implementation of change strategies. a summary of dutton and duncan’s strategic planning and change management is illustrated in figure 3 below; figure-3. dutton and duncan’s strategic planning and change model source: dutton and duncan (1987) financial risk and management reviews, 2015, 1(2): 68-87 81 © 2015 conscientia beam. all rights reserved. apart from the identification of key drivers of change, literature suggests that strategic planning which is well designed helps decision-makers to understand the culture of their organisation and to identify key forces that cause change programmes to fail (brammer et al., 2010; boddy, 2011). it is in this bid that hughes (2010 as cited by deloitte (2013)) argues that change management that ignores past organisational culture tends to be ineffective. this is to say that the impact of strategic planning on the management of organisational change processes allow management to reduce factors that cause change failures. 3. strategic planning: a fundamental tool 3.1. issues of importance .strategic planning as a rational for change analysis: mintzberg (2006) and bryson (2003a) argue that sp for change as the fundamental tool in change management identifies ‘what is’ and ‘what is to be done’ that intends develops into how to accomplish the target. the impact of this rationality according to mintzberg (2006) is the development of organisational strategies to the attainment of change. it is the researcher’s view that various strategies adopted by the organisations are as a result of strategic planning processes carried out (wood et al., 2010) influences team building through strategic communication: when change is effectively communicated to employees, taking change motivation into consideration, it triggers individuals to form teams and direct their efforts into accomplishing the change goals. it is in this bid that johnson et al. (2011) asserts that in order to ‘unfreeze’ change at all levels of change management, there is a need for effective communication. lewin in his work in 1957 with force field model of change management buttresses that in order to achieve a clear communication of the need for change; communication itself must be strategically done in order to capture the enthusiasm of employees. in the works of ford and ford (2011) who studies the impact of strategic planning on change, proposed four strategic change communication processes; initiative communication that focuses on employees’ attention on what needs to change, communication of understanding where employees tend to realise the need for change and how change should be responded to. performance communication; where intended result of change is addressed and finally, closure communication where change process is said to be complete were proposed. some scholars of sp for change have however contradicted the change approach whereby communication was done at a single stage. strategic thinking: the importance of sp in change management has been highlighted by scholars to have influence on strategic planners’ thought of striking common thoughts into strategic thoughts of thinking. long-term rather than the short term achievements by enabling managers to focus attention on organisation’s stakeholders’ expectations and attitudes towards change were known to be an outcome of the influence. according to graetz (2002), strategic thinking by virtue of sp for change are characterised by divergent, innovativeness and intuitiveness of ideas. the author defines strategic thinking as synthesis of data in pursuit to financial risk and management reviews, 2015, 1(2): 68-87 82 © 2015 conscientia beam. all rights reserved. determine and produce an organisational profile of what it wants to achieve in future. ghorbani and kiani (2012) who studied the influence of sp on strategic thinking indicate that strategic thinking triggers valuable strategies as an art rather than a more procedural system; thus it develops a specific mental model as the basis of strategies. according to bruce and laglan (2005), the impact of strategic thinking on change management is that it allows the focus on valuable activities towards change. however, heracleous (1998) and mintzberg (1994) mentioned by ghorbani and kiani (2012) are of the view that sp is a separate phenomenon to strategic thinking but draw the conclusion that ability to plan strategically would trigger strategic thoughts for the design and implementation of change goals. the contribution of the study by dye and sibony (2007), suggests that sp process for the purpose of strategic change that involves formalized processes contributes to the success of the change process. there have been some criticisms levelled against sp for change management. some scholars in the study area have argued that even though sp influences managerial thoughts to produce strategic thinking on how to implement and manage a change, strategic thinking becomes too formalised and rigid which usually results in the ignoring of organisational culture and context; effecting in lack of innovativeness on change strategies. peters in his earlier works in 1994 in his book entitled ‘‘death by a thousand initiatives’’ outlined the some negative outcomes in big organisations as a result of formalised strategic planning operations. his argument was that these so called formalised procedures appeared to be just paper work but tends to be different in practice as innovativeness but level of response tends out negative. birnbaum (2000) in his works on the impact of sp on change management in higher level educational institutions supports the view of peters. furthermore, the works of dooris (2002-2003) in his study of the impact of sp on organisational change management came with the view that service companies such as wal-mart, dell, south airlines and ibm encountered notable level of success when sp for change was approached in a less structured, less rigid yet rational manner. nevertheless, views about sp in effecting and managing change have been warranted. even though some scholars have critiqued the effectiveness of sp in change management, for most part, have concluded sp desirable and necessary in implementing and managing change. in fact, mintzberg and peters even though were sceptical in their views, concluded on the importance of sp in responding and managing change but emphasised its effective and wise use, thus, to allow contributions from employees and to aid managers to assess opportunities and threats of ideas in the mist of change. strategic direction: in the process of change management, sp is said to play a vital role in serving as a ‘road map’ to which the direction and destination of change plans carries strategic decisions: from the analysis of the two cases, an influence that sp imparted in their change management was the benefit of acquiring strategic directions in order to respond to change. in the works of wilson and eilertsen (2010) of the association for strategic planning (asp), who did a survey on staff professionals and 190 line managers on ‘the role strategic financial risk and management reviews, 2015, 1(2): 68-87 83 © 2015 conscientia beam. all rights reserved. planning played during a financial crisis’ found out that better strategic and critical decisions were made by organisations which used sp as a fundamental tool in their change processes. according to the researchers, this yielded the capitalization of identified opportunities which yielded growth opportunities. psychological contract (pc): the researcher is of the view that when management of change is done with sp being the fundamental tool, it stands to improve the understanding and conscientize employees’ and employer’s beliefs of their obligations and expectations towards the change initiative (rousseau, 2004). however, according to martin (2006 as cited by jones (2010)), without reciprocation of obligations of both parties, there is a breach of contract and classifies this phenomenon as one of the major causes of change failures. there are therefore critics of this theory affecting change management. guest (2004) argues that the conceptual distinction between obligations and expatiations are sometimes elusive as some organisations hold even and complex expectations and obligations for both parties, usually in favour of the organisation, causing the failure of many change programmes. the importance of psychological contract in change management is therefore suggested to be achieved through effective strategic planning of change efforts as it is essential to the success of change in organisations. wilson and eilertsen (2010) in their study in examining the impact sp on change management came with a finding that organisations who employed sp during change periods yielded trust and confidence in employees which aided in the adaptation to change. employee participation in decision-making (dm): williamson (2008) supports this view and argues that key employees involved in decision-making process in change management provide opportunity for vital and private opinions to be used for dealing with barriers of change. contrastively, wood and de menezes (2011) is of a different opinion that employee involvement in change dm when not considerably measured may result in flexibility of employee. this assertion is also supported by hofstede (2013) when he confirms this usually occurs in less power distant organisations. in a nutshell, even though there are some critics against sp by some scholars, other researchers regard sp as an important fundamental tool in organisations undergoing a change. the reason being that it has critical influences on the strategic direction and strategies that are beneficial to such organisations. it is essential to note that a particular type of change may demand different approaches to managing it. strategic planning serves as a tool to structure and organise the various response strategies needed. organisations undergoing changes can influence employee response to change by encouraging and motivating change response through sp to reduce anxiety and fear during the change period. these may be achieved by involving employees in change decision-making processes, training through scenario presentations and the improvement of employee psychological contract by change organisations ‘walking the talk’ of change promises. financial risk and management reviews, 2015, 1(2): 68-87 84 © 2015 conscientia beam. all rights reserved. 4. conclusion and recommendations 4.1. conclusions the formulation of a strategic plan in change management processes leaves much to be desired. the influence of sp in this process had centred on the behavioural and quality approach to change response. the study begun with in-depth analysis of strategic planning concept and the models often used in sp in change management processes. even though there are some critiques against sp in general, this present research suggests that there are much importance of sp especially in the management of change processes; (mintzberg, 2006; dye and sibony, 2007; ford and ford, 2011). due to the turbulent nature of competitively changing environments, any organisation which want to survive in such environments must respond to change by taking sp as a fundamental tool. literature therefore suggests that one of the major causes of change failures is centred on lack of strategic planning especially when it is not regarded as a pivotal area of change management programmes. references alvesson, m., 2004. knowledge work and knowledge intensive firms. new york: oxford university press. anon, 1948. current trends in psychology. pittsburgh: university of pittsburgh press. 1947 (book review), journal of clinical psychology psychology 4(1): 105. doi: 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views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.ipspr.sc.edu/publication/perspectives%20on%20strategic%20planning.pdf 8 † corresponding author © 2015 conscientia beam. all rights reserved. the impact of dividend policy on shareholders’ wealth before and after financial melt down: evidence from fmcg sector in india sandanam gejalakshmi1† --ramachandran azhagaiah2 1ph.d research scholar, kanchi mamunivar centre for pg studies, (autonomous “a” grade centre with potential for excellence by ugc), (government of puducherry) pondicherry university, puducherry, india 2associate professor of commerce, kanchi mamunivar centre for pg studies, (autonomous “a” grade centre with potential for excellence by ugc), (government of puducherry) pondicherry university, puducherry, india abstract dividend policy (dp) of corporate sector is widely researched topic in finance however; it remains a debatable issue to decide what factors determine the dp. the objective of this paper is to analyze the impact of dividend policy (dp) on shareholders’ wealth (sw) of fast moving consumer goods (fmcg) sector in india. out of 16 firms listed on national stock exchange (nse) 13 firms that have been paying dividend consecutively for the past ten years are considered for analysis. in the light of the prior literature, key predictor variables such as earnings per share (eps), dividends per share (dps), retained earnings per share (rps), price earnings ratio (per), lagged price earning (lagper), earnings (ear), and lagged market value (lagmps) are considered for analyzing the impact of dp on sw. the descriptive statistics reveals that the data form in to normal. whereas when the assumptions needed to be fulfilled for the ordinary least square method (ols), the data are found to be homoskedastic and are free of autocorrelation. augmented dickey fuller test (adf), white heteroskedasticity test, auto correlation, breuch-godfrey serial correlation lm test, durbin-watson, lagrange multiplier (lm) for autoregressive conditional heteroskedasticity (arch-lm), correlation, ordinary least square regression and chow test are applied using eviews 7 econometrics software package for analysis. regression result proves that dps (121.65) and rps (9.68) have significant positive co-efficient on eps(sw) of fmcg firms in india before global financial melt down, while dps (76.74), lagper (1.52) and lagmps (0.27) have significant positive co-efficient (76.74) on eps(sw) of fmcg firms in india after global financial melt down. the results of the chow test proves that the fmcg firms have significant shift-in-structure (positive improvement) in respect of sw after global financial melt down. keywords: dividend per share (dps), dividend policy (dp), market price per share (mps), price earnings ratio (per), earnings per share (eps), shareholders’ wealth (sw). jel classification: g 35, l 25. financial risk and management reviews 2015 vol. 1, no. 1 pp. 8-26 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2015.1.1/89.1.8.26 © 2015 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2015.1.1/89.1.8.26 financial risk and management reviews, 2015, 1(1):8-26 9 © 2015 conscientia beam. all rights reserved. contribution/ originality the study used new estimation methodology such as augmented dickey fuller test, white heteroskedasticity test, auto correlation, breuch-godfrey serial correlation lm test, durbin-watson and arch-lm test and chow test for analysis. very few studies, which have investigated the impact of dp on sw before and after financial melt down studied the structural changes. however, the present study proved that the dp is significantly and positively related to retained earnings per share and earnings per share (sw). the result of the study is consistent with the findings of gul et al. (2012), salman (2013), bawa and kaur (2013), azhagaiah and sabaripriya (2008), etc. 1. introduction dividend policy (dp) is one of the three major decisions of financial management. the decision of the firm regarding the extent of earnings that could be paid as dividend and the extent that of could be retained by the firm is the concern of dp. in other words, the dp determines what proportion of earnings is to be paid to shareholders by way of dividends and what proportion is ploughed back in the firm itself for its reinvestment purposes. the development of such a policy will be greatly influenced by investment opportunities available to the firm and the value of dividends as against capital gains to the shareholders. each firm should develop such a dp, which divides the net earnings in to dividends and retained earnings in an optimum way to achieve the objective of maximizing the shareholders’ wealth (sw) as it is represented by market price (mp) of the firm’s common stock which, in turn, is the function of the firm’s investment, financing and dividend decision. for studying the impact of dp on (sw), we have selected fast moving consumer goods (fmcg) sector, which is popularly known as consumer packaged goods sector. items in this category include all consumables (other than groceries / pulses) that people buy at regular intervals. the most common products in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and the list extends to certain electronic goods also. 1.1. fmcg sector in india the indian fmcg sector is the fourth largest sector in the country with a total market size in excess of us$ 13.1 billion. it has a strong multinational companies (mnc) presence and is characterized by a well established distribution network, intense competition between the organized and unorganized segments and low operational cost. availability of key raw materials, cheaper labour costs and presence across the entire value chain gives india a competitive advantage. the fmcg sector is flooded by firms from india and abroad and in future, the level of competition would increase further. moreover the gdp in indian economy is increasing every year therefore per capita income increases and hence there is a scope for further development. at financial risk and management reviews, 2015, 1(1):8-26 10 © 2015 conscientia beam. all rights reserved. present large and small firms are operating in indian fmcg sector. for the study purpose 13 firms are selected which, are listed on nse. the fmcg market is set to treble from us$ 11.6 billion in 2003 to us$ 33.4 billion in 2015. (source: building business leadership / confederation of indian industry). figure-a. india : gross domestic product (gdp) growth rate from 2004 to 2014 ( in percentage) source: imf statista 2014 figure – a depicts the real gross domestic product’s (gdp) growth rate from 2004 to 2014. the gdp rate has decined to 6.9% during the period of global financial melt down i.e. during 2008 09. so, the study attempts to find out the shift-in-structure in terms of dp on sw . for this purpose, the period of the study is divided into two sub-periods viz., before financial melt down i.e., from 2003 – 2007 and after global financial melt down i.e., from 2009 – 2013. 1.2. industry wise impact figure – b depicts the industry wise impact of global financial melt down. it is inferred that almost all key industries in india have been negatively impacted by global financial melt down and the fmcg sector is of no exception. in that, fmcg firms have registered an average growth score i.e. 21, which indicates moderate impact of global financial melt down. financial risk and management reviews, 2015, 1(1):8-26 11 © 2015 conscientia beam. all rights reserved. figure-b. industry wise impact on global financial melt down chart during the year 2008 ( in crore) source: cartesian economic meltdown survey, december 2008. an impact score of 0 – 15 indicates low impact an impact score of 16 – 50 indicates moderate impact an impact score of more than 50 indicates high impact hence, the present paper is to analyze the financial data of 13 fmcg firms for the financial data pertaining to the years ranging from 2003 2007 for before global financial melt down and from 2009 – 2013 for after global financial melt down, which are selected based on multi stage non-random sampling technique, focusing on estimating the impact of financial variables viz., dps, rps, per, lagper, ear, lagmps on sw (eps) of fmcg sector in india. 2. review of literature several studies were made in relation to dividend policy (dp) and shareholders’ wealth (sw) in the developed as well as in the developing countries. olandipupo and okafor (2011), devaki and kamalaveni (2012), gul et al. (2012), onwumere et al. (2012), salman (2013), bawa and kaur (2013), azhagaiah and sabaripriya (2008), tahir and raja (2014), atiyet (2012), chidinma et al. (2013), kumaresan (2014), uwuigbe et al. (2012) and parua and gupta (2009) investigated the impact of dp on sw applying ols method of regression. azhagaiah and veeramuthu (2010) analysed the impact of firm size on dividend behavior with the help of chow-test. rafique (2012) examined the factors affecting dp using multiple regression and the study found that dp has significantly influenced sw. researchers have used regression, independent sample t-test, correlation, granger causality test, adf, and white heteroskedasticity test to study the impact of the dp on sw. olandipupo and okafor (2011), in their research work titled “control of share wealth maximization in nigeria” focused on parties controlling shareholders’ wealth maximization and the ways it affects the firm’s performance. the data used for the study were collected from the nigerian stock exchange and the annual reports of six sample firms from food / tobacco and 67 50 40 34 34 33 31 23 21 21 17 11 9 0 10 20 30 40 50 60 70 80 in sector financial risk and management reviews, 2015, 1(1):8-26 12 © 2015 conscientia beam. all rights reserved. subsector for 20 years. the data collected were analyzed using ordinary least square (ols) regression, autocorrelation and auto regression. the study showed that all the predictor variables provided good explanation. the firm size (fs) and retained earnings (re) had positive relationship and their impact was proved statistically significant on the shareholders’ fund, while dividend payment had negative relationship with the sw. however, turnover and retained earnings were of more significance in controlling the shareholders’ wealth than the dividend payout. devaki and kamalaveni (2012), in their paper titled “shareholding patterns and dividend payout: an empirical analysis in indian corporate hotels” examined the influence of shareholding pattern of the indian corporate hotels. data were collected from 152 indian firms (both listed and unlisted) in hotel industry from the electronic corporate database called cmie and captaline database. fixed effect firm model estimation revealed that there was a positive association between lagged dividend, earnings, debt-equity ratio, sales size, age of the firm and institutional shareholding. gul et al. (2012),in their study titled “the relationship between dividend policy and shareholders’ wealth” examined the influence of dp on sw of 75 listed firms in karachi stock exchange. data were collected from annual reports of the firms, karachi stock market and state bank of pakistan. descriptive statistics, multiple regression and stepwise regression methods were used to study the impact of dp on sw. the study found that the difference in average market value relative to book value of equity was highly significant for dividend paying firms and dividend non-paying firms. lagged market value of equity had a significant impact on the market price per share; however, retained earnings had insignificant influence on the market price of equityas far as the dividend paying firms are concerned and there was a significant influence of dp on sw. onwumere et al. (2012), in a research paper titled “does the use of outsiders fund enhance shareholders’ wealth: evidence from nigeria” attempted to study the links between the firms’ financial structure and the objective of the firms in maximizing shareholders’ wealth. the study relied on historic accounting data obtained from the financial statements and accounts of 28 firms in the nigerian stock exchange. the study examined the impact of outsiders’ fund on the firms’ sw maximization using three value maximization indicators viz., net profit margin, dividend per share and current ratio. the study revealed that outsiders’ fund was positive and did not have significant impact on the dividend per share and current ratio; outsiders’ fundhadnegative and significant impact on the net profit margin. salman (2013) examined the “effect of dp on sw of sugar industry in pakistan” considering a sample of 33 listed firms of sugar industry listed on karachi stock exchange. the data were collected for a period of six years ranging from 2006 to 2011. descriptive statistics and regression analysis were applied for analysis considering dividend per share (dps), earnings per share(eps), lagged market price per share (mps), price earnings ratio (per), and retained earnings (re) as predictor variables and market price per share (mps) as response variable. the study showed that dps, eps, lagged mps, and lagged per had significant positive relationship with sw. financial risk and management reviews, 2015, 1(1):8-26 13 © 2015 conscientia beam. all rights reserved. bawa and kaur (2013), in a research work titled “impact of dividend policy on shareholders’ wealth: an empirical analysis of indian information technology sector” selected 308 firms , which have listing flag in national stock exchange and bombay stock exchange with the objective to study the impact of dp on sw. variables, viz., dividend per share (dps),retained earnings per share (reps), lagged price earnings ratio (lagper) and lagged market price per share (lagmps) were considered as predictor variables and market price per share (mps) was considered as response variable. panel data methodology was applied to study the impact of dp on market value of equity. the results showed that in the long run, shareholders’ wealth of dividend paying it firms had increased significantly when compared to the non-dividend paying it firms. azhagaiah and sabaripriya (2008),in their study titled “the impact of dividend policy on shareholders’ wealth” analyzed the impact of dp on shareholders’ wealth in organic and in-organic chemical firms in india with a sample of 28 firms selected from 114 listed firms on bse using multi stage non random sampling technique. they used mean, standard deviation multiple regression and stepwise regression techniques to ascertain the best fitted model for predicting the dp and studying its impact on sw. the study proved that the wealth of the shareholders’ was greatly influenced mainly by five variables viz., growth in sales, improvement of profit margin, capital investment decision, capital structure decision and cost of capital. there was a significant impact of dp on sw in organic chemical firms, while the sw was not influenced by dividend payout as far as the organic chemical firms are concerned. tahir and raja (2014), in their study titled “impact of dividend policy on shareholders’ wealth” of oil and gas exploration firms of pakistan during the years from 1999 to 2006 used regression and correlation to ascertain the best fitted model for the dp and to study its impact on sw. the variables viz., dividend payout ratio (dpr), price earnings ratio (per) and book value to market value of equity (bv/mv) ratio were considered as predictor variables and holding period yield as response variable. the result showed a correlation between predictor variables and response variable for all the firms. oil and gas industry of pakistan paid dividend on regular basis but there was uncertainty in stock market due to which holding period returns were not efficient because share price of firms were not stable and fluctuation took place in firms and the study proved that dividend payout ratio had insignificant relationship with holding period yield. atiyet (2012), in a study titled “the impact of financing decision on the shareholder value creation” covered 88 firms listed on french stock exchange. shareholders’ wealth creation was a response variable while equity issue, debt, growth rate, profitability, investment opportunities, and size were considered as predictor variables. statistical tools like regression and correlation were used to ascertain the best fitted model for the impact of financing decision on shareholders’ value creation. the result showed that growth, profitability, financial debt and size of the firm had significant impact on shareholders’ wealth. financial risk and management reviews, 2015, 1(1):8-26 14 © 2015 conscientia beam. all rights reserved. chidinma et al. (2013),in their study titled “shareholders’ value and firms’ dividend policy: evidence from public firms on nigeria stock exchange” used secondary data of 216 public limited firms listed on nigerian stock exchange for the period of 2000-2011. dividend per share (dps) was considered as response variable, while earnings per share (eps) and market price per share (mps) were considered as predictor variables. the study found that earnings per share and market price per share had significant impact on sw; a high dividend payout increases the market value of shares and thus, the shareholders’ value. kumaresan (2014), in a study titled “impact of dividend policy on shareholders’ wealth: a study of listed firms in hotels and travels sector of sri lanka” focused on top ten firms under hotel and travel sectors in sri lanka during the period from 2008 to 2012. shareholders’ wealth (eps) was considered as response variable while predictor variables were: return on equity (roe), dividend payout ratio (dpr), dividend per share (dps) and retention ratio (rr). the study used correlation and regression to analyse the data collected from top ten listed firms under hotel and travel sectors. the study found that there was a positive relationship between return on equity (roe), dividend per share (dps) and dividend payout ratio (dpo) and shareholders’ wealth (sw) of the selected firms under hotel and travel sectors in sri lanka and the study also proved that there was a negative relationship between retention ratio and shareholders’ wealth. uwuigbe et al. (2012) studied the relationship between financial performance and dividend payout among the listed firms in nigeria for a period of five years i.e. 2005-2010 and found that there was a significant positive association between the performance offirms and the dividend payout;ownership structure and firm’s size on dividend payout of the firms. rafique (2012) examined the “ factors affecting the dividend payout of listed non-financial firms of karachi stock exchange ” with a sample of 53 firms listed as non – financial firms on the karachi stock exchange for the period 2005-2010. the data were found to be homoskedastic and free of auto correlation and the regression results revealed that corporate tax (ct) and firms’ size (fs) had significant relationship with dp of firms. azhagaiah and veeramuthu (2010) examined the association between corporate leverage and dp of the firms across sectors in india on panel data of 73 firms for a period 1996-2007. the study proved that there was a significant impact of selected predictor variables on dividend behavior; the dp of small size, medium size and large size firms and overall corporate firms across sectors in india was dependent on the debt – equity ratio. 2.1. objectives and hypotheses development for the study the main objective of the study is to empirically analyze the impact of dividend policy on shareholders’ wealth. the following are the specific objectives of the study:  to study the relationship between dividend policy and shareholders’ wealth of fmcg sector in india before financial melt down and after financial melt down. financial risk and management reviews, 2015, 1(1):8-26 15 © 2015 conscientia beam. all rights reserved.  to analyze the variation in studying the impact of selected variables (dps, rps, ear, per, lagper, lagmps) on the sw (eps) of fmcg sector in india. 2.2. the following are the hypotheses developed for the study h0 1: “there is no significant impact of dividend per share (dps) on earnings per share (eps) (sw) before global financial melt down”. h0 2: “there is no significant impact of retained earnings per share (rps) on earnings per share (eps) (sw )before global financial melt down”. h0 3: “there is no significant impact of dividend per share (dps)on earnings per share (eps) (sw) after global financial melt down”. h0 4: “there is no significant impact of lagged price earning ratio (lagper) on earnings per share (eps) (sw) after global financial melt down”. h0 5: “there is no significant impact of lagged market price per share (lagmps) on earnings per share (eps) (sw) after global financial melt down”. h0 6: “there is no significant shift in structure in the shareholders’ wealth (sw) of fmcg sector in india after global financial melt down”. 3. research methodology 3.1. data source the study is analytical and empirical in nature and is based on secondary data. for the study, a sample of 13 fmcg firms listed on nse has been selected using multi stage non-random sampling technique. the period of the study has been divided into two sub-periods viz., before global financial melt down i.e., from 2003-2007 and after global financial melt down i.e., from 2009-2013. the global financial melt down occurred during the year 2008 is considered as the base for the study to analyze the impact of dp on sw. the required data were collected from the website called moneycontrol.com and the annual reports of the fmcg firms concerned too. the annual data for the selected fmcg firms are used for calculating key financial ratios (measures) to analyze the impact of dp on sw. 3.2. research methods various statistical methods like augmented dickey fuller test, white heteroskedasticity test, auto correlation, breuch-godfrey serial correlation lm test, lagrange multiplier (lm) for autoregressive conditional heteroskedasticity, correlation, ordinary least square method of regression and chow test are applied for analysis of data using eviews 7 econometrics software package . for the analysis of pooled data for ten years i.e. from 2003 – 2007 and 2009-2013, the following research methods are used. financial risk and management reviews, 2015, 1(1):8-26 16 © 2015 conscientia beam. all rights reserved.  descriptive statistics (jarque-bera test)  correlation  ordinary least square regression method  augmented dickey fuller test, white heteroskedasticity test, auto correlation, breuchgodfrey serial correlation lm test, durbin-watson and arch-lm test and  chow test general form of the regression model eps = β1 (dps) + β2 (rps) + β3 (per) + β4 (lagper) + β5 (ear) + β6 (lagmps) + e ……..(i) earnings per share (eps), dividend per share (dps), retained earnings per share (rps), price earnings ratio (per), lagged price earnings ratio (lagper), earnings (ear), lagged market price per share (lagmps). 3.3. chow test the shift-in structure in terms of dp on sw is studied with the help of chow test, which (chow, 1960) was originally designed to analyse the same variables obtained in two different data sets to determine if they were similar enough to be pooled together. the method, however, could be used to determine if two regression lines are different from one another (lee, 2008). the chow test for parameter stability confirms that there was a structural change in the equation. the chow test models indicate that for all the series under examination, the null hypothesis of more than one structural break time can be rejected (allaro et al., 2011). the impact of dp on sw is studied through its structural changes. for this purpose, the period of study has been divided in to two sub-periods viz., before global financial melt down i.e., from 2003 – 2007 and after global financial melt down i.e., from 2009 – 2013. the test statistic is as follows: this is distributed as f with k and n1 + n2 – 2k degrees of freedom where, f is the test statistic rss p = residual sum of squares for the whole sample rss1 = residual sum of squares for the first group (before dividend announcement) rss2 = residual sum of squares for the second group (after dividend announcement) n = number of observations k = number of regressors (including the intercept term) in each unrestricted sub-sample 2k = number of regressors in both unrestricted sub-sample regressions (whole sample) financial risk and management reviews, 2015, 1(1):8-26 17 © 2015 conscientia beam. all rights reserved. 3.4. sampling technique the study used multistage non-random sampling technique to select the ultimate sample units. out of 16 firms having listing flag on nse, 13 firms are selected based on adequate availability of data for the study period. table-1. list of measures (ratios) used in the study for analysis sl. no. variable / measure formula inference 1 earnings per share (eps) net income / number of equity shares it represents the capacity of firm to pay dividends. firm is willing to pay high dividend if it increases profitability. 2 dividend per share (dps) total dividend / no. of equity shares outstanding the dividend per share reveals how well earnings support the dividend payout. 3 retained earnings per share (reps) retained earnings / no. of equity shares outstanding a firm with growth in its retained earnings can use the additional earnings to expand its business, which can potentially lead to high profits and increase the firm’s value. 4 price earnings ratio (per) market value per share / earnings per share high price earnings ratio indicates that investors anticipate high growth in future. 5 earnings (ear) total revenue – total expenses higher the earnings, larger the cash flow and therefore, firms will pay high dividend. 6 market price per share (mps) market capitalization / no. of equity shares outstanding high market value reflects that the firms are in very good position and lower value reflects otherwise. source: www.scibd.com/essays/finance.php source:www.ukessays.com/essays/finance/current-assets-current-liability.php table 1 depicts the variables which were used to study the impact of dividend policy on shareholders’ wealth before and after financial melt down of the fmcg firms listed on bse. earnings per share (eps) was considered as response variable, while dividend per share (dps), retained earnings per share (reps), price earnings ratio (per), earnings (ear) and lagged market price per share (lagmps) were considered as predictor variables. 4. descriptive statistics table 2 shows the descriptive statistics of seven selected financial variables on dividend policy, which reveals that the data are normally distributed. the data set contained a total of 130 observations of 13 firms over a period of ten years. the mean of all the selected seven variables is very much close to the median, implying normality. the average dps is0.09 i.e., 9% which means, on an average, the firms pay about 9% of their profit as dividend. rps shows an average financial risk and management reviews, 2015, 1(1):8-26 18 © 2015 conscientia beam. all rights reserved. of 2.02, which reflects a firm with growth in its rps, which can lead to high profits and increase the shareholders’ wealth. ear shows an average of 606.66. higher earnings reflect that the firms have capacity to pay dividend. the average of per and lagper is 21.61 and 20.14 respectively, which means that the investors anticipate high growth in future. the average of eps is 22.35, which reflects that the firms of fmcg sector have good earnings and capacity to pay dividend if it increases profitability. the average of lagmv (388.50) reflects that the firms of fmcg sector are in very good position during the study period, which infers that the firms are potential and successful in dp in the long – run. the maximum and minimum values of the selected variables have more volatility for all except for ear. the standard deviation of ear is the highest (1051.61), whereas the lowest that of dps is 0.08. all the selected variables are positively skewed except for per. probability of ear is less than 1% level, implying that the selected variables are significant at 99% confidence interval. dps and rps is less than 5% level, implying that the selected variables are significant at 95% confidence interval. table-2. descriptive statistics of selected variables of fmcg firms in india from 2008 to 2012 variables dps rps per lagper ear lagmv eps mean 0.09 2.02 21.61 21.60 606.66 388.50 22.35 median 0.08 1.47 21.41 20.14 230.76 223.09 21.06 maximum 0.24 7.32 35.14 46.53 3598.38 898.79 54.61 minimum 0.01 0.28 3.12 5.86 70.82 21.05 3.60 std. dev. 0.08 1.98 9.95 10.71 1051.61 342.60 16.14 skewness 0.66 1.58 -0.31 0.73 2.207 0.30 0.70 kurtosis 2.19 4.63 2.07 3.35 6.36 1.36 2.37 jarque-bera 1.36** 6.91** 0.68 1.23 16.67*** 1.65 1.28 probability 0.04 0.03 0.70 0.53 0.00 0.43 0.52 n 13 13 13 13 13 13 13 dividend per share (dps), retained earnings per share (rps), price earnings ratio (per), lagged price earning ratio (lagper), earnings (ear), lagged market value (lagmv), earnings per share (eps). source: computed results based on compiled data from the annual financial reports of selected corporate firms from moneycontrol.com *** significant at 1% level; ** significant at 5% level figure-c. jarque-bera test of selected variables of fmcg firms in india from 2008 to 2012 ( in crore) normality test source: computed results based on compiled data from the annual financial reports of the selected corporate firms moneycontrol.com 0 1 2 3 4 5 -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5 series: residuals sample 1 13 observations 13 mean -5.77e-15 median -0.722129 maximum 5.547479 minimum -7.891606 std. dev. 4.071651 skewness -0.288542 kurtosis 2.166745 jarque-bera 0.556476 probability 0.757117 financial risk and management reviews, 2015, 1(1):8-26 19 © 2015 conscientia beam. all rights reserved. figure – c depicts normality test, which reveals that the data form normal distribution. jarque-bera test (0.56) is a goodness of fit, which is a measure of departure from normality, based on the sample of kurtosis and skewness. so, the samples from a normal distribution have an expected skewness of -0.29 and an expected kurtosis of 2.17. table-3. results of unit root test (augmented dickey-fuller test) variables adf(t-statistic) probability earnings per share (eps) -4.863297*** 0.0045 dividend per share (dps) -4.484696*** 0.0077 retained earnings per share (reps) -4.185369** 0.0137 price earning ratio (per) -10.31925*** 0.0000 lagged price earning ratio (lag per) -6.475426*** 0.0001 earnings (pat) -3.435427*** 0.0075 lagged market value (lagmv) -4.703563*** 0.0056 source: computed results based on compiled data from the annual financial reports of the selected corporate firms from moneycontrol.com *** significant at 1% level; ** significant at 5% level. table 3 shows the presence of unit root in the series using augmented dickey-fuller test (adf). the results show that there is a need for verifying whether the data are stationary by unit root test, hence it is conducted by augmented dickey-fuller (adf). the p values of adf are less than 0.05, which infer that the data of the time series for the whole study period are stationary. the adf test statistics report that hypothesis of a unit root in the series is rejected at 1% level for eps, dps, per, lagper, ear and lagmv (critical values -4.86, -4.48, -10.31, -6.48, -4.70 respectively) and at 5% for rps (critical value of -4.19) for the adf test. therefore, the result of the test confirms that the data of the series are stationary. table-4. results of white heteroskedasticity test f-statistic 0.326 probability 0.900 obs* r-squared 3.196 probability 0.783 source: computed results based on compiled data from the annual financial reports from moneycontrol.com financial risk and management reviews, 2015, 1(1):8-26 20 © 2015 conscientia beam. all rights reserved. the condition of classic linear regression model (vide table 4) implies that there should be homoskedasticity between variables, which means that the spread should be constant and same. variance of residuals should be constant otherwise, the condition for existence of regression, homoskedasticity would be violated and the data would be heteroskedastic. to check, white heteroskedasticity test is applied for the residuals, which reveals that the probability is more than 5%. hence, it proves that there is absence of heteroskedasticity and the data have uniform spread. table-5.results of breuch-godfrey serial correlation lm test f-statistic 0.779 probability 0.614 obs* r-squared 5.696 probability 0.458 source: computed results based on compiled data from the annual financial reports from the moneycontrol.com it is evident that there is no serial correlation (vide table 5). hence, the null hypothesis is accepted, which infers that if an estimated regression line fulfills all the requirements of a good regression model it invites to move for further hypothesis testing or forecasting. the estimated regression has either no heteroskedascity or no serial correlation hence it leads to go for testing hypothesis by use of arch-lm model. table-6. results of arch-lm test f-statistic 3.537 probability 0.059 obs* r-squared 3.135 probability 0.056 source: computed results based on compiled data from the annual financial reports from moneycontrol.com 6 shows the arch-lm test, (p< 0.05) and the null hypothesis is rejected at 5% level, which reveals that there is presence of arch effect in the residuals of simple time series models. 5. correlation analysis table 7(a) shows the correlation matrix of selected variables; the relationship between eps and rps (0.837); that of between lag mps and eps (0.751), which are highly significant positively at 1% level; whereas the relationship between eps and dps (0.617); and that of between ear and per (0.659); and that of between lagmps and lagper (0.585) are significant positively at 5% level. table 7(b) shows the correlation matrix of selected variables, the relationship between eps and dps (0.924); that of between eps and rps (0.720); that of between lagper and per (0.946) ; that of between lagmps and dps( 0.706); that of between lagmps and rps (0.876); financial risk and management reviews, 2015, 1(1):8-26 21 © 2015 conscientia beam. all rights reserved. and that of between lagmps and eps (0.827) are highly significant positively at 1% level; whereas the relationship between dps and rps (0.594) is significant positively at 5% level. table-7(a). results of correlation analysis among the predictor variables of fmcg firms in india from 2003 to 2007 ( in crore) variables dps rps per eps lagper eps pearson correlation 0.617** 0.837 *** sig. (2-tailed) 0.02 0.000 n 13 13 ear pearson correlation 0.659** sig. (2-tailed) 0.014 n 13 lagmps pearson correlation 0.751*** 0.585** sig. (2-tailed) 0.003 0.036 n 13 13 earnings per share (eps), earnings (ear), lagged market price per share (lagmps), dividend per share (dps), retained earnings per share (rps), price earning ratio (per), lagged price earning ratio (lagper). source: computed results based on compiled data from the annual financial reports from moneycontrol.com *** significant at 1% level; ** significant at 5% level. table-7(b). results of correlation analysis among the predictor variables of fmcg firms in india from 2009 to 2013 ( in crore) variables dps rps per eps eps pearson correlation 0.924*** 0.720 *** sig. (2-tailed) 0.00 0.00 n 13 13 dps pearson correlation 0.594** sig. (2-tailed) 0.032 n 13 lagper pearson correlation 0.946*** sig. (2-tailed) 0.00 n 13 lagmps pearson correlation 0.706*** 0.876*** 0.827*** sig. (2-tailed) 0.007 0.000 0.00 n 13 13 13 earnings per share (eps), dividend per share (dps), lagged price earnings ratio (lagper), lagged market price per share (lagmps), retained earnings per share (rps), price earnings ratio (per). source: computed results based on compiled data from the annual financial reports from moneycontrol.com *** significant at 1% level; ** significant at 5% level. financial risk and management reviews, 2015, 1(1):8-26 22 © 2015 conscientia beam. all rights reserved. 5.1. impact of dividend policy on shareholders’ wealth regression analysis table-8. results of multiple regression of selected variables of dividend policy on shareholders’ wealth of fmcg firms in india for the period before global financial melt down (2003 -2007) and after global financial melt down (2009 – 2013) periods variables unstandardized coefficients beta value before global financial melt down after global financial melt down β t-value pvalue β t-value pvalue constant ( eps) -10.91 -1.39 0.212 18.41 2.59** 0.04 dps 121.65 2.55** 0.03 76.74 2.25** 0.04 rps 9.68 4.13*** 0.006 0.42 0.27 0.79 per 0.024 0.098 0.925 0.79 1.56 0.16 lagper 0.16 0.447 0.671 1.52 2.05** 0.05 ear 0.005 0.955 0.377 0.001 0.39 0.707 lagmps 0.006 0.208 0.842 0.27** 2.73 0.03 adjusted r2 0.889 0.96 r2 0.94 0.98 f statistics 16.680*** (0.002) 25.19***(0.001) degrees of freedom 6,58 6,58 number of observations 65 65 earnings per share (eps), dividend per share (dps), retained earnings per share (rps), price earning ratio (per), lagged price earning ratio (lagper), earnings (ear),lagged market price per share (lagmps). source: computed results based on compiled data from the annual financial reports from moneycontrol.com *** significant at 1% level; ** significant at 5% level. the impact of dp on sw of it sector has been analyzed using multiple regression analysis. the dividend per share (dps) has been used as proxy for measuring the dp of the firms and earnings per share (eps) of the firms is considered as proxy for measuring the sw and is used as response variable. apart from dps, retained earnings per share (rps), earnings (ear), price earnings ratio (per), lagged price-earnings ratio (lagper) and lagged market price per share (lagmps) are also used as predictor variables to study whether dp of fmcg firms has impacted the sw. the results of the regression analysis are presented in table 8. the dps has significant positive co-efficient (121.65) on eps (sw) for the period before global financial melt down in india. hence, h0 1: “there is no significant impact of dps on eps (sw) before global financial melt down” is rejected at 5% level. rps has significant positive coefficient (9.68) on eps (sw) before global financial melt down in india. hence, h0 2: “there is no significant impact of rps on eps (sw) before financial melt down” is rejected at 5% level. [the fstatistics (16.680) is significant at 1% level with r² (0.94); adj r² (0.88)]. the regression results are as follows (before global financial melt down) eps = β1 (dps) + β2 (rps) + β3 (per) + β4 (lagper) + β5 (ear) + β6 (lagmps) + e (-1.39)(2.55) **(4.13) *** (0.098) (0.447) (0.955) (0.208) figures in parentheses denote tvalue *** significant at 1% level; ** significant at 5% level. the regression equation infers that there is a significant positive impact of dps and rps on eps (sw) before financial melt down. financial risk and management reviews, 2015, 1(1):8-26 23 © 2015 conscientia beam. all rights reserved. the dps has significant positive co-efficient (76.74) on eps (sw) of fmcg firms after global financial melt down in india (vide table 8). hence, h0 3:“there is no significant impact of dps on eps (sw) of fmcg firms after financial melt down” is rejected at 5% level. lagper has significant positive co-efficient (1.52) on eps (sw) of fmcg firms after global financial melt down in india. hence, h0 4: “there is no significant impact of lagper on eps (sw) of fmcg firms after global financial melt down” is rejected at 5% level. lagmps has significant positive co-efficient (0.27) on eps (sw) of fmcg firms after global financial melt down in india. hence, h0 5: “there is no significant impact of lagmps on eps (sw) of fmcg firms after global financial melt down” is rejected at 5% level. [the fstatistics is (25.19) at 1% level with r² (0.98); adj r² (0.96)]. the regression results are as follows (after global financial melt down) eps = β1 (dps) + β2 (rps) + β3 (per) + β4 (lagper) + β5(ear) + β6(lagmps) + e (2.59)**(2.25) **(0.27) (1.56) (2.05)** (0.39) (2.73) figures in parentheses denote tvalue ** significant at 5% level the regression equation infers that there is a significant positive impact of dps, lagper and lagmps on eps (sw) after global financial melt down. 5.2. testing of structural shift – application of chow test table-9.results of chow test for structural shift in dividend policy on shareholders’ wealth between before global financial melt down (2003 – 2007) and after global financial melt down (2009 – 2013) of fmcg firms in india whole sample sum of square residuals number of parameter s estimated number of observati ons f-value df f limit before global financial melt down after global financial melt down 662.976 326.928 232.406 7 130 3.07*** 7, 116 f0.01 2.79 (for v1 = 7; v2 = 116) source: computed results based on compiled data from the annual financial reports from moneycontrol.com *** significant at 1% level. f – limit for 7,116 degrees of freedom at 1% level is 2.79. the result of chow test (vide table 9) reveals that the f-value (3.07 0.01) is greater than the f limit (2.79) at 1% level for df. 7, and 116, hence, h0 6: “there is no significant shift in structure in the shareholders’ wealth of fmcg sector in india after global financial melt down” is rejected 1% level, which implies that the fmcg firms have a significant shift -in-structure (improvement positively) in respect of dp on sw after global financial melt down at 1 % level. financial risk and management reviews, 2015, 1(1):8-26 24 © 2015 conscientia beam. all rights reserved. 6. concluding remarks this paper is an effort to reveal the insight dynamics for the impact of dividend policy on shareholders’ wealth: evidence from fmcg sector in india considering global financial melt down as an event. in the light of the previous literature, key explanatory variables were found to disclose the relationship and the impact of dp on sw. the response variable i. e. earnings per share (eps) is considered as proxy for measuring the shareholders’ wealth. dividend per share (dps), retained earnings per share (rps), price earnings ratio (per), lagged price earning (lagper), earnings (ear), and lagged market value (lagmps) are considered as predictor variables. out of 16 listed firms on nse,13 firms are selected using multi stage non-random sampling technique based on the availability of data. regression analysis is used as the most appropriate tool for analysis of data. the shift-instructure in terms of dp on sw considering the event i.e. global financial melt down is studied with the help of chow test. descriptive statistics revealed that the data are normal whereas when the assumptions needed to be fulfilled for ordinary least square (ols) are tested, the data were found to be homoskedastic and free of auto correlation. correlation results revealed the relationship between eps and rps (0.837); that of between lagmpsand eps(0.751) which are highly significant positively at 1% level; whereas the relationship between eps and dps (0.617); and that of between ear and per (0.659); and that of between lagmps and lagper (0.585) are significant positively at 5% level before global financial melt down. the relationship between eps and dps (0.924); that of between epsand rps (0.720); that of between lagper and per (0.946); that of between lagmps and dps(0.706); that of between lagmps and rps (0.876); that of between lagmps and eps (0.827) are highly significant positively at 1% level after global financial melt down, whereas the relationship between dps and rps (0.594) is significant positively at 5% level. regression result proves that dps (121.65) and rps (9.68) have significant positive co-efficient on eps(sw) before global financial melt down of fmcg firms in india. dps (76.74), lagper (1.52) and lagmps (0.27) have significant positive co-efficient (76.74) on eps(sw) after global financial melt down of fmcg firms in india. hence, it is inferred from the results that the shareholders’ wealth is dependent on the dps, rps, lagper, and lagmps. on the whole, the results reveal that the selected variables viz dps, rps, lagper and lagmps have significant impact on earnings per share (sw). the results of the chow test implies that the fmcg firms in india have a significant shift-instructure (improvement positively) in respect of dp on sw after global financial melt down (2009 – 2013). when the firms pay dividend regularly with periodic growth, the sw would be maximized. this is quite possible for all dividend paying firms in fmcg sector in india. the dp has significant effect on sw of fmcg firms. from the analysis it is inferred that dividend per share, financial risk and management reviews, 2015, 1(1):8-26 25 © 2015 conscientia beam. all rights reserved. retained earnings per share , lagged price earning ratio and lagged market price per share act as important variables in determining the sw. generally, higher dp enables increase in the market value of equity per share and vice versa. shareholders preferred current dividend to future income so, dividend is considered to be an important variables, which determines the sw. since dividend is an unsolved puzzle there is a need for constant and continuous efforts and attempts in the field of dp research. the explanatory power of the model used was found low through the econometric results implying room for future research works on the subject of research. the study is based on secondary data collected from the money control data source, and websites of various fmcg firms concerned in india. therefore, the quality of the study depends upon the accuracy, reliability, and quality of secondary data source. in the study, a sample of 13 fmcg firms is considered for analyzing the impact of dividend policy on shareholders’ wealth. in the study, ols model of regression and chow test are used for analysis, therefore inclusion of some more appropriate methods of analysis, if used for analysis, will enable a further step in exploring new and further inference in the area of research. references allaro, b.h., b. kassa and b. hundie, 2011. a time series analysis of structural break time in the macro economic variables in ethiopia. african journal of agricultural research, 6(2): 392 400. atiyet, b., 2012. the impact of financing decision on the shareholders’ value creation. journal of business studies, 4(1): 44-63. azhagaiah, r. and n. sabaripriya, 2008. the impact of dividend policy on shareholders’ wealth. international research journal of finance and economics, 20: 180-187. azhagaiah, r. and p. veeramuthu, 2010. the impact of firm size on dividend behavior: a study with reference to corporate firms across industries in india. managing global transitions: 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of listed firms in hotels and travels sector of sri lanka. international journal of technological exploration and learning, 3(1): 349-352. financial risk and management reviews, 2015, 1(1):8-26 26 © 2015 conscientia beam. all rights reserved. lee, h.b., 2008. using the chow test to analyze regression discontinuities. tutorials in quantitative methods for psychology, 4(2): 46 – 50. olandipupo, a.o. and c.o. okafor, 2011. control of share wealth maximization in nigeria. journal of business system governance and ethics, 6(1): 19-24. onwumere, j., g. ibe and o. frank, 2012. does the use of outsiders’ fund enhance shareholders’ wealth: evidence from nigeria. journal of finance and investment analysis, 1(1): 173-197. parua, a. and a. gupta, 2009. dividend history and determinants in selected indian firms. australian accounting business and finance journal, 3(4): 46-83. rafique, m., 2012. factors affecting dividend payout: evidence from listed non-financial firms of karachi stock exchange. business management dynamics, 1(11): 76-92. salman, m., 2013. effect of dividend policy on shareholders’ wealth: a study of sugar industry in pakistan. global journal of management and business research finance, 13(7): 47-54. tahir, a. and n. raja, 2014. the impact of dividend policy on shareholders’ wealth. international journal of business and management, 16(1): 24-33. uwuigbe, u., j. jafaru and a. ajayi, 2012. dividend policy and firm performance: a study of listed firms in nigeria. accounting and management information systems, 11(3): 442-454. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 10 © 2019 conscientia beam. all rights reserved. an investigation of the impact of organisational structure on organisational performance sinqobile w. nene1+ alan s. pillay2 1,2mancosa graduate school of business, 16 samora machel st, durban central, durban, 4001, south africa. (+ corresponding author) abstract article history received: 4 january 2019 revised: 15 february 2019 accepted: 18 march 2019 published: 22 april 2019 keywords organisational structure organisational culture organisational performance organisational structure alignment. jel classification: l220. organisational structure is one of the core aspects that contribute to organisational performance. it can thus be said that it is the single most critical part of ensuring that the organization achieves its organisational objectives. this study examined the impact of organisational structure on the organisational performance of the property administration services department (pas) within an organisation located at the rosherville industrial area in johannesburg south, south africa. the study intended to give a practical perspective on the impact of a complex organisational structure on elements of personnel job satisfaction and departmental performance. the research instrument was designed to establish the elements that influence the composition of the organisational structure. data analysis was done through descriptive and inferential statistics. the conclusion showed the inference between these elements and the actual aim of this study. the study did not directly compare the analysis of performance and organisational structure influence on it but rather aimed at establishing the general consensus by the participants on the likelihood of them accepting suggestions and recommendations of the study. it was evident that the organisational structure is ineffective. the ineffectiveness of the structure was observed to have been a contributing factor to the low job satisfaction levels within the participants. the context of the study identified staff morale as the main contributor to poor performance. therefore, it could be concluded that since the organisational structure negatively impacted staff morale, it also inadvertently negatively affected the performance of the department. contribution/originality: this study contributes to the existing literature in the field of organisational structure effectiveness. the study results are based on practically evaluated current existing organisational structure within the organisation used for this study. 1. introduction in any organization, one of the most valuable assets is considered to be the person within that organization. for the effectiveness and alignment of personnel with the organisation‟s vision, it is of utmost importance to have leadership and management systems and personnel that are effective and efficient in ensuring business alignment and thus business accountability and sustainability. the management systems in place shall be such that the organisational structure is effective for the business objectives of the organisation. this also applies to departmental objectives as single departmental outputs or performance directly influence or contribute to the overall organisation‟s performance. most organisations do have some sort of an organisational structure. these structures financial risk and management reviews 2019 vol. 5, no. 1, pp. 10-24 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2019.51.10.24 © 2019 conscientia beam. all rights reserved. https://www.doi.org/10.18488/journal.89.2019.51.10.24 financial risk and management reviews, 2019, 5(1): 10-24 11 © 2019 conscientia beam. all rights reserved. are developed and based on theory. it is presumed by maquire (2003) that because theory claims that a particular organisational structure is effective in a particular type of an organisation, then it should work on most, if not all, similar organisations. the study conducted was aimed at highlighting the influence the organisational structure has on the organisation‟s performance. 2. literature review a number of scholarly articles and text books were reviewed during the literature review. 2.1. organisational structure according to business dictionary (2018) “an organisation is a social unit of people that is structured and managed to meet a need or to pursue collective goals. mcnamera (2018) further defines an organisation in its simplest form as “a person, a group or people intentionally organised to accomplish an overall, common goal or set of goals”. according to robbins et al. (2014) “an organisational structure is defined as a system that determines how job tasks are formally divided, grouped and coordinated within an organisation”. in the context of this study, the definition of an organisation as given by mcnamera (2018) in conjunction with the organisational structure definition as given by robbins et al. (2014) provided the core definition of an organisational structure in terms of this study. this study thus defined the organisational structure as “a system that determines how tasks are formally structured and coordinated within a group that is intentionally organised to accomplish a common goal” (robbins et al., 2014; mcnamera, 2018). each department or division within an organisation directly contributes to the overall organisational performance, thus the criticality of analysing each department‟s performance in order to determine what impact it has on the overall organisational performance. the business objective is to have an organisation in which all departments are in line with the organisation‟s main objectives. shields (2016) identified two main organisational structures. these are a mechanistic structure and an organic structure. the mechanistic structure is said to be more formalized with high specialization and high administrative intensity while the organic structure is said to be less formalized. it is thus evident that all organisational structures may experience challenges based on the circumstances around the organisation at a given point in time. since most organisational structures are fixed processes, the process to change them is very lengthy and this process cannot be adapted to all changes within the organisation, especially temporal or short-term changes. for an organisation to ensure that its organisational structure is always effective, it should ensure that the structure is flexible and/or adaptable to most anticipated circumstances. 2.2. organisational culture in mclaughlin (2018) it can be established that every organisation has a culture of some sort. in the context of organisations, culture can simply be defined as a way of doing things within that organisation. according to mclaughlin (2018) organisational culture is defined as a “system of assumptions, values, and beliefs, which governs how people behave in organisations”. mclaughlin (2018) further states that these shared values have a strong influence on the people in the organisation and dictate how they dress, act, and perform their jobs. every organisation develops and maintains its own unique culture which provides guidelines and boundaries for the behaviour of the members of that organisation (mclaughlin, 2018). according to rafaeli and worline (1999), “to understand the cultural system of an organisation is to understand the reactions, interpretations, and actions of organisational members, and how those actions, thoughts, and feelings are shaped by the collectivity”. rafaeli and worline (1999) introduced the case of organisational symbols in order to understand organisational culture. according to rafaeli and worline (1999) as cited in rafaeli and worline (1999) “symbols are integral to organisational life. they are not simply by-products of organisations but rather elements that structure members‟ active construction of sense, knowledge and behaviour”. a simple definition of organisational symbol from a financial risk and management reviews, 2019, 5(1): 10-24 12 © 2019 conscientia beam. all rights reserved. dictionary definition by chevalier and cheerbrant in 1994, as cited in rafaeli and worline (1999) is given as “a thing that stands for an idea”. however, rafaeli and worline (1999) also argued that this gives the impression that organisational symbols are randomly selected. they thus refer to organisational symbols as “visible, physical manifestations of organisations and indicators of organisational life”. organisational culture in this context is considered as the way of doing things for the department. it is about how the department responds to situations. this is in relation to time, resources and personnel attitude. robbins and coulter (2005) as cited in tsai (2011) also described organisational culture as “the shared values, beliefs, or perceptions held by employees within an organisation or organisational unit”. tsai (2011) stated that “the pervasiveness of an organisational culture requires that management recognize its underpinning dimensions and its impact on employer-related variables such as job satisfaction, organisational commitment and performance”. organisational culture is not only concerned with the cohesiveness of the organisational members, however, organisational culture can be said to have an influence on the job satisfaction as asserted by tsai (2011). 2.2.1. challenges within an organisational structure determining challenges within an organisational structure is critical for one to recommend an alternative for an already existing organisational structure. according to khaleghi et al. (2013) “organisational structure plays an important role in the success of the organisation”. according to robbins (1991) as cited in ahmed (2012), an organisational structure must be clear to everyone so as to avoid confusion about the reporting protocol and the actual approach to the functioning of the organisation. some of the challenges faced by organisational structures as indicated in an article by root (2017) are “departmental loyalty, new management, confusion and company goals”. organisational structures are set up to define the duties of each department and to determine each department‟s objectives and contribute to the overall organisation‟s performance and objectives. according to root (2017) one of the dangers of creating departments is the appearance of different groups‟ mentality between the departments whereby each group sees themselves as independent of the other instead of working together for the better good of the organisation. root (2017) also stresses that new management can also pose challenges to an organisational structure. root (2017) further states that “if there have not been changes of management for many years, the organisation may start to settle into doing things following a particular approach”. however, changes in management can result in challenges on the organisational structure if the new management does not adopt the previous management‟s management style. within the pas department, management changes have been a norm in the last few years. this, therefore, results in the organisational structure having to be changed every time new management changes the focus of the department. within an organisation, effective communication is identified by root (2017) as one of the critical aspects of any business environment. root (2017) stated that “without communication, new ideas and processes can get confused”. this can result in the misalignment of the organisation‟s objectives. therefore, if departments are not communicating effectively, then confusion may affect the effectiveness of the organisational structure. lastly, root (2017) indicated that “an organisational structure is only as effective when the entire organisation utilizes it properly”. 2.3. organisational performance in a study conducted by balci et al. (2016) performance was described as “a total endeavour to attain a particular goal”. according to torrington and hall (1995), as cited by balci et al. (2016) “performance with regard to function is associated with the terms, frequency, productivity and output and is viewed as a result of the interaction between individual talent and motivation”. yanfei xi and fantiani (2011) as cited by balci et al. (2016) stated that organisational performance which could be considered an indispensable part of the organisation and the main reason for organisational survival, is the total output of an employee as a result of certain processes, including job attitude and organisational behaviour”. according to dusing (2017) organisational performance is a general financial risk and management reviews, 2019, 5(1): 10-24 13 © 2019 conscientia beam. all rights reserved. term referring to an assessment of the overall success or health of the organisation. organisational performance can thus be defined as the measure of the outcome as compared to the target or inputs within an organisation for the organisation to reach its goals. organisational performance is important to determine whether the organisation is reaching its goals or fulfilling its objectives. goodman, pennings and associates (1917) as cited by henri (2004) indicated that organisational performance or effectiveness mainly reflects a construct perspective in which the focus is on the definition of the concept in terms of assessment and conceptualization. in the context of this study, the criticality of organisational performance was at the heart of the overall objectives. 2.3.1. relationship between organisational structure and performance the organisational structure is developed such that it would positively contribute to the organisation‟s overall performance. robbins and coulter (2001) as cited in avdelidou-fischer (2015) stressed the importance of measuring organisational performance and emphasized how vital an organisational structure is since it is “the vehicle through which managers can coordinate the activities of the various functions or divisions to exploit fully their expertise and capabilities”. avdelidou-fischer (2015) further indicated that an organisational structure is simply the process by which organisations formally divide, group, and coordinate job tasks. for any organisation to be effective and efficient, its organisational structure needs to be in line with the organisation‟s core objectives. a study conducted by khaleghi et al. (2013) indicated that “an organisational structure plays a crucial role in the success of an organisation”. khaleghi et al. (2013) further stated that a “successful organisation normally uses a horizontal and less complicated structure”. the study intended to identify the relationship between the organisation‟s formality, complexity and concentration to its performance. the results of that study by khaleghi et al. (2013) indicated that “although there were some positive impacts from the formality and concentration on the organisational performance, there was no indication of any possible effect from the complexity of the structure on the organisational performance”. in this research study, the departmental performance relied fairly on the organisational structure. a horizontal structure is more effective when it comes to performance measurement as opposed to a vertical or hierarchical organisational structure. this statement was supported by ostroff (1999) when he stated that, “the horizontal organisation promotes the understanding of the overall benefits of their work within the organisation”. in essence, many organisations continuously review their organisational structures in order to ensure that the organisational structure used is the most effective and efficient at any point in time as claimed by aquinas (2008). 2.3.2. the impact of organisational culture within an organization a study by joharis (2016) on “the impact of organisational culture, organisational structure and job satisfaction on teacher organisational commitment at senior high schools in medan, indonesia”, found that one of the conclusions was that, organisational culture, organisational structure and job satisfaction at the same time contributed to job performance. this clearly shows that in essence, one cannot separate performance from the organisational structure and culture. according to tsui et al. (2006) “the organisational culture is a consequence of the visionary and charismatic leadership of the ceo”. this means that there is a strong relationship between leadership and the organisational culture. it can thus be said that organisational culture has a direct impact on the organisation as a whole. tsui et al. (2006) argued that in many circumstances, leader‟s actions have little effect on the organisational performance. they further argued that factors such as “characteristics of individuals, jobs or organisations can act as substitutes for leadership and negate leader‟s influence on the organisation”. differently stated, it can be said that the organisational culture has more impact on the organisational performance than the leader‟s influence. the leadership shall thus be in line with the organisational culture. the intent of this study, however, only concentrated on the organisational structure impact on the department‟s performance. however, organisational culture was also discussed for the purpose of understanding the context of this research study. financial risk and management reviews, 2019, 5(1): 10-24 14 © 2019 conscientia beam. all rights reserved. organisational culture in this context was considered as the way of doing things in the department. it was about how the department responds to situations. this was in relation to time, resources and personnel attitude. 2.3.3. organisational structure and culture alignment impact on performance an organisational structure influences the culture of the organisation. organisational culture is one of the core drivers of performance. every organisational structure and culture must be aligned to the overall organisation‟s vision and mission. in a study by glavas and godwin (2013) it can be said that in the event of misalignment, the performance of that organisation may be negatively affected. there are a number of reasons for organisational alignment. according to schweitzer and iyengar (2013) some of the reasons for alignment within an organisation are to help an organisation work cohesively, in coordinating everyone‟s activities so the organisation as a whole can work towards the same goals and give employees direction and vision of what matters most in the organisation. an organisation‟s performance is the key to its success. if the performance of an organisation is directly influenced by the organisational culture, it is therefore critical to understand the organisational culture of an organisation before recommending changes to its organisational structure as per the assertion by schweitzer and iyengar (2013). 2.3.4. streamlining organisational performance through departments one of the ways of streamlining organisational performance is through its departments. each department focuses on its own objectives and performance which contributes to the overall organisation‟s performance. sometimes there can be departments within the larger department which are sub-departments of the larger department. a study by ahmed (2017) on, “the importance of the organisational structuring and departmentalization in the workplace” defined departmentalization of an enterprise as a process whereby a number of departments are created based on the nature of their functions. according to ahmed (2017) “departmentalization helps to develop new managers by providing them with the opportunity to take independent decisions and initiatives and this consequently creates an environment whereby highly skilled subordinates can get an opportunity of being promoted to higher levels of management”. in the same study, ahmed (2017) stated that if the departmental functions expand, the organisation can further sub-divide that department so as to share the workload more efficiently. the advantages of departmentalization by function given by ahmed (2017) is that, “it is the most logical and natural form of departmentalization, it brings about specialization which makes optimum utilization of human resources and it also lays emphasis on each and every activity. the departmentalization by function could also enable top management to exercise control over a number of functions and facilitates delegation of authority and therefore, reduces the work burden of a top manager and it eliminates the duplication of effort that brings efficiency”. the attestation by ahmed (2017) in the study conducted shows that departmentalization results in a single point of authority within a department. in this case, accountability can be appropriately directed to an individual. when performance as one of the key performance indicators is evaluated, the single source of accountability is responsible for ensuring that the department‟s performance is up to the acceptable standard. it has also shown that departmentalization can be used to streamline organisational performance. according to ahmed (2017) departmentalization leads to the benefit of applying the gained knowledge in order to achieve the required goals. this then improves the efficiency of the organisation. in this study by ahmed (2017) it is however stated that there are also disadvantages of departmentalization such as the negative impact on the personnel‟s attitude towards their work. ahmed (2017) further stated that “in departmentalization, the standard of performance of each department and objective to be achieved is planned and when actual performance deviates from the planned performance, these can be addressed accordingly”. financial risk and management reviews, 2019, 5(1): 10-24 15 © 2019 conscientia beam. all rights reserved. 2.4. accountability according to business dictionary (2018) accountability is “the obligation of an individual or organisation to account for its activities, accept responsibility for them, and to disclose the results in a transparent manner”. wigmore (2014) defines accountability as an assurance that an individual or an organisation will be evaluated on their performance related to something for which they are responsible. wigmore (2014) argues that the term “accountability” is related to responsibility but seen more from the perspective of oversight. accountability can be both personal and organisational. wigmore (2014) states that “organisational or corporate accountability involves being answerable to all of an organisation‟s stakeholders for all actions and results”. this corporate accountability implies that an organisation must be answerable for any deviations from its policies, mission statements and/or vision statements. it is also argued by wigmore (2014) that in its simplicity, corporate or organisational accountability is often broadened to imply a requirement for organisations to function in a more responsible, ethical and sustainable manner. this is generally considered as one of the two main principles in corporate governance, viz., accountability and transparency as asserted by wigmore (2014). in an article about avoidance of personal accountability, gibson (2008) as cited in laskowski (2013) relates the leader‟s approach to accountability by stating that “as a leader, one is the ultimate arbiter of accountability, but one should never be the primary arbiter of accountability”. according to laskowski (2013) “without commitment and clarity, it is impossible for team members to hold each other personally accountable for their behaviour”. this means that the organisation should ensure that each personnel as an individual should have clear responsibilities for them to be held accountable. the organisation as a whole should be positioned such that it can be held accountable to its functioning. this may include amongst others, performance, financial, social responsibility, etc. as attested by laskowski (2013) there must first be clearly defined responsibilities for the organisation for it to be held accountable. in the context of this study, the organisational responsibilities need to be clarified before the department can be held accountable for any of their actions as it is unfair to hold an individual or an organisation accountable for things that are not clearly defined as their responsibilities. in a study about organisational responses to accountability requirements, gray et al. (2017) found that organisations engage in active, as well as passive, forms of compliance. the study indicated that internal policies, practices and/or procedures are changed to meet accountability requirements. 2.5. management theory of argyris according to dininni (2017) chris argyris explored the concept of organisational learning and its impact on a company‟s growth, effectiveness and adaptability. dininni (2017) further stated that argyris‟ theories focused on single-loop learning and double-loop learning, the immaturity or maturity continuum, organisational communication and the effects of each of these on employee motivation, accountability and empowerment. this suggests that chris argyris‟ theories not only focused on the organisational behaviour but also on the individuals within the organisation as they touch on the employee motivation, accountability and empowerment. in an interview by christensen (2008) chris argyris stated that the key to changing behaviour is not simply changing behaviour, because it is possible to keep the same theory in your head and change your behaviour. the key is to change the way people reason about their behaviour, based on the theories in their heads. the challenge is to help individuals transform their espoused theories into theories-in-use by learning a new set of skills and a new set of governing values. chris argyris also argued that although people reason and take actions, they can be taught how to identify their reasoning when they take any action. in essence, this means that a key to changing behaviour is not mainly about the change in behaviour itself but the understanding of the principle or reasoning behind one‟s action. chris argyris as cited in vliet (2010) stated that most people define learning too narrowly as mere „problemsolving‟, so they focus on identifying and correcting errors in the external environment. he stated that solving problems is important, but if learning is to persist, managers and employees must also look inwards. there is a need to reflect critically on their own behaviour, identify the ways they often inadvertently contribute to the financial risk and management reviews, 2019, 5(1): 10-24 16 © 2019 conscientia beam. all rights reserved. organisation‟s problems and then change how they act. according to dininni (2017) chris argyris stated that in contrast to double-loop learning, which questions underlying assumptions, single-loop learning, which solves problems superficially and symptomatically, fails to address the real issues that make companies ineffective. dininni (2017) further stated that argyris‟ theory also asserted that open communication within an organisation, normally considered a good thing, can block learning and hinder progress if it is based on defensiveness, denial of real problems, inability to face tough issues and refusal to examine one‟s own attitudes and contributions to the problem. chris argyris‟ theory, according to dininni (2017) also stated that “successful employee empowerment requires management to provide opportunities for personal growth in the same seven areas in which children must mature as they approach adulthood”. these are activity, independence, behaviours, interests, perspectives, equality or superiority and self-awareness or self-control. chris argyris management theory states that employees must move from passivity to activity, dependence to independence, few behaviours to many behaviours, shallow interests to deep interests, short-term perspectives to long-term perspectives, subordination to equality or superiority and nonself-awareness to self-awareness or self-control (dininni, 2017). these assertions suggest that organisational learning is part of the principles that can be used for improved performance of an organisation. figure-1. organisational learning. source: rasulov (2017). in figure 1 above, rasulov (2017) highlights the sequence chris argyris followed in his study on organisational learning. this involved starting with the assumptions that the organisation knows why it does what it does. this is followed by the strategies and techniques which determine what the organisation is actually doing. thereafter, the results are what is achieved from the strategies and techniques. figure 1 shows how single-loop learning and double-loop learning relates to organisational learning. single-loop learning is focused on solving the problems that arise or correcting the errors identified from the undesired results of the strategies implemented. on the other hand, double-loop learning is concerned with reviewing the entire chain of thought, from the assumptions, values or beliefs of the organisation to the strategies implemented in order to ensure the desired results. according to zaleznik (1992) the efficient manager adopts impersonal attitudes towards goals, which themselves are deeply embedded in the organisation‟s history and culture while leaders on the other hand are active instead of reactive, shaping ideas and adopting a personal attitude toward goals. zaleznik (1992) further states that managers view work as an enabling process involving a combination of people and ideas interacting to establish strategies and financial risk and management reviews, 2019, 5(1): 10-24 17 © 2019 conscientia beam. all rights reserved. make decisions, while leaders work from high-risk positions and are disposed to seek out risk when opportunity arises. therefore, it can be said that within an organisation, managers may be inclined to using the single-loop learning approach as opposed to leaders who may be inclined to adopting the double-loop learning approach. according to argyris (1973) organisations come into being when goals to be achieved are too complex for any one individual. chris argyris also mentions the drive behind why employees do what they do. he indicates that, “employees produce the energy for the organisation and they do that to seek individual gain”. this gain is linked to their needs (argyris, 1973). from the argyris theory, it can be said that an organisation can be improved through single and double loop learning. 3. research methodology this research study was contextual in nature. it took place in the confines of the environment of the population where the study was taking place. according to lappe (2000) the aim of correlational research is to describe the relationship among variables rather than to infer cause and effect relationships. lappe (2000) further stated that descriptive correlational studies are useful for describing how one phenomenon is related to another in situations where the researcher has no control over the independent or outcome variable. the statement by lappe (2000) gave rise to the decision to select the correlation research design as the most appropriate research design structure that was used, as the outcome of the research was meant to identify the relationship between the variables. in the context of this study, the variables that were considered are the departmental organisational structure as the independent variable and departmental performance as the dependent variable. this means that the research had to conclude on the impact the organisational structure has on the organisational performance which may or may not be directly influenced by the organisational structure. the comparison was based on the current organisational structure and performance as compared to a possibly more effective organisational structure that would positively contribute to improved performance. a quantitative research method was used in which the questionnaire results were used for analysis as the questions used in the survey questionnaire were aimed at identifying particular trends or feelings of the respondents in relation to each question or statement posed. a positivist research strategy was thus the appropriate research strategy to use as cohen and crabtree (2006) had suggested that the positivist paradigm is grounded in the theoretical belief that there is an objective reality that can be known to the researcher if the researcher uses the correct methods and applies those methods in a correct manner. the researcher‟s approach was objective as the intent was not to purposely sway the result in one direction or the other but rather focus on the results of the data collected. the target population was the entire pas personnel. a census approach was used to maximise the response rate. there were a total of 250 personnel within the pas department who were approached to take part on the study. this included personnel at different levels and with different experiences within the department. a probability sampling strategy was used with a simple random sampling technique. the total number of the target population was taken as n = 250 and the sampled participants was taken as n = 250. a total number of 25 participants formed part of the pilot study. according to opoku et al. (2016) the choice of suitable data collection and analysis methods for any research study is determined by the paradigm of the research and the nature of the research question(s). a survey questionnaire was used as a data collection tool for this study. the responses were grouped together according to the statements and an analysis of the grouped responses was conducted. each statement represented part of the objectives. the outcome of the analysis of the responses was then aligned to the variables of which the study intended to correlate. thereafter, a correlation between the two variables, the organisational structure and the organisational performance, was done. likert-scale type statements were used during data collection. according to boone and boone (2012) a likert-scale “is composed of a series of four or more likert-type items that are combined into a single composite score or variable during the data analysis process”. data was collected and financial risk and management reviews, 2019, 5(1): 10-24 18 © 2019 conscientia beam. all rights reserved. analysed from a positivist paradigm. an enumerative or descriptive statistical analysis was used during the data analysis process (jarausch and hardy, 1991). the collected data was represented both in tables of which the tables were used as the data source for graphical or figure representation of the results. for each section of the questionnaire, a table and a graphical presentation was developed. these contributed to the overall representation of the results for conclusion purposes. inferential statistical analysis was also used to infer the findings to the general public within the same context of the study. a basic inferential statistics in the form of correlation was used. a correlation coefficient as explained by byme (2007) “measures the strength of association between two variables, and reveals whether the correlation is negative or positive”. 4. data analysis the data collection instrument was composed of four sections. section a entailed the demographic information, section b, the job satisfaction, section c, the impact of the organisational structure on the departmental performance and section d the processes for the organisation to streamline the department‟s performance. the participants were identifiable as shown in table 1: table-1. participant identification. participant identification position level participants’ codes manager management pmp 1 administration hod's management amp 1 to 4 engineering/maintenance hod's management emp 1 to 5 general work hods management gmp 1 to 3 technical/skilled supervision tsp 1 to 21 non-technical/semi-skilled employees nep 1 to 216 the collected data was presented as per the pie charts in figure 2 below. these were related to the participants‟ service with the organisation, participants‟ service with the department, years in current positions, qualifications of participants, gender composition, participants‟ age and race composition. figure-2. data representation as pie charts. financial risk and management reviews, 2019, 5(1): 10-24 19 © 2019 conscientia beam. all rights reserved. the data showed in summary that 64% of the participants had been with the organisation for between 1 and 5 years, 62% had been in the department under study for between 1 to 5 years, 62% had been in their current position for between 1 to 5 years, 84% only have up to matric as their highest qualification, 57% were female while 43% were male, 55% were between the age of 30 to 39 years and 91% of them were of black african ethnicity 4.1. specific analysis from the core data collected, specific analysis was conducted for the purpose of inference as the core data did not directly correlate the variables identified for the study. 4.1.1. job satisfaction the main objective of the job satisfaction section was to measure the level of job satisfaction in order to identify the general feeling amongst the participants. statements were given to the participants. the participants had to respond to each statement by stating whether they strongly agree, agree, do not know, disagree and strongly disagree. the participants‟ responses are presented in figure 3. figure-3. job satisfaction survey. based on the statements presented to the participants and their responses, it was evident that the majority of the participants (88.14%) indicated that they were not satisfied with their current conditions or jobs. the correlation inherent to job satisfaction for each statement was based on the responses for each statement whereby some responses presented a positive scenario and others a negative scenario which would indicate an agreement or disagreement of the respondents towards the statements given. it was noted that majority of the respondents disagreed with the majority of the statements given which meant that the level of their job satisfaction was low. job satisfaction and performance are related. according to a study by bakotic (2016) there was evidence of the existence of a clear link between employee‟s job satisfaction and organisational performance. bakotic (2016) concluded that it could be stated that job satisfaction strongly determines organisational performance as opposed to organisational performance determining job satisfaction. in the context of this research, it can be said that since only 11.86% of the participants responded positively to job satisfaction in indicating that they are satisfied with their job, then performance is likely to be positively influenced by 11.86% of the participants while 88.14% negatively was affecting it. according to a case study by awan and asghar (2014) it was concluded that in general, there is a relationship between job satisfaction and performance. although this study did not directly correlate job satisfaction with the participants‟ performance, it can be inferred that the high percentage of participants, at 88.14%, who indicated that they were not satisfied with their jobs was one of the negative contributors to departmental performance. financial risk and management reviews, 2019, 5(1): 10-24 20 © 2019 conscientia beam. all rights reserved. 4.1.2. organisational structure impact on performance organisational structure impact on performance is presented by figure 4: figure-4. organisational structure impact on the departmental performance. the figure above shows that a high number of participants, at 85%, indicated a level of disagreement or strongly disagreement towards statements that were intended to determine their opinion on the impact of the organisational structure on the departmental performance. maduenyi et al. (2015) stated that organisational structure has an impact on organisational performance. the paper further concluded that performance of an organization largely depends on the structure of the organization. this means that if an organization has an adequately developed organisational structure, it would be easy to identify any shortfalls that may affect performance. an adequately developed organisational structure in this context is one whereby all personnel within the structure understand their roles, the roles of others and the influence of their performance on the overall organization. 4.1.3. pas organisational structure impact on performance organisational structure and performance are two variables that were considered by this research study. their relationship formed part of the analysis of this research study so as to understand the impact of the current organisational structure on the performance of the department. according to nahm et al. (2003) for an organisation to reduce its response time, its organisational structure must be developed such that it is effective. in this organisational structure according to nahm et al. (2003) workers manage their work independently. response time is one of the influencers of performance, thus the attestation by nahm et al. (2003) which indicated that organisational structures with fewer layers in the hierarchy have reduced response time which would positively contribute towards performance. a study conducted by bai et al. (2017) showed that “cross-functional integration improves performance of the team”. according to richard et al. (2009) as cited in hao et al. (2012) “organisational performance is anchored around a multi-dimensional conceptualization related predominantly to stakeholders, heterogeneous market circumstances, and time”. hao et al. (2012) introduced the concept of organisational learning. organisational learning, according to morales et al. (2007) as cited in hao et al. (2012) is the firm‟s capability to improve performance based on experience. hao et al. (2012) further cited sakalas and venskus (2007) stating that organisational structure is an important factor in knowledge management, and learning organisation is impossible to realize without respective organisation management structures. wong and cheung (2008) as cited in hao et al. (2012) asserted that there is a relationship between organisational learning and performance. they further stated that different kinds of organisational learning relate to performance. in this study, the organisational structure being studied showed a negative contribution towards performance. financial risk and management reviews, 2019, 5(1): 10-24 21 © 2019 conscientia beam. all rights reserved. 4.1.4. statistical analysis the standard deviation, effect sizes and confidence intervals were calculated. during the calculations, the data results were further grouped into two groups. the two groups were the group that supported the recommendations (group 1) and the group that had low job satisfaction levels (group 2). mean values were calculated from the two groups and for group 1 it was found to be 203.4285714 with a median of 225 and a mode of 225 and for group 2 , the mean value was found to be 29.6875 with a median of 3.5 and a mode of 0. although the standard deviation had minimal impact on this study, it was however calculated in order to indicate that the respondents did not all fall into the same category on the likert-scale responses. the standard deviation for group 1 was found to be 59.2007 while for group 2 it was 66.756. the standard deviation formula used considered only the sample data used. figure 5 below presents the data that was extrapolated from the mean value and standard deviation calculation to determine the effect sizes. figure-5. values used for the effect size calculations. . cohen‟s d, glass‟ delta and hedges‟ g were calculated and found to be as presented in table 2: table-2. effect size determinants. effect size determinants value cohen's d 2.753792 glass's delta 2.934779 hedges' g 2.753792 in this context, since the two groups have different standard deviations and the difference in the sample size is negligible, cohen‟s d and hedges‟ g was disregarded. instead, glass‟s delta was considered. this means that the two groups differ by 2.75379 standard deviations. however, this was not considered as an issue as it only indicated how much the two groups differ in terms of standard deviation. the two groups were not the direct variables used in this research, rather they were used as secondary data for the final analysis as they provided the research with information that was used for the descriptive analysis. the calculated glass‟s delta indicated that there was a relationship between group 1 and group 2, however their means were different. although the confidence interval between the two groups was found to be between 162.05091 and 185.43109, this means that one can be 95% confident that the difference between the two populations means lie between 162.05091 and 185.43109 only if the same process of sampling method is used. for inferential statistics analysis, a standard confidence interval using the t-distribution was used. using the mathportal computation method, the mean values were verified while the tvalues calculated. the t-value that indicates the difference between the sample data and the null hypothesis was found to be 7.4929, the degrees of freedom to be 28 and the critical value to be 2.048. the two groups of values used were only for inference purposes to the main aim of this study. financial risk and management reviews, 2019, 5(1): 10-24 22 © 2019 conscientia beam. all rights reserved. 5. conclusion and recommendations although no reference to the actual measurements of performance within the department was made, it was evident that the department‟s organisational structure is ineffective. the ineffectiveness of the organisational structure was observed to have been contributing to the low levels of job satisfaction within the participants in the study. thus it can be concluded that there is general low staff morale within the department. therefore, it could be concluded that since the organisational structure negatively impacted the staff morale, it also inadvertently negatively affected the performance of the department. this then implied that the current organisational structure does have a negative impact on the overall performance of the department. as indicated within the literature review, the departmental performance also influences the overall organisational performance, therefore it can be further concluded that the current departmental organisational structure is negatively affecting the organisational performance. since it is difficult to measure the influence of each demographic profile element such as age, race, gender, level of education, period in the current position and period in the organization, on performance, it can only be relied on inference regarding what impact these have on organisational performance. also, the research instrument was designed to establish a number of other elements such as job satisfaction, willingness to engage and support new proposals that influence the organisational structure composition; the conclusion showed the inference between these elements and the actual aim of this study. the study did not directly compare the analysis of performance and organisational structure influence on it but rather aimed at establishing the general consensus by the participants on the likelihood of them accepting suggestions and recommendations of the study. this then was used to conclude that it is clear that the current organisational structure has a negative impact on the participants, thus negatively affecting their general performance. personnel performance could then be directly linked to departmental performance. thus the assertion by the researcher in this study stated that the current organisational structure negatively affects/impacts organisational performance. the literature showed that according to robbins (1991) as cited in ahmed (2012), an organisational structure must be clear to everyone so as to avoid confusion about the reporting protocol and the actual approach to the functioning of the organization. the acceptance or agreement by the participants in relation to the recommendations brought forward implies that they are not satisfied with the current environment. the recommendations brought forward were related to the organisational structure review, skills improvement requirements, delegation of authority review and team building. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. contributors/acknowledgement: both authors contributed equally to the conception and design of the study. references ahmed, m.a., 2017. the importance of the organizational structuring and departmentalization in workplace. the journal of middle east and north africa sciences, 3(3): 30-38.available at: https://doi.org/10.12816/0034796. aquinas, p.g., 2008. in: organization structure and design. new delhi: excel books. pp: 7. argyris, c., 1973. personality and organizational theory revisited. 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tunisia 2associate professor in financial and accounting methods: lartige, fseg, university of sfax & fargo, iae dijon, france abstract in the current framework of behavioral corporate finance, this article studies the relationship between the managers’ overconfidence and firm performance through the financing structure in the tunisian context. our model seeks to identify if the financing structure as a mediating variable between the performance and overconfidence. the empirical study is based on a sample of 56 firm managers for the year 2014. the results of the conducted regressions confirm the existence of a mediating effect of the financing structure on the relationship between overconfidence and the performance of tunisian firms. keywords: overconfidence, financing structure, firm’s performance. received: 20 september 2016/ revised: 1 october 2016/ accepted: 5 october 2016/ published: 7 october 2016 contribution/ originality this study is one of the few studies which have investigated the indirect impact of overconfidence on the performance of tunisian firms through their financing structure; it is based on a new methodology that uses the theory of baron and kenny (1986) by utilising mediating variables to assess the relationship between the firm’s overconfidence and performance. 1. introduction the literature review conducted from the perspective of behavioral finance shows that the majority of the work examine the direct relationship between leaders’ overconfidence and the performance of the firm by ignoring the indirect relationship between these two variables (bernardo and welch, 2001; ben-david et al., 2006; keiber, 2006). for this reason, the research wishes to establish and develop the field of behavioral finance to business psychology inspired by adopting a more realistic nature than generally the one used in economics (market finance and corporate). so, this is an exploratory study carried out primarily through a literature review. this development is similar to a complementary or even, in some respects, a revolution of paradigms. indeed, some authors (hermalin and isen, 2000; heaton, 2002) studying the behavioral approach in the context of rationality (mainly substantive) and other (shiller, 1997) analyze the behavior outside this framework. in our study, we will focus on explaining how work performance is not only dependent on the growth and skills directly related to the activity of labour but also on the conduct which constitutes an essential element in making financial decisions in the firm. to do this, we will undertake a questionnaire with directors of listed tunisian firms. the purpose of this research is to explain the advantage of the behavioral approach apprehended by financial risk and management reviews 2016 vol. 2, no. 1, pp. 26-42 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2016.2.1/89.1.26.42 © 2016 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2016.2.1/89.1.26.42 financial risk and management reviews, 2016, 2(1): 26-42 27 © 2016 conscientia beam. all rights reserved. the leaders’ overconfidence as an alternative explanation for the performance of the firm through the funding structure. we fixed a reality, for a hypothetical-deductive approach, in order to detect the development of a research model based on a set of assumptions through the combination of theory on behavioral biases and exploratory qualitative study conducted on leaders. our position is, in essence, positivist (martinet, 1990; wacheux, 1996) since it is based on a deductive approach to test questionable research hypotheses (igalens and roussel, 1998). thus, we are trying in this research to describe the relationships between variables and test them to verify their loyalty when put to the test of reality in our sample of leaders. our research shows, then the following two sections: the first presents the theoretical model which posits that overconfidence could influence performance. in the midst of this direct relationship, interpose variables are related to the financing structure (equity, bank debt, bond debt and external equity). besides, being influenced by leaders’ overconfidence, these variables influence, in turn, performance. the second empirical section is designed to test the potential effect of the financing structure as a mediating variable between overconfidence and performance of the firm. 2. literature review and hypotheses overconfidence is the illusion of knowledge that makes individuals feel the accuracy of their information and capabilities as a selection (stock-picking). it is one of the most documented behavioral means (daniel and titman, 1999). in their synthesis on the foundations of behavioral finance, de bondt and thaler (1995) state that "overconfidence is one of the most relevant features in the psychology of judgment." these authors define an individual with excessive confidence in their own skills, abilities or knowledge. this bias, associated with that of optimism, is a central aspect of the current literature on behavioral finance to business as highlighted by baker et al. (2004): "optimism is an unrealistic overestimation of future events, not related to personal skills, while overconfidence reflects an overestimation of the past" (véronique, 2007). explicitly, in the modeling of these two means, optimism is captured as an average error (overestimation) and overconfidence as an underestimation of the variance, but the two terms are often used interchangeably (fairchild, 2005). in addition, these biases are often paralleled (heaton, 2002; gervais et al., 2003) and combined, especially in the illusion of control when the individual thinks he can control, thanks to his abilities, purely random events. thus, according to daniel et al. (2001) overconfidence is stronger in activities that involve valuation difficulties, and this is why the feedback on the quality of the evaluation is ambiguous. roll (1986) was the first to introduce the idea of optimistic and confident leader in finance. the principle defines the leaders of the acquiring companies as overestimating the gains resulting from these transactions and thus on average paying high prices for shareholders of target companies, thus leading to the phenomenon of the winner's curse. according to weinstein (1980) excessive optimism is connected to trust; therefore, these two biases are distinct. considering the definition of hackbarth (2004) optimistic managers overestimate the earnings growth rate, while the on-confident managers underestimate the risks of gains. hackbarth (2004) compares his model in the decisions of a biased and unbiased leader, he finds that optimism produces an overestimation of earnings growth rates, while overconfidence reduces the variance from expected results. both effects lead to underestimate the probability of the investment project bankruptcy (bernardo and welch, 2001) consider that the presence of overconfident leaders play a positive role within the group and transmit private information about the area other leaders likely to follow. indeed, the impact of overconfidence on financial decisions and business performance has been studied, both on a theoretical and empirical, since the early two miles. these early contributions confirm the effect of the bias, which is not necessarily negative, however. financial risk and management reviews, 2016, 2(1): 26-42 28 © 2016 conscientia beam. all rights reserved. yet, few studies have tried to link the three dimensions in one perspective, i.e. trust, financing structure and performance. indeed, this relationship is very complex; it must be specified by including the mediating concept of the financing structure. this assumes that the direct relationship between overconfidence and performance is rather an indirect relationship through the influence of the financing structure in enterprises. therefore, the funding structure acts as a mediating variable in the relationship between leaders’ overconfidence and business performance. considering the scarcity of work, our research objective is to answer the question: how leader’s overconfidence has an indirect effect on the performance of the firm through the firm's financing structure. several theoretical developments and empirical tests have been developed to study the impact of the excess through confidence in the major financial decisions, namely the investment decision and the financing (heaton, 2002; hackbarth, 2004; malmendier et al., 2005). several studies show that the direct relationship between the leaders ‘overconfidence and the firm performance is unstable. it can be positive, negative or non significant (bernardo and welch, 2001; bendavid et al., 2006; keiber, 2006). therefore, it is recommended to introduce a mediating variable, the financing structure (apprehended by the various modes of financing, namely: self-financing, bank loans, bond debt and external equity) that allows to stabilize the impact of executives’ confidence on business performance. we start with self-financing that plays a very important role, it increases the profitability of investments and business performance. indeed, leaders believe that being confident about the decisions they make will help to pursue conflicting objectives, namely: maximizing the fundamental value and minimizing capital costs. for this reason, confident leaders prefer internal financing (self-financing). however, self-financing is a free, renewable resource for leaders as for the company, it allows some financial independence, good control of financial charges, and gives the company freedom of action because it is independent of its creditors. then, it is of lower cost. besides, confident leaders think that self-financing would lead neither to a waste of funds nor to conservatism, but rather it would have a leverage accelerator to research new ideas. all these arguments lead us to say that cash is more interesting for leaders and for good performance. we then deduce the following hypothesis: h1: the use of self –financing positively mediates the relationship between overconfidence managers and performance of the firm. hackbarth (2004) develops a model of capital structure based on the trade-off theory to study the impact of bias optimism and managerial confidence on the financial policy and the company's value. he believes in optimism by overestimating earnings growth rates and trust by an underestimation of the variance results anticipated by management. the author examines leaders’ confidence about choosing a high debt ratio and emits mostly debt relative to rational leaders, which significantly impacts the capital structure. according to jensen and meckling (1976) companies ‘debt is considered as one of the leaders’ control tool that reduces discretionary cash flow. according to several studies and research, debt plays a very important role in explaining the performance of businesses, namely the study of modigliani and miller (1958). furthermore, the confident leaders’ use of debt is a way to support business operations, improve productivity and stimulate economic growth on the one hand, and increases their performance on the other. moreover, confident leaders prefer this type of funding, that pushes for modernization and innovation, and streamline production because debt compresses manufacturing costs. it therefore appears that the debt is required for the performance of the company. it is considered as a sacrifice of economic resources today in the hope of obtaining higher revenues in the future. from this point of view, should be favored by innovative firms with high quality. in addition, debt (bank or bond) opens more prospects other than financing alternatives. indeed, a company issuing a bond sells its signature, hence its "serious" and "reputation" on the market, so that when the company financial risk and management reviews, 2016, 2(1): 26-42 29 © 2016 conscientia beam. all rights reserved. launches bidding to acquire the equipment they need as part of the project, suppliers know that it has already funds this has considerable influence on performance. we then deduce the following assumptions: h2: the recourse to bank debt positively mediates the relationship between overconfidence managers and performance of the firm.. h3: the use of bond debt positively mediates the relationship between overconfidence managers and performance of the firm. the use of external capital is also an important operation for the company; it allows the structures of the company to consolidate its business. indeed, the company can better manage its working capital or even increase it. in addition, it will gain in economic credibility, to the extent that it may strengthen its capital base. finally, this operation evokes stability in his favor of shareholders, associates and creditors. the confident leaders feel that this transaction as it increases the capital is important in the lives of enterprises to strengthen capital and ensure balanced economic development project. moreover, the capital increase is an acquisition mode of the company but also serves to strengthen its balance sheet when the company is financially weakened. thus, it improves the ratio of financial independence and leaves room for new debt capacity. this method of financing has a major advantage over the performance of the firm, since it is free which automatically leads to an increase in equity and therefore stable resources and turnover of the company funds, resulting in a good financial health of the business. however, to our knowledge, no studies have been conducted yet to show the intermediary role of the financing structure in the relationship of trust on leadership and performance of the firm. we then deduce the following hypothesis: h4: the use of external funds positively mediates the relationship between overconfidence managers and performance of the firm. 3. empirical analysis this section is designed to test the mediating effect of the financing structure in the relations between overconfidence managers, on one hand, and the performance of the firm, on the other. first, we will present our sample, the dependent and independent variables and the multivariate analysis method (hierarchical). the presentation and interpretation of the results of this study will be a second subsection. 3.1. presentation of data variables and measures for our research, a study data from the annual reports of 56 listed companies in the tunisian stock exchange in tunis for the year 2014 and a questionnaire (conducted for my master thesis) sent to their leaders are conducted. these companies belong to the industrial, service, media and travel sectors. our study includes 3 main variables: the dependent variable: the performance of the firm, an independent variable: overconfidence and a mediating variable: the funding structure (self-financing, bank debt, bond debt and external funds). financial risk and management reviews, 2016, 2(1): 26-42 30 © 2016 conscientia beam. all rights reserved. figure-1. conceptual model of the mediating effect of the financing structure in the relationship of overconfidence with the performance of the firm source: manel (2015). 3.1.1. dependent variable: the performance of the firm performance is the ending result of all efforts of a company the company’s efforts. indeed, they are doing the right thing in the right way, at the right time and cost to produce good results that meet the needs and expectations of customers, giving them satisfaction and achieving the goals set by the organization. we can say that a successful company must be both effective and efficient1. it is effective when it accomplishes the objectives it has set to minimize the resources implemented. it is also effective when it reaches the goals it has set to achieve the welfare of its stakeholders ‘parts. furthermore, performance is measured with qualitative or quantitative indicators of outcome. to measure effectiveness, we will be using a criterion that expresses a relationship between the result and the goal. to measure efficiency, we will be using a criterion that expresses a relationship between the result obtained and the means used. to evaluate the performance of a company, it is necessary to set measures at all levels: economic and financial. like previous studies, we define the economic performance of the firm by the return on assets "roa" operating income before depreciation and r & d / total assets (zouari and zouari-hadiji, 2014a; 2014b)2 and financial performance by the market to book "mtb" = market capitalization / book value of equity (zouari and zouarihadiji, 2014a; 2014b). 3.1.2. independent variable: overconfidence the identification of relevant and operational measure of overconfidence is not an easy exercise to handle in the sense that this measure must be earlier and exogenous to the decision in order to determine the direction of causality (véronique, 2007). according malmendier and tate (2005b) two different approaches to measure this way: the first is an approach called "internal" bias, it is revealed preference by the leader himself through his answers to a 1 according charreaux (1999). efficiency "refers to the performance of a collective entity appreciated by the welfare provided to its stakeholders, that is to say by all the individuals whose the utility is affected by the decisions of the entity. however, efficiency is a different concept that refers to the means used by the players to achieve their goals. a negotiation is deemed effective if the actors have used their best resources to achieve their goals. the aggregation of the effective behavior of individuals does not necessarily lead to produce an efficient organizational behavior. in some cases, we also will bead efficiency "informational" to describe the ability of markets to reflect the information in prices. " 2 this measure of performance accounting has the advantage of eliminating the effect of accounting choices related to the treatment of r & d expenses in the financial statements largely prone to opportunism of the leaders. financial risk and management reviews, 2016, 2(1): 26-42 31 © 2016 conscientia beam. all rights reserved. questionnaire or the exercise of such stock options. the second so-called "external" approach is to analyze the perception and description of the leader by third parties such as the press. russo and schoemaker (1992) propose specific questions and ask the leaders to rank the relevance of questions about their work. the introduction of different questions depending on the questioned individual aims at improving interindividuals comparison, and therefore, detect overconfidence. this requires an individual pre-calibration of the relevance and difficulty of the questions. ben-david et al. (2006) used a simpler methodology, the same question is asked to all leaders (expected evolution of the market index, but general issue which can assume relevant to cfos of listed companies that constitute the sample) every quarter for four years. overconfidence is then measured by the difference between volatility perceived ex ante and the actual volatility of the index calculated ex post. in our study, we chose the questionnaire as a tool for measuring overconfidence. the questionnaires are questions based on the investor profile developed by the research unit on savings (pes) of the company fern hill. each item is encoded by a likert scale of 5 points (from "strongly disagree" = 1 to "strongly agree" = 5). 3.1.3. mediating variable: the financing structure in our study, the mediating variables related to the financing structure are self-financing, bank debt, bond debt and external funds. to measure these variables, we use financial statements of listed tunisian firms for 2014. 3.1.4. control variables for more results reliability, we have introduced control variables that have a significant effect on performance. the multiple linear regression models used in this empirical study retain the size of the company and its industry. the firm size is measured by the natural logarithm of total company assets. this measure has been used in several studies such as (nekhili et al., 2012; zouari and zouari-hadiji, 2013;2014a;2014b). the industry is a dummy variable taking the value 1, if firms belong to a high-tech sector and 0 if not. this measure has been used by several researchers such as zouari and zouari-hadiji (2013;2014a;2014b) and zouari and zouari-hadiji (2010). the explanatory and control variables influence the performance of the company and check its multidimensionality. they are as distinct from each other and present as shown in appendix table 9, a low correlation and / or nonsignificant between them. 3.2. the modeling assumptions the empirical study of this research is based on the use of hierarchical regression models3 to test research hypotheses. to verify all assumptions, we need to test the existence of a mediator. the verification of this effect is achieved by the construction of three models. according to baron and kenny (1986), four conditions to are check a complete mediating effect of m in the framework of the x-y relationship:  condition (1): the variable x must have a significant impact on variable y.  condition (2): the variable x must have a significant impact on mr. 3 in this work, the treatment of mediating variables should follow the approach devised by baron and kenny (1986). this framework, which aims at testing the mediating effect, is implemented via a multiple-hierarchical regression. this analysis consists in assessing the total effect (cumulative) of the explanatory variables on a certain criterion. the method can be performed on the basis of several steps. firstly, it undertakes to test the predictor effect (independent variable) firstly on he criterion (dependent variable) and, secondly, on the mediator using partial and simple regressions. then, the other relationship has to be tested (predictor and mediator on the criterion). in this case, a multiple-hierarchical regression has to be applied. it consists in gradually introducing certain independent variables into the regressionequation: starting with the predictors and control variables (step 1), then the mediating variable (step 2). on reaching an increase in the adjusted r² after inserting the mediator, one is able to assume the mediator effect on the relationship between the predictor and the criterion zouari and zouari-hadiji (2014a; 2014b). financial risk and management reviews, 2016, 2(1): 26-42 32 © 2016 conscientia beam. all rights reserved.  condition (3): the supposed mediator variable m has significantly influence the variable y, where the influence of variable x on y is controlled.  condition (4): the significant influence of the variable x on y should disappear when the effect of m on y is controlled statistically. econometrically, we estimate models 1-3 testing the indirect relationship between the trust and on firm performance by the effect of the financing structure (self-financing). these models allow the validation of the hypothesis (h1) (1) i (2) (3) equations 4-6 test the indirect relationship between the firm’s overconfidence and its performance by the effect of the financing structure (bank debt). these equations are used to validate the hypothesis (h2) (4) (5) (6) equations 7-9 test the indirect relationship between firm’s overconfidence and its performance by the effect of the financing structure (bond debt). these equations are used to validate the hypothesis (h3) (7) (8) (9) equations 10-12 test the indirect relationship between firm’s overconfidence and its performance by the effect of the financing structure (external funds). these equations are used to validate the hypothesis (h4) (10) (11) (12) with, perf i: variable measured by roa ratios and mtb of firm i, sconf i: score overconfidence calculated through a questionnaire of firm i, autof i: this is the result of firm i + amortization, fonds ext i: external capital firm i, the capital increase, dette banc i: bank debt of the company i, dette obliga i: bond debt of the company i, financial risk and management reviews, 2016, 2(1): 26-42 33 © 2016 conscientia beam. all rights reserved. tail i: the natural logarithm of total assets of firm i, sect i: a binary variable which takes the value 1 if the firm i belongs to a high-tech industry sector, and 0 inversely, β0, β1, β2, β3, β4, β5, β6: parameter estimate, i: standard error. 3.3. presentation and interpretation of results this section aims to present the results of the testing hypotheses that relate to overconfidence to the company's performance (roa, mtb) through the financing structure (autof, dette banc, deete obliga, fonds ext). in order to submit our assumptions, we estimated models of separate regressions for each of the four stages of the process of baron and kenny (1986). model 1 (reduced model) contains the independent variable and the control variables in predicting the performance of the firm. model 2 on the other side (reduced model), seeks to explain the variation of the mediator variable (financing structure) in a third step by the independent variable (sconf) and control variables. model 3 (full model) includes all the variables: the independent variable (sconf) and mediating variables (autof, dette banc, deete obliga, fonds ext). the control variables (tail, sect) seeking to explain the variable dependent, ie the performance of the firm. 3.3.1. interpreting the results of the indirect relationship between the overconfidence and firm performance through self-financing according to the results in table 1, the first condition was met, as the model 1 (which tests the relationship between the variable sconf and roa) has a low explanatory power (r2 adjusted = 0.041). the overall quality of the model is significantly acceptable (f = 0.163 at the 10% threshold), however, when performance is measured by mtb, the model in question has a very low explanatory power (r2 adjusted = 0.019), and test fisher becomes insignificant (f = 0.269, p> 10%). the student’s tests reveal that sconf variable has a positive and significant impact when performance is measured by roa ( = 0.236, t = 1.704, p <10%), while mtb is not significant ( = 0093, t = -0661, p> 10%). the objective of the second step is to demonstrate the existence of a relationship between sconf and autof. model 2 shows that overall quality is statistically significant at the 10% level and the sconf variable is positively and significantly associated with autof tunisian companies ( = 0.214, t = 2.080, p <5%), and hence the second condition in the approach baron and kenny (1986) holds true. table-1. results of hierarchical regression of steps 1 and 2 (model 1 and 2) to tunisian company variables step 1 model 1 step 2 model 2 firm’s performance self-financing roa mtb t t t v. control tail -0.201 -1.501 n.s 0.042 0.314 n.s 0.587 5.927 *** sect -0.059 -0.430 n.s 0.227 1.638 * 0.230 2.267 n.s v. independent sconf 0.236 1.704 * -0.093 0.661 n.s 0.214 2.080 ** r 2 ajusted 0.041 0.019 0.474 f 0.163 * 0.269 n.s 0.000 * *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant financial risk and management reviews, 2016, 2(1): 26-42 34 © 2016 conscientia beam. all rights reserved. examining the results of table 2 reveals a positive and significant relationship between self-financing and the two indicators of firm performance (roa and mtb), from these results we can see that self-financing has a positive impact on the economic and market performance of the company (for roa, = 0.034, t = 0.045, p <5%; and for mtb: = 0.088, t = 0.098, p <10%). model 3 (full model) is used to verify third-mediated condition of self-financing between sconf and firm performance (roa and mtb). the results of the hierarchical regression analysis indicate that the self-financing (mediating variable) remains important in explaining the dependent variable (the two forms of performance) after considering the predictor variable. the statistical coefficient of autof variable has a positive and significant value to roa ( = 0.002, t = 0.032, p <10%) and also with respect to mtb ( = 0.065, t = 0.078, p <10%). it appears from these results that the third condition is completely verified. it only remains to verify the last condition, that is to say the effect of the predictor sconf on the dependent variable (roa and mtb) which should not be significant once the possible mediator (autof) is considered. the results in table 2 show that the coefficients associated with the variable sconf are statistically significant for the indicator (roa) of the performance of the firm ( = 0.271, t = 1.872, p <10%) and nonsignificant for mtb ( = 0.078, t = 0.528). it follows that the mediation by self-financing is a partial mediation on confidence and performance of the firm. through these results, we see that the sconf variable has a positive effect when the firm performance is measured by mtb. from these results, the hypothesis 1 is confirmed (partial mediation) with tunisian companies. table-2. results of hierarchical regression steps 3 and 4 (model 3) to tunisian companies variables step 3 step 3 and 4 model 3 firm’s performance firm’s performance roa mtb roa mtb t t t t v. control tail 0.124 -0.697n.s 0.089 0.506 n.s -0.106 0.609 n.s 0.084 0.473 n.s sect 0.140 -0.960n.s 0.223 1.556 n.s -0.096 0.668 n.s 0.211 1.439 * v. independent sconf 0.271 1.872 * 0.078 0.528 n.s v. mediator autof 0.034 0.045 ** 0.088 0.098 * 0.002 0.032 * 0.065 0.078 * r 2 ajusted 0.053 0.051 0.098 0.095 f 0.049** 0.095* 0.002* 0.056* adjusted r² variation 0.057 0.076 *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant from table 2 (model 3), we found that the control variables (tail, sect) are not statistically significant for both indicators of firm performance (roa, mtb), except the coefficient of sect variable that is statistically significant for the mtb indicator ( = 0.211, t = 1.439, p <10%). indeed, the industry has a positive impact on the market performance. however, the company size is not an important factor in analyzing the performance of the firm. according to table 2, for both measures of performance, model 3 (full model) has an interesting adjusted explanatory power. thus, this comprehensive model, which takes into account the mediating effect of self-financing, also increases the percentage of explained variance from model 1, in cases where performance is measured by roa, adjusted r2 passes from 0.041 to 0.098. similarly, when performance is measured by mtb, adjusted r2 passes from 0.019 to 0.095 and the f statistic becomes significant in model 3 at the 10% threshold than that in the model 1 (not significant). the adjusted r2 of increase is linked to the consideration of the mediating effect of self-financing, so the financial risk and management reviews, 2016, 2(1): 26-42 35 © 2016 conscientia beam. all rights reserved. change in adjusted r2 for the two models associated with the addition of the mediating variable is significant (0.057 and 0.076). this shows that this variable is a good predictor of the dependent variable, namely the performance of the firm. the mediator variable (autof) allows us to better explain the causal relationship between overconfidence and the performance of the firm. 3.3.2. interpreting the results of the indirect relationship between the overconfidence and firm performance through bank debt consistent with previous results, the first condition of the relationship between the variable sconf and roa was filled (see table 3). the objective of the second step is to demonstrate the existence of a relationship between sconf and bank debt (bank debt). model 2 shows that the overall quality is statistically significant at the 10% level and the sconf variable is positively and significantly associated with bank debt tunisian companies ( = 0.045, t = 0.098, p <10%), and the second condition of baron and kenny (1986) holds true. table-3. results of hierarchical regression of steps 1 and 2 (model 1 and 2) to tunisian companies variables step 1 model 1 step 2 model 2 firm’s performance bank debt roa mtb t t t v. control tail -0.201 -1.501 n.s 0.042 0.314 n.s 0.465 4.670 *** sect -0.059 -0.430 n.s 0.227 1.638 * 0.526 5.158 *** v. independent sconf 0.236 1.704 * -0.093 0.661 n.s 0.045 0.098 * r 2 ajusted 0.041 0.019 0.325 f 0.163 * 0.269 n.s 0.08 *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant examining the results of table 4 shows a significant positive relationship between bank debt and both indicators of firm performance (roa and mtb). from these results we see that bank debt has a positive impact on the economic and market performance of the company (for roa, = 0.065, t = 0.096, p <10%; and for mtb: = 0.015, t = 0.045, p <5%). model 3 (full model) is used to verify third-mediated condition in bank indebtedness between sconf and firm performance (roa and mtb). the results of the hierarchical regression analysis indicate that bank debt (mediating variable) remains important in explaining the dependent variable (the two forms of performance) after considering the predictor variable. the statistical coefficient of the variable "debt bank" has a positive and significant value compared to the roa ( = 0.028, t = 0.150, p <10%) as compared to mtb ( = 0.056, t = 0.086, p <10 %). it appears from these results that the third condition is completely verified. it only remains to verify the last condition, that is to say the effect of the predictor sconf on the dependent variable (roa and mtb) which should not be significant once the possible mediator (debt banc) is considered. the results in table 4 show that the coefficients associated with the variable sconf are not statistically significant whatever the extent of the performance will be then it was statistically significant at the first step of the process of baron and kenny (1986) when compared to measuring the performance roa. the regression coefficients of the variable sconf have insignificant signs relative to roa ( = 0.012, t = -0.158, p> 10%) and the mtb ( = 0.068, t = -0.490, p> 10%). it follows that the mediation by bank debt is between full confidence on and performance of the firm. from these results, the hypothesis is validated with two tunisian companies. financial risk and management reviews, 2016, 2(1): 26-42 36 © 2016 conscientia beam. all rights reserved. table-4. results of hierarchical regression steps 3 and 4 (model 3) to tunisian companies variables step 3 step 3 and 4 model 3 firm’s performance firm’s performance roa mtb roa mtb t t t t v. control tail 0.112 1.166 * 0.180 1.148 * 0.020 1.730 * 0.186 1.174 * sect 0.156 0.060 * 0.412 2.581** 0.068 1.689 * 0.390 2.325 ** v. independent sconf 0.012 0.158 n.s 0.068 0.490 n.s v. mediator dette banc 0.065 0.096 * 0.015 0.045 ** 0.028 0.150 * 0.056 0.086 * r 2 ajusté 0.056 0.065 0.057 0.039 f 0.042 ** 0.091 * 0.053* 0.098 * adjusted r² variation 0.016 0.002 *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant from table 4 (model 3), we note that the control variables (tail, sect) are statistically significant for both indicators of firm performance thresholds of 5% and 10%. these results are consistent with the work of strahan (1999) stipulating that the size of the company and the industry are two indicators necessary for the evaluation of the performance of a company. the results of these two variables emphasize their importance among the leaders in the financial decisions (financing, investment ...). according to table 4, for both measures of performance, model 3 (full model) has an interesting adjusted explanatory power. thus, this comprehensive model, which takes into account the effect of the mediator bank debt, also increases the percentage of explained variance from model 1. in cases where performance is measured by roa, adjusted r2 passes from 0.041 to 0.057. similarly, when performance is measured by mtb, adjusted r2 passes from 0.019 to 0.039 and the f statistic becomes significant in model 3 at the 10% threshold than that of the model 1 (not significant). the adjusted r2 of increase is related to the consideration of the mediating effect of bank debt. thus, the variation of adjusted r2 for both models associated with the addition of the variable is an important mediator (0.016 and 0.002). this shows that this variable is a good predictor of the dependent variable, namely the performance of the firm. 3.3.3. interpreting the results of the indirect relationship between the overconfidence and firm performance through the bond debt consistent with the previous results, the first condition of the relationship between the variable sconf and roa was filled (see table 5). the objective of the second step is to demonstrate the existence of a relationship between sconf and bond debt (debt obliga). model 2 shows that overall quality is statistically significant at the 10% level and the sconf variable is positively and significantly associated with debt obliga tunisian companies ( = 0.065, t = 0.038, p <10%), and the second condition of baron and kenny (1986) holds true. table-5. results of hierarchical regression of steps 1 and 2 (model 1 and 2) to tunisian companies variables step 1 model 1 step 2 model 2 firm’s performance bond debt roa mtb t t t v. control tail -0.201 1.501 n.s 0.042 0.314 n.s 0.294 2.340 ** sect -0.059 0.430 n.s 0.227 1.638 * 0.332 2.583 ** v. independent sconf 0.236 1.704 * -0.093 0.661 n.s 0.065 0.038 * r 2 ajusted 0.041 0.019 0.154 f 0.163 * 0.269 n.s 0.080 *** significant at1%, ** significant at 5%, *: significant at 10%, n.s: not significant financial risk and management reviews, 2016, 2(1): 26-42 37 © 2016 conscientia beam. all rights reserved. examining the results of table 6 shows a positive and significant relationship between the bond debt and both indicators of firm performance (roa and mtb). from these results, we see that the bond debt has a positive impact on the economic and market performance of the company (for roa, = 0.027, t = 0.178, p <10%; and for mtb: = 0.026, t = 0.046, p <10%). model 3 (full model) is used to verify third-mediated condition of the bond debt between sconf and firm performance (roa and mtb). the results of the hierarchical regression analysis indicate that the bond debt (mediating variable) remains important in explaining the dependent variable (the two forms of performance) after considering the predictor variable. the statistical coefficient of the variable debt obliga has a positive and significant value compared to the roa (= 0.004, t = 0.030, p <10%) as compared to mtb ( = 0.186, t = 0.076, p <10%). it appears from these results that the third condition is completely verified.it only remains to verify the last condition, that is to say the effect of the predictor sconf on the dependent variable (roa and mtb) which should not be significant once the possible mediator (dette obliga) is considered. the results in table 6 show that the coefficients associated with the sconf variable are statistically significant for both indicators of the performance of the firm (for roa: = 0.236, t = 1.678, p <10% and mtb: = 0.163, t = 0.012, p <10%). it follows that bond debt is not a mediating variable on overconfidence and performance of the firm. from these results, the hypothesis 3 is not validated with tunisian companies. table-6. results of hierarchical regression steps 3 and 4 (model 3) to tunisian companies variables step 3 step 3 and 4 model 3 firm’s performance firm’s performance roa mtb roa mtb t t t t v. control tail 0.172 1.199 n.s 0.086 0.620 n.s -0.202 -1.423 n.s 0.096 0.680 n.s sect 0.130 0.903 n.s 0.311 2.223 ** -0.060 -0.411 n.s 0.288 1.965 * v. independent sconf 0.236 1.678 * 0.163 0.012 * v. mediator dett e oblia 0.027 0.178 * 0.026 0.046 * 0.004 0.030 * 0.186 0.076 * r 2 ajusted 0.022 0.041 0.059 0.028 f 0.055 * 0.101 * 0.067 * 0.086 * adjusted r² variation 0.018 0.009 *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant from table 6 (model 3), we find that the control variables (tail, sect) are not statistically significant for both indicators of firm performance (roa, mtb), except the variable coefficient sect which is statistically significant for the mtb indicator ( = 0.288, t = 1.965, p <10%). we conclude then that the industry has a positive impact on the market performance, as the company size is not an important factor in analyzing the performance of the firm. this leads us to also consider that large companies do not have necessarily a high level of confidence on leadership and high performance. according to table 6 for both measures of performance, model 3 (full model) has an interesting adjusted explanatory power. thus, this comprehensive model, which takes account of the bond debt mediate, also increases the percentage of explained variance from the model 1. in cases where performance is measured by roa, adjusted r2 passes from 0.041 to 0.059. similarly, when performance is measured by mtb, adjusted r2 passes from 0.019 to 0.028 and the f statistic is significant at the 10% level in model 3 than in model 1 (not significant). the adjusted r2 of increase is related to the consideration of the mediating effect of the bond debt. the change in adjusted r2 for the two models associated in addition with the mediating variable is significant (0.018 and 0.009). financial risk and management reviews, 2016, 2(1): 26-42 38 © 2016 conscientia beam. all rights reserved. this shows that this variable is a good predictor of the dependent variable, namely the performance of the firm. but, these results do not confirm our hypothesis (h3). 3.3.4. interpreting the results of the indirect relationship between the overconfidence and firm performance through external funds consistent with previous results, the first condition of the relationship between the variable sconf and roa was filled (see table 7). the objective of the second step is to demonstrate the existence of a relationship between sconf and external funds. model 2 shows that the overall quality is statistically significant at the 10% level and the sconf variable is positively and significantly associated with fonds ext tunisian companies ( = 0.257, t = 1.990, p <10%), and the second condition of baron and kenny (1986) holds true. table-7. results of hierarchical regression of steps 1 and 2 (model 1 and 2) to tunisian companies variables step 1 model 1 step 2 model 2 firm’s performance external funds roa mtb t t t v. control tail 0.201 1.501 n.s 0.042 0.314 n.s 0.320 2.565 ** sect 0.059 0.430 n.s 0.227 1.638 * 0.096 0.755 n.s v. independent sconf 0.236 1.704 * 0.093 0.661 n.s 0.257 1.990 * r 2 ajusted 0.041 0.019 0.169 f 0.163 * 0.269 n.s 0.050 *** significant at 1%, ** significant at 5%, *: significant at 10%, n.s: not significant examining the results of table 8 reveals a positive and significant relationship between external funds and two indicators of firm performance (roa and mtb). from these results, we see that external funds have a positive impact on the economic and market performance of the company (for roa: = 0.032, t = 0.006, p <10%; and for mtb: = 0.091, t = 0.075, p <10%). model 3 (full model) is used to check the condition of third mediation between own external funds sconf and firm performance (roa and mtb). the results of the hierarchical regression analysis indicate that external funds (mediating variable) remain important in explaining the dependent variable (the two forms of performance) after considering the predictor variable. the statistical coefficient of the variable fonds ext has a positive and significant value compared to the roa ( = 0.015, t = 0.066, p <10%) and mtb ( = 0.022, t = 0.058, p <10%). it appears from these results that the third condition is completely verified. the results in table 8 show that the coefficients associated with the variable sconf are not statistically significant regardless of the extent of the performance of the firm retained, while it was statistically significant for the roa in the first step of the process baron and kenny (1986), the regression coefficients of the variable sconf have no significant signs relative to roa ( = 0.082, t = 0.875, p> 10%) and the mtb ( = -0.077, t = -0.527, p > 10%). it follows that the mediation by external funds is full on between the overconfidence and performance of the firm. through these results, we see that the sconf variable has a positive effect on firm performance. the assumption 4 is then validated with tunisian companies. according to table 8 for the two performance measures, model 3 (full model) has an interesting adjusted explanatory power. thus, this comprehensive model, which takes into account the mediating effect of external capital, also increases the percentage of variance explained from the model 1. in cases where performance is measured by roa, adjusted r2 passes from 0.041 to 0.089. similarly, when performance is measured by mtb, adjusted r2 passes from 0.019 to 0.056 and the f statistic is significant at the 10% level in model 3 that financial risk and management reviews, 2016, 2(1): 26-42 39 © 2016 conscientia beam. all rights reserved. the model 1 (not significant). the adjusted r2 of increase is linked to the consideration of the mediating effect of external funds. the change in adjusted r2 for the two models associated with the addition of the mediating variable is significant (0.048 and 0.037). this shows that this variable is a good predictor of the dependent variable, namely the performance of the firm. table-8. results of hierarchical regression steps 3 and 4 (model 3) to tunisian companies variables step 3 step 3 and 4 model 3 firm’s performance firm’s performance roa mtb roa mtb t t t t v. control tail 0.065 1.723 * 0.057 0.398 n.s 0.188 1.668 * 0.062 0.425 n.s sect 0.131 0.950 n.s 0.238 1.753 * -0.072 0.519 n.s 0.221 1.575 n.s v. independent sconf 0.082 0.875 n.s -0.077 0.52 n.s v. mediator fonds ext 0.032 0.006 * 0.091 0.075 * 0.015 0.066 * 0.022 0.058 * r 2 ajusted 0.015 0.027 0.089 0.056 f 0.009 * 0.056 * 0.075 * 0. 098 * 0.048 0.037 *** significant at 1% , ** significant at 5%, *: significant at 10% , n.s: not significant the results in table 8 (model 3) show that the control variables (tail, sect) are not statistically significant for both indicators of the performance of the firm, unless the statistical coefficient of tail variable has a positive value and significance compared to roa ( = 0.188, t = 1.668, p <10%). this result is consistent with the work of strahan (1999) stipulating that the size of the business is a necessary indicator for evaluating the performance of a company. we believe that the company size is a decisive and significant criterion for the firm’s performance and financing structure. from these results, we note that the tunisian listed firms in the tunis stock exchange seem to prioritize their funding resources by favoring self-financing at the expense of external resources. if they have to resort to external funding, they prefer the obligator bank debt. the validation of the funding hierarchical theory is based on the existence of asymmetric information that could lead to adverse selection problems from external investors. the role of information asymmetry on the choice of tunisian companies funding is confirmed. the most sensitive information asymmetry a reveals that companies rely primarily on debt. however the least affected by adverse selection companies prefer the emissions of capital. 4. conclusion under the current behavioral finance companies, this article examined the relationship between the company’s overconfidence and performance through the funding structure. the emerging literature on overconfidence confirms the marked presence of bias among business leaders. theoretical approaches, however, do not conclude in a systematically negative effect, particularly in the case of a moderate confidence. several studies show the positive effect of managers’ overconfidence on financial decisions (debondt and thaler, 1994; bukszar, 2003; véronique, 2007). the majority of these studies focus on the direct relationship between managers’ overconfidence and performance without taking account of other intermediate factors that may be relevant for the understanding of this indirect relationship. empirically, the regression results show that leader’s overconfidence has an impact on the performance of tunisian companies through the mediation of the financing structure. indeed, these results indicate that tunisian financial risk and management reviews, 2016, 2(1): 26-42 40 © 2016 conscientia beam. all rights reserved. companies have an interest to finance their activities and investments using the various modes of financing such as self-financing, bank loans, bond debt and equity external funds can be to increase their performance. moreover, we noted that the confidence of the manager plays an important role in improving the performance of tunisian companies. the modeling of relations between the three concepts, namely overconfidence / financing structure / firm performance, could be summarized as follows. because the funding structure could act as a mediating variable, checking this mediating effect was achieved by developing models based on variables selected in this study. in this respect, our results indicate that the sconf variable is relevant in determining the mediate with the methodology of baron and kenny (1986). indeed, considering the mediating variable, the financing structure improves in a significant way the explanatory power of the model based on overconfidence / financing structure / performance. from these results, we note that the mediating variable is a good predictor of the dependent variable, namely the performance of the firm. however, hierarchical regressions show that control variables have a significant effect on the financing structure and the performance of the firm. this angular part allowed us above all to empirically explore the contrast between what the theory says and what is observed in practice. this study limits and still leave many questions open about the issue of performance, overconfidence and the funding structure. the model should include other variables to represent more fully the economic reality. finally, the consideration of overconfidence opens new perspectives in corporate finance, including a renewal of issues relat related to governance mechanisms and value creation associated with the ability to develop 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(4) -0.219 0.014 0.143 1 fonds ext (5) -0.270 0.043 0.183 0.495 1 tail (6) 0.253 0.331 0.250 -0.044 -0.051 1 sect (7) 0.230 0.153 0.316 0.387 0.313 0.357 1 (1) note: that all the correlations between the explanatory variables are significantly smaller than 0.6 (threshold at which we begin to encounter serious problems of multi collinearity). pearson test and condition index have revealed that these variables are also distinct from each other and are non-significant (higher correlation levels 10% and condition index is less than 1000). views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 25 © 2019 conscientia beam. all rights reserved. external debt and nigeria’s sovereignty umar dantani1 1department of political science, faculty of social sciences, usmanu danfodiyo university, sokoto, pmb 2346, sokoto, nigeria abstract article history received: 9 january 2019 revised: 26 february 2019 accepted: 2 april 2019 published: 20 may 2019 keywords external debt sovereignty adjustment programmes and imf and world bank. jel classification: h63. this paper examines external debt and nigeria’s sovereignty. the methodology of this research is based on content and qualitative analyses. the paper argues that external debt influences the sovereignty of nigeria in different ways. these include the imposition of adjustment programmes ie privatization, devaluation, deregulation and trade liberalization. these programmes have subjected nigeria to political control by the international financial institutions and affected nigeria’s sovereignty vis-à-vis the place of the country in the comity of nations. the paper also argues that the imposition of adjustment programmes on the country provides opportunity to the imf and the world bank to monitor the implementation of the programmes that infringe on the sovereign right of the country. furthermore, the paper believes that the imposition of high debt burden on the country infringes on the sovereign power of nigeria to perform its human rights obligations towards its citizens. moreover, this research argues that the introduction of debt rescheduling i.e. debt-equity swaps by the creditor countries give them the opportunity to determine how resources from the debt-equity swaps should be invested in the country. therefore, the paper concludes that for nigeria to utilize its sovereign power within the comity of nations it ought to have deimplemented adjustment programmes that are agents of imperialist control. contribution/originality: this study contributes to the existing literature on external debt and sovereignty. this study is one of few studies which have investigated the implementation of saps in nigeria. the paper contributes to the first logical analysis of debt overhang and debt burden. the paper’s primary contribution is finding that external debt subjects nigeria to political control. this study documents for proper management of external debt. 1. introduction nigeria’s external debt started in 1958 when $2.8 million was incurred to finance railway construction (anthony, 2005). the external debt of $1 obtained from the international capital market (icm) in 1978 increased nigeria’s external debt to $2.2 billion. the loan was the genesis of nigeria’s debt crisis because it came with 4 percent interest charges (anthony, 2005). subsequently, in the 1970s and 1980s, nigeria obtained external loans from the world bank to finance the economic sector and other superstructures in the social formation. specifically, the loans were obtained to finance trade, support balance of payments and achieve socio-economic development. external debt is also an instrument of imperialist exploitation and political control because high debt burden is imposed on the weaker debtor nations. for instance, nigeria’s external debt repayments in 2002 amounted to $1.8 billion. the repayment of debt infringes on the sovereign power of nigeria to finance economic sector and other financial risk and management reviews 2019 vol. 5, no. 1, pp. 25-39 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2019.51.25.39 © 2019 conscientia beam. all rights reserved. https://www.doi.org/10.18488/journal.89.2019.51.25.39 financial risk and management reviews, 2019, 5(1): 25-39 26 © 2019 conscientia beam. all rights reserved. superstructures as well as carry out human rights obligations in the social formation. by 1980s, nigeria’s debt crisis became manifest. the crisis could be attributed to poor lending and inefficient loan utilization, mismanagement of external loans, unequal trade and exchange rate policies, accumulation of arrears and penalties, increase in interest rate, poor debt management; and increase in the exchange rate. others include dependent industrialization, the decline in the prices of oil between 1981 and 1982, lack of effective feasibility studies on a project to be financed with external debt, the conspiracy of ifss/west in assisting the corrupt leaders to misappropriate external loans and the adoption of structural adjustment programmes (sap). for instance, in the early 1970s the international financial institutions charged a 4 percent interest rate but in 1989 it reached 12 percent. the increase in interest rate has increased nigeria’s debt overhang to $28 billion in 1991. the devaluation of the nigerian currency, the naira has also contributed to nigeria’s debt crisis because between 2002 and 2003 the country’s external debt increased by $4 billion due to depreciation in the exchange rate of the naira to dollar. in fact, debt crisis and debt burden affect the productive forces, distributive capacity and exchange relations of nigeria because massive resources are allocated in the payment of debts than in investment, provision and maintenance of economic sector and other superstructures. arguably, it hinders investment and affects growth and development in the nigerian social formation. consequently, this affects social relations of production between nigeria and international financial institutions in particular and it trading partners in general. therefore, external debt has far reaching impacts on the sovereignty and political economy of any debtor state. nigeria, has suffered a lot from the impact of its external debts. in fact, the last two decades have been characterized by a severe economic and social crisis in the country. the prevalence of the crises was as a result of the adoption of the capitalist mode of production in response to debt predicament. external debt is a major challenge to sovereignty. sovereignty is an important characteristic of a state. the characteristics of a sovereign nation include absoluteness, comprehensiveness and universality, permanence, inalienability, exclusiveness and indivisibility. these are essentials for a sovereign nation to make choices, decisions and take courses of actions that are independent without external influence, manipulations or control. however, external debt, an imperialist agenda is tied to acceptance of certain conditionalities and their implementations. these include adjustment programmes, democracy and good governance as well as adherence to the rule of law. the imposition of devaluation, privatization, deregulation and trade liberalization by the imf and the world bank on nigeria interferes with domestic policies of the country that undermines its political sovereignty. external debt is also an instrument of imperialist exploitation and political control because high debt burden is imposed on the weaker debtor nations. for instance, nigeria’s external debt repayments in 2002 amounted to $1.8 billion. this infringes on the sovereign power of nigeria to carry out its human rights obligations towards its citizens. therefore, external debt has far-reaching impacts on the sovereignty and political economy of any debtor state. nigeria has suffered a lot from the impact of its external debts. in fact, the last two decades have been characterized by a severe economic and social crisis in the country. these arise as a result of adjustment policies in response to debt predicament. this paper examines how external debt influences the sovereignty of nigeria. 2. literature review over the years the sovereignty of state has been a determining factor in interstate relations and the foundation of world order. the concept has its origin from customary international law and the united nations charter. sovereignty is an essential element of maintenance of international peace and security and protection of weak states against the strong ones (boueteflika, 1999). sovereignty is a complex concept that generates a lot of controversies. for boueteflika (1999) who argues that: few subjects in international law and international relations are as sensitive as the notion of sovereignty. steinberger refers to it in the encyclopedia of public international law as “the most glittering and controversial notion in the history, financial risk and management reviews, 2019, 5(1): 25-39 27 © 2019 conscientia beam. all rights reserved. doctrine and practice of international law”. on the other hand, henkin seeks to banish it from out vocabulary and lauterpaeth calls it a “word which has an emotive quality, lacking meaningful content”, while verzij notes that any discussion on this subject risks degenerating onto a tower of babel. more, affirmatively, brownline sees sovereignty as “the basic constitutional doctrine of the law of nations and alan james sees it as “the one and the only organizing principle in respect of the dry surface of the globe, all that surface now… being divided among single entities of a sovereign, or constitutionally independent kind”. as noted by falk, “there is little neutral ground when it comes to sovereignty. krasner (2001) differentiates between four meanings of sovereignty. these comprise of interdependence, domestic, westphalian or vattelian and international legal sovereignties. independence sovereignty refers to “the ability of states to control movement across their borders”. domestic sovereignty means the “authority structures within states and the ability of these structures to effectively regulate behaviour (krasner, 2001). krasner argued that authority structures could include monarchies, republics, democracies, unified and federal systems. he believed that the loss of interdependence sovereignty tantamounts to some loss of domestic sovereignty. krasner justified his argument when he said that “if a state cannot regulate movements across its borders such as the flow of illegal drugs, it is not likely to be able to control activities within its borders such as the use of drugs (krasner, 2001). westphalian or vattelian sovereignty connotes the exclusion of external sources of authority that involves dejure and defacto. in other words, it means that the state possesses the power to make authoritative decision making within its specific boundaries. in this perspective of sovereignty, it signifies non-intervention in the internal affairs of other states. finally, international legal sovereignty refers to mutual recognition which in the international practice, is accorded to “juridically independent territorial entities…capable of entering into voluntary contractual agreements” (krasner, 2001). the above-mentioned definitions of sovereignty have identified five key dimensions of sovereignty that need to be analysed. the first definition gives emphasis on the recognition of state sovereignty. ashley (1984) and miller (1984) argued that sovereignty is not an attribute of the state but is attributed to the state by other states or ruler. in this circumstance, jackson (1990) was motivated to state that state depends on other states for its authority. in the modern state system, members recognize the equal authority to employ coercion within their defined territories. for a state to be recognized as sovereign it must be able to decide and initiate alternative courses of actions to overcome internal and external problems. in effect, capabilities are actually central to the recognition of the sovereignty of the state (jackson and roseberg, 1982) and jackson (1990). given more support to the works of jackson and roseberg (1982) and jackson (1990); thomson (1995) argued that: states are recognized as sovereign when they present a fact of sovereignty: that is, states recognize another’s sovereignty when the latter has achieved the capability to defend its authority against domestic and international challenges. european history largely supports this argument but the post-world war ii period of decolonization does not. by no stretch of the imagination is it possible to explain the existence of the vast majority of today’s sovereign states in terms of their empirical power capabilities. most cannot defend against either external or internal challenges (…) power capabilities are equally as or more important than outside recognition. it may (…) that sovereignty is limited to those who possess the material resources to defend it while the less powerful are nominally sovereign but in fact, are subject to heteronomy. financial risk and management reviews, 2019, 5(1): 25-39 28 © 2019 conscientia beam. all rights reserved. the second meaning of sovereignty gives it the premise on the state dimension of sovereignty. the theory of international relations assumes that sovereignty resides with the state. the assumption has it genesis from the european conquests and annexations that led to the emergence of the modern state that resulted from their resisted efforts in which state-builders attempt to monopolize their authorities (tilly, 1975). on this basis, gidden (1985) was motivated to argue that sovereignty resides with the state when such state monopolizes coercion both internally and externally. similarly, thomson (1995) concluded that the residency of the state sovereignty is a product of both internal and external competition, of conflict and cooperation. the third is the authority dimension of sovereignty. in defining authority thomson (1995) sees it as “political being what is subject to state coercion”. thomson argued that in analyzing sovereignty the main concern should be based on political authority rather on control. in fact, authority and control are separable however they are paramount in providing a clear understanding and measurability of sovereignty. authority exists when it is being recognized but control is determined by the capabilities of the state to monitor and enforce compliance with rules and regulations made by the constituted authority. this line of demarcation made jackson and roseberg (1982) to lament that the new african states although not scientifically sovereign possess sovereignty because of the interstate recognition of their sovereignty. for instance, capabilities perhaps might be supplied by other states or international organizations as in the case of somalia or the earlier case of congo where international intervention is aimed at building the state’s power capabilities especially the security and police forces. the fourth is the coercion dimension of sovereignty. coercion is defined as “a monopoly on the major organized forces of violence”. a prerequisite for recognizing the sovereignty of a state is its ability to regulate and control its territory (ashley, 1984). coercion is central to understanding the sovereign nature of a state because the exercise of absolute authority depends largely on it blau (1963). the manifestations of the monopolization of coercion were facilitated by the european conquest and annexation of the third world nations and gradually achieved by the late nineteenth century. they employed the use of maxim guns and coerced the conquered territories. therefore, european invaders were able to have absolute control over coercion through foreign military interventions and resulted in the eroding of the sovereignty of the independent states of africa. the last is the territorial dimension of sovereignty. in international politics, sovereignty provides a linkage between territory and political authority. indeed, skocpol (1979) argued that territorial sovereignty is vested in “a set of administrative policing and military organizations headed and more or less well co-ordinated by an executive authority”. thomson (1995) demarcated sovereignty from authority not on the basis of function but on geography. the dimension of sovereignty separates sovereignty from heteronomy. the basis of territorial sovereignty could be euro-centric in nature and extent to non-european territories in order that international politics is based on sovereignty. territorial sovereignty has been legally extended to political authorities or state that lack european state sovereignty (bull and watson, 1982; miller, 1984; strang, 1991a;1991b). this movement is known as a globalization of sovereignty (thomson, 1995). despite the formal extension of sovereignty to third world nations their sovereignties have been seriously eroded by the developed countries in order to protect their economic and political interests. in line with this, wendt and barnett (1993) and onuf and klink (1989) argued that sovereignty resides with the developed countries. furthermore, thomson (1995) maintained that: at one level, territory is simply a geographical space whose limits are defined by physical borders-lines on a map. with sovereignty, however, states mutually recognize one another’s exclusive authority over what is contained in that space. the essence of the state-building process has been the state’s drive to penetrate, exploit and mobilize those resources for interstate competition and war. one of those resources of course, is the people who live within the state’s borders, and financial risk and management reviews, 2019, 5(1): 25-39 29 © 2019 conscientia beam. all rights reserved. part of the state-building processstill incomplete in most of the worldentails creating a “society” or nation out of these people; that is forging their loyalty to and identification with the state. so, the territorial dimension of sovereignty entails not just the defense of geographic boundaries but tight linkages between the state and people. the concept of sovereignty has been criticized by many scholars. krasner (1999) perceived it as an “organized hypocrisy” while fowler and bunck (1995) view sovereignty as “of more value for the purposes of oratory and persuasion than of science and law”. weber and biersteker (1996) reconstructed sovereignty to mean “social construct” which has no identifiable features and its nature is determined by the customs and practices of nationstates and international system and liable to change over time. this argument was supported by krasner (1999) who maintained that: sovereignty has many different aspects and none of these aspects is stable. the content of the notion of “sovereignty” is continuously changing, especially in recent years (…). from the above we may conclude that under international law the sovereignty of states must be reduced. international cooperation requires that all states be bound by some minimum requirements of international law without being entitled to claim that their sovereignty allows them to reject basic international regulations. thirdly, we may conclude that the world community takes over sovereignty of territories where national governments completely fail and that therefore national government sovereignty has disappeared in those territories. the world community by now has sufficient means to stop in with the help of existing states and has therefore the obligation to rule those territories where the government fails. in fact, there are limits to sovereignty of the state. these could either come from the customary international law or treaty obligations. for instance, chapter vii of the un charter. also articles 1(2) and 2(7) the criticisms presented by some scholars have been the instrumenting force that resulted to the reconstruction of the concept of sovereignty. it has been intensified and reinforced by the emergence of globalization. the spread and development of globalization had generated an intellectual tempo for debunking the state-centric approach to international relations. the state-centric theories assume that states are by nature sovereign. in other words, states are territorial political units, having political independence, free from external control and possess de facto autonomy (krasner, 2001). while the rationalist theories of international relations ie realism and liberal institutionalism view state sovereignty as the genetic material of the international system. but constructivists believe that the sovereignty of the state is an expression of the mutual understanding between and among many states (ruggie, 1998). the state-centric approach to international relations was criticized in the late 1970s and early 1980s by liberalism and maintained that the sovereignty of the state had been eroded by the economic interdependence, growth and development of global technology and institutionalization of democratic politics (keohane and nye, 1972; rosecrance, 1986). the scholars believe that states could no longer be able to control their borders due to forces of globalization. specifically, the development of modern technology has empowered non-state and sub-state actors to control the movements of goods, people and information across states’ territorial boundaries. capital accumulated could also move across national boundaries and the currency has the opportunity to escape state fiscal and monetary policies. furthermore, the development of computer and telecommunication technologies has shattered down the efforts of states to defend their cultural values (rosecrance, 1986). the above challenges to state sovereignty became manifest since the end of the cold war that led to the emergence of new globalization. financial risk and management reviews, 2019, 5(1): 25-39 30 © 2019 conscientia beam. all rights reserved. the new globalization poses a serious challenge to the sovereignty of the state because it erodes the power of the state to have control over the activities within its defined territories. in addition, the activities of the united nations, the international monetary fund (imf), the world bank, the world trade organization, the wave and spread of democratization and technology, the dubious activities of multinational enterprises and the atrocities committed with the cyberspace could not only erode the power of the state but also the structure of the state authority. thus, globalization is attributed to the “disintegration of the state, its “collapse” or the emergence of a powerless state. 3. external debt and nigeria’s political sovereignty in the 1970s, before nigeria became highly indebted, its annual budget was internally scrutinized and later presented to the public. but beginning from the early 1980s when nigeria’s debt crisis became manifest coupled with the adoption of adjustment programmes, the country’s debt overhang and debt burden became unbearable, the political sovereignty of nigeria began to be severed. during the period, nigeria’s budgets in 1986, 1987, 1988, 1989, 1990, etc respectively were approved by the imf and the world bank before presenting it to the nation. this was done to ensure that nigeria complies with the implementation of adjustment programmes. this compliance with the dictates of the imf and the world bank on budget proposal indicates that the nigerian state has seemingly lost a very important political power of policy-making and execution. this is because the budget is a very important instrument of national public policy. similarly, during the civilian administration of obasanjo needs was created. it was aimed at wealth creation, reducing poverty, employment generation and attainment of millennium development goals (mdgs) (needs document, 2004). this homegrown economic policy was also submitted to imf for approval to qualify for a fresh loan facility and secure debt relief. the effect is that nigeria has bargained its political right at the expense of qualifying for creditworthiness (anthony, 2005). bamiduro further argues that needs was an externally driven economic policy designed for nigeria as an instrument of debt trap because it gives the country the opportunity to further obtain fresh loan facilities in the mist of debt overhang and debt burden (bamiduro, 1999). therefore, external debt overhang provides opportunity for the bretton wood institutions to control or influence the leadership in nigeria through the dictates of economic and social policies that are coined within the vicious circle of debt trap (bamiduro, 1999). this reinforces the integration of country into the global capitalist exploitation. in this act of integration, politico-economic sovereignty is also seriously affected. before the adjustment period, nigeria adopted a mixed economic system where state intervened in the management of the economy with private enterprise development (anyanwu, 1997). however, as the country applied for structural adjustment facilities to address its economic crisis, nigeria was advised by the imf and the world bank to adopt privatization, devaluation, deregulation, trade liberalization and reduce public expenditure as conditionalities for incurring external debt (hussain and faruqee, 1993). thus, the implementation of these adjustment programmes has affected nigeria’s sovereign power to continue with its mixed economy. the effect is that nigeria has aligned itself with the ideological bloc of the capitalist economy and integrated it into the exploitative international capitalist system. representatives are also sent by the imf and the world bank to assess the progress of adjustment programmes in nigeria (akubo, 1985). in fact, a permanent representative of imf advised nigeria to obtain external loans to address its economic problems. his advised motivated the country to apply for structural adjustment programmes loan facility (hussain and faruqee, 1993). this served as the basis for the adoption of sap in nigeria. in addition, the representatives of the imf are sent to nigeria on a quarterly basis to monitor the activities of cbn to ensure strict compliance to the continuous devaluation of the naira. similarly, imf monitoring team was sent on a quarterly basis to assess the progress of needs during the civilian administration of obasanjo. financial risk and management reviews, 2019, 5(1): 25-39 31 © 2019 conscientia beam. all rights reserved. this influences the imf and the world bank to intervene in nigeria’s sovereign power. this is a violation of the internal sovereignty of a country. third world nations depend on external debt to address economic crises and finance development projects. this gives the world bank and the imf the opportunity to enslave them to their whims and caprices. in fact, the world bank and imf have become international brokers for the rich countries and financial houses. the effect is that the financial institutions exploit the opportunity by imposing policy options on weaker debtor nations as a guarantee against default in debt repayments. the imposition of adjustment programmes on sub-saharan africa is an example of the imf’s interference in policy choices that affect the best interest of the citizens. perhaps this infringes on their sovereignty. in addition, the imf and the world bank have been playing a major role in rolling back the frontiers of government responsibilities and assigning more responsibility to private sector. this started during the military administration of babangida and continued by his successors. for instance, obasanjo implemented deregulation inspite of public outcry against the policy. furthermore, the prices of petroleum products were increased by 50 percent in 2003, inspite of its opposition by the civil society organizations. in a related development, radical economists and policymakers from the south accused the imf and the world bank for intervening into the domestic affairs of the debtor nations. for instance, critics of the world bank argued that the world bank: has deliberately and consciously used its financial power to promote the interests of private international capital in its expansion to every corner of the “underdeveloped” world. similarly, they argued that: … the bank is perhaps the most important instrument of the developed capitalist countries for prying state control of its third world member countries out of the hands of nationalists and socialists who would regulate international capital’s inroads. in an address delivered by obasanjo at the g-8 summit in cairo, egypt on 25th february 2001, he was skeptical about the survival of democracy in developing countries of africa, asia and latin america under an intense debt burden. according to him: … debt erodes the will of government to address the needs of its people. democracy, which we all want, and which we all practice is seriously threatened by an environment of strangulating debt, where there are social and economic needs to be satisfied. el-rufai (2003) argued that privatization “is the key economic policy of the new world of globalization, democracy and market economy”. it is superimposed on the weaker debtor countries. privatization erodes national sovereignty by transferring ownership of public enterprises to foreign investors (dinneya, 2006). therefore, nigeria’s political sovereignty has also been infringed as a result of adjustment programmes being adopted in the country (kukah, 1999; umoren, 2001). for instance, the second phase privatization of cement company of northern nigeria (ccnn) in 1999 has transferred state power of management of the enterprise into the hands of norwegians and chinese. dinneya (2006) argues that the sovereignty of a country is limited when its leaders misappropriated the loan resources and deposited it in foreign countries. he argues that “where your wealth is, there will your heart be”. a typical example can be seen from the ajaokuta debt buy-back fraud that involved $6 billion in nigeria. the misappropriated resources were deposited into the bank for international settlement, switzerland. the implication is that the military administration of babangida was committed to promoting the interest of the foreign banks at the expense of its domestic ones. this limited the sovereign power of nigeria to protect and promote its national interest. financial risk and management reviews, 2019, 5(1): 25-39 32 © 2019 conscientia beam. all rights reserved. however, dinneya (2006) argues that privatization that allows foreign investment in the debtor nations does not undermine their sovereignty under a purely democratic system. privatisation, denationalization and reliance on market forces had compounded the weaknesses of african state (ake, 2001). ake (2001) argued that they are instruments of the debt trap. the negative consequences of privatisation had engendered hostility to the state that undermined its legitimacy. in fact, it has generated popular unrest against the state (ake, 2001). for instance, between 1990-2000 about 1 million workers were involved in public sector industrial unrest (dinneya, 2006). modern liberals argue that the state is established to provide welfare services to the citizens (rawls, 1970) cited in heywood, 2004). thus, the demand for loan facilities warranted the imf to impose expenditure cut on nigeria. this makes the state to cut expenditure for the provision of social services to its citizens despite constitutional provision for welfarism in nigeria. this has been responsible for the deterioration of infrastructural facilities in the country. for instance, the dictates that have been made by the world bank, imf and other imperialist international financial institutions and aid agencies to influence the government of obasanjo to impose unpopular anti-people and pro-rich petroleum product prices affects human rights and sovereignty of nigeria. he also pursued the policy of removal of subsidies on social services such as health and education. this affected the sovereign power of the country to carry out its human rights obligations. consequently, the ordinary citizens are turning to nongovernmental organizations to provide them social infrastructure (ake, 2001). by implication, the sovereign power of the country to allocate sufficient resources for the provision of social services has been undermined. wto is an instrument of promoting international capitalist exploitation of the weaker nations (aiyedun, 2004). the sovereign rights and bargaining power of nigeria on its trade with international communities have been jeopardized by the unfavourable rules and regulations of wto (ogbu, 2004). in fact, the power of the nigerian government to regulate its economy has been undermined by the rules of the world trade organization (wto). this makes (dinneya, 2006) to argue that undue dependence on foreign investment diminishes the political sovereignty of nigeria to interact with the comity of nations. for instance, during the regime of general abacha the international capitalist system under the auspices of the international economic order dictated at the geneva “urugay round” deliberations of the group of seven nations that nigeria should adopt trade liberalization as a policy instrument for addressing the economic crisis in the country. as a result, nigeria became a member of world trade organisation (wto) in 1994 and adopted the trade liberalization policy of the international organization. this has undermined the political sovereignty of nigeria because it has abandoned its restrictive trade policy in place of trade liberalisation. however, elzinger maintained that despite the trade liberalization as advocated by the wto the european countries adopted protectionism in the north-south dialogue under the conception of the “rule of three”. these are concurrence, whereby companies have agreed not to underbid each other; coordination in which firms create mechanisms to carry out their play; and compliance through which conspirators enforce their plan. a recent amendment to fresh external debt and debt relief is aid conditionalities. these include approval and implementation of adjustment programmes, good governance and democratization and suspension of any form of aid for government accused of human rights violations. in addition, the european union (eu) insisted that intensive dialogue with the governments of african, caribbean and pacific (acp) on the economic priorities should be conducted. indeed, the eu argued that their development experts have a larger say on how to manage the economies of the acp countries. this limited the power of the acp to take independent decisions. to ensure that acp countries adhere to the economic reforms as directed by the international financial institutions, the practice of providing the needed resources at the commencement of the projects has been replaced by step-by-step disbursement and the system was designed to: to encourage countries to spread up to the implementation of projects and programmes and the size of subsequent allocations and the speed with which financial risk and management reviews, 2019, 5(1): 25-39 33 © 2019 conscientia beam. all rights reserved. they are released will be contingent on acp countries’ ability to put its first instalment to good use. the instalment disbursement of loan facility to acp countries for the development of human resources and environmental protection are only based on the approval of specific projects. in addition, they are directed to encourage the growth of the private sector and ensure that the local entrepreneurs could get access to the resources. these policy options are good to ensure transparency in the implementation of projects funded with external debt. however, the imf and the world bank have been making policy prescriptions on the weaker debtor countries that interfered with their political sovereignty. the united states-african trade bill of 1998 also contains certain market-oriented economic policies that ought to be implemented by individual countries before the disbursement of funds. these are privatization, elimination of tariff and non-tariff barriers, reduction of business and commercial taxes and regulation. the effect is that the adjustment loan facility is withheld whenever policy implementation and macroeconomic performance are not achieved. the conditionalities perhaps may be good for developing countries to manage the resources and avoid its misappropriation or transfer to western banks. for instance, many african countries have implemented devaluation of their national currencies in their bid to obtain an external loan. specifically, this started in nigeria during the regime of babangida and had been continued by his successors. therefore, the fear for withholding external resources for project financing becomes instrumental for the debtor nations to succumb to the whims caprices of the creditors that clash with the sovereign power of the debtor countries to carry out state obligations. in 1994 cameroon was suspended by the imf because it was 60 days overdue for the payments of $46.6 million external loan facility. sierra leone too was also suspended on 25th april 1988 due to accumulation of debt that amounted to $85 million. nigeria also experience unhealthy cordial relations with imf and world bank because of its failure to meet the track record of performance as demanded by the institutions. in essence, external loan conditionality provides opportunity for the international financial institutions to control weaker debtor nations. however, on 28th march 1994, the imf approved the sum of $163 million for sierra leone after lifting the six months ban on lending. this resulted from the payments of its external debt. similarly, the imf approved sdr 47.56 ($66.7 million) for senegal in april 1994 due to its good economic behaviour for twelve months. according to onimode sap has unstated objectives which it wants to achieve. these are: to decolonise nigeria and other third world countries; to ensure the payments of often “bogus” foreign loans; to keep nigeria and other countries of the south down and deny them opportunity to rise and challenge the hegemony of the west; imposition of massive currency devaluation; and to ensure that industrialization eludes nigeria and other countries implementing the saps conditionalities. the effect of these conditionalities is that sap is an instrument that is employed by the international financial institutions to politically control the debtor nations. for instance, when general abdulsalami abubakar emerged as the head of state in nigeria in 1998 the imf and the world bank directed the government to implement the policy of economic liberalism as a conditionality for an external loan facility. in fact, in 1998 when the government of abdulsalam sought to negotiate with imf medium-term economic reform programme, the government was directed to privatise state-owned enterprises. in addition, for nigeria to establish a mutual understanding with imf and the world bank and obtain debt relief from the paris club, it has to express greater commitment to privatization and liberalization. in essence, due to coercive demands of the international financial institutions and creditor nations, nigeria sold about 40 percent of its equity share in public enterprises to strategic investors which control the management of the enterprises. these conditionalities are an instrument of political control, integrated the nigerian economy into the global political economy, compounded its neo-colonial dependency that could affect its sovereignty. financial risk and management reviews, 2019, 5(1): 25-39 34 © 2019 conscientia beam. all rights reserved. the intensity of the conditionalities for the external debt has made many third world nations to submit themselves to policy commitments as directed by international financial institutions. for instance, uganda made 79 policy commitments between 1991 and 1992. cumulatively, african countries conducted over 8,000 negotiations with creditor nations. the effect is that it infringes on the domestic policy of the debtor nations. this jeopardizes the political sovereignty of the debtor nations nigeria inclusive. the impact of globalisation via external debt on the third world nations was presented by the critics of globalization. they argue that: the current process of globalisation diminishes the capacity of national government to assert their economic policy or sovereignty. globalisation thus makes international policy coordination as well as domestic policy coherenceincreasingly indispensable. the choice for a country is therefore whether to actively engage in such coordination through some form of regional integration, perhaps pooling its sovereignty to some degree with other countries in the subregion in order to collectively strengthen it; to do so passively, which will eventually mean aligning its policies with those of others without playing a strong role in their definitions, or to be by-passed by the globalisation process, as has so far been too much the case. the world bank attributed the failure of sap in nigeria to lack of good governance. as a result, it has been encouraging the country to ensure effective utilization of resources, efficient management of the institutional structures and good governance. as the country return to democratic government in 1999, the us ex-im bank provided a sum of $100 million to finance short and medium term insurance in the private sector. in addition, in 2000 the bank also provided nigeria a loan of $1.2 billion for medium and longterm investment (dinneya, 2006). the entrenchment of democracy and ensuring good governance in nigeria encourages the world bank and other financial institutions to provide new loan facilities to the country. this enables the state to finance its human rights obligations. amnesty international in its annual reports and publications exposed to the international community the human rights abuses particularly during the regime of abacha. in fact, between 1996 and 1997, ai published over 14 reports indicating the military administration of abacha because of its human rights violation (amnesty international, 2002). similarly, transparency international in its first publication on the corruption perception index involving 45 countries rated nigeria as the most corrupt nation in the world. this was more peculiar to the regime of abacha. ti also accused the military regime of abacha for its human rights violation and poor transparency (transparency international, 2002). between 2001 and 2004 ti rated nigeria as the second most corrupt country in the world. however, in 2005 nigeria was placed in the third position in corruption rankings (transparency international, 2005). this shows the increasing involvement of international actors in nigeria’s domestic affairs. the effect of these human rights violations is that the international financial institutions refused to negotiate nigeria’s debt. the commonwealth of nations through its committee for the defence of human rights (cdhr) also indicted nigeria due to gross human rights violations. cdhr accused the military administration of abacha for incarceration of chief abiola, the acclaimed winner of june 12 presidential election; torture and extermination of security personnel; arbitrary arrests and detention of opposition groups without trial; replacement of judiciary with military tribunals; and the assassination of ken saro-wiwa and nine ogoni environmental activits. these human rights violation are against harare declaration set up in 1991 to promote democracy, human rights and good governance in africa (dinneya, 2006). as a result, the commonwealth ministerial action group (cmag) imposed certain sanctions on the country. these range from oil embargo, a ban on air links with nigeria, freezing of bank accounts in foreign countries of the members of the repressive military leadership and suspension of the country financial risk and management reviews, 2019, 5(1): 25-39 35 © 2019 conscientia beam. all rights reserved. from the commonwealth of nations. this made nigeria’s relations with imf and the world bank to be uncordial. by implication, the international financial institutions refused to grant nigeria fresh loans and negotiate its external debt. the united states of america also accused nigeria of official corruption, human rights abuses and reluctance to fight drug trafficking. based on this, the united states aviation authorities in 1993 suspended its flights to and from nigeria. the suspension was made on the ground that the nigeria-us route was considered to be the biggest in narcotic trade (dinneya, 2006). sanctions were also imposed on foreign aid and foreign investment in nigeria. due to the indictment of nigeria by the us-based international narcotic control strategy (incs) on its drug trafficking the united states of america blocked nigeria’s request for financial assistance from the imf and the world bank. in 1995 an american multinational export/import guarantee bank, the ex-im bank suspended its financial cover of $2 billion meant for the construction of liquefied natural gas (lng) industry in finima, rivers state (dinneya, 2006). this made the japanese and other creditors who were committed to co-financing the project to withdraw their support. the implications of these sanctions and indictments on nigeria’s political sovereignty were that nigeria was denied financial assistance from the international financiers; the co-financing of the project by creditors was discontinued; and nigeria was denied its rights to participate in the international economic interchange despite the propaganda for globalisation by the international capitalist system. the nigerian-american chamber of commerce (nacc) also accused the nigerian political environment to be characterized by democratization crisis, human rights abuses, insecurity, drug trafficking and official corruption (obasanjo, 1997). this made the environment to be unhealthy for foreign investment. to this end, in july 1997, four major us cities, amherst, berkeley, massachusetts and oakland imposed trade embargoes on nigeria (dinneya, 2006). this trade embargoes further reinforced the export credit guaranteed agencies to suspend their insurance cover for nigerian imports. this affected business at activities in the country. the 1999 constitution of the federal republic of nigeria, as well as the regional and international conventions, have empowered nigeria and other countries of the world to provide their citizens with economic rights to food, shelter, work and income; social rights to security, physical and mental health; and cultural rights to education and non-discrimination. section 18 sub-section 3 of the 1999 nigerian constitution prescribes that the government shall strive to eradicate illiteracy and where applicable provide free, compulsory and universal primary education; and free secondary, tertiary and adult literacy programme. similarly, article 26 section 1 states that: every one has a right to education. education shall be free at least in the elementary and fundamental stages. elementary education shall be compulsory. technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit. article 55 of the international convention of economic, social and cultural rights (icescr) states that: in accordance with article 55 and 56… with well-established principles of international law, and with the provisions of the [icescr] itself, international cooperation for development and thus for the realization of economic, social and cultural rights is an obligation of all states. it is particularly incumbent upon those states which are in a position to assist others in this regard. within the context of global external debt predicament, the article stipulates legally that the creditors have the human rights obligations to fulfill in the debtor countries. put differently, the creditors are under the law bounded to ensure that debt related policies ie privatization, devaluation, liberalization and deregulation do not adversely affect the fulfillment of human rights in the debtor nations. in connection to this argument critics of external debt argue that the creditor countries are: financial risk and management reviews, 2019, 5(1): 25-39 36 © 2019 conscientia beam. all rights reserved. obliged to consider how individual projects, programs, and policies may affect the population in the countries where they are to be implemented and later to alter them when necessary to avoid possible human rights violations. on the monetary policies carried out by the creditor countries in the debtor nations critics of external debt also argue that: substantial external effects of monetary decisions can generate obligations to take into account the concerns of non-citizens or justify claims on the part of non-citizens that they be consulted about, or included in the making of the decisions. with respect to sanjay’s argument, prudence and foresight need to be developed by the creditors to ensure that their economic and social policies in the debtor nations do not undermine the debtor’s sovereign power to promote the human rights of their citizens. for instance, in nigeria between 1999 and 2005 the civilian administration of obasanjo made a substantial investment in education that amounted to n 400 billion in tertiary education; however the figure did not meet the unesco recommendation of 26 percent annual budget to education. indeed, it was only 5 percent to 10 percent in 2001. it was also stated that over 70 percent of nigerians are poor and that the average income per capita in nigeria was $430 that was lower in sub-saharan african countries put at $601. the organization also ranked nigeria’s health facilities as the 187th among 191 member states. in the area of security nigeria requires sufficient security agencies to secure an enabling environment for its nascent democracy; protect and prevent capital flight abroad; and encourage investment from abroad. the federal government presidential committee on police fund reported that the police department requires n 100 billion to ensure adequate operational tools, equipment and welfare package. with regard to food security, nigeria tops the list of countries with the highest number of malnourished children in the world. according to the unicef report out of a total of 146 million underfed children in the world, 73 percent live in africa countries and nigeria came first with 6 million malnourished children. in terms of housing, the un reported that nigeria has a housing deficit of 17 million units and n 31 to n 36 trillion is required to address the problem. from the above economic and social indexes nigeria could not meet its human right obligations to its citizens due to scarcity and non-availability of resources to finance the sectors sufficiently. the scarcity of resources was warranted by high debt burden and looting of the public treasury by the leaders. it was argued that massive debt repayments undermine the resource capacity of the poorer debtor countries to perform their human rights obligations. he identifies three ways through which debt repayments undermine the sovereign power of a state to fulfill its human rights obligations. these are: a debtor nation that diverts it resources for debt repayments and fails to utilize them maximally; when a debtor nation becomes incapable to satisfy the minimum level of its human rights obligations because debts repayments have drained the available resources; and when a debtor nation deliberately adopts certain measures to save and allocate more funds for debt repayments. antagonists of external finances further argue that: on the basis of their extraterritorial human rights obligationsa necessary offshoot of their duty of international cooperation and assistance – creditor countries have a corresponding obligation not to undermine or frustrate debtor countries’ efforts to realize their peoples’ esc rights. creditor countries’ insistence on debt repayments, despite the clearly adverse impact on debtor countries’ ability to realize esc rights, is legally incompatible with such a duty. in fact, excessive external debt repayments over the years have undermined the sovereign power of nigeria to allocate sufficient resources to meet its human rights obligations to its citizens. debt-equity swaps allow debt to be bought from the secondary market and sell it to debtor countries in exchange for local currency. the proceeds are later utilized in financing business ventures in the debtor countries. financial risk and management reviews, 2019, 5(1): 25-39 37 © 2019 conscientia beam. all rights reserved. for instance, ford motor company (ford) bought $50 million mexican debt from the secondary market at $29 million. later, the company sold it to the mexican government at $43.5 million in local currency. similarly, this was adopted in nigeria during the regime of babangida. the debt-equity swaps or debt conversion was conducted through the establishment of debt conversion committee (dcc) in february 1988. between july 1988 and june 1989 the total amount of debt converted was $160.7 million and the discounted value was $88.6 million representing an average discount of 44.8 percent. the cumulative external debt converted between 1992 and 1996 was $448.5 million. the implications of debt-equity swaps on the economy and political sovereignty are numerous. debtor countries are subjected to political control due to foreign control of the local assets and investment opportunites; exchanging local currency for debt causes inflation in the country; there is the danger of local currency devaluation because the debtor countries perhaps may need more local currency to purchase foreign debt. political conditionalities are new external loan criteria designed by the imf and the world bank. these are respected for human rights, democracy and good governance and fight against corruption. in 1992, the international financial institutions suspended loan facility to kenya for its failure to implement adjustment programmes. but in 1993, the institutions agreed to negotiate with the government of kenya for the disbursement of loan facility subject to implementing economic reform agenda, fighting corruption, respect for human rights and good governance. the institutions also directed kenya to pay its debt arrears. despite the directives given by the financial institutions, daniel arab moi reversed the economic and political conditionalities with domestic ones. he argued that it became necessary to reverse the conditionalities because they could only intensify the existing unemployment, decline in per capita income, devaluation, cut in expenditure for crop production and affect the sovereignty of the country. similarly, zambia had complained of undue interference by the international financial institutions and protested against imposing governance and performance without agreed parameters and precise definitions. in fact, the interference was very intensive that the imf and paris club conditionality for renegotiation of debt terms has conditioned many african countries confronted with debt problems to submit to perpetual negotiation with imf over their economic policies. this tantamounts to external control and promotes a relationship that affects the sovereignty of the debtor nations. 4. conclusion sovereignty is an important characteristic of a state. it provides the state the power to make independent decisions that protect its national interest. as nigeria applied for an imf loan facility, the international financial institutions imposed certain conditionalities for obtaining the loan. these include devaluation, privatization, deregulation, and trade liberalization. the adoption of these conditionalities has integrated the country into the international capitalist system and subjected nigeria to political control. this paper concludes that the sovereignty of the country would continue to be infringed as far as the country continues to commit itself to neo-liberal policies. funding: this study received no specific financial support. competing interests: the author 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(eds), state sovereignty as social construct. new york: cambridge university press. wendt, a. and m. barnett, 1993. the sovereignty. cambridge, ma: mit press. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 1 © 2018 conscientia beam. all rights reserved. forecasting equity index volatility: empirical evidence from japan, uk and usa data divine n. obodoechi1 anthony orji2 onyinye i. anthony-orji3+ 1,2,3department of economics, university of nigeria, nsukka, nigeria (+ corresponding author) abstract article history received: 17 september 2018 revised: 22 october 2018 accepted: 27 november 2018 published: 20 december 2018 keywords equity market volatility arch garch egarch. jel classification: c53, c58, e17, e44, e47, g17. using non-linear models to forecast volatility for three equity index samples, this study examines weekly returns of three indices; dow jones industrial index, ftse 100 index, and nikkei 225 index. the sample covers a twenty year sample period. the study employs an in sample and out of sample volatility forecast using standard symmetric loss functions in order to identify an appropriate model that best forecast volatility. using the mean error (me), root mean square error (rmse), mean absolute error (mae), and mean absolute percentage error (mape), the study finds the egarch model to outperform the arch, and garch model in forecasting volatility. contribution/originality: this is among the first studies that found egarch model to outperform the arch, and garch model in forecasting volatility using a combination of japan, uk and us data. 1. introduction modelling and forecasting volatility has been the subject of most economists, financial experts, researchers, financial advisors and economic policy makers over the past three decades (boguth et al., 2011; constantinides et al., 2013; bollerslev et al., 2016; cipollini et al., 2017; bollerslev et al., 2018). volatility forecasting plays a vital role in the black and scholes (bs) option pricing theory, providing key function in pricing options in the financial market. in the black and scholes (bs) model, four parameters are observable in this model, with volatility being the only parameter that is unobservable. this has given derivative traders and financial dealers difficulties as to how to observe or predict this parameter accurately. regulators, practioners and academics have embraced value at risk and many view value at risk as a vital component of current best practice in risk management. one of the most common methods of parametric approach in value at risk requires calculating the volatility of a return series. in this work, we explore a number of models ranging from the linear models to the more sophisticated nonlinear models, on weekly volatility of three equity index from three different indices and they include; the dow jones industrial index, ftse 100 index and the nikkei 225 index. the mean square error (mse), root mean square financial risk and management reviews 2018 vol. 4, no. 1, pp. 1-23 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2018.41.1.23 © 2018 conscientia beam. all rights reserved. https://orcid.org/0000-0001-7873-1856 http://www.orcid.org/0000-0003-4032-7051 https://orcid.org/0000-0002-0603-7264 https://www.doi.org/10.18488/journal.89.2018.41.1.23 financial risk and management reviews, 2018, 4(1): 1-23 2 © 2018 conscientia beam. all rights reserved. error (rmse), mean absolute percentage error (mape) and the mean absolute error (mae) will be employed later in this work to evaluate the performance of the various models as to how they forecast volatility. why study volatility? volatility plays a crucial role in financial markets and hence it is important to understand this concept, which is why we model volatility using the non-linear models in this work. volatility quantifies risk and thus plays a major role in modern finance. black and scholes (1973) evaluated volatility using the option pricing formula. it shows the relationship between an option’s price and several other factors, including volatility of the underlying asset’s price. ye-hsiang (1993) argued that in order to derive an option’s price from the black and scholes formula, the option is replicated by a portfolio consisting of the underlying asset and a risk free bond. in the black and scholes formula, different expectation of volatility will result in a different option price from this formula. this allows for an arbitrage opportunity if the option’s market price is different from the initial cost of the portfolio. thus an option trader is able to make profit by making superior forecasts of future volatility. with the vast portion of the financial markets so dependent on the volatility behaviour, there are obvious benefits to understanding volatility better. improved forecast would allow traders to price their options more accurately. using more frequent data provide better estimation of volatility. day and lewis (1992) proved that volatility can be predictable using the arch models and that volatility is entirely captured by implied volatility within the black and scholes model. the reason for this is that autoregressive models are still not entirely exploited by the market. however, kuwahara and marsh (1992) argued that the conditional volatility derived from garch and egarch models enable researchers to obtain option values which are very close to those that could be observed by the market. this suggests that conditional volatility cannot be used as an additional source of information, since it can be observed in the implied values. according to michael minnich, vice president of capital market risk advisor, value at risk is a very important component of risk management and also an important part of volatility forecasting. furthermore, modelling and forecasting volatility has been subject of interest to many academicians, portfolio analysis’s and those involved with risk management. there has been growing interest in this area of research as a result of the current economic crisis hitting most countries of the world. the indices of most countries are experiencing severe downturn and hence derivative traders, academicians and portfolio managers are more concern about this problem. the purpose of this paper then is to forecast volatility using the non-linear models and applying the various standard symmetric loss functions to evaluate which of these models forecast volatility better. the rest of the paper is structured as follows: section 2 presents a concise review of the various literature on volatility. section 3 discusses the methodology while section 4 and 5 is analyses the empirical results and conclusion respectively. 2. literature review over the last two decades, there has been an increasing interest in modelling the volatility of stock market returns (akgiray, 1989; dimson and marsh, 1990; pagan and schwert, 1990; boguth et al., 2011; constantinides et al., 2013; bollerslev et al., 2016; cipollini et al., 2017; bollerslev et al., 2018). this is basically due to the highly volatile movements of prices of stock returns in the financial market. this has led researchers into investigating the level and stationarity of volatility over time (day and lewis, 1992; tse and tung, 1992; figlewski et al., 1993). most research has been directed towards examining the accuracy of this forecast. both linear and nonlinear models have been applied by different researchers and each of them came out with different conclusions as regards the accuracy of volatility forecast (cao and tsay, 1992; heynen and kat, 1994; brailsford and faff, 1996; figlewski, 1997). financial risk and management reviews, 2018, 4(1): 1-23 3 © 2018 conscientia beam. all rights reserved. following the outburst of the arch models by engle (1982); bollerslev (1986) and nelson (1991) literature surrounding its emergence has boomed since its discovery. many researchers have come up with different views as to how these models forecast volatility better. such model ranges from the naive (linear models) to the more sophisticated (nonlinear) models. their findings are, however by no means consistent, as their end results differ even when the same indices and sample period are considered. this can be attributed to the manner in which the models were evaluated and the evaluation criteria employed. the review of literature tries to bring different research findings, how they differ and how they are consistent with one another, but none of the findings gave exact results, but where able to identify which of the models forecast volatility better (see for example; (angelidis et al., 2003; louis and guan, 2004; balaban and bayar, 2005; mats and viman, 2005; palmquist and viman, 2005; abdul and shabbir, 2008)). 3. methodology 3.1. data set and sample description. this work uses the daily closing prices of three stock market indices from 3rd april 1989 to 7th april 2009. the investigated indices are ftse 100 index from the uk; s&p 500 index from the usa and the nikkei 225 index from japan. these indices have a continuous sequence of around 5034 observations, excluding the non-trading days such as weekends, public holidays and other exchange closure days. data are sourced from data stream. the ftse 100 index comprises of 100 large firms registered in the uk, while the s&p 500 and the nikkei 225 comprises of 500 top rated companies and 225 top rated companies, respectively. the entire sample for each index is divided into two subsample periods, with each representing a 10 year period. the first subsample period is from 4th april 1989 to 2nd april 1999 with 523 trading weeks and second subsample from 6th april 1999 to 7th april 2009 with 524 trading weeks. the daily returns are calculated on each of the subsample periods on each of the three indices mentioned earlier. this is done by applying the formula represented below as thus; 3.1.1 where rt denotes daily index returns, pt denotes the closing price of the index at time t and pt-1 refers to the closing index price at time t-1. the ln represents the logarithm of the relative price index. the daily returns calculated are then divided by the number of trading days in a week, with holidays excluded from the calculation to obtain the weekly return of the various series. 3.2. arch methodology 3.2.1. testing for arch effect arch (autoregressive conditional heteroskedasticity) models are designed to model and forecast conditional variance. an indication of arch is that the residuals will be uncorrelated, but the squared residuals will show autocorrelation. the later is once again tested when we consider the autocorrelation function (acf) and the partial autocorrelation (pacf) of the squared residuals. testing for arch effects requires us to test for a reasonable test of the null hypothesis of conditional homoskedasticity, against the conditional heteroskedasticity. this done basically to make sure that there is no heteroskedasticity in the arch model being estimated. we therefore need to apply the lm test (lagrangian multiplier test), using the residual series of the model to test for arch effects. according to brooks (2002) the test is one of a joint hypothesis that all q lags of the squared residuals have coefficient values that are not significantly different from zero. if the value of the test statistic is greater than the critical value from the distribution, then financial risk and management reviews, 2018, 4(1): 1-23 4 © 2018 conscientia beam. all rights reserved. we reject the null hypothesis of no arch effects and conclude that there is a presence of arch effect. the lag to implement here depends on the preferences of the researcher. 3.2.2. arch (p) model specification arch the result of the lags that proved no arch effect from the above section is employed to estimate in the order of the arch model to be adopted. we used the pacf of square residuals to estimate the order of the arch (p) model. the form of the ar (p) model can be used as the mean equation for the arch type model. other researchers claim that the pacf of the square residuals can be useful for such applications. the mean equation is represented as; 3.2.1 while the conditional variance is represented as; 3.2.2 garch following lamoureux and lastrapes (1990); walsh and tsou (1998) a simple garch (1 1) will be employed and thus there is no need to specify any higher order. egarch the same principle is applied here as above and this is done following engle and ng (1993) and brooks (2002) and thus simple egarch (1 1) is employed. 3.2.3. arch-type model estimation. the r square and the f statistics are evaluated so as to identify their importance and significance in the arch model. in this particular case, we consider the mean equation only rather than the model as a whole. the r square most of the time is meaningless and they contribute nothing to the estimation process. r square sometimes is negative in value and such a value is irrelevant. this is obvious when the residual sum of squares is greater than the sum of square residual in the model. the r square and the f statistics are meaningful for ols models but meaningless for the arch models. 3.2.4. diagnostic check arch the stationarity condition for arch models is checked here for the non-negativity constraints and the finite unconditional variance. the alpha coefficients are summed to ensure they sum to less than one and this implies the non-breach of the stationarity condition of the arch (p) model. garch we also checked for the restrictions of the non negativity constraint as this determine the stationarity of the garch model. the restrictions most of the time are satisfied but this is checked for our model specified in the above section. serial correlation in standardised residuals we checked whether the serial correlation present in the autoregressive model are removed and are also not present in the arch type models. this is achieved when we tested using the arch lm test. financial risk and management reviews, 2018, 4(1): 1-23 5 © 2018 conscientia beam. all rights reserved. 3.3. forecasting the study focuses on performing out of sample weekly volatility forecasting and each sample is split into two sub samples. this work is consistent with those of figlewski et al. (1993) studied the weekly return of various return series using the linear and non linear models. their result proved that the egarch model outperformed other models when evaluated. there are basically two types of forecasting, the static and dynamic forecasting. these forecasting types have two implications, the dynamic forecasting sets subsequent innovations to zero, while the static forecasting extends the forward recursion through the end of the estimation sample, allowing for a series of one step ahead forecasts of both structural model and the innovation. for simplicity, we will thus look at dynamic forecasting generated in eviews. 3.3.1. dynamic forecasting according to tsay (2005) the arch model, the one step ahead forecast of is = 3.3.1 the m-step ahead forecast for is 3.3.2 where if 3.3.2. out of sample forecast forecasting is a very important aspect in finance as it helps researchers and derivative traders in determining the risk in portfolio management. in-sample forecasting, is based on parameter estimated using all data in the sample, and it implicitly assumes parameter estimates are stable across time. in practice, time variation is a critical issue in forecasting (poon, 2005). the in sample forecasting was done using the first 261 weeks to forecast volatility of the model. for the entire indices, the first subsample was forecasted using the sample period from 1st april 1994 to 1st april to 1999, representing the first 261 weeks. for the second sub sample the forecasting is done using the sample period from 6th of april 2004 to 7th of april 2009, representing the first 261 weeks. the result of this will be discussed in section four. 3.3.3. forecast evaluation criteria. various evaluation criteria are used to know how best a particular model out performs another. the mean errors (me), mean square error (mse), root mean square error (rmse), and the mean absolute error (mae) are the various error techniques to look at when testing performance. the ones mentioned here are employed so as to check performance. a forecast error with mean near zero and small variance depicts the more preferred model. therefore the model that best forecasts volatility is taken from the criteria discussed above. the model with the lowest value of the mean error (me) proves to be the best forecast of volatility and the same applies to the mean square error (mse), the root mean square error (rmse), and the mean absolute error (mae). (see poon (2005)) mean error (me) 3.3.3 financial risk and management reviews, 2018, 4(1): 1-23 6 © 2018 conscientia beam. all rights reserved. root mean square error (rmse) 3.3.4 mean absolute error (mae) 3.3.5 mean absolute percentage error. 3.3.6 denotes weekly volatility forecast of the model, while denote the in sample actual standard deviation and n the total number of observation (number of weeks). 4. empirical results 4.1. data series statistics. table-4.1.1. descriptive statistics of return series. dj-ind ftse 100 nikkei 225 sample: 1989-1999 1999-2009 1989-1999 1999-2009 1989-1999 1999-2009 size 2517 2515 2524 2531 2469 2461 mean 0.000576 -0.0000996 0.000441 -0.000188 -0.000286 -0.000250 median 0.000693 0.000312 0.000530 0.000227 -0.000231 0.00000584 sd 0.008922 0.013067 0.008925 0.013402 0.014946 0.016201 skewness -0.585097 0.025056 0.069316 -0.126501 0.343934 -0.319098 kurtosis 9.839083 10.74865 5.302952 9.220919 7.213919 9.553287 jb-test 5048.935 6292.118 559.7818 4087.958 1875.439 4445.475 probability 0.000000 0.00000 0.000000 0.000000 0.000000 0.000000 source: eviews’ result output from table 4.1.1, the mean value in the first subsamples seems to be closer but with the exception of those of the nikkei 225 suggesting a negative value. in the second subsample, the mean of the various indices are all negative with that of the ftse 100 and nikkei 225 relatively close. in the first subsample, the standard deviation of dow jones industrial and the ftse 100 are quite close but that of nikkei 225 is significantly different. the same applies to the second subsample, but this time the standard deviation of the nikkei 225 seems close to those of the other indices. the skewness of dow jones industrial in the first subsample is negative suggesting a longer left tail and a higher peak in the middle. according to poon (2005) the implication of this is that for a large part of the time, financial asset returns fluctuate in a range smaller than that of a normal distribution. on the other hand, ftse 100 and nikkei 225 are positively skewed suggesting a longer right tail and a higher peak in the middle. in the second subsample, dow jones industrial tends to be positive, while that for ftse 100 and nikkei 225 is negatively skewed. the kurtosis for all the samples are positive and in excess of 3 suggesting a flatter and thicker tail and are very sensitive to outliers. 4.1.1. jarque-bera normality test. this test for the normality of the asset returns of the various indices. the low p value and high value of the jarque-bera statistics suggests we reject the null hypothesis of normality for all the samples. these values are lower financial risk and management reviews, 2018, 4(1): 1-23 7 © 2018 conscientia beam. all rights reserved. than that of the 5% level of significance and this suggests that the financial assets are not normally distributed, hence are non normal. 4.1.2. stationarity test (adf test) augmented dickey fuller test table-4.1.2. augmented dickey fuller test for all the return series dj-industrial ftse 100 nikkei 225 lag 1989-1999 1999-2009 1989-1999 1999-2009 1989-1999 1999-2009 0 -3.84951 (0.0000) -4.15147 (0.000) -3.580068 (0.0000) -4.330746 (0.0000) -4.074043 (0.0000) -4.230698 (0.0000) 1 2.032284 (0.0000) 2.235980 (0.0000) 1.830214 (0.0000) 2.440101 (0.0000) 2.225083 (0.0000) 2.353054 (0.0000) 2 1.346313 (0.0000) 1.422396 (0.0000) 1.198992 (0.0000) 1.659917 (0.0000) 1.439777 (0.00000 1.607558 (0.0000) 3 0.788079 (0.0000) 0.836214 (0.0000) 0.681636 (0.0000) 0.953854 (0.0000) 0.845688 (0.0000) 0.993646 (0.0000) 4 0.371190 (0.0000) 0.410869 (0.0000) 0.342955 (0.0000) 0.520806 (0.0000) 0.412657 (0.0000) 0.526422 (0.0000) 5 0.112196 (0.0000) 0.120470 (0.0000) 0.112003 (0.0000) 0.203948 (0.0000) 0.146547 (0.0000) 0.194116 (0.00000 notes: values in parenthesis are p-values lower than the 1% level of significance. the return series were tested for stationarity using 36 lags as a result of the weekly returns being employed. according to brooks et al. (2005) if the data are monthly, use 12 lags, if the data are quarterly, use 4 lags and so on. but in order to make our work simple, we decided to illustrate 5 lags in the table above. based on these, we decided to use 36 lags being that the data are weekly. from table 4.1.2, since the adf test statistics has p-values lower than the 1 % level of significance, we reject the null hypothesis of unit root and conclude that there is no unit root and hence returns series are stationary. 4.2. ar (m) model building model identification we used the akaike and the schwartz information criteria to determine the order of the model to employ. the rejection of the null hypothesis of non stationarity makes it reasonable to proceed to the model specification. table-4.2.1. akaike and schwartz bayesian information criteria of the first subsamples. dow jones indus 1989-1999 ftse 100 1989-1999 nikkei 225 1989-1999 lag aic sbic aic sbic aic sbic 0 -6.600140* -6.597823* -6.599418 -6.597107 -5.568396 -5.566042 1 -6.599403 -6.594769 -6.605291 -6.600667* -5.567375 -5.562665 2 -6.598964 -6.592010 -6.604955 -6.598017 -5.574370* -5.567304* 3 -6.599120 -6.589845 -6.605395 -6.596141 -5.573830 -5.564405 4 -6.598522 -6.586924 -6.604755 -6.593184 -5.572675 -5.560891 5 -6.597365 -6.583443 -6.605677 -6.591787 -5.571529 -5.557382 6 -6.596421 -6.580172 -6.605632 -6.589421 -5.571612 -5.555102 7 -6.598028 -6.579452 -6.607450 -6.588918 -5.570536 -5.551661 8 -6.597738 -6.576834 -6.607472* -6.586616 -5.570540 -5.549299 the * represents aic or sbic with the lowest value. from table 4.2.1 in the first sub sample, the akaike and the schwartz suggest ar (0), since it represents the value with the lowest aic and sbic. the pacf for the dow jones indus suggest ar(1) while the information criteria suggest ar (0), but following akgiray (1989) he decided to choose ar(1)for his sample despite the fact that the aic and sbic suggests ar(0). financial risk and management reviews, 2018, 4(1): 1-23 8 © 2018 conscientia beam. all rights reserved. we therefore modelled our autoregressive model based on the information criteria with the lowest value and in some cases where the aic suggest too many lag say ar(8), like in the dow jones industrial index in the second sample of table 4.2.2, instead we decided to choose ar(2) suggested by the sbic. the motivation for this is that we are trying to keep our model as parsimonious as possible and also in some researches, the sic has proven to suggest a better order for ar models than the aic. see (brooks et al., 2005). table-4.2.2. akaike and schwartz bayesian information criteria of the second subsample. dow jones indus 1999-2009 ftse 100 1999-2009 nikkei 225 1999-2009 lag aic sbic aic sbic aic sbic 0 -5.836983 -5.834665 -5.786470 -5.784164 -5.407093* -5.404732* 1 -5.841630 -5.836992 -5.789847 -5.785234 -5.406985 -5.402263 2 -5.846672 -5.839713* -5.792963 -5.786041 -5.406392 -5.399307 3 -5.848573 -5.839291 -5.800910 -5.791677 -5.406296 -5.396846 4 -5.847438 -5.835833 -5.805403 -5.793858 -5.405245 -5.393429 5 -5.848652 -5.834720 -5.807617 -5.793759 -5.405194 -5.391010 6 -5.847546 -5.831287 -5.810867 -5.794693* -5.404694 -5.388140 7 -5.848213 -5.829625 -5.810481 -5.791991 -5.404949 -5.386024 8 -5.848694* -5.827776 -5.811791* -5.790983 -5.403813 -5.382514 the * represents aic or sbic with the lowest value. 4.2.1. ar (m) model estimation table-4.2.3. ar (m) modelols regression coefficient estimates notes: figures in parenthesis are the p-values. dj-industrial ftse 100 nikkei 225 stat/coeff 19891999 19992009 stat/coeff 19891999 1999-2009 stat/coeff 19891999 19992009 0.000578 (0.0015) -0.0001 (0.6524) 0.000441 (0.0227) -0.000197 (0.3323) -0.00029 (0.2859) -0.0025 (0.4237) 0.019919 (0.3179) -0.082 (0.000) 0.083857 (0.000) -0.0667 (0.0008) -0.00886 (0.6585) -0.03137 (0.1198) -0.07676 (0.0001) -0.0659 (0.0009) -0.0905 (0.000) -0.0993 (0.000) 0.06595 (0.0001) -0.06246 (0.0018) -0.0647 (0.0012) f-stat 0.9978 14.749 f-stat 17.85108 12.9849 f-stat 10.234 2.4216 r-square 0.00039 0.0116 r-square 0.00703 0.03001 r-square 0.008 0.00098 dw 1.9987 1.990 dw 1.995 1.995 dw 1.995 2.0016 loglik 8304.05 7349.34 loglik 8334.574 7343.22 loglik 6878.98 6652.5 4.2.2. diagnostic checks from table 4.2.3, the significance of the p value and the high value of the f-statistics of most of the models shows equations are well specified. but there are cases where the f-statistics seems not to be statistically significant and this can be seen with low insignificant f-statistic. insignificant f-statistics are observed in dow jones industrial index of the first subsample and the nikkei 225 index of the second subsample. this does not matter much as most of the other coefficients were statistically significant. the r-square of most of the subsamples were less than 1%, except for two cases where they went above 1% to about 3%. it was 1.1% during the second subsample of the dow jones industrial index and 3% during the second financial risk and management reviews, 2018, 4(1): 1-23 9 © 2018 conscientia beam. all rights reserved. subsample of the ftse 100 index. the r-squares tend to increase during the second subsamples of the various indices, and this might be as a result of the more volatile periods (the september 11 attack of 2001 and the recent credit crunch of the last three years). durbin-watson the durbin-watson statistic for all most all the models are close to 2, leading to the rejection of the null hypothesis of no serial correlation of the residuals. this suggests that there is little evidence of serial correlation in the models (see brooks et al. (2005)). table-4.3.1. arch (m) model regression coefficient parameters. dow jones indus ftse 100 nikkei 225 stat/coeff 1989-1999 19992009 stat/coeff 19891999 19992009 stat/coeff 1989-1999 1999-2009 0.00079 (0.0000) -0.0001 (0.6524) 0.000441 (0.0227) -0.000197 (0.3323) -0.00029 (0.2859) -0.0025 (0.4237) 0.019919 (0.3179) -0.082 (0.0000) 0.083857 (0.0000) -0.0667 (0.0008) -0.00886 (0.6585) -0.03137 (0.1198) -0.07676 (0.0001) -0.0659 (0.0009) -0.0905 (0.000) -0.0993 (0.0000) 0.06595 (0.0001) -0.06246 (0.0018) -0.0647 (0.0012) variance equation variance equation variance equation k 0.0000563 (0.0000) 0.000025 (0.0000) k 0.000046 (0.0000) 0.0000203 (0.0000) k 0.0000562 (0.0000) 0.0000826 (0.0000) dow jones indus ftse 100 nikkei 225 1989-1999 19992009 19891999 19992009 1989-1999 1999-2009 0.09212 (0.0014) 0.03579 (0.1664) 0.112736 (0.0089) 0.10295 (0.0035) 0.180006 (0.0000) -0.000712 (0.9595) 0.150645 (0.0056) 0.12039 (0.0002) 0.147786 (0.0000) 0.130056 (0.0000) 0.131339 (0.0000) 0.19168 (0.0000) 0.042911 (0.0477) 0.127171 (0.0000) 0.15256 (0.0000) 0.15165 (0.0000) 0.11555 (0.0002) 0.159832 (0.0000) 0.133670 (0.0000) 0.14526 (0.0001) 0.14546 (0.0000) 0.13495 (0.0000) 0.091687 (0.0000) 0.14147 (0.0000) 0.10737 (0.0011) 0.19271 (0.0000) 0.04847 (0.0201) 0.12652 (0.0000) 0.14140 (0.0000) 0.177484 (0.0000) 0.053988 (0.0403) 0.128662 (0.0000) 0.08182 (0.0008) arch lm arch lm arch lm f-test 1.762934 1.518740 f-test 0.995300 1.125045 f-test 0.038590 1.538423 p-value 0.117122 0.180530 p-value 0.418995 0.344721 p-value 0.999187 0.174486 r-square -0.000576 -0.00118 r-square -0.000004 -0.001327 r-square -0.00188 -0.000812 durbin watson 1.95889 2.148 durbin watson 1.8321 2.124 durbin watson 2.0123 2.060 loglikhood 8397.664 7897.671 loglikhood 8435.413 7916.169 loglikhood 7138.604 6984.194 figures in parenthesis represent the p-values. the only exception to this is the second subsample of nikkei 225 index which shows a durbin-watson statistic of 2, suggesting no autocorrelation of residuals in the model. but one should take this with a pinch of salt as durbin-watson is not a perfect measure of the presence of autocorrelation in the residuals. financial risk and management reviews, 2018, 4(1): 1-23 10 © 2018 conscientia beam. all rights reserved. 4.3. arch effect the residuals of the ar (m) models in the above section were tested for arch effect using the arch lm test. the residuals of all the return series were all significant at 1% level of significance, indicating that there is presence of heteroskedasticity in the residuals of the return series. this means that the autoregressive models cannot adequately model the return of the series and this therefore means that any result will be biased and the will produce false estimates and results. as a result of this, we resort to model the arch type models in order to take care of the issue of heteroskedasticity, but this will depend upon the fact that there are no heteroskedasticity in the model. from table 4.3.1, significant coefficients of the variance equation can be seen in almost all the return series, with significance at both 1% and 5% level. this is indicated by the small p-values illustrated in parenthesis. the only exception to this is the large p-value observed in the first coefficient of the second subsample of the nikkei 225 index. the insignificance does not matter much as majority of the other coefficients shows significance with low pvalues. the negative value of the r-square makes it impossible to estimate the value of the f-statistic for the entire sample. r-square is negative for the entire sample; this is explained in section 3.6.3. the log likelihood is relatively large for the entire sample suggesting the models employed fits the data well. according to brooks et al. (2005) the more parameters there are in the conditional variance equation, the more likely it is that one or more of them will have negative estimated values. this same result is observed in the second subsample of the nikkei 225 index where the first coefficient of the model is negative as a result of arch (5) being estimated. btu this is not the case in all circumstances even when we estimated arch (8) of second subsample of dow jones industrial index and that of ftse 100 index. table-4.3.2. garch (1 1) model estimation. dow jones indus ftse 100 nikkei 225 stat/coeff 1989-1999 1999-2009 stat/coeff 1989-1999 1999-2009 stat/coeff 1989-1999 1999-2009 0.00062 (0.0001) 0.000342 (0.0425) 0.000497 (0.0012) 0.000275 (0.1186) 0.000304 (0.1978) 0.000337 (0.1813) variance equation variance equation variance equation k 0.00000798 (0.0005) 0.00000104 (0.0130) k 0.00000117 (0.0008) 0.00000116 (0.0017) k 0.0000028 (0.0068) 0.0000301 (0.0001) 0.038544 (0.0010) 0.078135 (0.0000) 0.05663 (0.0000) 0.109349 (0.0000) 0.109291 (0.0000) 0.094202 (0.0000) 0.952471 (0.0000) 0.91678 (0.0000) 0.92875 (0.0000) 0.888057 (0.0000) 0.88482 (0.0000) 0.89690 (0.0000) arch arch arch lm f-test 0.307995 0.954119 f-test 0.950460 0.564544 f-test 0.038408 1.657808 p-value 0.908359 0.444729 p-value 0.447063 0.727279 p-value 0.999196 0.103763 r-square -0.00024 -0.001142 r-square -0.000039 -0.001198 r-square -0.00156 -0.001313 dw 1.959 2.1482 dw 1.8321 2.1252 dw 2.012 2.0598 log likhood 8479.762 7927.203 log likhood 8505.963 7939.081 log likhood 7183.273 7021.074 notes: figures in parenthesis represent the p-values. from table 4.3.2, we estimated the garch (1 1) model and the parameter represents the lagged squared residual and the lagged conditional variance equation. both parameters are highly statistically significant, with low p-values significant at all levels of significance. the sum of the coefficients on the lagged squared error and lagged conditional variance is very close to one for all samples of the return series. that for the dow jones industrial index is approximately 0.99101 and 0.99491 for both first and second subsamples respectively. the same issue applies to the rest of the return series, where all the coefficients seem to be very close to unity. this also implies that the shocks to the conditional variance will be highly persistent. see (brooks et al., 2005). financial risk and management reviews, 2018, 4(1): 1-23 11 © 2018 conscientia beam. all rights reserved. table-4.3.3. egarch (1 1) model estimation dow jones indus ftse 100 nikkei 225 stat/coef 1989-1999 1999-2009 stat/coef 1989-1999 1999-2009 stat/coef 1989-1999 1999-2009 c 0.000468 (0.0032) -0.000015 (0.9281) c 0.000399 (0.0099) -0.000154 (0.3761) c -0.000167 (0.4367) -0.000106 (0.6637) varince eqution variance eqution variance equation c (2) -0.33473 (0.0000) -0.21708 (0.0000) c (2) -0.16749 (0.0000) -0.220353 (0.0000) c (2) -0.29774 (0.000) -0.361448 (0.0000) c (3) 0.112528 (0.0000) 0.099973 (0.0000) c (3) 0.089652 (0.0000) 0.104704 (0.0000) c (3) 0.15967 (0.0000) 0.173927 (0.0000) c (4) -0.006795 (0.0001) -0.114367 (0.0000) c (4) -0.04264 (0.0000) -0.120989 (0.0000) c (4) -0.10200 (0.0000) -0.084147 (0.0000) c (5) 0.97370 (0.0000) 0.984802 (0.0000) c (5) 0.98984 (0.0000) 0.98495 (0.0000) c (5) -.97987 (0.0000) 0.973512 (0.0000) r-square -0.000148 -0.000042 r square -0.000023 -0.000006 r square -0.000064 -0.000079 dw 1.9597 2.1505 dw 1.83213 2.1278 dw 2.0159 2.062440 figures in parenthesis represent the p-values. the coefficients of the constant in the mean equation from table 4.3.3 are not statistically significant, except for that of the dow jones industrial index of the first subsample which is significant at 5% level. but all the parameters of the variance equation for all the samples were found to be statistically significant at all level of significance. the r square here is again negative like that of the other arch type models, but the reason for this has been explained before in section 3.6.3. this model has an overwhelming advantage over the garch model presented in table 4.3.2 above. the reason being that there are no non-negativity restrictions placed on the parameters of the model, as the negative results found in table 4.3.3 will be taken care of by the log of garch represented as the dependent variable in the above model. 4.4. diagnostic checks the arch models in the various subsamples were checked that they don’t breach the stationarity condition explained in section 3.6.4. for the arch model, table 4.5.1 shows that the stationarity conditions for the arch models are fulfilled as the sum of the alpha coefficients are close to unity. this stationarity condition satisfies that the models in table 4.5.1 are modelled correctly. table 4.5.1 shows estimates of the garch model and the stationarity condition here is satisfied also as the coefficients of the variance equation were very close to unity, indicating evidence of stationarity in the model and that the simple garch (1 1) model is adequately modelled. the overwhelming advantage of the egarch model makes the stationarity condition satisfied as there are no restrictions to the model. serial correlation of standardised residuals the arch lm test was employed after estimating the arch model to check whether the presence of heteroskedasticity in the autoregressive model are not present in the arch models estimated for the various return series. the arch lm test for the various indices in tables 4.5.1 and 4.5.1 suggests p values that are very high and in most cases close to 100%. we therefore fail to reject the null hypothesis of homoskedasticity and conclude that there are no heteroskedasticity in the model. this is indicated by the high p values suggested by the arch lm test. this suggests that the arch models are adequately modelled and that there are no serial correlations in the model. 4.4.1. dynamic forecasting fig 4.5.1a to fig 4.5.1r (at the appendix) illustrates the in sample actual standard deviation of the first and second sub samples of the three indices under investigation. this represents 521 weeks with week1 to week 261 in sample conditional standard deviation values, followed by week 262 to week 521 dynamic out of sample forecast. financial risk and management reviews, 2018, 4(1): 1-23 12 © 2018 conscientia beam. all rights reserved. arch type models in most cases seem to better describe samples in which volatility clustering are more transparent. in all the graphs presented above, the arch type models tend to follow the in sample actual standard deviation quite closely than any other models in most cases. for the dow jones industrial index, the arch model seems to follow the actual in sample standard deviation quite closely in the first sub sample than those of the garch and egarch in fig 4.5.1 a to fig 4.5.1c. the second model that best forecast volatility from the visual investigation is the egarch model in fig 4.5.1c as they tend to follow the actual in sample standard deviation quite closely. for the second sub sample, the egarch model follows the actual in sample better than the garch and arch model and hence tends to forecast volatility better from fig 4.5.1d to fig 4.5.1f. fig 4.5.1g to fig 4.5.1i at the appendix represents the first sub sample of ftse 100. the arch model in this case, forecasts volatility better than the garch and egarch model, as they tend to follow the actual in sample standard deviation with high peaks. the garch model seems to follow the actual in sample quite closely after the arch model. again for the second sub sample the arch model seems to follow the actual in sample better than the garch and egarch model. this is illustrated in fig 4.5.1j to fig 4.5.1l where the garch model seems to be second best in terms of volatility forecasting since they follow the actual in sample standard deviation quite closely. the nikkei 225 index shows higher peaks than those of the dow jones industrial and the ftse 100 indices. the arch model again seems to follow the actual in sample standard deviation quite closely than the other models in fig 4.5.1m to fig 4.5.1o. the second sub sample in fig 4.5.1p to fig 4.5.1r has peaks that are lower than those of the first sub sample explained above. the egarch model follows the actual in sample standard deviation quite closely than the arch and garch models, followed by the arch and then the garch model. the arch type models seems to forecast volatility better than the garch and egarch models in most cases, but one cannot rush into such conclusion as what will determine which model forecast volatility better will be based on the standard symmetric loss function. 4.4.2. out of sample forecast from fig 4.5.1a to fig 4.5.1r in appendix, the week 262 to week 523 represents the out of sample forecasting period of the various return series. this shows that the out of sample forecast of the three indices clearly converge to the long term unconditional values. this is common with all the forecasts of the indices under study. the in sample forecast and out of sample forecast were analysed using the standard symmetric loss function to evaluate the performance of the competing models. the forecast was done using the dynamic forecasting, forecasting multi periods ahead. the in sample forecast period is made up of the first 261 weeks with 1249 observations and an out of sample forecast period of the second 261 weeks with 1264 observations. returns of the various indices were calculated weekly and are used in the analysis of this work. this is consistent with those of balaban and bayar (2005). the four standard symmetric loss functions here include; the mean error, root mean square error, mean absolute error and the mean absolute percentage error. the model with the most minimum forecasting error is regarded as a model that best forecast volatility better. table 4.6.1a to 4.6.1c in appendix represents the in sample volatility forecast for the entire sample (first and second sub samples), with the tables representing the actual error statistics for the non linear models. using the four evaluation criteria, the egarch model clearly dominates the arch and garch models by registering the lowest statistical error for the three indices. the garch model seems to have the lowest minimum values of the errors but it is not enough to outperform those of the egarch model as they seem to do so only with the dow jones industrial index and the ftse 100 in the first sub samples. egarch model has the lowest values and thus is regarded as the model the best forecast volatility when we consider the in sample forecast. this result is financial risk and management reviews, 2018, 4(1): 1-23 13 © 2018 conscientia beam. all rights reserved. consistent with those of najand (2002); pagan and schwert (1990) and figlewski et al. (1993) who all conclude that the egarch model seems to outperform other models in their studies. for the out of sample forecast (table 4.6.1d to 4.6.1f in appendix), the egarch model again outperformed the arch and the garch model. its dominancy can be seen mostly in the nikkei 225 index where it outperformed the arch and garch models all over the entire sample (in sample and out of sample), registering the lowest statistical error among other models in the work. egarch model outperformed the arch and garch models in the second sub sample of the ftse 100 index. egarch model seems to perform very well in periods of high volatility and it is common mostly in the second sub samples of the various indices. during the second sub sample of the various indices, there are two major events that led to high and low periods of volatility and these are the september 11 terrorist attack in 2001 and the ongoing financial crisis that started late 2007. the result here are again similar to those of figlewski et al. (1993); pagan and schwert (1990) and najand (2002) who all found the egarch to best forecast volatility than the arch and garch models. 5. summary and conclusion the purpose of this paper is to evaluate and investigate the forecasting ability of the non-linear models which include; the arch, garch and egarch models. we also investigated the autoregressive model but this model was not used in forecasting volatility of the return series under investigation for simplicity reasons. from our analysis of the various return indices, we discovered that the return series does not follow a normal distribution, thus exhibiting fat tails and high peaks which are higher than those of a normal distribution. evaluation of volatility forecasting have been investigated both in out of sample and in sample forecast, using the mean error (me), root mean square error (rmse), mean absolute error (mae) and mean absolute percentage error (mape) applied to a multi-step ahead out of sample weekly volatility forecast. among the three non-linear models under investigation, the arch type model exhibits relatively a poor forecast performance under both in sample and out of sample forecast, followed by the garch type models. the egarch model was found to outperform other models in forecasting volatility in this analysis. its superiority was observed in return series like the nikkei 225 where the egarch model tend to outperform other models both in out of sample forecast and in sample forecast. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. contributors/acknowledgement: all authors contributed equally to the conception and design of the study. references abdul, r. and a. shabbir, 2008. predicting stock returns volatility: an evaluation of linear vs. nonlinear methods. international research journal of finance and economics, 20(141-150): 31. akgiray, v., 1989. conditional heteroscedasticity in time 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pricing of japanese equity warrants. management science, 38(11): 1610-1641. available at: https://doi.org/10.1287/mnsc.38.11.1610. lamoureux, c.g. and w.d. lastrapes, 1990. heteroskedasticity in stock return data: volume versus garch effects. the journal of finance, 45(1): 221-229. available at: https://doi.org/10.2307/2328817. louis, h. and w. guan, 2004. forecasting volatility. available from https://ssrn.com/abstract=165528 or http://dx.doi.org/10.2139/ssrn.165528. mats, p. and b. viman, 2005. forecasting volatility in the swedish stock market. najand, m., 2002. forecasting stock index futures price volatility: linear vs. nonlinear models. financial review, 37(1): 93-104. available at: https://doi.org/10.1111/1540-6288.00006. nelson, d.b., 1991. conditional heteroskedasticity in asset returns: a new approach. econometrica, 59(2): 347-370. available at: https://doi.org/10.2307/2938260. pagan, a.r. and g.w. schwert, 1990. alternative models for conditional stock volatility. journal of econometrics, 45(1-2): 267290. available at: https://doi.org/10.1016/0304-4076(90)90101-x. http://dx.doi.org/10.2139/ssrn.165528 financial risk and management reviews, 2018, 4(1): 1-23 15 © 2018 conscientia beam. all rights reserved. palmquist, m. and b. viman, 2005. forecasting volatility in the swedish stock market; volatility modeling of the omx-index using four different models. available from www.stat.umu.se/kursweb/vt05/stac05mom3/?download=matsbjorn.pdf? poon, s.h., 2005. a practical guide to forecasting financial market volatility. chichester: jhon wiley and sons, ltd. tsay, r.s., 2005. analysis of financial time series. 2nd edn.: john wiley & sons. tse, y.k. and s.h. tung, 1992. forecasting volatility in the singapore stock market. asia pacific journal of management, 9(1): 1-13. walsh, d.m. and g.y.-g. tsou, 1998. forecasting index volatility: sampling interval and non-trading effects. applied financial economics, 8(5): 477-485. available at: https://doi.org/10.1080/096031098332772. ye-hsiang, l., 1993. forecasting daily volatility of foreign exchange markets: a comparison of the arch model and a new model using high frequency data. an unpublished msc project, submitted to the sloan school of management, mit, usa. pp: 1-33. appendix 4.6. forecasting fig-4.6.1a. a comparison of arch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1989-1999) first subsample. source: eviews’ result output http://www.stat.umu.se/kursweb/vt05/stac05mom3/?download=matsbjorn.pdf? financial risk and management reviews, 2018, 4(1): 1-23 16 © 2018 conscientia beam. all rights reserved. fig-4.6.1b. a comparison of garch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1989-1999) first subsample. source: eviews’ result output fig-4.6.1c. a comparison of egarch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1989-1999) first subsample. source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 17 © 2018 conscientia beam. all rights reserved. fig-4.6.1d. a comparison of arch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output fig 4.6.1e; a comparison of garch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output fig-4.6.1f. a comparison of egarch model conditional standard deviation of dow jones industrial index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 18 © 2018 conscientia beam. all rights reserved. fig-4.6.1g. a comparison of arch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (19891999) first subsample. source: eviews’ result output fig-4.6.1h. a comparison of garch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (19891999) first subsample. source: eviews’ result output fig-4.6.1i. a comparison of egarch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (1989-1999) first subsample source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 19 © 2018 conscientia beam. all rights reserved. fig-4.6.1j. a comparison of arch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (19992009) second subsample. source: eviews’ result output fig-4.6.1k. a comparison of garch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (19992009) second subsample. source: eviews’ result output fig-4.6.1l. a comparison of egarch model conditional standard deviation of ftse 100 index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 20 © 2018 conscientia beam. all rights reserved. fig-4.6.1m. a comparison of arch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (19891999) first subsample. source: eviews’ result output fig-4.6.1n. a comparison of garch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (1989-1999) first subsample. source: eviews’ result output fig-4.6.1o. a comparison of egarch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (1989-1999) first subsample. source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 21 © 2018 conscientia beam. all rights reserved. fig-4.6.1p. a comparison of arch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (19992009) second subsample. source: eviews’ result output fig-4.6.1q. a comparison of garch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output fig-4.6.1r. a comparison of egarch model conditional standard deviation of nikkei 225 index returns versus actual standard deviation (1999-2009) second subsample. source: eviews’ result output financial risk and management reviews, 2018, 4(1): 1-23 22 © 2018 conscientia beam. all rights reserved. 4.7. forecast evaluation table-4.7.1a. in sample forecast evaluation values. dj-indus first sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.001010918 0.004470646 0.003201589 0.367176116 garch 0.00967646 0.00444766 0.00315545 0.114862607 egarch 0.001077527 0.004465665 0.003189905 0.125018067 dj-indus second sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.002107113 0.007660924 0.005507428 0.422727826 garch 0.002052513 0.007457126 0.005271119 0.403523888 egarch 0.00062735 0.007178554 0.004690626 0.424726446 notes: values on bold represents values with lowest errors. table 4.7.1b. in sample forecast evaluation values. ftse 100 first sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.002984594 0.00395790 0.003690902 0.417200386 garch 0.000819442 0.003959491 0.002977073 0.337510323 egarch 0.000833467 0.004702743 0.002976499 0.340345209 ftse 100 second sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.003664441 0.008406874 0.006350382 0.409346787 garch 0.003998175 0.008393197 0.00642288 0.409436781 egarch 0.00428441 0.006942878 0.004573834 0.416043781 notes: values on bold represent the lowest values of the errors. table-4.7.1c. in sample forecast evaluation values. nikkei 225 first sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.003454182 0.007536839 0.006096075 0.3774864 garch 0.005049545 0.009189002 0.00751955 0.414153727 egarch 0.001579412 0.00698981 0.005360969 0.377098188 nikkei 225 second sub sample (in sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.00170211 0.009122864 0.006194947 0.398395463 garch 0.002609161 0.009305596 0.006562385 0.390184292 egarch 0.001190273 0.009009175 0.00598187 0.401501728 notes: values on bold represent the lowest values of the errors. table-4.71d. out of sample forecast evaluation values. dj-indus first sub sample (out sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.000651786 0.005216271 0.003634623 0.410702669 garch 0.000951028 0.005190626 0.0036393397 0.10880283 egarch 0.001157949 0.005267675 0.003800533 0.126536878 dj-indus second sub sample (out sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.003441605 0.009857653 0.007556308 0.558128635 garch 0.003269886 0.009581641 0.007174781 0.530767792 egarch 0.000648471 0.009227492 0.006106292 0.569757756 notes: values on bold represent the lowest values of the errors. financial risk and management reviews, 2018, 4(1): 1-23 23 © 2018 conscientia beam. all rights reserved. table4.7.1e. out of sample forecast evaluation values. ftse 100 first sub sample (out of sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.004954642 0.005991094 0.005214505 0.584485088 garch 0.00086058 0.004675147 0.003659436 0.408896685 egarch 0.000891135 0.004699706 0.000368831 0.411908289 ftse 100 second sub sample (out of sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.00671887 0.011146005 0.00964341 0.568854013 garch 0.007384655 0.011089078 0.009737928 0.554996617 egarch 0.00339366 0.008901765 0.006125039 0.584640813 notes: values on bold represent the lowest values of the errors. table-4.7.1f. out of sample forecast evaluation values. nikkei 225 first sub sample (out of sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.005101684 0.009031602 0.007777869 0.44111831 garch 0.008373207 0.011082624 0.009987103 0.478706324 egarch 0.00191227 0.007670322 0.006108042 0.423331019 nikkei 225 second sub sample (out of sample forecast) mean error root mean square error mean absolute error mean absolute percentage error arch 0.002391304 0.011508265 0.007933385 0.496586615 garch 0.004129922 0.011874298 0.008791541 0.493609117 egarch 0.001330736 0.01133557 0.007444403 0.4997820013 notes: values on bold represent the lowest values of the errors. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 14 © 2020 conscientia beam. all rights reserved. evaluating the effectiveness of capm and apt for risk measuring and assets pricing fahim afzal1+ pan haiying2 1,2business school of hohai university, nanjing, jiangsu, pr. china. (+ corresponding author) abstract article history received: 26 november 2019 revised: 30 december 2019 accepted: 4 february 2020 published: 18 march 2020 keywords capm apt risk analysis stock return stock risk asset pricing. jel classification: g32, e44, g10. persistent with the problem of quantifying the risk associated with securities, this study examines the applicability and validity of capital asset pricing model (capm) and arbitrage pricing theory (apt) while evaluating the stock prices and returns of listed companies in the pakistan stock exchange. while examining the applicability of capm and apt, this study considers the stock return of top ten sectors listed in stock exchange from the period of 2014 to 2019. the result shows that the application of apt for risk estimations may not be showing satisfactory results from the observed data. on average, the p-value is more than 30% for all factors which should be less than 5%. therefore, in order to compare the application of methods and find out the stock risk, it can be concluded that capm approach is more reliable than apt. thus, it is suggested to adopt the capm approach to estimate the realistic stock returns. additionally, the investor can also consider different indigenous and exogenous economic factors according for calculating market risk and maximizing the return. contribution/originality: this study contributes in the existing literature in a way to show that capm is still a valid tool to estimate the return in pakistani capital market, which implies that the market risk can better be estimated by the companies. investors must consider the market index performance for realistic stock return rather to follow other economic indicators. 1. introduction pricing an asset is a very technical but crucial phase for investors in the stock markets to predict the future price of the stock, where they are investing. different techniques have been used by investors to predict the expected prices of assets. stock investors are always looking for specialized instruments that can capture the risks associated to their investments in order to maximize their profit returns regardless of risk levels. recently, most efficient methods through which the risk and return can be calculated are capital asset pricing model (capm), and arbitrage pricing theory (apt) are two models, which are useful to predict the expected value of stocks and also helpful to individual and institutional investors regarding the pricing of stocks. this study examines the applicability and validity of capm and apt while evaluating the stock prices and returns of listed companies in the pakistan stock exchange (psx). capm of sharpe (1964) and lintner (1965) are the presenters of the apt, and there were no asset pricing models that exist in the financial world before the development of capm and apt which boosts the trust of investors in order to capture the risks associated to their assets. till date, the capm is being used by investors in risk applications in order to estimate the cost of equity financial risk and management reviews 2020 vol. 6, no. 1, pp. 14-21. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.14.21 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0001-6292-8531 https://www.doi.org/10.18488/journal.89.2020.61.14.21 financial risk and management reviews, 2020, 6(1): 14-21 15 © 2020 conscientia beam. all rights reserved. capital and for portfolios performance evaluation. ataullah (2001) states that the macroeconomic indicators exchange rate, oil prices, balance of trade and inflation are the principal source of systematic risk in the psx, and the apt pricing restrictions hold. the findings can help the individual as well as corporate investment managers including brokers efficiently manage the cost of capital estimations. the quantification of risk is the main challenge for the investors and practitioners that are associated with securities in which they are investing. therefore, the main objective of this study is to determine how accurately the capm and apt predict the expected return from psx. so in this study from the top ten sectors, ten companies have been selected from each sector according to their high market capitalization. this study helps the individual as well as institutional investors to decide to what extent they can rely on capm and apt while making investments in stocks. 2. literature review nowadays, the stock investors are always having the main focus on how to maximize the returns by minimizing the risks associated to their investments, even if they are investing in the assets or securities or business projects with higher risks. to achieve this target, investors are always wondering to find new tools to quantify the risk and return association upon their investments. therefore they implement different models for their risk quantifications. in this regard, the capm has been widely used by the risk managers for the risk and return quantifications (jagannathan & wang, 1996). since the development of the capm, to evaluate the validity of capm, multiple efforts have been ardent, a valuable contribution, and unique development in the field of finance. some studies that have been conducted related to the use of capm support the principle of the model while few contradict the model. the capm of sharpe (1964) and black, jensen, and scholes (1972) has been proved to be one of the most efficient tools to explain the association of risks and returns briefly. the capm model measures the risk of an asset by the covariance of an asset’s return with the market return. the linearity of expected returns related to asset covariance of market return is the main implications of the model, called the beta risk that is higher the beta, higher the risk association. qu and perron (2007) explained that if the new capm model is providing efficient results in the estimation of returns or not. they used the data set of new york stock exchange from the period of 1978 to 2004 with the sample size of 50 securities on the us stock market and concluded that the capm only identifies a single-equation factor which leads to the insignificant findings. another study conducted by elbannan (2015) examined the emerging greek securities market by using the weekly data of 100 companies from the period of 1999 to 2002, listed on the athens stock exchange. their results do not support the basic statement of capm that higher beta leads to generate higher returns. al refai (2011) inspected the relationship of risks and returns on jordan’s stock market portfolios by using the monthly data from the period of 1999 to 2008, which concluded that the positive relationship of risk and returns between emerging markets was rejected. bhatti and hanif (2010) also examined the capm in different institutes of pakistan. they inspected the capm application on psx to build an opinion about the model reliability and validity by applying to the different institutional frameworks. they studied sixty companies chosen from the kse-100 index using the data from 2003 to 2008. the variance-covariance approach has been used to calculate the beta in the prediction of desired returns from specific security. according to the results extracted suggested that out of 360 observations, there are only 28 companies supports the capm, that accurately measures the systematic risks between the securities, whereas remaining 332 companies does not support the primary application of capm, findings suggested that the capm gives accurate results for a limited period and few companies only. hundal, eskola, and tuan (2019) examine the relationship between risk and stock returns in the finnish stock market, and secondly, they examine to identify the performance of finnish companies if the realized returns are financial risk and management reviews, 2020, 6(1): 14-21 16 © 2020 conscientia beam. all rights reserved. under-performed or over-performed. their principal findings indicated the relationship between risk and returned worked in a synchronized way and stock return of observed companies is observed to be less volatile as compared to the market index. a multi-factor model known as apt has been developed in need, because many researchers believed that capm is unable to capture all the factors that affect the stock returns, which was further used by ross (1976) as cited in laubscher ( 2019). by using this model, it can be determined or explain the relationship between risks and return that an investor wants to take from his investments. javid and eatzaz (2009) made compares the conditional multi-risk factor model and capm by using the data of 49 companies of psx from the period of 1993 to 2004. the results concluded that the capm model is just applicable and can give satisfactory results for few securities in just a few years. it can be helpful for some times in psx if the investor is investing in low-risk securities. they concluded that the conditional multifactor model gives much more efficient results as compared to the single-factor model of decision making. shamim, abid, and shaikh (2014) examined the data of 70 companies from the period of 1994 to 2005 listed in the nasdaq stock exchange. the result concluded that the model for the prediction of future returns had been changed but the capm is only useful for the estimation of the cost of capital. furthermore, when they compared the results generated from capm and apt, showed that the apt model gives more accurate measures of future returns ad capm gives much less returns than apt. iqbal and haider (2005) examined the portfolios from the bombay stock market and the national stock market of india. they concluded that the apt model gives more accurate measures than capm. furthermore, they suggested that the apt model explains the process of return generation more accurately than capm (harshita, singh, & surendra, 2015). dash and rishika (2011) examined the most important industries in the national stock exchange of india. the main objective of their research was to check the applicability of apt and capm in capital markets of india and to check how macroeconomic factors play their role in the generation of securities returns. the results of their research suggest that the apt model does not have adequate power when compared to capm in indian stock markets. numerous studies have been done to check different economic factors and their influence on the stock market returns but the majority concluded that apt is far better than capm. siregar and diana (2019) study the indonesia stock exchange using the sample data of 194 companies from the period of 2007 to 2017 to examine the macroeconomic factors on stock returns by using the apt approach. the findings of their research depict that different economic factors have different influences on the stock returns and they categorized the period in three observational ways that include economic growth, increase stock returns and increased market risk. the solidification of the rupiah concerning the usd is a significant signal for stock market investors who had full confidence in the country’s economic situation. political risk studied to be one of the factors that are important in determining the stock returns comparative to market risk and macroeconomic factors. 3. research methodology the research purpose is to check that “which model is applicable on psx for capm or apt?” for this purpose, the following methodology has been used, and through different studies from different articles, it will also guide an investor that whether capm or opt provides valid results in psx, and does it prove to be helpful to the investors? psx has been selected for this study by considering ten sectors of psx from the period of 2014 to 2019 see table 3. furthermore, to simplify the study, from each selected sector, only one company has been chosen based on market capitalization. secondary data is taken, which has been collected from different reliable sources. the primary source is the official websites of psx. other sources are financial statements, national security website and google finance. secondary data (a stock price or the share prices of the companies) considered for this study, have been financial risk and management reviews, 2020, 6(1): 14-21 17 © 2020 conscientia beam. all rights reserved. taken from the website of psx. capm and apt have been used to calculate the expected return of the stocks. because by using these models on both stocks, then they will guide the investors to invest in which type of stock. 3.1. capital asset pricing model the capm is a model that explains the relationship of risk and returns, and that is utilized in risky portfolios pricing. risk and the time value of money are the two key ways that need to be compensated in the capm model. in equation 1, the risk-free rate is the time value of money and compensates the investors to invest their savings in any security over some time. the second half of equation 1 represents the risk and helps the investors to estimate the compensation amount that needs to have additional risk. this is calculated by estimating the risk-measure (beta) that compares the asset returns to the market over a period and to the market premium. capm has been calculated by equation 1; ( )s m        (1) where s signifies the expected stock returns.  is the return on risk-free rate m shows the market return and β is covariance of stock and market / variance of market. 3.2. arbitrage pricing theory the apt model explains the relationship of single assets by using the linear combination of macroeconomic factors and the returns of portfolios. the apt defines the price where a mispriced asset is likely to be. since the assumption power and requirements of apt considered to be very flexible but considered to be as an alternate of capm. whereas the capm requires the expected market return, but apt only requires the expected returns of the assets that are risky and risk premiums of different macroeconomic variables. apt is calculated by equation 2; 1 1 2 2 3 3 4 4 ......a n n                   (2) where the rate of return of an asset is s ,  labels the risk-free rate 1 shows the asset returns sensitivity of specific macroeconomic factors and 1 is the risk premium related to the specific macroeconomic factor. and asset returns  have been calculated by equation 3, where 1 reflects the recent price of stocks and 0 is the price of stocks last month. 1 0 0      (3) figure 1 of a framework shows that apt has four independent factors, which include inflation, money supply, unemployment & foreign exchange rate, and one dependent factor which is expected stock returns. these four independent factors can influence on expected stock returns. capm has only one factor that is market risk premium which can influence on expected stock returns. 4. data analysis our research results are showing significant results by regression analysis from data that has been used in this research. because the results of the p-value for all companies is showing less than 5% except ppl. on the average t-stats is showing positive signs. moreover, r-squared is showing insignificant results with an average of 26% of explanatory power see table 1. however, apt was not showing the most satisfactory results in psx from selected financial risk and management reviews, 2020, 6(1): 14-21 18 © 2020 conscientia beam. all rights reserved. data in this research. because on p-value it is more than 30% for all factors which have been used in the apt model & it should be less than 5%. figure-1. theoretical framework. on the other hand, the average value of t-stats is showing a negative sign for the inflation factor see table 2. moreover, showing a positive sign for the other three factors. furthermore, average explanatory power is 9.8% see figure 2 and figure 3. table-1. results of the capm model. index r-squared t-stat p-value significance luck 0.340 5.471 0.000 0.000 engro 0.257 4.477 0.000 0.000 kel 0.257 4.482 0.000 0.000 ptcl 0.265 4.577 0.000 0.000 ppl 0.002 0.328 0.744 0.744 nishat 0.506 7.710 0.000 0.000 mcb 0.538 8.212 0.000 0.000 aicl 0.287 4.828 0.000 0.000 ffc 0.152 3.224 0.002 0.002 upfl 0.052 1.787 0.079 0.079 table-2. results of the apt model. index r-squared beta inflation money supply unemployment forex luck 0.084 0.960 0.301 0.905 0.633 0.075 engro 0.078 0.301 0.755 0.072 0.133 0.923 kel 0.019 0.642 0.463 0.685 0.757 0.804 ptcl 0.092 0.684 0.232 0.094 0.165 0.598 ppl 0.025 1.442 0.384 0.965 0.518 0.963 nishat 0.162 1.678 0.266 0.022 0.262 0.155 mcb 0.154 1.112 0.461 0.021 0.913 0.240 aicl 0.141 1.462 0.203 0.007 0.233 0.667 ffc 0.044 1.280 0.700 0.472 0.703 0.246 upfl 0.186 1.524 0.646 0.185 0.003 0.467 financial risk and management reviews, 2020, 6(1): 14-21 19 © 2020 conscientia beam. all rights reserved. apt may not be showing satisfactory results from the observed data. on average, the p-value is more than 30% for all factors, which should be less than 5%. the average value of t-stats is negative for inflation and the other three factors are positive. figure-2. the beta of capm for psx. figure-3. betas of apt for psx. 5. conclusion this study has been done with several objectives in mind. first of all, it was to determine which model is providing more significant results for expected stock returns. for this purpose, time series analysis has been done for five years using two models capm and apt. the other objective was to determine which stock exchange gives more return based on the estimation of these models. for this purpose time series analysis has been done for psx taking ten companies from each sector. firstly the explanatory power of psx capm and apt 26.4% and 9.47% respectively. overall, capm is showing more significant results for the stock exchange, whereas apt is showing mixed results and for factors like unemployment rate and exchange rate, they are not even close to significant. the average p-value for both factors is 58% and 60% respectively which should be less than 5%. so based on these results, it can be concluded that capm is more reliable than apt. as far as apt is concerned, it cannot be denied that the sample was short and some factors work differently on different companies. so, if there would have been different factors like gdp growth rate or oil prices, then maybe there would have been different and more reliable results for apt. according to the results of this study, capm is suggested for investors to estimate the stock returns but an investor can also use different factors according to his requirements for apt as every factor affects differently on the apt model. for further research, new researchers can take a more than five-year time span and also take other factors of apt like oil prices and gdp growth rate to check the validity of apt. financial risk and management reviews, 2020, 6(1): 14-21 20 © 2020 conscientia beam. all rights reserved. table-3. list of acronyms. index abbreviation luck lucky cement limited engro engro corporation limited kel k-electric limited ptcl pakistan telecommunications company limited ppl pakistan petroleum limited nishat nishat mills limited mcb mcb bank limited aicl adamjee insurance company limited ffc fauji fertilizer company limited upfl unilever pakistan foods limited funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references al refai, h. (2011). empirical test of the relationship between risk and returns in jordan capital market. available at: ssrn 1443367. ataullah, a. (2001). macroeconomic variables as common pervasive risk factors and empirical content of the arbitrage pricing theory in pakistan ali ataullah. lahore journal of economics, 6(1), 56-74. available at: https://doi.org/10.35536/lje.2001.v6.i1.a3. bhatti, u., & hanif, m. (2010). validity of capital assets pricing model: evidence from kse-pakistan. european journal of economics, finance and administrative sciences, 20. black, f., jensen, m. c., & scholes, m. (1972). the capital asset pricing model: some empirical tests. studies in the theory of capital markets, 81(3), 79-121. available at: https://doi.org/10.1111/j.1467-629x.1989.tb00155.x. dash, m., & rishika, r. (2011). asset pricing models in indian capital markets. indian journal of finance, 5(11), 4-10. elbannan, m. a. (2015). the capital asset pricing model: an overview of the theory. international journal of economics and finance, 7(1), 216-228. available at: https://doi.org/10.5539/ijef.v7n1p216. harshita, s., singh, & surendra, s. y. (2015). indian stock market and the asset pricing models. procedia economics and finance. hundal, s., eskola, a., & tuan, d. (2019). risk–return relationship in the finnish stock market in the light of capital asset pricing model (capm). journal of transnational management, 24(4), 305-322. available at: https://doi.org/10.1080/15475778.2019.1641394. iqbal, j., & haider, a. (2005). arbitrage pricing theory: evidence from an emerging stock market. lahore journal of economics, 10(1), 123-139. available at: https://doi.org/10.35536/lje.2005.v10.i1.a8. jagannathan, r., & wang, z. (1996). the conditional capm and the cross‐section of expected returns. the journal of finance, 51(1), 3-53. available at: https://doi.org/10.1111/j.1540-6261.1996.tb05201.x. javid, a. y., & eatzaz, a. (2009). testing multifactor capital asset pricing model in case of pakistani market. international research journal of finance and economics, 25(2009), 114-138. laubscher, e. r. ( 2019). a review of the theory of and evidence on the use of the capital asset pricing model to estimate expected share returns. meditari accountancy research, 10(1), 131-146. lintner, j. (1965). security prices, risk, and maximal gains from diversification. the journal of finance, 20(4), 587-615. available at: https://doi.org/10.2307/2977249. qu, z., & perron, p. (2007). estimating and testing structural changes in multivariate regressions. econometrica, 75(2), 459-502. available at: https://doi.org/10.1111/j.1468-0262.2006.00754.x. ross, s. (1976). the arbitrage theory of capital asset pricing. journal of economic theory, 13(3), 341-360. financial risk and management reviews, 2020, 6(1): 14-21 21 © 2020 conscientia beam. all rights reserved. shamim, m. a., abid, y., & shaikh, e. a. (2014). validity of capital asset ricing model in pakistan’s capital market (karachi stock exchange). journal of emerging issues in economics, finance and banking, 3(4), 1141-1149. sharpe, w. f. (1964). capital asset prices: a theory of market equilibrium under conditions of risk. the journal of finance, 19(3), 425–442. available at: https://doi.org/10.2307/2977928. siregar, e. i., & diana. (2019). the impact of political risk and macro economics on stock return at indonesia stock exchange (an approach of arbritage pricing theory (apt). kne social sciences, 3(26), 744-772. available at: https://doi.org/10.18502/kss.v3i26.5412. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 1 † corresponding author © 2016 conscientia beam. all rights reserved. does managerial emotional biases affect debt maturity preference? bayesian network method: evidence from tunisia azouzi mohamed ali1† --jarboui anis2 1assistant professor in finance and accounting methods higher institute of business administration (isaas) university of sfax, tunisia 2doctor and hdr financial and accounting associate professor of universities higher institute of business administration (isaas) university of sfax, tunisia abstract this study documents that managerial characteristics’ play an important role in determining corporate debt maturity. specifically, we focus on the relationship between the managerial biases and firm debt maturity preference. empirical analysis of the relationship between emotional bias and debt maturity using bayesian network method. we distributed a questionnaire among 100 tunisian managers to measure their emotional biases. our results have revealed that the behavioral analysis of debt maturity preference implies leader affected by behavioral biases (optimism, loss aversion, and overconfidence) presence prefer long term debt maturity allowing this protect against the takeover operation russianness. keywords: emotional biases, debt maturity, behavioral corporate finance, bayesian network, managerial characteristics. jel classification: g14, g31, g32, d80. contribution/ originality the paper pushing organizations managers to choose according to their emotional level (applied emotional capacity test up psychometric testing). in addition, it increases the validity of inferences from the research. this paper incites governments to establish training programs aimed at the development of learning of emotional capacity. 1. introduction in most cases, the decision is complex because, in addition to the difficulty of choosing an alternative from a multitude of alternatives, the decision maker often faces the uncertainty of actions whose results are very imperfectly known at the time of choice. managers must make daily choices related to the definition of sectors and business strategy, monitoring market investments or equipment, supply management and inventory management of financial risks, industrial or environmental, employment, and the launch of new products. financial risk and management reviews 2016 vol. 2, no. 1, pp. 1-25 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2016.2.1/89.1.1.25 © 2016 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2016.2.1/89.1.1.25 financial risk and management reviews, 2016, 2(1): 1-25 2 © 2016 conscientia beam. all rights reserved. moreover, the nature of the objectives pursued by the leaders can be broken between search security or durability and a desire for growth and acceptance of risk which cannot remain without consequence also their behavior in terms of investment and funding (julien and marchesnay, 1987). in recent decades, a significant amount of research in finance, both theoretical and empirical focused on the psychology of leadership and its impact on the process of decision making. these studies have contributed to the understanding of certain behavioral biases that affect the decisions made by leaders namely through loss aversion in the case of financing choices and investment (kahneman et al., 1991; stulz, 1996; zhang, 1997; helliar et al., 2005). many contemporary researches in behavioral corporate finance have stressed the importance of the personal equation and objectives of the leaders in explaining corporate finance structure. this theories have illuminated how biases like overconfidence and optimism can affect various corporate decisions (bernardo and welch, 2001; heaton, 2002; goel and thakor, 2008). recent papers there are findings on managerial fixed effects (bertrand and schoar, 2003) on managerial overconfidence proxies relating to firm behavior (malmendier and tate, 2005; 2008) and on chief executive officer (ceo) characteristics in private equity firms being related to outcome success (kaplan et al., 2010). in this context, research in finance, both theoretical and empirical have focused on the psychology of leadership and its impact on the process of decision decisions. these studies have contributed to the understanding or even explaining some decisions by behavioral arguments (malmendier and tate, 2005; lin et al., 2007; azouzi and jarboui, 2012). malmendier and tate (2005) find that ceos who are optimistic regarding their firm’s future performance have greater sensitivity to investment cash flow leading to distortions in investment. also, lin et al. (2007) show in more financing constrained firms, optimistic managers exhibit higher investment cash flow sensitivity than do non-optimistic managers. bison by these studies, on our article examines the possible influence of three closely related emotional biases, which are extensively documented in behavioral research, loss aversion, optimism and overconfidence, on a firm’s debt characteristics’ choice. more specifically, it examines the links between emotional biases and firm debt maturity preference. 2. hypothesis development research related to ceo financing choices have focused on the debt level of analysis and that all debt is homogeneous (harris and raviv (1991)). however, as part of a credit report, companies are able to set their preferences regarding debt maturity, level and nature. it is not yet well understood to what extent firms manage the rollover dates of their bonds by spreading out maturities. fixed cost components of bond issues and secondary market liquidity considerations should motivate firms to concentrate their debt in a single or few issues. financial risk and management reviews, 2016, 2(1): 1-25 3 © 2016 conscientia beam. all rights reserved. static trade-off theory ( stt) and pecking order theory (pot) is the body of theory of reference that addressed the issue of the firm financial structure choice (ross, 1977; jalilvand and harris, 1984; myers, 1984; stulz, 1990; titman and wessels, 1998; graham, 2000; booth et al., 2001; azouzi and jarboui, 2012). these approaches argue that firms tend to choose between financial methods based on agency costs (stt) and / or asymmetric information (pot) between leadershareholders and creditors (myers and majluf, 1984; myers, 1984; fama and french, 2002; bushman et al., 2004; antoniou et al., 2007; frank and goyal, 2007; huang and ritter, 2009; graham et al., 2013). thus, the choice of debt maturity is explained by the costs of agency debt in the long term, by choosing a reported debt in the short term, the share leader in the capital and the duration its place the head of his company. however, even non-financial firms frequently have several bonds outstanding, with different times to maturity. however, despite the contributions of these approaches in the analysis of financial policy corporate several decisions remain misunderstood. in this sense, several authors have updated the old idea that emotions have an adaptive role. emotions are necessary for the operation of many of our faculties, such as memory, reasoning, decision making or social adjustment. only recently has a smaller number of analyses emerged focusing the leader cognitive biases themselves and trying to understand how they can affect their investment and financing decisions (hawkins et al., 2001; baker et al., 2004; hackbarth, 2009; ho and chang, 2009; malmendier et al., 2010; azouzi and jarboui, 2012). we investigate the influence of managerial bias (loss aversion, optimism and overconfidence) about corporate debt maturity choice. 2.1. optimism and debt maturity ceo optimism and overconfidence have been shown theoretically and empirically to explain important corporate decisions, including investment, financing, and dividends (bernardo and welch, 2001; heaton, 2002; goel and thakor, 2008; hackbarth, 2009; ho and chang, 2009; malmendier et al., 2010; azouzi and jarboui, 2012). hackbarth (2009) argue that managers are optimistic more likely to excel in tournaments and can be promoted to senior positions. this leader optimistic with its firm growth opportunities uses its decisional leverage to improve its reputation on the labor market. he opts for long-term debt indicating the convergence of its interests with those of shareholders. this implies a positive correlation between ceo optimism level and firm long-term debt choice. menkhoff and nikiforow (2009) show that the knowledge of behavioral biases changes the way the managers perceive the markets, but not the way they see themselves. optimistic leader is aware that his company is undervalued by the market. it therefore seeks to limit its reliance on external financing modes whose debt. however, if insufisance internal financing mode it chose not risky debt (short-term) first then risky debt (long-term debt), and finally the capital increase financial risk and management reviews, 2016, 2(1): 1-25 4 © 2016 conscientia beam. all rights reserved. (heaton, 2002; malmendier and tate, 2005). this implies that the optimistic manager seeks to reduce the debt maturity. malmendier et al. (2010) also show that leaders optimistic are able to take risky decision, and find that overconfident ceos take on more debt. this optimistic leader underestimates its firm total risk. it tends to preferred of long-term debt positively correlated with firm value increase. the choice of debt maturity level improves mutual trust between manager and shareholders. the establishment of a trust environment increase ceo freedom rate and enhances its reputation on the labor market. this implies the presence of a positive correlation between firm maturity debt and leader optimism level. hirshleifer (1993) shows that managers invest in short-term projects to generate a positive cash flow, increase their income and their managerial reputation on the labor market. this leader opts for choice related to the duration of his monday. optimistic leader kept his place at the head of his company opts for long-term financial policy which long term debts choice. this implies a positive correlation between optimism and debt maturity. azouzi and jarboui (2012) find that the find that the analysis of managerial decisions (financing and investment) within the behavioral approach is consistent with the financial organizational theory. in other word, the optimistic leader uses his decisional power to converge with the interest of shareholders and ensure its place at the head of the management team. this prediction in tunisian context implies that optimistic leader adjusted its firm maturity according to their confidence kept its place at the head of his company. h1: optimistic leader accepts level of maturity debt greater than rational leader 2.2. loss aversion and debt maturity psychological studies document that loss aversion causes people to overestimate risk, be more uncertain about forecasts and opt for making it safer to limit the likelihood of his removal (bertrand and mullainathan, 2003; baker et al., 2007; azouzi and jarboui, 2012). adams et al. (2005) also show that in firms where ceos are powerful and dominate most major decisions, the risk arising from judgment errors is not well-diversified, resulting in more extreme decisions and higher variance of firm performance. this shower head to risk of loss of earnings or reputation seeks to limit the potential loss by choosing low-risk decisions including short-term debt choice. this implies negative correlation between ceo loss aversion level and firm debt maturity choice. baker et al. (2007) shows that loss aversion causes ceo to overestimate its firm total risk. this overestimation of the risk of the business leader impulse decision to choose less risky. he prefers the short-term debt low risk compared to long term. this implies a positive correlation between ceo loss aversion level and firm short-term debt level. nosic and weber (2008) have shown the importance of perception yields and risk officer in explaining these choices. indeed a leader who undervalued the capacity of its business to generate financial risk and management reviews, 2016, 2(1): 1-25 5 © 2016 conscientia beam. all rights reserved. future revenues is encouraged to undertake choices consistent with shareholder interest. he opted for policies and strategies converge with the interests of major shareholders with long term debt. this implies a positive correlation between ceo loss aversion level and firm short-term debt level. chang et al. (2009) argue that the stock price variation affects the firm capital structure composition. this explains the limited use of the leaders (loss aversion) in equity financing. he opts for long term risky debt reporting the performance of its business (able to comply with the commitments of long-term debt). this choice of risky financing improves the evaluation of its business in the market and increases its reputation on the labor market. h2: loss aversion leader accepts level of maturity debt greater than rational leader 2.3. overconfidence and debt maturity the human tendency to be overconfident has been widely documented in psychology and has become a central feature in economics and behavioral finance (heaton, 2002; malmendier and tate, 2005; ben-david et al., 2007; hackbarth, 2009; landier and thesmar, 2009; malmendier et al., 2010; azouzi and jarboui, 2012). many facets of overconfidence have been examined through the tendency to overestimate our own knowledge (in particular in miscalibration studies), our abilities compared to others (better-than-average effect), or the degree to which we control future events. landier and thesmar (2009) explored the impacts of overconfidence and/or optimistic entrepreneur on financial contracting and corporate performance and found that optimistic entrepreneur tend to make decisions under-reacting the negative information. so, ceo overconfidence debt maturity choice is a reaction to undervaluation. it uses long-term debt reported to the performance of its business and corrected firm market valuation. malmendier et al. (2010) argue that overconfident managers perceive their firms to be undervalued. to correct this undervaluation leader opts decisions by indicating the performance of its business, the choice of long term debt. this choice of risky financing improves the evaluation of its business in the market and increases its reputation on the labor market. this implies positive correlation between ceo overconfidence level and firm debt maturity choice. goel and thakor (2008) find that excessively overconfident ceos invest less in information reception and jeopardize the stakeholders. this implies that the ceo overconfident of their personal abilities opts for diverging choice with shareholders’ interests. the diminution of his loss aversion level he impulse to choose risky decisions and negatively correlated with creation value objective (expensive), the choice of risky debt in the long term. this implies positive correlation between ceo overconfidence level and firm debt maturity choice. ben-david et al. (2010) suggest that overconfident managers will either tend to underestimate the volatility of their firms' future cash flows or overweight their private signals relative to public information. this firm risk probability underestimation impulse ceo financial risk and management reviews, 2016, 2(1): 1-25 6 © 2016 conscientia beam. all rights reserved. overconfident to undertake risky policy, the choice of high debt maturity. this implies positive correlation between ceo overconfidence level and firm debt maturity choice. h3: overconfidence leader accepts level of maturity debt greater than rational leader. 3. research method 3.1. data to note, the empirical tests are based on 100 non-financial tunisian firms during the 2010 fiscal year (28 are listed companies and 82 are non-listed companies, see table 1). all financial firms (including banks) outing to the fact that this business sector is regulated and likely to have fundamentally different cash flows and characteristics. firms with insufficient data regarding about emotional characteristics and the board of director’s composition are also excluded. the board’s compositions, as well as financial characteristics data, are gathered from the bvmt annual report. emotional and psychological characteristics are collected by means of an administered questionnaire. actually, the selected choice deals with some homogeneous individuals representing some tunisian ceo representatives of 100 firms (60 males, 35 females, 5 unreported), ranging in age from 25 to 58 (table 2). table-1.visited companies initial bvmt sample for 2010 50 financial firms (22) other non financial firms 120 insufficient data to emotional intelligence (40) insufficient data to board of directors compositions (8) final sample 100 source: bvmt most questionnaires have been distributed by the method of door to door to ensure they are personally delivered to the person concerned; few among them have been mailed, for businesses located outside the greater tunis area. it is worth noting, however, a broader sample that even if it had been envisaged to be studied and that more than 100 questionnaires had been distributed for this purpose, we would have received far fewer responses than expected (return rate 44.84 per cent: although the number of distributed questionnaires reached 223, the responses received did not exceeded 100 ceo). financial risk and management reviews, 2016, 2(1): 1-25 7 © 2016 conscientia beam. all rights reserved. table-2.ceos’ characteristics n percentages age 25-30 years 31-40 years 40-49 years over 50 years 5 20 35 40 5% 20% 35% 40% gender/sex males females unreported 60 35 5 60% 35% 5% degree baccalaureate bac + 2 bac + 4 das/hdss 15 20 30 35 15% 20% 30% 35% indeed, many of the adduced have refused to respond to our questions on the ground of several reasons, namely, that:  they are too busy and have no time to devote to research;  they generally do not pay any interest to the questionnaires submitted by students and would return them to their assistants or other staff for a response (this has been the case of our officer-centered research); and  they perceive that the questionnaire is a sort of ‘‘control’’ damage to their private lives and that it is out of the question to answer. other encountered difficulties are mainly due to the administrative procedures and hierarchical procedures which linger questionnaires to the recoveries. fortunately, the leaders who had been so kind as to cooperate and help us formulate and set up our sample eventually composed of 100 private company leaders, belonging mostly to the industrial sector. 3.2. variables’ measurement the objective of this section is to determine the variables’ measurement. 3.2.1. debt maturity the deadline is the measure most famous of the life of the debt that is the time between the date of possession of the borrowing and repayment. debts are classified according to the three following periods: one year at most, one year and five years and more than five years. for our part, we consider bank debt long-term (or more logically medium and long term), any debt granted to a credit institution having a period of payment over a year. we propose to use in our study the ratio of long-term debt term total debt as a measure of the dependent variable. the amount of debt reported long-term to total debt and total assets not to separate the decision of the debt maturity and the decision of leverage. financial risk and management reviews, 2016, 2(1): 1-25 8 © 2016 conscientia beam. all rights reserved. dmat= long term debet/total debet this measured is used by scherr and hulbert (2001); barclay and smith (1995) and gueney and paudyal (2003) 3.2.2. emotional bias the questionnaire focuses on evaluating and scoring of the three emotional biases (risk aversion, optimism and overconfidence). the questions have been inspired from the questionnaires formulated by the fern hill and industrial alliance companies (table 3). the emotional bias takes 2 follows: • 1 if the individual has a high level for each bias. • 0 if not. 3.2.3. investment decision the purpose of this article is to show the impact of emotions on the firms’ investment decision (investment nature, level and horizon). the appropriate measures in the literature to evaluate investment decision are: 3.2.3.1. assets specificity in our study, we will use the degree of assets intangibility as a proxy of the specific investments. the degree of assets intangibility can be appreciated on many levels. the france bank and ministry of industry in studies devoted to the development of intangible investments in france has used the ratio often intangible / tangible assets. in tunisia, as in france, the intangible asset accounting record comes from the capitalization of such expenses. however, the unavailability of information legitimizes the use of the amount of intangible assets is presented in the balance sheet although this amount is usually surrounded by doubt as the result of discretionary choices performed by the leaders. akin to the french context, the measurement of intangible capital in the tunisian context has the same problems, which leads us to adopt accounting. based on that discussion and the availability of data of tunisian companies we offer the following indicator of the degree of activation of intangible expenses: asset specificity rate (asr) = intangible assets / asset accounting. this measured is used by cazavan-jeny (2004); moussu and thibierge (1997); thibierge (2001) etc. financial risk and management reviews, 2016, 2(1): 1-25 9 © 2016 conscientia beam. all rights reserved. table-3. items used in the emotional biases scale (14 items) items factor 1: loss aversion 50.710 % of total variance factor 2: optimism 29.450 % of total variance factor 3: overconfiden ce 10.275 % of total variance factor 4: cognitive flexibility 5.385 % of total variance 1. what is your propensity to take financial risks with respect to others? 0.802 2. with a great financial decision, what do you care about more: possible losses or possible gains? 0.742 3. insurance can protect us against a wide variety of risks: theft, fire, accidents, illness and death... how many insurance subscriptions have you subscribed to? 0.713 4. when you think of the word ‘‘risk’’ in a financial context, what term in the following list first comes to mind? 0.686 5. when i’m faced with a challenge, i give up because i’m afraid of failure. 0.600 6. what emotional effect do important decisions have on you once they are taken? 0.857 7. i am motivated by imagining the successful decisions positive results of entrepreneurial tasks 0.851 8. do you consider that degree of uncertainty is the business environment is 0.842 9. i know how to most control my emotions. 0.774 10. for how long do you reckon to keep your position in your firm? 0.715 11. how confident are you in your ability to take good financial decisions? 0.641 12. how easily do you adapt yourself to deterioration of your financial situation? 0.862 13. your reaction regarding changes in your firm environment is: 0.862 14. in a job search would you rather seek: 0.789 financial risk and management reviews, 2016, 2(1): 1-25 10 © 2016 conscientia beam. all rights reserved. 3.2.3.2. investment level in this study, we will use the presence of free cash flow and growth opportunities as two indicators of over-investment (low future investment opportunities and free cash flow) or underinvestment (low free cash flow and future investment opportunities). the literature differs on how to measure the free cash flow as conceptualized by jensen (1986). in general, however, it is defined as operating income before depreciation interest expense and taxes, as well as dividends paid (lehn and poulsen, 1989; gul and tsui, 1998; jaggi and gul, 1999) divided by book value of total assets to account for effects related to size (lang et al., 1991). free cash flow rate (fcfr) = operating profit / total assets. future investment opportunities are measured by tobin's q (skinner, 1993). tobin's q is defined as the ratio of market value of a firm to the replacement value of its assets (griliches, 1981; lindenberg and ross, 1981; cockburn and griliches, 1988; megna and klock, 1993; skinner, 1993). a tobin's q greater than one then the company has signed a profitable investment opportunities and vice versa. in our study, we will retain an approximation of tobin's q, calculated as follows (chung and pruitt, 1994): it it it it mvs d q a   mvs – market value of common and preferred shares; d – book value of debt, defined as current liabilities plus long-term debt plus inventories minus current assets; a – total assets. 3.2.3.3. investment horizon referring to the theory of agency leaders has an obligation of result on short horizons. their wealth is tied to the performance of the firm during the duration of their mission is the period during which they run the firm. these leaders prefer investment projects in the short term to quickly reveal the performance of these investments and reduce uncertainty about their own value on the labor market. in our study we will use the rate of investment operations (industrial and commercial assets) as an indicator of the investment horizon. capital expenditure rate (cer) = operating assets / total assets this measured is used by cliche (2000); gervais et al. (2002); malmendier and tate (2005); chang et al. (2009); draief (2010) etc. the investment decision takes 9 follows: • 1 if the manager chooses investment specific: positive variation in the rate of assets specificity. • 2 if the manager chooses overinvestment: low future investment opportunities and free cash flow • 3 if the manager chooses underinvestment: low free cash flow and future investment opportunities. financial risk and management reviews, 2016, 2(1): 1-25 11 © 2016 conscientia beam. all rights reserved. • 4 if the manager chooses long-term investment: negative variation in the rate of capital expenditure • 5 if the manager chooses short-term investments: positive variation in the rate of capital expenditure. • 6 if the manager chooses (overinvestment+ long-term investment): negative variation in the rate of capital expenditure, low future investment opportunities and free cash flow. • 7 if the manager chooses (underinvestment+ short-term investments): positive variation in the rate of capital expenditure, low free cash flow and future investment opportunities. • 8 if the manager chooses (specific investment+ overinvestment + long-term investment): positive variation in the rate of assets specificity, negative variation in the rate of capital expenditure, low future investment opportunities and free cash flow. • 9 if the manager chooses specific investment+ underinvestment + long-term investment): positive variation in the rate of assets specificity, low free cash flow, future investment opportunities and negative variation in the rate of capital expenditure. 3.2.4. dividend policy the variable used to measure dividends level is the distribution rate (rozeff, 1982; agrawal and jayaraman, 1994). the advantage of the distribution rate is the information that is in terms of retention of earnings and, therefore, whether the flow (the retention rate is equal to 100 in the payout ratio). payout ratio = dividend per share / earnings per share 3.2.5. control variables static trade-off theory (stt) and pecking order theory (pot) is the body of theory of reference that addressed the issue of the financial structure of the firm. the factors that explain the financial structure are mainly at the cost, size, level of risk, growth opportunities, the structure of assets and business (rajan and zingales, 1995; booth et al., 2001; dufour and molay, 2010). we include in our model three control variables that explain the effectiveness of choice of financial structure of the company. these variables are proxies for profitability, firm size and growth opportunities. 3.2.5.1. profitability more profitable firms have, ceteris paribus, more internally generated resources to fund new investments. if their managers follow a pecking order, they will be less likely to seek external financing (fama and french, 2002). thus, on average, these firms’ leverage ratios will be lower. in trade-off models, on the other hand, this relationship is inverted. more profitable firms are less subject to bankruptcy risks, ceteris paribus. hence, their expected bankruptcy costs are reduced financial risk and management reviews, 2016, 2(1): 1-25 12 © 2016 conscientia beam. all rights reserved. and they can make more use of the tax shields provided by debt, thus choosing a position of greater leverage. we will keep the ratio of return on assets roa to measure this variable: roa= earnings before interest, tax, depreciation divided by total assets, lagged one year period. 3.2.5.2. firm size studies suggest that the probability of bankruptcy is lower in larger firms and that, therefore, their debt capacity is higher than that of smaller ones, all else equal. on the other hand, fixed transaction costs can make new stock issues unattractive to small corporations, stimulating them to issue debt (rajan and zingales, 1995; hovakimian et al., 2004; dufour and molay, 2010). indeed, most studies have applied total assets or turnover as a measure for firm size (bujadi and richardson, 1997). in this paper, it is measured through the log of the firm’s total assets (lnsize). mvs – market value of common and preferred shares; d – book value of debt, defined as current liabilities plus long-term debt plus inventories minus current assets; a – total assets. 3.2.5.3. board of directors to note, theories regarding the board of directors, along with prior empirical researches and various recommendations have suggested that some board characteristics have an influence on the quality of the financial report and on firms’ performance. board characteristics are examined here:, independence (fama and jensen, 1983). the board’s independence the different characteristics pertaining to the board’s independence are measured by the following variable: bind is defined as the percentage of the board members who are simultaneously independent and non-executives which is equal to the number of outside directors divided by the total board members (forker, 1992; wright, 1996; haniffa and cooke, 2000; chtourou et al., 2001). bind = number of outside directors /total board members. table 4 presents the characteristics of boards of directors of the 100 tunisian companies included in our study. tunisian companies are run by independent boards, medium (seven directors) and not dominated by ceos. table-4. board of directors’ characteristics variables mean std min max n entire board 7.60 2.56 4 12 100 outside directors 2.62 1.11 1 4 100 affiliated directors 1.98 0.80 1 3 100 inside directors 3.360 1.34 1 5 100 ceo duality 0.26 0.44 0 1 100 financial risk and management reviews, 2016, 2(1): 1-25 13 © 2016 conscientia beam. all rights reserved. for simplification purposes, the summary of each variable extent range in the model, its name as well as its expected impact on the firm assets specificity choice are depicted in table 3. table-5. operational definitions of variables class : phenomena : mesure : variables : predictions : endogens variables : debet maturity debt deadline dmat= long term debet/total debet dm exogenous variables : short ter m medium longterm optimism directors overestimate capacity of their firms the questionnaire obtained score op + + lost aversion loss rumination and reputation the questionnaire obtained score la + + overconfidence directors overestimate their personal competences the questionnaire obtained score over + + + investment decision assets specificity asset specificity rate (asr) = intangible assets / asset accoun ting. as + + investment level free cash flow rate (fcfr) = operating profit / total assets. and it it it it mvs d q a   inl + + investment horizon capital expenditure rate (cer) = operating a ssets / total assets inh + + + dividend policy the presence of a dividend policy payout ratio = dividend per share / earnings per share if the payout ratio <0 or> 0: yes: presence of a policy of dividend distribution. if the payout ratio = 0: no, absenc e of a policy of dividend distribution dv + controls variables: financial risk and management reviews, 2016, 2(1): 1-25 14 © 2016 conscientia beam. all rights reserved. profitability reports on the company's ability to meet its commitments roa= earnings before interest, tax, depreciation divided by total assets, lagged one year period pf + + firm size firms signaled performance ln (total assets) lnsize + + + board of directors the presence of independent members in the board number of outside directors /total board members. bind + 3.3. bayesian network method the definition of a bayesian network can be found in many versions, but the basic form (pearl, 1986) is stated as follows: a bayesian network is a directed probability graph, connecting the relative variables with arcs, and this kind of connection expresses the conditional dependence between the variables. the formal definition follows. a bayesian network is defined as the set of (d, s, and p), where: (1) d is a set of variables (or nodes): in our case it consists of investment cash flow sensitivity, optimism, loss aversion, overconfidence, profitability, firm size and future investment opportunities. (2) s is a set of conditional probability distributions (cpd). s = {p (d /parents (d) / d ∈ d), parents (d) ⊂ d stands for all the parent nodes for d, p (d/parents (d) is the conditional distribution of variable d. (3) p is a set of marginal probability distributions. p = {p (d) / d ∈ d} stands for the probability distribution of variable d. in the bayesian network, variables are used to express the events or objects. the problem could be modeled with the behavior of these variables. in general, we first calculate (or determine from expert experience) the probability distribution of each variable and the conditional probability distribution between them. then from these distributions we can obtain the joint distributions of these variables. finally, some deductions can be developed for some variables of interest using some other known variables. 3.3.1. define network variables and values the first step in building a bayesian network expert is to list the variables recursively, starting from the target variable to the causes. in this order we present the variables in the table below: financial risk and management reviews, 2016, 2(1): 1-25 15 © 2016 conscientia beam. all rights reserved. table-6. the network variables and their values variables type debt maturity discret [1 ; 2 ; 3] investment decision discret [1 ; 2 ;3 ;4 ;5 ;6 ;7 ;8 ;9] dividend policy discret : yes/no optimism discret : yes/no loss aversion discret : yes/no overconfidence discret : yes/no profitability discret : yes/no firm size discret [1 ; 2 ; 3] future investment opportunities discret : yes/no board independence discret : yes/no 3.3.2. graphical model the second step of bayesian network the construction is to express the relationships between variables. the bayesialab learning of bayesian network by taking the database as a discrete entry process without sampling data. the bayesian network constructed is the result for the total database. according to the data that we have received through the questionnaire, we have established relationships following graph (fig. 1). fig-1. firm debt maturity choice: bayesian network the graphical model if it (figure 1) explains the debt maturity choice of tunisian firms. this decision is affected by the ceo emotional bias (optimism, loss aversion, and overconfidence). these emotional biases originate the firms’ financial position (capital structure choice, dividend policy, size, profitability and board independence). in what follows, we describe in detail the various correlations between these variables and their effect on the target variable (debt maturity: dm). financial risk and management reviews, 2016, 2(1): 1-25 16 © 2016 conscientia beam. all rights reserved. 4. empirical results 4.1. the relationships discovered analysis the relationships between the variables in the database are directed at the parent node child node. each relationship is composed of three different measures: the kullback-leibler, the relative weight and the pearson correlation (direction of relation). indeed, the kullback-leibler and the relative weight are two measures indicating the strength of relationships and the level correlation between variables, in that while the correlation measure of personal meaning and relationship significance. the relative weight scale of 0 to 1. thus, the table (table 5) below shows the relationships analysis results between variables across the network pearson correlation. table 7 examines the relationship (independence and correlation) between networks variables. table-7. the relationships analysis note: a. kullback-leibler close to 1: important correlation between the variables b. relative weight close to 1: important correlation between the variables. c. pearson correlation:*, **, ***, respectively at 10%, 5%, 1%. parents nodes childs nodes kullback-leibler divergence relative weight pearson correlation csc di 0,9159 1,0000 0,1911* bind op 0,8846 0,9659 0,9724 op csc 0,6031 0,6585 -0,0395** fsize dm 0,5750 0,6278 0,5422 over di 0,4591 0,5012 0,1448* la di 0,4122 0,4500 -0,0117*** di dm 0,3374 0,3684 -0,0694** la csc 0,3240 0,3538 -0,0612** csc dm 0,2999 0,3274 -0,0636** di dv 0,2939 0,3209 -0,0857* op dv 0,2703 0,2951 0,5527 op di 0,2484 0,2713 -0,1453* over csc 0,1946 0,2124 0,2642 la dv 0,1727 0,1886 -0,0555** fsize la 0,1416 0,1546 -0,3055 over dv 0,1006 0,1098 -0,1486 dv dm 0,0936 0,1022 0,0956* pf la 0,0745 0,0813 -0,1532* bind la 0,0708 0,0773 -0,0117*** fsize op 0,0491 0,0536 -0,0694** pf over 0,0352 0,0384 -0,0612** fsize over 0,0256 0,0280 -0,0636** pf op 0,0149 0,0163 -0,0857* bind over 0,0032 0,0034 0,5527 op over 0,0000 0,0000 -0,1453* la op 0,0000 0,0000 0,2642 financial risk and management reviews, 2016, 2(1): 1-25 17 © 2016 conscientia beam. all rights reserved. table 7 examines the relationship (strength and correlation type) between networks variables. the analysis of the relations shows the presence of a strong relationship (kullbackleibler=0, 9159/ relative weight =1) and positive (β = 0, 1911) between capital structure choice and firm investment decision. this confirms the predictions of organizational financial theory independence between the two decisions. the results also show the presence of a strong and nonsignificant relationship between board of director’s independence and investment decision (kullback-leibler=0, 8846/relative weight = 0, 9659/β=0, 9724). in addition, the firm capital structure choice is negatively correlated with his level of optimism (β=-0, 0395) and loss aversion (β=-0, 0612), positively correlated with ceo overconfidence rate (β= 0, 2642). the investment decision is positively correlated with the ceo overconfidence level (β=0, 1448) and negatively correlated with the loss aversion level β= (-0, 0117) and optimism (β=-0, 1453). behavioral investment level analysis has enriched the predictions of theories based on asymmetric information (signals theory and rooting theory) and agency theory in choice of underinvestment or overinvestment. finally, firm dividend policy is positively correlated with ceo optimism level (β=0, 5527) and negatively correlated with the loss aversion level (β= -0, 0555) and overconfidence (β=-0, 1486). ceo overconfidence/optimistic positively affects firm dividend policy. a confident leader agrees on the establishment of a generous dividend policy. it overestimates the future results of its business and its ability to meet its commitments on dividends distribution network debt maturity analysis show the presence of strong relationship (kullbackleibler 0, 3374=/relative weight= 0, 3684) and negative (β=-0, 0694) between investment decisions and firm debt maturity choice. also, there is a strong relationship (kullbackleibler=0, 0936/0, 1022=relative weight) and positive (β=0, 0956) between firm debt maturity and dividend payments. this confirms the predictions of financial theory for organizational independence between financing decisions (dividend payment and choice of financing method) and investment. thus, overconfidence leads the manager to underestimate the company bankruptcy probability and, therefore, a higher debt. this financial decision (external preference method) impulses leader to follow a generous policy dividends distributing to offset the losses associated with its choice. the relationship analysis find absence of relation between debt maturity choice and managerial biases (optimism, overconfidence and loss aversion). this result is explained by the effect of board independency to moderate ceo emotional bias presence: result finds presence of negative correlation between firm board of director’s independence and ceo loss aversion (β= -0, 0117). this confirmed contractual governance theory prediction: the presence of external improves control exercised by the board and the executive disciplined. thus, ceo overconfidence overestimates his skills to reduce risk. this led him to choose high projects risk which is in the interest of shareholders and increases firm’s value. to finance its investment choices, this financial risk and management reviews, 2016, 2(1): 1-25 18 © 2016 conscientia beam. all rights reserved. overconfidence leader considers his company undervalued by the market limit its emissions securities risky. firm capital structure nature affect negatively debt maturity choice (kullbackleibler 0, 3374=/relative weight= 0, 3684/ β= -0, 0636). this result confirmed organizational financial theory and shows that the ceo debt nature choice is related to the company's ability to generate internally cash flows. ceo recognizes firms’ operational risk level and loss aversion seeks to reduce its firm’s total risk by using low of external funding including debt. ceo of high operational firms risk tries to control the total risk by limiting the financial risk introduced by debt and the issuance of new shares. he prefers to finance its investment projects through internal funds. the relation analysis test shows that firm size affects their debt maturity choice (kullback leibler 0, 5750=/relative weight= 0, 6278/ β= 0, 5422). in addition, firm size is negatively correlated with ceo optimism level (β= -0, 0694), loss aversion rate (β= -0, 0555) and overconfidence (β= -0, 0636). finally, the results also show the presence of a negative correlation between managerial overconfidence and his optimism level (β=-0, 1453). 4.2. target variable analysis: debt maturity (dm) to analyze the ceo assets specificity choice, we must choose the variable debt maturity as a target variable in the bayesian network. then we can use the function that generates the analysis report of the target firm debt maturity level. in this report, the relationship between debt maturity level and the other variables are measured by binary mutual information and the binary relative importance. the mutual information of two random variables is a score measuring the statistical dependence of these variables. it is measured in bits. the result find that ceo not loss aversion at 50, 8906%, optimism at 58, 3082%, overconfident at 60,785%, preferred equity at 24, 5584%, choice dividend distribution at 72,4981%, opted for overinvestment position at 14,4476%, operated in firm big size at 86,7491%, 58,9050% of independence board presence. this result implies that ceo behavioral characteristics’ affect his decision. firm long term debt choice is justified by leader emotional profile (optimism, loss aversion and overconfidence). this leader optimistic with its firm future investment opportunities increases debt maturity level to limit the likelihood of its replacement (loss aversion). loss aversion leaders seek to avoid the worst-case scenarios. they not only use the tools of risk management to reduce the variance of cash flows but rather to avoid the worst scenarios that influence the risk of bankruptcy or preventing the company to take advantage of profitable investment. thus, a downpour in the loss leader seeks the minimization of the probability of loss for him and a firm. he refuses to debt financing (to avoid the risk of bankruptcy) and prefer self-financing financial risk and management reviews, 2016, 2(1): 1-25 19 © 2016 conscientia beam. all rights reserved. ceo debt maturity average ratios of the order of 26, 4416% is explained by its optimist level at 56, 2120%, its loss aversion at 78,7610%, its overconfidence at 64,4348%, its preference for as+lt+undin at 16,0929%, equity preference at 28,4494%,dividend distribution at 64,5319%, firm directors board independence at 57,5172%,firm low profitability at 55,5406% and average size at 71,5105%. optimistic leader is aware that his company is undervalued by the market. it therefore seeks to limit its reliance on external financing modes whose debt. however, if insufficiency internal financing mode it chose not risky debt (short-term) first then risky debt (long-term debt), and finally the capital increase (heaton, 2002; malmendier and tate, 2005). this implies that the optimistic manager seeks to reduce the debt maturity. table-8. target variable analysis c. modal value: the average values of the explanatory variable for each the target value. the target variables analysis shows that 57, 8323% of tunisian is opting to long term debt maturity, 26, 4416% choice average term debt maturity rate and 15.7261% prefer short term debt maturity. dm = long term (57,8323%) nodes binary mutual information binary relative importanc modal value fsize 0,3157 1,0000 big 86,7491% la 0,0601 0,1903 no 50,8906% csc 0,0262 0,0831 eq 24,5584% di 0,0220 0,0695 overinv 14,4476% dv 0,0067 0,0211 yes 72,4981% op 0,0029 0,0092 yes 58,3082% bind 0,0015 0,0046 yes 58,9050% over 0,0007 0,0023 yes 60,7857% pf 0,0000 0,0000 no 55,9322% dm = average term (26,4416%) nodes binary mutual information binary relative importance modal value fsize 0,2305 1,0000 average 71,5105% la 0,0367 0,1593 yes 78,7610% di 0,0215 0,0934 as+lt+undin 16,0929% csc 0,0124 0,0537 eq 28,4494% dv 0,0021 0,0089 yes 64,5319% over 0,0006 0,0026 yes 64,4348% op 0,0000 0,0002 yes 56,2120% bind 0,0000 0,0001 yes 57,5172% pf 0,0000 0,0001 no 55,5406% dm = short term (15,7261%) nodes binary mutuel information binary relative importance modal value fsize 0,0792 1,0000 small 36,6580% csc 0,0110 0,1386 eq 33,1499% la 0,0108 0,1368 yes 74,4477% op 0,0064 0,0809 no 55,2571% di 0,0049 0,0618 as+lt+undin 16,9809% bind 0,0034 0,0426 no 50,8751% dv 0,0030 0,0381 yes 61,6434% pf 0,0001 0,0007 no 57,0217% over 0,0000 0,0006 yes 63,0190% financial risk and management reviews, 2016, 2(1): 1-25 20 © 2016 conscientia beam. all rights reserved. finally, target variable analysis show that ceo short term debt choice at 15, 7261% is positevelly correlated with its loss aversion at 74,4477%, its pessimism level at 55,2571%, its overconfidence at 63,0190%, its preference for as+lt+undin at 16,9809%, firm equity choice at 33,1499%, firm small size at 36,6580%, dividend distribution choice at 61,6434%, firm low profitability at 57,0217% and firm depended board at 50,8751%. ceos are powerful and dominate most major decisions, the risk arising from judgment errors is not well-diversified, resulting in more extreme decisions and higher variance of firm performance. this shower head to risk of loss of earnings or reputation seeks to limit the potential loss by choosing low-risk decisions including short-term debt choice. 4.3. average target maximizing analysis thus, the target dynamic profile capability software (bayesialab) to query about an a posteriori maximization of the target average. this test shows the case to maximize the target variable value. table 7 presents the dynamic profile of the debt maturity (dm). table-9. target maximizing analysis. dm = short term nodes optimal modality probability joint probability priori 15,7261% 100,0000% fsize small 52,4081% 11,0000% di lt+overinv 78,3799% 0,9174% csc eq 100,0000% 0,4528% dm = average term nodes optimal modality probability joint probability a priori 26,4416% 100,0000% fsize average 65,2017% 29,0000% di st+underinv 93,4636% 3,0924% op yes 100,0000% 2,1177% dm = long term nodes optimal modality probability joint probability a priori 57,8323% 100,0000% fsize big 83,6150% 60,0000% di overinv 100,0000% 7,5841% note: a. optimal modality: modality is maximizing the traget value. b. probability: the prior probability of each variable. c. joint probability: the probability that the target variable takes the value n given that the explanatory variable takes the value p. for example, the probability of choosing big level of long term debt by firm big size is 60.000%. the target maximizing analysis show that 11.00% firm size decrease, 0, 4258% equity choice and 0,9174% overinvestment preference in long term project is positively correlated with ceo preference of short term debt at 15,2761%. the 29,000 % in firm size average rate, 3, 0924% increase ceo preference of underinvestment position in short term project and 2,117 % ceo financial risk and management reviews, 2016, 2(1): 1-25 21 © 2016 conscientia beam. all rights reserved. optimism level increase is positively correlated with 26,4416 increase in its preference for debt average term maturity. this result implies the impact of ceo optimism in its firm policy. this optimistic leader kept his place at the head of his company opts for long-term financial policy which long term debts choice. a leader optimistic with the growth opportunities of his business has an interest to limit the risk of hostile takeover. it seeks a debt threshold limiting the risk of failure, the risk of hostile takeover and indicating the health of the business. finally, target dynamic profile analysis show that ceo increased preferences for long term debt maturity of the order of 57,832% its correlated with its firm size increased at 60,00% and its preference for overinvestment position at 7,5841%. 5. conclusion this research examines the determinants of firms’ debt maturity choice introducing a behavioral perspective. theoretical analysis presented implications of managerial characteristics (emotional biases) to explained his preference for debt maturity position. thus, the optimism of the leader over the problem of managerial opportunism described by the agency theory in debt choice. leader optimistic interest in bringing to the maximization of shareholder wealth and to know in order to optimize the flow of funds. debt nature analysis by introducing behavioral dimension enriched organizational financial theory: leader affected by behavioral biases presence prefer long term debt maturity allowing this protect against the takeover operation russianness. empirical analysis presenting survey ceo large private companies in tunisia. data analyses revealed ceo emotional biases importance in explaining his debt nature choice. indeed, empirical relationship analysis between optimism and firm debt maturity shows behavioral dimension role in the explanation. ceo optimism level is positively correlated with a preference for long term/and or average term debt. optimistic ceo with its firm growth opportunities uses its decisional leverage to improve its reputation on the labor market. he opts for long-term debt indicating the convergence of its interests with those of shareholders. we also note that ceo loss aversion level is positively correlated with firm debt maturity choice. loss aversion causes ceo to overestimate its firm total risk. this overestimation of the risk of the business leader impulse decision to choose less risky. he prefers the short-term debt low risk compared to long term. finally, the ceo debt maturity behavioral analysis is consistent with the corporate financial theory, the leader affected by behavioral biases adjusts its debt maturity based on their ability to assess alternatives (optimism and overconfidence) and risk perception (loss aversion) to create of shareholder value and ensure its place at the head of the management team. references adams, k.h., e. hansen, l.h. pinborg, s.g. hasselbalch, c. svarer, s. holm, t.g. bolvig and g.m. knudsen, 2005. patients with obsessive-compulsive disorder have increased 5-ht2a 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temidayo b.1+ wasiu a. yusuf2 1central bank of nigeria (hqtr), abuja, nigeria. 2nile university of nigeria, fct abuja, nigeria. (+ corresponding author) abstract article history received: 13 november 2019 revised: 19 december 2019 accepted: 23 january 2020 published: 16 march 2020 keywords broad money monetary policy narrow money treasury bill saving-deposit rate. jel classification: e41; c42. in nigeria, demand for money is frequently affected by factors that regularly experience shocks in the economy. therefore, regular adjustment and reforms are done to monetary policy which creates a lot of uncertainties in the market. this paper therefore examined the demand for money (narrow money, m1) in nigeria, using quarterly time series data from 2006 to 2018, the study attempted multiple ols regression analysis and ardl. the result found out that money demand function cannot be appropriately estimated by ols estimation technique due to the presence of the lagged value of both the dependent and independent variables. although, the no long run relationship among the variables but the result indicates that m1 is largely influenced by inflation, exchange rate, mpr (monetary policy rate), and savings as well as real gdp to some extent; particularly in the short run. it was observed from the analysis that economic units in nigeria are shedding more of cash assets (naira) as inflation increases while stocking up on foreign cash and assets (dollar and foreign denominated assets) as shown by the positive-related exchange rate. contribution/originality: this study contributes to the existing literature by examining the demand for money (narrow money, m1) in nigeria and using quarterly time series data from 2006 to 2018, the study attempted multiple ols regression analysis and ardl. 1. introduction 1.1. background to the study the subject of demand for money has always generated keen interest among research and theoretical economists in both the developed and developing countries. this high interest stems from the facts that demand for money plays a major role in empirical macroeconomics analysis and policy decision formulations. the interest has, however, heightened in recent years, and may attributable to concerns among central banks and researchers on the economic impact of the movement towards flexible hang rate regime, globalization of capital markets, ongoing domestic financial liberalization, advancement in time series econometrics, and some other country-specific issues. in nigeria, the monetary authorities acknowledge that a sound specification and estimation of money demand function is essential in the selection of instruments and targets, so also is the fact that the transmission mechanism of monetary policy depends on how correct its specification and estimation. the central bank of nigeria is charged with promoting monetary stability and a sound financial system in nigeria (central bank of nigeria (cbn), 2018; research department central bank of nigeria, 2016). therefore, in pursuit of its mandate, the monetary policy financial risk and management reviews 2020 vol. 6, no. 1, pp. 1-13. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.1.13 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0003-0461-3253 https://www.doi.org/10.18488/journal.89.2020.61.1.13 financial risk and management reviews, 2020, 6(1): 1-13 2 © 2020 conscientia beam. all rights reserved. measures adopted by the central bank have direct and/or indirect effects on money demand. deliberate policydriven changes in monetary policy tools such as monetary policy rate (mpr), cash reserve requirement (crr) and other reserve requirements induce fluctuations in interest rates, exchange rates and gdp, which in turn bring about changes in money demand in the economy. however, despite the enormity of the importance of monetary policy instruments as it affect demand for money; there is dearth of literature on the subject matter. therefore, there is the need to constantly assess the model of demand for money with a view to determine its stability over time as well as its speed of adjustment to monetary policy changes. the study also aimed at creating a background to review the effectiveness of the central bank’s monetary policies in the context of the overall macroeconomic stability; evaluate the determinants of money demand and their impacts on demand for money in nigeria. in addition, the study will also provide a basis to advance recommendation in relation to monetary policy framework in the country. 2. literature review 2.1. theoretical review many of the theories on demand for money specify different explanatory variables ranging from inflation, interest rate, transactions, utility, wealth, etc. one important feature of these theories is that they share almost same determinant variables; however, they differ in the specific role and significance attached to each variable. in general, theoretical models of money demand have underpinned and motivated a great deal of empirical work. the quantity theory examined the relationship between the total quantity of money m and the total amount of spending on final goods and services produced in the economy p×y, where p is the price level and y is aggregate output (busari, 2005). in its basic form, the theory specifies that (1) where m is the quantity of money, v is the velocity of circulation; p is the price levels and t the volume of transactions. because v cannot be measured empirically, equation 1 becomes a mere identity. if we assume t moves approximately in tandem with the real gdp (y), (1) leads to the standard form of quantity theory (see equation 2: (2) which is still an identity and not yet a theory of money demand. a variant of the theory re-specifies demand for money as shown in equation 3 and 4: (3) and then, (4) equation 4 shows that the demand for money is proportional to the amount of real transactions, represented by the real gdp; and is proportional to the price level. it can also be interpreted in a way that the demand for money is actually a demand for a real quantity of money as in equation 5, where md/p represents the demand for real quantity of money: (5) financial risk and management reviews, 2020, 6(1): 1-13 3 © 2020 conscientia beam. all rights reserved. one important difference between the cash balance approach and subsequent theories of the demand are the lack of an interest rate variable in the former. moreover, the fundamental assumption of the quantity theory as regards stable velocity of money lacks empirical support. the liquidity preference theory emphasized the role and importance of interest rates. keynes (1930) in his book titled “the general theory of employment, interest and money” introduced three motives for holding money (essien, onwioduokit, & osho, 1996): (transaction motive, precautionary motive, speculation motive). the speculative demand for money is an inverse function of the rate of interest on bonds, . together with a transaction demand for money, and a precautionary demand for money, both being a direct function of income, y, the total demand for money md (shown in equation 6) now becomes: (6) however, a completely different approach was chosen by baumol (1952) and tobin (1956). the model seeks to determine the optimum level of demand for money considering the trade-off between one the opportunity cost of holding money in term of interest on securities foregone, and two, the transaction cost of converting money into securities. that is, the total cost for the payments services (ps) is as given in equation 7: = (7) where tc is the transaction cost of conversion, oc is the opportunity costs of holding money, n the number of transactions in a given period, i the interest rate of securities and m equals py/2n (that is, the average money holdings in the period are determined by monthly income, py, and the number of transactions).the minimum cost is obtained on differentiating ps with respect to m (see equation 8): which gives; (8) taking the nominal transaction costs can be regarded as the product of the real transaction costs (cr) and the price level (p), i.e. c = cr.p, thus equation 9 leads to the optimum real stock, which is identical with the optimum real money demand. (9) using m for m/p and transforming into a natural logarithmic form, gives equation 10: (10) the conclusions derivable form the baumol–tobin money demand function is that the demand for non-interest bearing money in the sense of m1 depends positively on real income, negatively on interest rate, and positively on real transaction costs. in addition, friedman (1956) argues that the demand for money should be treated in the same way as the demand for goods or services. he defines the total wealth of an individual as sum of five components: money, bonds, financial risk and management reviews, 2020, 6(1): 1-13 4 © 2020 conscientia beam. all rights reserved. shares, real assets and human capital. therefore, a theory of demand for money would require information on each of the components and on the individual returns therefrom (friedman, 1956). he stated the money demand function as equation 11. (11) where w is the fraction of wealth in non-human form, are the expected nominal rates of returns on money, bonds and physical asset; and stands for other variables attached to services of money. 2.2. empirical review: models of money demand function dou (2018) observed that money demand and its stability have a great impact on the economy of a country. since china’s financial and monetary system has been in reform, there are many uncertainties in money demand. especially, china’s money demand has its own particularity. this paper studies the determinants of china’s money demand through building a linear econometric model and svar model. the empirical results show that china’s money demand is mainly decided by income, interest rate and expected inflation rate. however, other factors, such as financial innovation, government debt, capital mobility and currency substitution, play a relatively small role, mainly because china’s financial and monetary system has been under reform. the regression results of sample data from different periods show that money demand in china is unstable, indicating that china’s macro-economy has certain risks. this finding suggests that china should adopt prudent financial and monetary policies to cope with the uncertainty of money demand in the future. ben-salha and jaidi (2014) estimated the money demand function in tunisia. the study assumed that unlike many previous money demand studies, the major components of real income are considered. based on annual data ranging between 1979 and 2011 and the ardl bounds testing approach, results reveal evidence of cointegration between the broad money demand and its determinants, namely the final consumption expenditure, the expenditure on investment goods, the export expenditure and the interest rate. the error correction model shows that the demand for money is only affected by the interest rate and the expenditure on investment goods in the short-run, while in the long-run the final consumption expenditure and the interest rate represent the major money demand determinants. these findings are robust to a variety of alternative money demand specifications and estimation methods. the saikkonen–lütkepohl cointegration test with structural shift and the johansen–mosconi–nielsen structural break cointegration test are performed in order to control for structural change. in addition, the stability of the relationship is checked using the chow stability test and the hansen parameter instability test. in the light of the study, we advance that monetary policy in tunisia should be based on a broad definition of money. furthermore, the estimation of money demand functions must take into account the different expenditure components of real income. bhattarai (2014) observed that cash in advance and money in utility function models are used to examine whether the nature of fluctuations in economic activities and welfare in three interdependent economies are related to the stocks and growth rate of money. when the money is exogenously introduced in the form of cash in advance, it serves as a medium of exchange and the rate of return in real and nominal assets become equal. idiosyncratic technological shocks generate fluctuations in the growth rates of capital, output, prices, money, consumption, investment, labour supply and lifetime utilities of households. when households have money endogenously in their utility functions, the stock of money in excess of that required for transactions causes inflation and reduces the amount of capital stock and output in these economies. both cia and miu models support for a steady growth rate of money according to the growth rate of output. while the inflation targeting by manipulating the interest rates for macroeconomic stability is theoretically a prudent policy move, it is impossible for a central bank to eliminate business cycles that arise from shocks to production technology or to other structural features of an economy. https://www.sciencedirect.com/topics/economics-econometrics-and-finance/cointegration https://www.sciencedirect.com/topics/economics-econometrics-and-finance/capital-goods https://www.sciencedirect.com/topics/economics-econometrics-and-finance/monetary-policy https://www.sciencedirect.com/topics/economics-econometrics-and-finance/macroeconomics financial risk and management reviews, 2020, 6(1): 1-13 5 © 2020 conscientia beam. all rights reserved. iyoboyi and pedro (2013) studied the narrow money demand function of nigeria using data from 1970 to 2010, using (a) autoregressive distributed lag bounds test approach to cointegration; (b) augmented dickey fuller (adf); (c) philips–perron (pp) unit root tests. the result established that cointegration exists among narrow money demand, real income, short term interest rate, real expected exchange rate, expected inflation rate, and foreign real interest rate in the period under investigation; and that real income is a significant determinant of narrow money in both long and short run in nigeria and interest rate is only significant in the long run nut not short run. central bank of nigeria (cbn) (2018) re-examined the stability of the broad money (m2) demand function in nigeria. the study employed autoregressive distributed lag (ardl) as well as bounds tests in relation to a set of quarterly time-series data from 1985(1) to 2016(4). it was then concluded that there was a stable long-run relationship between broad money and gdp, stock prices, foreign interest rates and real exchange rate. darrat (1986) in his study of the demand for money function in nigeria for 1963–1979. the study employed a more involved complex form of distributed lag framework for his model specification for currency, narrow money and broad money. consideration was also given to the international monetary influences on domestic money holdings, through the inclusion of foreign interest rate, and also to income and expected inflation rate. the result found that income and inflationary expectation play significant roles in determining real balances; foreign interest rate exerted a significant negative impact on real money demand; and the demand for money function exhibited stability in the period under review. currently, the central banks of nigeria, in the formulation monetary policy, has invariably adopted the log-linear real demand for money function (for both broad and narrow money) alongside the partial adjustment framework, with the principal independent variables being real income, inflation rate and lagged real balances. 3. methodology 3.1. sources of data given that both the broad (m2) and the narrow money (m1) were studied. therefore, quarterly data were collected from the central bank of nigeria (cbn) database and statistical bulletin publications as well as from the database of the nigeria bureau of statistics (nbs) for all the variables from 2006(q1) to 2018(q4). however, quarterly data for gdp were not available between 2006 and 2009 though annual series existed, and the annual series were subjected to the process of data segregation to obtain estimated quarterly series for gdp. furthermore, variables (m1, gdp and exchange rate) were translated into log form and expressed accordingly 3.2. estimation and evaluation techniques vis a vis data desegregation prior to 2010, quarterly data (both at nominal and real prices) were not available for nigeria’s gdp, except annual gdp series. that is, only annual data for those periods (2006 to 2009) were available and collected. incidentally, quarterly and annual data for aggregate credits to private sector (cps) were available. therefore, upon further analysis it was found that there was a high positive correlation (98%) between annual gdp and credit to private sector (cps). given the high correlation and the fact that quarterly data on cps were available for the period 2006 to 2009, the annual gdp data were linearly segregated into quarterly data for the period 2006 to 2009 using quarterly trends of cps. the linear relationship used for the desegregation is: where; qgdp  gdp for a given quarter; qcps  cps movement for a given quarter; financial risk and management reviews, 2020, 6(1): 1-13 6 © 2020 conscientia beam. all rights reserved. total movement in cps= 4th qtr. cps minus 1st qtr. cps 3.3. model specification this study assumes that the demand for money in nigeria is a function of real gdp, inflation rate, interbank lending rate, monetary policy rate (mpr), federal government treasury bill rate, rate on savings and exchange rate. it then used a linear model of the form in equation 12: 1 ( , , , , , , )m f rgdp infr exr tby sdr ibr mpr (12) where m1=money stock represented by m1. rgdp=real gdp. infr=inflation rate. exr=exchange rate. tby=treasury bill yield. sdr=savings deposit rate. ibr=interbank. mpr=monetary policy rate. the model is expanded in the form (shown in equation 13): 0 1 2 3 4 5 6 71 tm rgdp infr exr tby sdr ibr mpr                 (13) where is the error term. note that m1, rgdp, and tby are in initially naira form and are converted to their logarithmic forms. using a log model, functional form money demand equation 14 now becomes: 0 1 2 3 4 5 6 7ln 1 ln ln tm rgdp infr exr tby sdr ibr mpr                 (14) note that real gdp (y) is obtained after deflating by the consumer price index (cpi) the ols model has proved to be a reliable estimation technique for many types of linear models. it is particularly suited for many economic variables because economic variables are inherently linear especially over a short range. in the class of estimators, ols estimates are the best linear unbiased linear estimators. that is, the estimates of the population parameters computed from linear least squares regression are the most optimal estimates; and, it is relatively easy to use. expectedly, given the different theoretical and empirical works on the subject of demand for money, it is expected that the coefficient of income (gdp) will be positive, while coefficients of savings and treasury bill yield will be negative. for inflation and exchange rate, their coefficient could either take a negative or a positive form depending on the dominant behaviour of economic units. for interbank rate, the tendency is for it to be negatively correlated with demand for money. further, it should be noted that narrow money (m1) is the stock of currency in circulation (c) plus demand deposits (d). that is, m1=c+d. this is distinct from broad money given as is the stock of narrow money (m1) as well as time, savings and foreign currency deposits with banks. it is given as real gdp is a measure of a country’s economic output deflated by the country’s consumer price level (cpi) index. in the money demand function, real gdp is a proxy for wealth. the exchange rate is the rate of conversion of naira cash assets to dollar denominated cash assets. that is, the naira-to-dollar exchange rate. it serves as a proxy for an alternate form of cash assets to naira cash assets. inflation measures the general level of increase in the financial risk and management reviews, 2020, 6(1): 1-13 7 © 2020 conscientia beam. all rights reserved. prices of goods and services in an economy over a given period and it proxies the reduction in money value. interest rate: this is cost of borrowing money, or conversely, the income earned from lending money. it is can also refer to the return or yield on bond or opportunity cost of deferring current consumption into the future. it represents the speculative motive and it’s proxied, in the model, by interest rate on deposit, monetary policy rate, treasury bill yield and interbank lending rate. monetary policy rate (mpr) is the anchor rate set by the central bank of nigeria as a reference for other rates while the treasury bill yield: the yield on treasury bill which equates to the return earned on investing in treasury bill. 4. empirical results and interpretation 4.1. graphical representation of money stock (m1) and other variables figure 1 below depicts graphical relationship among the demand for money represented by (m) and the exogenous variables: real gdp(y), exchange rate (x), inflation (f) and treasury bill (g), savings deposit rate, interbank rate and mpr (p). a visual assessment of the trends as shown in the figure 1 revealed that some of the variables (like mpr and interbank rate) do not share almost same appearance as the trend of the dependent variable (m1). there is an apparent close movement between m1 and real gdp. figure-1. graphical illustrations of m1 and other variables. table-1. augmented dickeyfuller test results. variable order of integration t-adf prob* 1% cv 5% cv 10% cv m1 i(1) -4.113684 0.0000 -3.584743 -2.928142 -2602225 rgdp i(0) -5.615693 0.0000 -3.565430 -2.919952 -2.597905 exr i(0) -4.685323 0.0000 -3.565430 -2.919952 -2.597905 inf i(1) -10.77550 0.0000 -3.568308 -2.921175 -2.598551 intr i(0) -7.529088 0.0000 -3.565430 -2.919952 -2.597905 mpr i(1) -6.253837 0.0000 -3.568308 -2.921175 -2.598551 sdr i(1) -6.345020 0.0000 -3.568308 -2.921175 -2.598551 tby i(1) -5.898709 0.0000 -3.568308 -2.921175 -2.598551 phillip-perron test results m1 i(1) -7.670905 0.0000 -3.568308 -2.921175 -2.598551 rgdp i(0) -5.615693 0.0000 -3.565430 -2.919952 -2.597905 exr i(0) 81965.80 0.0000 -3.565430 -2.919952 -2.597905 inf i(1) -14.66489 0.0000 -3.568308 -2.921175 -2.598551 intr i(0) -7.525145 0.0000 -3.565430 -2.919952 -2.597905 mpr i(1) -6.307009 0.0000 -3.568308 -2.921175 -2.598551 sdr i(1) -6.306554 0.0000 -3.565430 -2.919952 -2.597905 tby i(1) -6.866263 0.0000 -3.568308 -2.921175 -2.598551 financial risk and management reviews, 2020, 6(1): 1-13 8 © 2020 conscientia beam. all rights reserved. in table 1 above, the series were tested for stationarity of individual series using augmented dickey fuller (adf) test, this becomes necessary given the assumption that most economic variables are not stationary at level and following the basic requirement of interacting economic variables. out of the eight variables tested, three variables (rgdp, exr, and intr) were integrated of order zero i(0), while the remaining five were integrated of order one (i.e. i(1)). in all, the study established that each of the series intended for estimating the behaviour of demand for money exhibits short run stability. furthermore, the study attempted to affirm the result of the adf test by using a non-parametric phillip-perron test on the same set of the variables, the results showed the same three variable with order i(0) and the same five variables with order i(1). thus, it validates the finding of the adf test. consequent upon the results of the unit root tests that affirmed the existence of short run stability of individual variable, it becomes necessary to test for group interaction and affirm a long run relationship. the result in table 2 indicates the outcome of johansen cointegration (using trace and maximum eigen) test. the result unrestricted rank (trace) test indicates that there exist at most three (3) cointegrating equations; these were affirmed by the higher values of the trace statistics when compared with the critical values at 5 percent significant level, given these, the study therefore rejects the null hypothesis. the result of the maximum eigen also led to the rejection of the null hypothesis as it indicates that there exist at most two cointegrating equation. we therefore affirm that there is a long run relationship among the variable. table-2. johansen cointegration test. series: m1 exr inf intr rgdp mpr sdr tby unrestricted cointegration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.710548 228.6089 159.5297 0.0000 at most 1* 0.648414 166.6207 125.6154 0.0000 at most 2* 0.573444 114.3556 95.75366 0.0000 at most 3* 0.477503 71.75504 69.81889 0.0000 at most 4 0.327056 39.29828 47.85613 0.0003 at most 5 0.243387 19.49363 29.79707 0.0156 at most 6 0.090817 5.548464 15.49471 0.0968 at most 7 0.015637 0.788043 3.841466 0.2067 trace test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level unrestricted cointegration rank test (maximum eigenvalue) hypothesized max-eigen 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none* 0.710548 61.98822 52.36261 0.0000 at most 1 * 0.648414 52.26508 46.23142 0.0000 at most 2* 0.573444 42.60055 40.07757 0.0011 at most 3 0.477503 32.45676 33.87687 0.0002 at most 4 0.327056 19.80465 27.58434 0.0103 at most 5 0.243387 13.94517 21.13162 0.0853 at most 6 0.090817 4.760421 14.26460 0.2178 at most 7 0.015637 0.788043 3.841466 0.1529 max-eigenvalue test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level financial risk and management reviews, 2020, 6(1): 1-13 9 © 2020 conscientia beam. all rights reserved. table-3. correlation matrix. variables m1 rgdp inf exr tby sdr ibr mpr m1 1 0.3812 0.5379 0.7832 0.3591 0.1351 0.1338 0.3959 rgdp 0.3812 1 -0.0986 0.1343 0.3220 -0.1490 -0.0749 0.0975 inf 0.5379 -0.0986 1 0.5579 -0.0291 -0.0045 0.0676 0.0380 exr 0.7832 0.1343 0.5579 1 0.3381 0.5195 0.1112 0.5494 tby 0.3591 0.3220 -0.0291 0.3381 1 0.0578 0.5250 0.7133 sdr 0.1351 -0.1490 -0.0045 0.5195 0.0578 1 0.0244 0.4432 ibr 0.1338 -0.0749 0.0676 0.1112 0.5250 0.0244 1 0.4160 mpr 0.3959 0.0975 0.0380 0.5494 0.7133 0.4432 0.4160 1 4.2. interpretation of first ols result table 3 shows the result of estimation of linear relationship between m (m1) and all the variables. the pvalues (probability values) of four variables (out of seven) are not significant. the p-values of f, g, n and p are 39.84%, 70.37%, 44.61% and 75.37%. that is, variables f, g, n and p are not significant in explaining the movement in demand for money. in other words, more than 50% of our chosen variables (four out of seven) cannot explain changes in m1 or demand for money. given a r-squared value of 76.4% shows a good fit, however the durbin-watson statistic is 0.58, signifying the presence of autocorrelation. the presence of autocorrelation is further confirmed by the serial correlation test contained in table 3. the probability of chi-squared is less than 5%, indicating autocorrelation. table-4. 1st ols estimation of money demand function. dependent variable: m1 variables coefficient std. error t-statistics probability constant 2.7602 2.4256 1.1380 0.2613 rgdp 0.4443 0.1499 2.9634 0.0049 inf 0.1503 0.1763 0.8527 0.3984 exr 1.0296 0.1828 5.6317 0.0000 tby -0.0499 0.1304 -0.3828 0.7037 sdr -0.3855 0.1559 -2.4732 0.0173 ibr 0.0542 0.0704 0.7689 0.4461 mpr 0.0803 0.2543 0.3157 0.7537 other parameters r-squared 0.7647 mean dependent var. 15.5708 adj. r-squared 0.7273 s.d. dependent var. 0.5084 s.e. of regression 0.2655 akaike info criterion 0.3262 sum square resid 3.1015 schwarz criterion 0.6264 log likelihood -0.4812 hannan-quinn criterion 0.4413 f-statistic 20.4314 durbin-watson statistics 0.5797 prob(f-statistic) 0.0000 4.3. interpretation of second ols result given the poor statistics generated from the above model (contained in table 4) in terms of p-values of coefficients, r-squared, durbin-watson and autocorrelation test, the model is re-specified. the re-specification is aimed at elimination autocorrelation while obtaining a good fit. the new specification becomes: 0 1 1 2 3 4 5 61 1t t t t t tm m rgdp inf exr tbr sdr               where the variables are in their log forms, m1=money stock represented by m1. rgdp=real gdp. m1t-1= lagged value of m1. inf=inflation rate. exr=exchange rate. financial risk and management reviews, 2020, 6(1): 1-13 10 © 2020 conscientia beam. all rights reserved. tbr=treasury bill yield. sdr=savings deposit rate. m is lagged by one level and introduced into the model as an independent variable to prevent the presence of autocorrelation. the resulting model is shown in table 5. the p-values of the explanatory variables are significant in explaining the variation in m, except f. r-squared of 96.5% shows a good fit and durbin-watson of 2.52 indicates the absence of autocorrelation. this is further confirmed by serial correlation statistics in table 6 below. therefore, the money demand function (m) estimated by ols technique becomes: 11 0.1586 0.8441 1 0.1009 0.0233 0.1436 0.0380t t t t t tm m rgdp inf exr sdr        the new model is free from autocorrelation and is hereby presented below: table-5. 2nd ols estimation of money demand function. dependent variable: m1 variable coefficient std. error t-statistic probability constant 0.1586 0.8608 0.1842 0.8547 m1t-1 0.8441 0.0556 15.1791 0.0000 rgdp 0.1009 0.0546 1.8591 0.0696 inf -0.0233 0.0613 -0.3807 0.7052 exr 0.1436 0.0795 1.8062 0.0776 sdr -0.0380 0.0563 -0.6753 0.5030 other parameter r-square 0.9645 mean dependent var. 15.5946 adj. r-squared 0.9606 s.d. dependent var. 0.4835 s.e. of regression 0.0960 akaike info criterion -1.7384 sum square resid 0.4149 schwarz criterion -1.5112 log likelihood 50.3297 hannan-quinn criterion -1.6516 f-statistics 244.5680 durbin-watson statistic 2.5232 prob(f-statistic) 0.0000 table-6. post estimation diagnostics. serial correlation test breuch-godfrey serial correlation lm test null hypothesis: no serial correlation at up to 2 lags f-statistics 2..4639 prob. f(2,43) 0.0970 obs*r-squared 5.2436 prob. chi-squared(2) 0.0727 homoscedasticity test heteroscedasticity test: breuch-pagan-godfrey null hypothesis: homoskedasticity f-statistics 4.2620 prob. f(5,45) 0.0029 obs*r-squared 16.3898 prob. chi-squared(5) 0.0058 scaled explained ss 25.3824 prob. chi-squared(5) 0.0001 conversely, given the presence of lagged values of the dependent variable as regressors, ols estimation of the model that already present itself as an ardl model will yield biased coefficient estimates; therefore, ardl bounds testing approach developed by pesaran, shin, and smith (2001) was employed to test for presence of long run relationship among the variables is hereby required. this procedure, though relatively new method, has many advantages over the classical cointegration tests. the bounds tests suggest that the variables of interest are bound together in the long-run when narrow money (m1) is the dependent variable. however, the f-statistics is higher than the critical values for i(0) bound but lower than the critical values for i(1) bound. this put the study at a crossroad and as well reduces the possibility of having a long run speed of adjustment see table 7. financial risk and management reviews, 2020, 6(1): 1-13 11 © 2020 conscientia beam. all rights reserved. table-7. cointegration bound test result. null hypothesis: no long-run relationships exist test statistic value k f-statistic 2.774954 7 critical value bounds significance i0 bound i1 bound 10% 1.92 2.89 5% 2.17 3.21 2.5% 2.43 3.51 1% 2.73 3.9 table-8. short run coefficients. variable coefficient std. error t-statistic prob.* m1(-1) 0.520696 0.144168 3.611735 0.0023 m1(-2) 0.356260 0.181161 1.966545 0.0668 m1(-3) 0.143230 0.169717 0.843936 0.4111 m1(-4) -0.353142 0.137008 -2.577523 0.0202 exr 3.52e-08 1.28e-08 2.753128 0.0141 exr(-1) -0.012819 0.131417 -0.097547 0.9235 exr(-2) 0.178571 0.131438 1.358594 0.1931 inf -1.210651 0.598870 -2.021561 0.0603 inf(-1) 0.294782 0.523537 0.563059 0.5812 inf(-2) 1.550495 0.420462 3.687597 0.0020 inf(-3) -1.445361 0.379516 -3.808434 0.0015 inf(-4) 0.943221 0.306483 3.077558 0.0072 intr 0.057933 0.092853 0.623920 0.5415 intr(-1) 0.471100 0.184822 2.548939 0.0214 intr(-2) 0.663295 0.203296 3.262708 0.0049 intr(-3) 0.295069 0.145149 2.032874 0.0590 mpr -2.993007 2.657931 -1.126066 0.2767 mpr(-1) 2.521902 2.968475 0.849561 0.4081 mpr(-2) -7.539781 2.080061 -3.624789 0.0023 rgdp -0.050160 0.075746 -0.662211 0.5173 rgdp(-1) 0.126696 0.083963 1.508959 0.1508 rgdp(-2) 0.121228 0.072817 1.664819 0.1154 rgdp(-3) -0.295891 0.062053 -4.768385 0.0002 rgdp(-4) 0.225231 0.069056 3.261586 0.0049 sdr -0.959672 4.750367 -0.202021 0.8424 sdr(-1) 5.942464 4.959648 1.198163 0.2483 tby 2.919892 1.440714 2.026699 0.0597 tby(-1) -2.475186 1.335124 -1.853900 0.0823 tby(-2) 2.528519 1.212742 2.084960 0.0535 tby(-3) -0.274169 0.919491 -0.298175 0.7694 tby(-4) 1.881673 0.832242 2.260970 0.0380 c 2.430520 3.622738 0.670907 0.5118 r-squared 0.994485 mean dependent var 15.65916 adjusted r-squared 0.983801 s.d. dependent var 0.420080 s.e. of regression 0.053466 akaike info criterion -2.784809 sum squared resid 0.045738 schwarz criterion -1.537341 log likelihood 98.83541 hannan-quinn criter. -2.313389 f-statistic 93.07605 durbin-watson stat 2.455294 prob(f-statistic) 0.000000 financial risk and management reviews, 2020, 6(1): 1-13 12 © 2020 conscientia beam. all rights reserved. table-9. long run coefficients. variable coefficient std. error t-statistic prob. exr 0.497820 0.409780 1.214846 0.2420 inf 0.397905 0.547759 0.726424 0.4781 intr 4.467253 2.489339 1.794554 0.0916 mpr -24.059928 16.212286 -1.484055 0.1572 rgdp 0.381746 0.581028 0.657018 0.5205 sdr 14.965340 16.491210 0.907474 0.3776 tby 13.757783 10.071146 1.366059 0.1908 c 7.299834 11.024655 0.662137 0.5173 4.4. policy implication the findings of this study reveal that movements in the prior (lagged) values together with movements in real gdp, inflation, exchange rate and savings deposit rate can explain to a great extent changes in money demand in nigeria. the direction (sign) of variables like real gdp, inflation, and savings deposit rate conform to expectations. the findings suggest that the government, through the central bank, should employ balanced policies that encourage economic units to exhibit more confidence in naira assets as against foreign assets and stem the rate of dollarization of the economy. 5. conclusion the findings of this study reveals that movements in the prior (lagged) values together with movements in real gdp, inflation, exchange rate and savings deposit rate can explain to a great extent changes in money demand in nigeria. of particular interest is the positive movement in exchange rate. exchange rate increases as demand for money increases, suggesting that more of money demanded finds its way to the foreign exchange market. citizens may have been replacing naira cash assets with dollar cash assets. the findings from the study suggest that the government, through the central bank, should employ balanced policies that encourage economic units to exhibit more confidence in naira assets as against foreign assets and stem the rate of dollarization of the economy. the study concludes that demand for narrow money in nigeria is influenced by past demand as well as level of income, inflation, exchange rate and savings rate. interbank lending rate and mpr do not have influence on the level of money demand. 6. recommendations given the findings in this study, the following recommendations are proffered: the monetary authorities, the central bank of nigeria, should employ balanced policies that encourage economic units to exhibit more confidence in naira assets as against foreign assets and stem the rate of dollarization of the economy the central bank of nigeria should develop come with an efficient policy around the components of narrow money (that is, currency in circulation and demand deposit) to curb the level of inflation in the country. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references baumol, w. j. (1952). the transactions demand for cash: an inventory theoretic approach. the quarterly journal of economics, 66(4), 545-556. available at: https://doi.org/10.2307/1882104. ben-salha, o., & jaidi, z. (2014). some new evidence on the determinants of money demand in developing countries–a case study of tunisia. the journal of economic asymmetries, 11, 30-45. available at: https://doi.org/10.1016/j.jeca.2014.06.001. financial risk and management reviews, 2020, 6(1): 1-13 13 © 2020 conscientia beam. all rights reserved. bhattarai, k. (2014). money and economic growth. the journal of economic asymmetries on science direct, 11(june), 8-18. busari, d. (2005). on the stability of money demand function in nigeria. financial and economic review, cbn. central bank of nigeria (cbn). (2018). banks and other financial institutions act 1991 (as amended in 1997, 1998, 1999 and 2002. darrat, a. f. (1986). money, inflation, and causality in the north african countries: an empirical investigation. journal of macroeconomics, 8(1), 87-103. available at: https://doi.org/10.1016/0164-0704(86)90035-2. dou, x. (2018). the determinants of money demand in china. cogent economics & finance, 6(1), 1564422. essien, e. a., onwioduokit, e. a., & osho, e. t. (1996). demand for money in a debt-constrained economy: a case study of nigeria. economic and financial review, 34(2), 579-605. friedman, m. (1956). the quantity theory of money – a restatement in m. friedman. studies in quantity theory of money: chicago university press. iyoboyi, m., & pedro, l. m. (2013). the demand for money in nigeria: evidence from bounds testing approach. business and economics journal, 2013, bej-76. keynes, j. m. (1930). the general theory of employment, interest and money: john maynard keynes. pesaran, m. h., shin, y., & smith, r. j. (2001). bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3), 289-326. available at: https://doi.org/10.1002/jae.616. research department central bank of nigeria. (2016). monetary policy education in economic series, 2. nigeria: central bank pf nigeria. tobin, j. (1956). the interest-elasticity of transactions demand for cash. the review of economics and statistics, 38(3), 241-247. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 79 © 2020 conscientia beam. all rights reserved. financial risks in turkish banking industry: a panel data analaysis on istanbul stock exchange cem berk1+ eyyup arslan2 1kirklareli university, turkey. 2independent researcher, turkey. (+ corresponding author) abstract article history received: 21 september 2020 revised: 5 october 2020 accepted: 16 october 2020 published: 28 october 2020 keywords banking industry exchange rate risk financial risks interest rate risk liquidity risk panel data. jel classification: c23; f31; g21; g32. global price movements have been affecting markets dramatically in recent years. the changes in exchange rates, interest rates, and liquidity directly affect market value of firms. these risks are called financial risks and typically affect financial institutions. many methods are developed to compute these risks. this study has a panel data analysis on 7 banks listed on istanbul stock exchange. the motivation of this study is to investigate the relationship between financial risks (interest rate risk, exchange rate risk and liquidity risk) and market value of these banks. many tests are available in the research such as vif, ar roots, lag length selection criteria, cross section dependence test, delta test, unit root tests, model selection tests, heteroscedasticity and autocorrelation tests. based on the tests, two way fixed effects model is developed. the results reveal that financial risks explain 29% of all price movements of commercial banks. the model is statistically significant. there is a positive relationship between liquidity and market value and negative relationships between interest rate risk and market value, and exchange rate risk and market value. the results are also consistent with the literature. the research is unique for the turkish banking industry and therefore is important academically as well as for risk management practice. results show that banks operating in turkey don’t properly manage financial risks. macroeconomic dynamics and maturity mismatch problems in turkey require great attention on financial risks. it is recommended that banks should operate with more risk management instruments such as financial derivatives and corporate risk management. contribution/originality: this study is one of the very few studies which have investigated the relationship between financial risks and market value of turkish commercial banks. most studies on financial risks have analyzed non-financial firms. and the studies on financial risks of financial firms primarily focus on profitability. 1. introduction financial risk can be defined as the loss potential which may affect a company negatively to reach its goals and possibly results in a profit less than expected (koroglu, 2019). this risk will lead to an increase in liabilities or a decrease in assets of a company. in the event of fluctuation of prices in the market, especially commercial banks are very fragile. many techniques have been developed to measure this risk (kocak, 2012). price fluctuations in the markets have increased in the recent years. the fluctuations in exchange rates, interest rates, stocks and commodities directly affect firms. because of these factors, firms are exposed to financial risks which are difficult to be managed (yucel, mandacı, & kurt, 2007). financial risk and management reviews 2020 vol. 6, no. 1, pp. 79-87. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.79.87 © 2020 conscientia beam. all rights reserved. https://www.doi.org/10.18488/journal.89.2020.61.79.87 financial risk and management reviews, 2020, 6(1): 79-87 80 © 2020 conscientia beam. all rights reserved. companies work in the field of risk management to still obtain profits while protecting themselves from financial risks. financial risks may lead to low financial leverage, negative changes in exchange rates, overdependence to a supplier, loss of primary customer, and loss of external investors (chapman, 2006). due to increased communication and information technologies, firms and individuals interact more closely. the advances in internet led to developments in domestic trade. on the other hand, economic and political operations between countries and continents have increased. a negative situation in one part of the world may lead to several consequences in other parts of the world. these financial shocks stem from economic and non-economic reasons (yanartaş, 2010). examples of economic factors that is related to financial risk are inflation, interest rate, exchange rate, and market volatility. non-economic financial risks may occur because of political and social events. the increase in financial instruments and information technologies has led to an increase in the number of financial risks that can occur. firms develop new financial instruments to attract global capital, however increased leverage also come with greater financial risks (uzak, 2019). the motivation of this study is to investigate the relationship between market value and financial risks of commercial banks. for this purpose, a panel data analysis of commercial banks listed on istanbul stock exchange is done. the rest of this study is organized as follows. in the next chapter, several previous works in this field are given. in the main focus of the study section, the motivation and information on data set is available. the methodology section has information on the computation of variables and panel data regression. the results of the analysis and a brief discussion are available in solutions and recommendations part. final remarks are available in the conclusion section of this study. 2. background most works on the literature of financial risks focus on non-financial firms. most of the studies that focus on commercial banks have analysis on profitability. unal and altin (2010) analyzed the relationship between firm value and net foreign exchange position in the turkish automotive industry. reis, kilic, and bugan (2016) showed that gdp, leverage ratio, loans/deposits ratio, and market capitalization affect probability. the study is a panel data analysis. the research period is between 2009 and 2013.saldanli and aydin (2016) analyzed 23 commercial banks. the research period is between 2004 and 2014. they found that shareholders’ equity / total assets, liquid assets / current liabilities, non-interest income / total assets, and interest income/ interest expense ratios all affect profitability of banks. kok, ekinci, and ay (2017) studied the effect of financial risks with an ardl model. the research period is 1993-2015. they found a relationship between financial risks and non-financial firms. senol and karaca (2017) studied the effect of financial risks on non-financial firms. the analysis includes 35 firms. the research period is 2008-2015. they found that there are statistically significant relationships between exchange rate risk and liquidity risk and tobin’s q and leverage and credit risk and market value. topaloglu (2018) used 3 different models to test the relationship between financial risk and market value of non-financial firms. accordingly, there are statistically significant relationships between capital and liquidity risk and tobin’s q, credit risk and market value, and exchange rate risk and credit risk and price / earnings ratio. senol, oncül, and buyer (2019) found that liquidity risk affect profitability positively, whereas credit and capital risks negatively affect profitability of commercial banks. the study consists of 19 commercial banks. 3. main focus of the study in this study, the relationship between market value of commercial banks and financial risks in these banks are analyzed. financial risks are studied in three broad categories which are liquidity risk, exchange rate risk, and interest rate risk. financial risk and management reviews, 2020, 6(1): 79-87 81 © 2020 conscientia beam. all rights reserved. the research period is between 2010 and 2019. the reason of starting the research with the year 2010 is extremely high volatility in banking industry in the years 2008 and 2009 due to global financial crisis. the data used in this research is obtained from annual reports of the banks, banking regulation and supervisory agency, and finnet database. the commercial banks analyzed in this study is given in table 1. albaraka turk is excluded from the study because it doesn’t accept deposits. tskb (industrial development bank of turkey) is not included because it doesn’t have regular financial operations. icbc turkey and q&b finansbank are also not studied due to the the high volatility of these stocks related with mergers & aquisitions activities. table-1. banks analyzed in the research. no. bank ticker 1 akbank akbnk 2 türkiye garanti bankası garan 3 türkiye halk bankası halkb 4 türkiye i̇ş bankası isctr 5 şekerbank skbnk 6 vakıfbank vakbn 7 yapı ve kredi bankası ykbnk these banks are listed in istanbul stock exchange. they have to make disclosures on financial risks such as exchange rate risk, interest rate risk and liquidity risk in their quarterly financial reports. the data on financial risks are obtained from these audited financial reports. the motivation of the study is to see whether there is a relationship between financial risks and market value of the commercial banks operating in turkey. if there is such a relationship, a further analysis is what kind of financial risks affect the market price. this is important for academic purposes and for the banks in order to effectively manage these risks. 4. methodology the formulas to obtain variables used in the study to represent independent variables of financial risk; exchange rate risk, interest rate risk and liquidity risk and the dependent variable of market value are given in table 2. these values are computed for each of the bank analyzed in this study. table-2. formulas to obtain variables. variable abbreviation formula independent variables exchange rate risk exc net foreign exchange position / shareholders’ equity interest rate risk int (interest rate risk t – interest rate risk t-1) / interest rate risk t-1 liquidity position liq cash and liquid assets / total assets dependent variable market value mbv market value / book value commercial banks disclose net foreign exchange position in financial statements. this is used in exchange rate calculations of this study. to account for the size effect, net foreign exchange position is divided to shareholders’ equity. interest rate risk consists of the maturity mismatch in the balance sheet which is related with asset liability management and revaluation of off balance sheet positions. in the study, interest rate risk disclosed in the annual reports of the banks is used. for a meaningful calculation, the change in interest rate risk is used instead of the level of interest rate risk. financial risk and management reviews, 2020, 6(1): 79-87 82 © 2020 conscientia beam. all rights reserved. as liquidity variable liquidity position is used. due to unique balance sheet structure of the banks, liquidity position is a meaningful indicator of liquidity risk. the banks with higher liquidity position are exposed to less liquidity risk. panel data analysis is used study. the model allows to test the relationship between liquidity risk and market value, interest rate risk and market value and exchange rate risk and market value. the panel data regression model is given below. in the formula i stands for each commercial bank used in the study t stands for the time period, β is coefficient of independent variable, and ԑ is the error term. mbvit = αit+ β2it excit + β3it intit + β4it liqit + ԑit + λt 5. solutions and recommendations first the data is tested for multicollinearity. the method used for this is vif. the results are presented in table 3. the maximum vif value is 1.016518 which is less than five. therefore, there is no multicollinearity problem for the variables used in this research. table-3. results for vif. mbv coefficient variance coefficient non central vif central vid liq 4.878232 28.339460 1.016518 exc 0.000174 1.014890 1.012592 int 0.000180 1.133516 1.005991 c 0.078783 28.132030 na to test the validity of the model, ar roots are analyzed. the results are given in figure 1. accordingly, all of the roots are inside the unit circle. this shows the model is appropriate for the analysis. figure-1. ar roots. appropriate lag length has to be determined in panel data analysis. lag length selection criteria are used for this purpose. the results are given in table 4. accordingly, 2 lengths are suggested by all (aic, sc, hq, lr and fpe) criteria. financial risk and management reviews, 2020, 6(1): 79-87 83 © 2020 conscientia beam. all rights reserved. table-4. lag length selection criteria. lag lr fpe aic sc hq 0 na 0.017842 7.3253 7.479734 7.383892 1 73.18276 0.006516 6.315117 7.087288 6.608078 2 51.75661* 0.003481* 5.674263* 7.064171* 6.201592* 3 21.54703 0.003808 5.728795 7.736441 6.490493 cross section dependence is also analyzed in this study. since time period (10) is more than number of banks (7) peseran cd is applied. the results are given in table 5. accordingly, for the variables mbv and int there is no cross section dependence as the probability is greater than 0.05, whereas for the variables exc and lic there is cross section dependence. table-5. cross section dependence test. variable test statistics probability value mbv -0.983 0.163 exc -1.899 0.029 int -0.805 0.211 liq -1.672 0.047 in panel data analysis, series are assumed to be homogenous. this assumption is tested with pearson and yagamata delta test. the results are shown in table 6. as for all of the variables probability values are larger than critical value, slope coefficients are homogenous. table-6. delta test results. mbv exc 0.877 1.049 -1.446 -1.728 prob 0.190 prob 0.147 olasılık 0.926 prob 0.958 int liq -1.543 -1.844 0.777 0.929 prob 0.939 prob 0.967 olasılık 0.218 prob 0.176 the variables used in the panel data analysis has to be stationary. based on the results of cross section and homogeneity tests, levin, lin and chu (llc) test is used for mbv and int while bai and ng panic test is used for exc and liq. the results for llc test is given in table 7. according to llc test, the variables mbv and int are stationary in level. the results of panic test are available in table 8. accordingly, the variables exc and liq are not stationary in level but stationary in first difference. table-7. llc panel unit root test results. variable statistics probability constant+ trend variable statistics probability mbv -2.42688 0.0076*** mbv -10.9845 0.0000*** int -7.04066 0.0000*** int -6.62184 0.0000*** financial risk and management reviews, 2020, 6(1): 79-87 84 © 2020 conscientia beam. all rights reserved. table-8. panic panel unit root test results. constant constant +trend level statistics probabilty statistics probabilty exc -0.6888 0.7545 0.1877 0.4256 10.3550 0.7358 14.9930 0.3786 liq -0.8612 0.8054 -0.9543 0.8300 9.4431 0.8017 8.9503 0.8342 first difference exc 1.8899 0.0294** 2.4545 0.0071*** 24.0003 0.0458** 26.9882 0.0193** liq 3.4017 0.0003*** 5.3716 0.0000*** 32.0003 0.0040*** 42.4236 0.0001*** table-9. model selection results. test statistics p-value hypothesis f-group_fixed 14.64063 0.000000 h0:cross section effect f-time_ fixed 19.84238 0.000000 h0: time effect f-two way_ fixed 17.88136 0.000000 h0:no effect lm-group_random 12.52044 0.000403 h0: cross section effect lm-time_ random 35.68262 2.32e-09 h0: time effect lmtwo way_ random 48.20306 3.41e-11 h0: no effect honda-group_ random 3.538424 0.000201 h0: cross section effect honda-time_ random 5.973493 1.16e-09 h0: time effect honda-twoway_ random 6.725941 8.72e-12 h0: no effect in the analysis, an evaluation is made to choose between fixed effect and random effect models. the tests used for this purpose are f test, breuch-pagan lm test and honda test. the results are shown in table 9. according to f test results, group and time two way fixed effects model is suggested. however lm and honda tests suggest two financial risk and management reviews, 2020, 6(1): 79-87 85 © 2020 conscientia beam. all rights reserved. way random effects model. considering data set of the study, two way random effects model is chosen for the analysis. finally, error term is tested for heteroscedasticity and autocorrelation. heteroscedasticity is tested with breusch-pagan-godfrey lm test. autocorrelation is tested with baltagi and li, born and bretuing and durbinwatson tests. the results are presented in table 10. according to the results, there are both heteroscedasticity and autocorrelation problems in the model. table-10. heteroscedasticity and autocorrelation tests results. heteroscedasticity breusch-pagan-godfrey lmh_fixed 36.49401 0.000000 h0: no heteroscedasticity h1: heteroscedasticity autocorrelation baltagi and li (1991) lmp-stat 13.44682 0.000245 h0: no autocorrelation h1: autocorrelation born and breitung (2016) lmp*-stat 22.13317 0.000003 h0: no autocorrelation h1: autocorrelation durbin-watson bhargava, franzini and narendranathan 0.683223 h0: no autocorrelation h1: autocorrelation table-11. model results. dependent variable method data mbv least square method white period standard errors & covariance (d.f. corrected) 2010-2019 independent variable coefficient std error t-stat prob liq 5.790447 2.852820 2.029727 0.0474** exc -0.003159 0.000459 -6.883929 0.0000*** int -0.014317 0.001712 -8.360204 0.0000*** c 0.864289 0.011510 75.08737 0.0000*** period fixed (dummy variables) r-squared 0.391486 mean dependent var 0.866512 adjusted r-squared 0.288153 s.d. dependent var 0.358401 s.e. of regression 0.302386 akaike info criterion 0.590395 sum squared resid 4.846187 schwarz criterion 0.930575 log likelihood -8.597435 hannan-quinn criter. 0.724189 f-statistic 3.788603 prob(f-statistic) 0.000967*** as a result, two way fixed effects model is used to analyze the relationship between financial risks and market value of commercial banks. white panel corrected standard errors is used to cope with autocorrelation and heteroscedasticity problems. the results are shown in table 11. the model is significant with 1% level of significance. r2 value of %28,81 means that financial risks (exchange rate risk, interest rate risk and liquidity risk) financial risk and management reviews, 2020, 6(1): 79-87 86 © 2020 conscientia beam. all rights reserved. affect around %29 of market price movement. therefore, there are statistically significant relationships between exchange rate risk, interest rate risk and liquidity risk and market value. 6. conclusion volatility in global markets and the pandemic increases the importance of banks. countries’ stability and growth require strong commercial banks. in recent years, asset size and profitability of turkish banks have increased. meanwhile, the stock prices of commercial banks haven’t increased that much on istanbul stock exchange. the most important barriers of stock price increase are the financial risks. in this study, 7 commercial banks on istanbul stock exchange are analyzed. financial risks available in this study are interest rate risk, exchange rate risk and liquidity risk. the motivation of the study is to test the relationship between financial risks and market value. according to the results of the research, there is a statistically significant and positive relationship between liquidity position and firm value. a unit increase in liquidity position results in 5.79 units increase in firm value. liquidity position is computed by dividing liquid assets to total assets. this result highlights the importance of holding liquid assets in commercial banks. liquidity risk in general is related to the inability of paying back the current liabilities. for banks, this requires an additional maturity mismatch analysis. however, strong liquidity positions contribute to the market value of commercial banks. there is also statistically significant but negative relationship between firm value and exchange rate risk. a unit increase in exchange rate risk results in 0.003 unit decrease in firm value. excessive use of speculative foreign exchange positions in bank treasuries may lead to decreases in their market value. therefore the results of this study are also consistent with financial risk literature. on the other hand, there is a statistically significant and negative relationship between interest rate risk and firm value. foreign exchange and interest rate is closely connected in finance theory, so this explains similar patterns that occur as a result of this study. the primary operations of banks; loans and deposits are interest related. therefore interest rate is an important risk for commercial banks. in addition, central bank of turkey, often changes the market interest rates in order to control the volatility in exchange rates. this results in losses for banks in wrong position. as a result, economic situation in turkey combined with maturity mismatch contain threats for banks operating in turkey. since banks work under intense financial risks, these risks have to be measured, categorized and managed properly. this research shows that banks don’t adequately manage financial risks. increase in the use of hedging instruments such as derivatives, and corporate risk management would make the banks more resistant. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references baltagi, b. h., & li, q. (1991). a joint test for serial correlation and random individual effects. statistics & probability letters, 11(3), 277–280. born, b., & breitung, j. (2016). testing for serial correlation in fixed-effects panel data models. econometric reviews, 35(7), 12901316. chapman, r. j. (2006). simple tools and techniques for enterprise risk management: john wiley and sons. kocak, k. (2012). mixed distribution model approach in financial risk analysis. cukurova university graduate school of science, master thesis, adana. financial risk and management reviews, 2020, 6(1): 79-87 87 © 2020 conscientia beam. all rights reserved. kok, r., ekinci, r., & ay, y. a. e. (2017). country risk impact on corporate sector components: the case of turkey and azerbaijan-kazakistanrusy. bilig, 83, 281-302. koroglu, y. (2019). mixed distribution model in financial risk management. necmettin erbakan university. institute of science. master thesis. konya. reis, s. g., kilic, y., & bugan, m. f. (2016). factors that affect bank profitability: the case of turkey. the journal of accounting and finance, 72, 21-36. saldanli, a., & aydin, m. (2016). investigation of the factors affecting profitability in the banking sector with panel data analysis: the case of turkey. journal of economics and statistics, 24, 1-9. senol, z., & karaca, s. s. (2017). the effect of enterprise risk management on firm performance: a case study on turkey. financial studies, 21(2), 6-30. senol, z., oncül, m., & buyer, m. s. (2019). effect of bank financial risks on bank profitability. international journal of management education and economic perspectives, 7(2), 101-109. topaloglu, e. e. (2018). determination of the relationship between financial risks and firm value: an application on istanbul stock exchange companies. journal of mehmet akif ersoy economics and administrative faculty, 5(2), 287-301. unal, o., & altin, h. (2010). analysis of the relationship between exchange rate risk and firm value in the istanbul stock exchange automotive sector. dumlupinar university journal of social sciences, 26, 277-287. uzak, g. (2019). financial risk hedge accounting practices in the real sector. bahcesehir university, masters thesis, istanbul. yanartaş, m. (2010). a model suggestion for determining the financial risks of firms. kadir has university, institute of social sciences, doctoral dissertarion, istanbul. yucel, a. t., mandacı, p. e., & kurt, g. (2007). financial risk management of enterprises and use of turev product: an application in businesses in ise 100 index. accounting and finance magazine, 36, 1-9. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 40 © 2020 conscientia beam. all rights reserved. factors affecting the capital structure of the textile industry in bangladesh: an inferential study aysha ashraf1 sonia rezina2+ 1assistant professor of finance, school of business, asian university of bangladesh. 2assistant professor, school of business, uttara university, dhaka, bangladesh. (+ corresponding author) abstract article history received: 19 may 2020 revised: 22 june 2020 accepted: 24 july 2020 published: 17 august 2020 keywords capital structure trade-off theory leverage profitability tangibility textile industry bangladesh. jel classification: g30; g32; l67. the main objective of the study is to recognize the major factors influencing the capital structure of the textile firms and to identify the association among them from the context of bangladesh. the researchers reviewed different conditional theories of capital structure before identifying the determinants of the textile firms. for this purpose, panel data for a-category listed textile companies of the dhaka stock exchange were selected. the study developed multiple regression models for the period 2008 to 2017. key -independent variables include firm profitability, tangibility, growth, age, liquidity and size. leverage ratio was used as the dependent variable. the study explored that profitability; firm size and liquidity have significant positive relationship with the debt ratio, which is consistent with the trade-off theory. on the other hand, tangibility, growth rate and age are not significantly related with the said ratio. the findings of this study will help financial managers to make the right decisions on fund borrowing and equity financing. then they can use borrowing in a proper way to support the market value of their companies. contribution/originality: this study is one of the very few studies which have investigated the direct relationship of determinant factors with the debt maturity of the listed textile companies in the stock exchange by using panel data analysis. 1. introduction the capital structure of a company means the mixture of sources of funds from which the assets of a company are composed. debt and equity are the major elements of capital structure. decisions about debt and equity allow the company to maximize share value and the wealth of the firm. the right capital structure is necessary for the firm’s survival as well as its financial success. every company has to seek the optimal debt-equity mix. there is a lot of published literature about the determinants of capital structure. yet the question of what determines a firm’s optimal capital structure remains a subject of debate. also, optimal capital structure, and the factors which ultimately determine it, may differ by industry and even by country. no published article has yet considered all possible determining factors at one time. that is the contribution of this article. we need an overarching theory that managers can use to build their capital structures in an optimal and informed way. this article will present such a theory for the textile industry in bangladesh. other financial risk and management reviews 2020 vol. 6, no. 1, pp. 40-51. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.40.51 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0002-1383-4536 https://orcid.org/0000-0002-3218-4372 https://www.doi.org/10.18488/journal.89.2020.61.40.51 financial risk and management reviews, 2020, 6(1): 40-51 41 © 2020 conscientia beam. all rights reserved. researchers can use this article as a model in developing theories for other industries in bangladesh or in other countries. there are lots of paper about determinants of capital structure in the context of bangladesh and international. this study has been occurred previously internationally and nationally. this study includes a panel data set of 10 listed a-category textile companies on the dhaka stock exchange for a period of 10 years (2008-2017). their decisions on debt and equity are examined to determine how leverage, debt and equity are related among bangladesh textile producers. however due to change of time risk factor, stock market behavior changes. inefficient market, manipulated imports and exports, rumors and poor knowledge of stock market and huge money laundering affect the determinants of capital structure. so, this research is needed to reflect those factors. each and every variable used in this study has significant effect on leverage ratio. this study is unique because included factors that no other study has considered. in the present study the researcher’s wants to show the fixed effect and random effect model. this paper seeks to redress this gap. 2. objectives of the study the purpose here is to examine the relationship between determining factors of capital structure and the financial risk of the bangladesh textile industry. specifically, the objectives are: 1. to identify the major variables influencing debt and equity choices in bangladesh textile firms. 2. to apply accepted theories of debt-equity decision-making to see whether this helps to explain how leverage is decided in the textile industry of bangladesh. 3. to consider correlations between leverage ratio and the firm-specific variables which are profitability, tangibility, growth, age, liquidity, and size. 3. capital structure theory capital structure theory describes how the debt-equity ratio, capital cost and the overall value of a company relate. there exists no perfect theory to apply in deciding a company’s mix of borrowing and shareholding. rather theories on these issues remain controversial. as the major theories contradict each other, none of these theories prevails. so this research is needed. two longstanding alternatives for companies in making their decisions on borrowing and share issue (durand, 1952) have long been the “net income approach” and the “net operating income approach”. focusing on net income approach, the manager does not consider interest rates or shareholder dividends in making borrowing and share issue decisions. focusing on net operating income approach, the increases in equity costs and leverage are assumed to have a linear relationship. classically, solomon (1963) as leverage increases, capital cost falls and the value of the firm increases until one reaches a level of borrowing which, for a given company, is considered “prudent” after this minimax solution (minimum cost for maximum value), further borrowing will only cause the value of the company’s shares to decrease as capital costs rise. supporting the focus on net operating income approach, modigliani and miller (1958) introduced the capital structure irrelevancy propositions. given a perfectly-competitive capital market, no transaction costs and no bankruptcy costs, with perfect information: they deduced the following conditions: (1) companies and individuals can borrow at the same interest rate. (2) taxes and investment are not affected by financing. (3) without regard to taxes, neither a firm’s market value nor the cost of capital is correlated with the debt-equity mix of the firm. from this theory, modigliani and miller (1958) deduced the following propositions:  the value of a firm is independent of its capital structure. financial risk and management reviews, 2020, 6(1): 40-51 42 © 2020 conscientia beam. all rights reserved.  the cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm plus an added premium for financial risk. so modigliani and miller’s propositions imply that, as leverage increases while the burden of individual risks is shifted between different investors’ classes, total risk is conserved and hence no extra value of companies is created. in modigliani. and miller (1963) published another paper which included the effect of taxes and high-risk debt in their 1958 theory. they concluded that leveraged company will be more valuable than an unleveraged company because the interest on company debt can be deducted from the company’s corporate income tax liability. that is how debt-equity decisions could impact a company’s value. as per their observation, an optimal capital structure would be zero equity and all financing by debt. such a company’s large debt burden would simply be written off against tax liability, but in the real world, companies never would use such a strategy because of another variable not included in modigliani and miller’s theory: the cost of bankruptcy. high bankruptcy costs make the perfect strategy in modigliani and miller’s model a high-risk strategy. later theories try to remove the imperfections in modigliani and miller’s theories include the static trade-off theory, agency costs theory, signaling theory and pecking-order theory. trade-off theory, kraus and litzenberger (1973) conceives of a company’s optimal debt ratio as a trade-off between the advantages and disadvantages of using debt. to calculate these advantages and disadvantages, they consider the tax deductibility of interest payments and the cost of bankruptcy. kraus and litzenberger conclude that debt is preferable until the probability of bankruptcy is equal to the tax advantage of interest payments. jensen and meckling (1976)’s agency costs theory advocates that an optimal debt-equity mix can be achieved by increasing the managers’ ownership of the company. such a solution induces managers to minimize agency costs by transferring some of the companies’ risk to them personally. signaling theories, developed by ross (1977)states that managers decide leverage as a signal to the market. these theories assume asymmetric information between the market and the managers. debt is a signal of high future performance and cash flows to repay it. according to ross, investors take larger levels of debt as a signal of a higher-quality company, raising the company’s share price and, thus its value. the result is that, using more debt, the company finds it easier to raise capital so less debt is needed in the long-term. pecking order theory, developed by myers and majluf (1984) states that, when a company is going to raise capital, managers prefer financing that comes from, in the following order: 1. internal funds (retained earnings). 2. debt. 3. issuing new equity as a last resort, when it is no longer sensible to issue any more debt. 4. literature review 4.1. international evidence rajan and zingales (1995) found that size, growth, profitability and tangible assets determined how debt and equity issue decisions were made by american companies. bevan and danbolt (2002) found that large british companies, having high growth potential used less bank debt than small companies did. in pakistan, mazhar and nasr (2010) and shah and hijazi (2004) found that earnings volatility, profitability, non-debt tax shield asset tangibility, size and growth were significantly correlated with decisions on leverage. in nepal, baral (2004) found operating leverage, dividend payout ratio; business risk, growth rate and size were the major determinants of leverage ratio, with a positive correlation. debt service capacity and profitability were significant but had a negative correlation with leverage ratio. vasiliou, daskalakis, and eriotis (2006) found that the significant variables influencing the decisions of greek companies on leverage were financial distress, market timing and competitiveness. rajan and zingales (1995) financial risk and management reviews, 2020, 6(1): 40-51 43 © 2020 conscientia beam. all rights reserved. conducted a trans-national study of companies across developed countries. they found that companies in the g-7 countries made decisions on debt and equity in a similar way. they also found that firm size was not significant as a determiner of leverage decisions. booth, aivazian, demirguc-kunt, and maksimovic (2001) examined the factors of capital structure across developing & developed countries. the study shows that the factors are similar & they affect the capital structure in a similar way for both developed and developing countries. buferna, bangassa, and hodgkinson (2005) found that four variables related to leverage decisions in a developing country: profitability, growth, tangibility and size. both the agency cost theory and the static trade-off theory found support in bufema’s study of libyan companies’ leverage decisions. 4.2. evidence from bangladesh chowdhury (2004) was one of the first studies of bangladeshi companies’ capital structure. chowdhury (2004) research was comparative, looking at bangladeshi and japanese companies. chowdhury (2004) used the agency cost model. he concluded that agency cost of debt, profitability, growth rate, operating leverage and bankruptcy risk were the significant factors for leverage decisions in both countries. lima (2009) studied the pharmaceutical industry in bangladesh. operating leverage, growth rate, debt service capacity and tangibility had a positive correlation with capital structure. bankruptcy risk and agency cost of equity showed a negative correlation to debt ratios. sayeed (2011) used cross section random effects model for panel data to explore the determinants of capital structures of selected bangladeshi listed companies. agency cost and debt tax shield (e.g. depreciation) had a negative correlation with debt-equity ratio and tax rate. firm size and collateral value of assets had a significant positive correlation with the ratio. siddiqui (2012) examined the importance of 8 factors in the capital structure decisions of non-bank financial institutions in bangladesh. it was found that factors such as debt service coverage, liquidity ratio, and growth rate, operating leverage, firm size and age of the firm had significant influences on the capital structure of bangladeshi nbfis. in the paper of jahan (2014) tangibility and profitability were found as statistically-significant in determining total debt ratio in total debt ratio in the bangladeshi textile industry. neither size nor growth rate of the company was found significant. ullah, uddin, abdullah, and islam (2017) concluded that age and profitability of the textile companies have a significant relationship to the debt maturity of the company. growth opportunity was not found to be insignificant. hossain and ali (2012) found that profitability, tangibility, liquidity, and managerial ownership are significant in determining leverage. their impact is negative. growth opportunity and non-debt tax shield were significant in determining the leverage of the stock-exchange-listed companies in bangladesh. their impact was positive. moreover, size, earnings volatility, and dividend payments were insignificant. alom (2013) found significant and negative impact of profitability, collateral and liquidity on leverage. increased market to book value ratio increased leverage while decreased market to book value ratio reduced it. dividend payment and size were found to be insignificant. hossain. and hossain (2015) concluded that the relationship between managerial ownership and the capital structure was both significant and positive. growth rate, profitability, debt service coverage ratio, on-debt tax shield, financial costs, free cash flow to firm, agency costs and dividend payment had a relationship with the capital structure that was both significant and negative. higher tangibility and liquidity ratio tended to be associated with higher levels of long-term debt but with lower levels of short term debt and total debt. financial risk and management reviews, 2020, 6(1): 40-51 44 © 2020 conscientia beam. all rights reserved. imtiaz, mahmud, and mallik (2016) studied the bangladesh pharmaceutical industry, found tangibility, profitability and operating leverage to be significant (at a 1% level) in determining capital structure. size, growth and liquidity were not found to be significant. 5. data and research methodology 5.1 data and variables for constructing the panel dataset, 10 a category companies out of 35 companies listed on dhaka stock exchange under textile industry have been chosen. the data were collected from 2008-2017 company annual reports of sample enterprises because of unavailability and postponing of the business operations. the independent variables in this study are profitability, asset tangibility, growth, age, liquidity, and size and the dependent variable is financial risk. table 1 demonstrates the operational definition of the dependent and independent variables. table-1. list of operational variables. variable definition dependent variable financial risk total debt/ total asset independent variables firm size log(total asset) profitability ebit/total asset growth rate (total asset current year-total asset previous year )/total asset previous year tangibility fixed asset/ total asset liquidity total current asset/total current liability age foundation years 5.2. sampling and sample size a random sampling technique was adopted to collect data. the sample size is 10. the sample size is selected through the following formula (yamane, 1967). n ------------------------(i) here, n = sample size. n = population size (listed a category company is 35). e = percentage of sampling error (10%). we put the value of population size and sampling error, than we got the sample size of 18. among those, 10 companies are listed in dse for 10 years. so in this study sample size is 10 listed acategory textile companies. 5.4. model and estimation multiple regression analysis has been used in the study to analyze the association between leverage ratio and a set of firm-specific variables which are profitability, tangibility, growth, age, liquidity, and size. the following equation expressed in econometric form has been developed based on the variables used in this study for conducting the test: the result of the study was a capital structure model in which total debt ratio is a function of: financial risk and management reviews, 2020, 6(1): 40-51 45 © 2020 conscientia beam. all rights reserved. (1) profitability. (2) asset tangibility. (3) growth. (4) age. (5) liquidity. (6) size of the firm: yit = αi + β1*profitability + β2*asset tangibility + β3*growth + β4*age + β5*liquidity + β5*size + ɛit-- (ii) note: i = number of companies with i= 1,2…..n. t = number of years for which data were collected (here, n= 10 and t = 10 [years]). αi = constant value (the unknown intercept for time). yit = capital structure (dependent variable). β1 to β6 all are the slopes of the independent variables of the regression. ɛ = error (normally distributed error term with an assumed mean value of 0). the independent variables were structured to minimize the likelihood of multicollinearity problem. multicollinearity was tested by the variance inflation factor or vif method. the significance of independent variables in determining the companies’ capital structure was deduced by (panel) multiple regression analysis, using “stata” software and considering both fixed-effect and random-effect models. 6. results and discussion 6.1. factors affecting capital structure these factors are the independent variables listed above, at the end of the methodology section. the study finds that these 6 factors are statistically significant in determining the capital structure, or leverage, essentially the debt-assets mix in fund-raising as defined in the introduction section above, of a publicly-traded company in the textile industry of bangladesh. 6.1.1. dependent variable financial risk (debt ratio) has been selected as a dummy variable for the capital structure of a publiclytraded company in the bangladesh textile industry. many published studies have taken this approach to measure the capital structure of a company: (janbaz, 2010; lópez-gracia & sogorb-mira, 2008; rajan & zingales, 1995; sheikh & wang, 2010). in choosing this approach, we reject the book value of debt as a measure of capital structure, as it is comparatively outdated (fama & french, 2002). 6.1.2. independent variables firm size is found from this data to have a negative correlation with debt ratio, meaning that bigger firms have lower debt ratios and less leverage. this is logical, as bigger firms have more assets to use in obtaining finance without debt. company size is measured in this study as the natural logarithm of total assets (abor, 2008; janbaz, 2010). this finding contradicts most of the published theories trade-off theory titman and wessels (1988) and, implicitly, agency cost theory posit a positive relationship between company size and leverage however, our results confirm the expectation of pecking-order theory, which predicts a negative correlation between leverage and company size, because of the lack of equal access to information between managers and outside investors as companies grow larger. financial risk and management reviews, 2020, 6(1): 40-51 46 © 2020 conscientia beam. all rights reserved. profitability is shown by our data to have a significant and negative relationship with debt ratio. following titman and wessels (1988) we have taken earnings before interest and taxes (ebit) and divided it by the company’s total assets. again, our findings contradict most of what published theories would suggest. trade off theory and the agency model indicate that leverage and profitability are positively correlated and signaling hypothesis of ross (1977) would suggest a similar result. this study result also differs from that of long and malitz (1985) find the relationship between leverage and profitability not to be statistically significant. here again, our results confirm (myers & majluf, 1984) pecking order theory, which suggests a negative correlation. growth rate is a problematic issue in the literature. however, we find it to be a statistically insignificant variable. we followed buferna et al. (2005) in using percentage change in book value of total assets as a proxy variable for a company’s growth rate. the researchers found that each other theory takes a different view. pecking order theory predicts a positive correlation between growth rate and leverage. , static trade-off theory takes no position, so perhaps our finding most supports this theory. agency cost theory concludes that there is a negative correlation between growth rate and debt level. tangibility of assets is found in our data not to be statistically significant. in accordance with the study of rajan and zingales (1995) the ratio of fixed assets to total assets is selected as a proxy for tangibility of assets. trade-off theory and agency cost theory say that tangibility’s relationship with debt ratio is a positive correlation. pecking order theory arrives at the contrary conclusion, as a company with more tangible assets will have less of an information asymmetry problem with shareholders (harris & raviv, 1991). liquidity is found, in our data, to be statistically significant and has a negative correlation with leverage. we use the current assets to current liabilities ratio as a proxy for liquidity. this is a logical result, as a liquid company is, by definition, “cashed up” and does not need to borrow much. trade-off theory posits a positive correlation with leverage while pecking order theory posits a negative one. again, our study supports the expectation of the pecking order theory. age of the firm was found, in our data, to be an insignificant variable. hall, hutchinson, and michaelas (2004) found that age was positively correlated with long-term debt but negatively correlated with short-term debt. green, murinde, and suppakitjarak (2002), found that the correlation was negative with debt both of the shortand the long-term varieties. 6.2. the multicollinearity problem multicollinearity, or intercorrelation, means that the variables in the study are correlated with one another. this can mean that the data have less predictive value because the variables are not fully-independent. using the vif method, there would be multicollinarity if tolerance < 0.1 but vif > 10. table 2 shows that the selected independent variables of this study are not multicollinear. all the vif factors are well below 10 and the mean is 1.26. therefore, we need not be concerned about this issue, although it was necessary to test for it in order to be sure of the validity of our variables and our conclusions. table-2. collinearity statistic (vif) variable vif 1/vif firm size 1.55 0.647018 age 1.37 0.732366 tangibility 1.35 0.739534 liquidity 1.13 0.88112 growth rate 1.13 0.9505 profitability 1.05 0.9505 mean vif 1.26 financial risk and management reviews, 2020, 6(1): 40-51 47 © 2020 conscientia beam. all rights reserved. table 3 reinforces this conclusion, that multicollinearity is not a problem here, by another test. this test is a direct test of correlation between independent variables. perfect correlation is a value of 1. thus, all the variables are correlated with themselves at a value of 1. however, all the other correlation factors are far from 1, the highest one being 0.4245. again, we dismiss the multicollinearity issue: the problem has not arisen. 6.3. correlation matrix table-3. correlation matrix. variable financial risk firm size profitability growth rate tangibility liquidity age financial risk 1 firm size -0.4229 1 profitability 0.0015 -0.1003 1 growth rate -0.1528 0.1314 -0.0998 1 tangibility 0.2677 -0.3726 -0.0397 -0.2428 1 liquidity -0.2291 0.1364 0.061 0.2451 -0.2556 1 age 0.2924 -0.4245 0.1793 -0.0329 -0.0777 0.09 1 6.4. regular multiple regressions now we turn to the inferences which we can draw from the study. we consider the correlation of independent variables with the dependent variable. a sufficient degree of correlation means that our independent variable is significant in predicting the level of the dependent variable: it could be a factor in the decision on leverage. then we must also consider whether it is positively-correlated (more of the independent variable yields more leverage) or negatively-correlated (more of the independent variable yields less leverage). table-4. multiple regression. source ss df ms model 5.94730751 6 0.99121792 residual 17.6010349 9 0.18925844 total 23.5483424 99 0.23786204 variables coefficient t p>iti firm size -0.2502801 -2.32 0.022 profitability -0.3831479 -0.57 0.572 growth rate -0.0518921 -0.46 0.644 tangibility 0.3062162 1.28 0.205 liquidity -0.0660923 -1.73 0.087 age 0.0122014 2.06 0.042 cons 2.537554 2.25 0.027 the r squared value becomes 0.2526. the adjusted r squared becomes 0.2043 and the root mse becomes 0.43504. total number of observations was 100. it indicates that among all the independent variables, the firm size, and age become significant at 5% level of significant. and the liquidity, profitability, tangibility and growth rate become significant at 10% level of significance. fixed effects model: fixed effects model is that statistical model where model parameters are considered to be fixed/ non-random quantities. ordinary least square method is being followed by fixed effects model. it’s found that, some companies have the highly different values while in some companies are best for their different other variables. the outcome of fixed effects model is given below: financial risk and management reviews, 2020, 6(1): 40-51 48 © 2020 conscientia beam. all rights reserved. table-5. fixed-effects (within) regression. fixed-effects (within) regression. r-square: within .1028 no. of objects 100 between .2017 no. of groups 10 overall .1470 f(5.85) 2.05 corr(u_i, xb) = 0.1217 prob > f 0.0791 variables coefficient t p>iti firm size -.1689556 -0.64 0.525 profitability -.8156639 -1.44 .152 growth rate -.1101819 -1.15 0.253 liquidity -.0656663 -1.98 0.051 age -.001708 -0.10 0.922 cons 2.436067 1.19 0.238 sigma_u .33093108 sigma_e . 34940329 f(9, 85) = 7.41 prob > f = 0.0000 rho .47286834 here r square is within 0.1028, between 0.2017, overall 0.1470 f (5.85). prob>f=0.0791. corr=-0.1217. it means all the independent variables can impact by 14.70% on financial risk. p value indicates that the model is significant. random-effects gls regression: random effects model is just the opposite of fixed effects model. here variables are random and unpredictable. here model parameters are considered as random. random effects model follows gls regression equation. the outcome of random effects model is given below: table-6. random-effects gls regression. random effects gls regression r-square: within .1042 no. of objects 100 between .3631 no. of groups 10 overall .2348 wald chi2(5) 14.67 corr(u_i, xb) 0 prob > chi2 0.0118 variable coefficient z p>izi firm size -.302624 -2.18 0.030 profitability -.8164211 -1.48 0.100 growth rate -.0927495 -1.01 0.313 liquidity -.0664912 -2.04 0.041 age .0081479 0.95 0.340 cons 3.341806 2.66 0.008 sigma_u .28151998 sigma_e .34940329 rho .39363768 generalized least square regression method is being followed by random effect model because of cross sectional data. in table 6 here r square is within 0.1042, between 0.3631, overall 0.23480. wald chi2(5) =14.67. prob>chi2= 0.0118. corr=0. it means all the independent variables can impact by 23.48% on financial risk. p value 0.01 indicates that the model is not weak. financial risk and management reviews, 2020, 6(1): 40-51 49 © 2020 conscientia beam. all rights reserved. hausman test: through conducting the hausman test, we can understand between fixed effects and random effects model, which option provides the best result to our model. here is the outcome of hausman test: table-7. hausman test variables fixed random difference sqrt s.e firm size -0.1689556 -0.30262 0.1336685 0.225567 profitability -0.8156639 -0.81642 0.0007573 0.118001 growth rate -0.1101819 -0.09275 -0.0174324 0.02723 liquidity -0.0656663 -0.06649 0.0008249 0.006312 age -0.001708 0.008148 -0.0098559 0.015123 b = consistent under ho and ha chi2(5) 2.32 ; obtained from xtreg b = inconsistent under ha, efficient under ho; prob>chi2 0.8026 hausman fixed random reveals that difference in coefficient is not systematic (prob>chi2=0.8026). if p > 0.05, random effects outcome is best suitable for the test. thus random effects can be used for analysis. table 7 reports that wald chi2(5) = 2.32. it indicates that the perfection model has been used. random-effect regression analysis in table 5 reports that there are 100 observations on company-years, reflecting n=10 companies, each observed for an average of 10 years. besides, the p-value is also lower than 0.05, hence this also signifies liquidity, profitability and size have significant influence on dependent variable. the calculated prob>chi2=0.0118 is less than 0.05, hence random-effects model is reported to be significant at 5% level of significance. therefore, this study is significant and indicating that there exists significant association between capital structure and firm specific determinants of selected textile manufacturing enterprises. 7. policy implications and conclusion the data show, mainly from multiple regressions testing, that profitability, liquidity and asset size are statistically significant explanatory variables for total debt ratio, all with a negative correlation. as they are larger, borrowing is less. other independent variables considered were not found to be significant at the .95 probability standard. this means that the data collected here does not show sufficient correlation of the variables other than size, profitability and liquidity with the total debt of the companies studied here, whether or not these factors are significant in general or for other companies, to be considered influential in the decisions on total debt. the chisquare test further gives us confidence that there is sufficient goodness of fit to show that the correlations in the random effects model reported actually exist. in general, our findings have been most consistent with the expectations of the pecking order theory and lend some support to the accuracy of that theory. there is some support for the static trade-off theory, where the theory did not mention a variable and we did not find it to be significant, but in general the results contradict the expectations of that theory. therefore, it is quite likely that company managers, in large companies in the textile industry in bangladesh, are influenced by the profitability, liquidity and size of the company, in deciding how much to borrow and how much funding to raise by selling of shares and other assets or use of own assets and cash. other company managers can consider these results in making their decisions on these matters, as can banks considering applications for company financing and those consider purchasing company bonds and debentures. other studies can consider other types of companies, or verify the results of this study, as well as conducting further tests on the variables not found significant here. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. financial risk and management reviews, 2020, 6(1): 40-51 50 © 2020 conscientia beam. all rights reserved. references abor, j. 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(1967). elementary sampling theory. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 27 corresponding author © 2015 conscientia beam. all rights reserved. promoting local acceptability of international oil companies (iocs) through corporate social responsibility (csr): the case of tullow oil in ghana evangelia fragouli1† --aiden yengbalang danyi2 1university of dundee, lecturer in management, scotland 2msc, university of dundee, scotland abstract ghana discovered oil in commercial quantities in 2007 following intense exploration works by tullow oil plc and kosmos energy. ghanaians are expecting more benefits from government and the international oil companies (iocs) in particular. this study is aimed at assessing the global integration and local responsiveness strategies of iocs in ghana and how that impacts on the acceptability of the operations of these iocs by locals presenting tullow as a case study. main research questions refer to how these local expectations can be properly managed, how iocs can design and properly implement their csr obligations and the extent to which the pursuit of csr activities by iocs can help promote their local acceptability in ghana. an empirical study with a qualitative analysis approach was applied to obtain primary information from tullow oil plc, government agencies, civil society organisations (csos), and local communities. the study established a positive relationship between good csr practice and local acceptability. even though some of the local people acknowledged the benefits of tullow‟s csr activities, others do not, but express a continuous desire for iocs and tullow in particular to do more. keywords: oil, corporate social responsibility (csr), policy, international oil companies (iocs) 1. introduction the discovery of oil in ghana brought about an increase in the presence of iocs and other allied businesses owned by foreign investors in the country. even though ghana is endowed with a lot of mineral and natural resources such as gold, diamond, bauxite, manganese, oil and gas and timber among others (cia the world factbook, 2011), the discovery of oil and gas in commercial quantities were done only recently in 2007 by tullow oil plc. (top) and kosmos energy. the need to discover more oil and gas resources is as important to the producing countries just as it is to the iocs that are engaged in the oil exploration, development and exploitation. as captured by broni-bediako and addei (2010), “ghana‟s oil and gas discovery has brought in its wake, huge growing expectations where the youth in fishing, farming and diverse fields are strongly financial risk and management reviews 2015 vol. 1, no. 1 pp. 27-52 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89/2015.1.1/89.1.27.52 © 2015 conscientia beam. all rights reserved. http://crossmark.crossref.org/dialog/?doi=10.18488/journal.89/2015.1.1/89.1.27.52 financial risk and management reviews, 2015, 1(1): 27-52 28 © 2015 conscientia beam. all rights reserved. awaiting their share of the impending wealth-generating potentials of the oil and gas”. the production of oil in ghana has led to the development of other petroleum related projects in the country some of which have led to the destruction of farmlands and the relocation of people away from these projects. even though those affected are either being compensated or are going to be compensated, a sense of dissatisfaction looms among the affected communities. the importance though that has been attributed to oil and gas revenue and the socio-economic development of oil producing countries should not be overemphasised. a lot of lessons remain to be learned by a new oil producing country like ghana, given the case of nigeria, and specifically the niger delta region of nigeria where most of its oil and gas resources are located, which is still worse off even with the abundance of this resource (von kemedi, 2003). this is the case with many other oil-rich countries in the developing world and particularly in africa. this development has put iocs under the spot lens as the local population count their gains from oil and gas activities in the country long before the first oil pours out of the oil wells. this paper‟s contribution is that it serves as a guide for iocs and their stakeholders in designing and implementing appropriate and acceptable global integration and local responsiveness strategies. the above is achieved by answering the following pertinent questions:  how can the government and iocs effectively manage local expectations of oil and gas finds in ghana?  to what extent are the csr activities of iocs effective in promoting their local acceptability in ghana?  to what extent is local acceptability of iocs important to their survival in ghana? 1.1. research problem although it is anticipated that oil and gas resources should be effectively exploited to help accelerate national economic development and poverty reduction in order for the country to attain middle income status by the year 2015 (asamoah, 2011), however, there is the fear that this newly discovered “black gold” will become a bane rather than a blessing if caution is not taken. the experience also that stems from the mining sector, particularly the gold-mining sector which is another key natural resource sector in the country that is alleged to be contributing very little (oxford business group, 2011) to the socio-economic development of the country, increases this fear. the expectations are legitimate and genuine given the fact that oil and gas revenues that have been properly managed in countries like norway, canada and brazil among others have acted as strong economic incentives for propelling economic and social development in these countries while poorly managed oil and gas resources elsewhere in nigeria, chad and trinidad and tobago among others have also led to oil crisis due to the inadequate or the complete mismanagement of local expectations of oil and gas discovery and revenue (von kemedi, 2003; bategeka et al., 2009; bronibediako and addei, 2010; gary, 2010). the problem is further compounded by the occurrence of major oil disasters ranging from piper alpha (march 24, 1988) through exxon valdez (july 6, 1989) to the gulf of mexico‟s (april 20, 2010) oil spills. the big question therefore remains as to how these iocs can effectively manage these local expectations and the associated problems of oil production in order to gain local acceptability and become popular in the financial risk and management reviews, 2015, 1(1): 27-52 29 © 2015 conscientia beam. all rights reserved. countries and communities in which they operate. managing these numerous local expectations could be a daunting task for both government and the iocs that are involved in the exploration, development and production of these petroleum resources in the country. tog, whose name is almost synonymous with oil production in ghana, is not insulated from all these challenges and expectations. 2. the importance of csr, stakeholder management and local acceptability in international business interactions 2.1. corporate social responsibility (csr) the concept of csr is fast gaining grounds and corporations are being encouraged to act in a socially responsible way. it is also widely used interchangeably with corporate social performance (csp) and corporate citizenship (dahlsrud, 2008). according to the world business council for sustainable development (2000), cited in dahlsrud (2008), “corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large”. businesses are therefore eyed in the mirror of their level of voluntariness, stakeholder engagement and the amount of socio-economic value they create for their stakeholders (dahlsrud, 2008). however, the idea that corporations should endeavour at all times to strike a balance between the interests of its numerous stakeholders such as employees, suppliers, the local communities and the societies in which they operate began gaining prominence in the 1960s (thompson et al., 2010; thompson et al., 2013). the concept was popularised by “the business roundtable” in its popular “statement on corporate responsibility” in 1981 which noted that “balancing the shareholder expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. the shareholder must receive a good return, but the legitimate concerns of other constituencies (customers, employees, communities, suppliers and society at large) also must have the appropriate attention” (business roundtable, 1981 as cited in thompson et al. (2005)). in assessing the social, environmental and health considerations for host communities as a csr imperative for iocs, maniruzzaman (2009) opined that, iocs need to take into account the socio-economic and environmental concerns of the local communities in designing their corporate strategies which should also be reflected in their contracts with the hcs. maniruzzaman further agrees that these factors should be incorporated into the csr programmes of iocs to serve as both a risk mitigation and dispute avoidance tool. there is therefore the need to properly integrate corporate strategies and local community needs so as to ensure mutual benefits (maniruzzaman, 2009). mullins (2007) has also noted that, in an era of increasing globalisation the decisions taken by the management of large organisations have a growing impact on the lives of other organisations, communities and the individuals within their physical area of operation since these organisations cannot operate in isolation from their environment in their strive to achieve their organisational goals and objectives. in stressing on the interdependence between organisations, the society and the environment in which they operate, mullins (ibid) further noted that organisations do not only make positive contributions to the quality of life and social well-being of the people in the communities where they operate but that the survival financial risk and management reviews, 2015, 1(1): 27-52 30 © 2015 conscientia beam. all rights reserved. of the organisation itself is dependent to a large extent on the series of positive relationships that they establish with these local communities. in effect, mullins also agrees with chant (2005) that csr is a twoway partnership which if done properly will yield mutual benefits to both the organisation and local population alike. in writing on the new csr models for oil companies in the niger delta region of nigeria and its challenges for sustainability, aaron (2012) agrees with (blowfield, 2004; 2005; jenkins, 2005; idemudia, 2008; 2009) that, csr is an effective tool for international development that can reduce poverty especially in developing countries. unlike other writers such as newell (2005) who sees csr as mere image management strategies employed by corporate entities, aaron (2012) sees the benefits of csr to be two ways; that help build the corporate image of businesses while providing development to the local communities. however the extent to which this development is sustainable could be a subject matter for further research. porter and kramer (2006) also opine that, stigmatised industries such as those in the chemical, oil and gas and other extractives industries often perform csr obligations as a form of insurance with the hope of building their reputation and gaining local acceptability. they also hope that the creation of public awareness of the company‟s social consciousness will one day temper public criticism in the unwelcome event of a disaster such as what was witnessed in the gulf of mexico in 2010. by these assertions, porter and kramer sought to establish a kind of relationship between organisations and local communities “that does not treat corporate success and social welfare as a zero-sum game” (ibid: 79). 2.2. stakeholder management according to carroll and buchholtz (2012), “stakeholder management is an approach that increases the likelihood [sic] decision makers will integrate ethical wisdom with management wisdom in all that they do”. for carroll and buchholtz, as a management perspective, stakeholder management practice will help managers of businesses to identify the various stakeholders within and outside the firm who contribute to its major decision making processes and survival and also help them identify and incorporate the various concerns of these stakeholders into the daily operations and strategic business plans of the firm (ibid). carroll and buchholtz further asserts that an effective stakeholder management process should result in a win-win situation for all stakeholders and that management can achieve this by gaining knowledge about the needs and behaviours of all stakeholders and translating these behaviours into actions by appropriately predicting their behaviours and actions. johnson et al. (2011) have identified four types of external stakeholders in accordance with the nature of their relationship and how they might affect the success or otherwise of the company‟s corporate strategy. according to johnson, whittington and scholes, economic stakeholders include; suppliers, distributors, competitors and shareholders who are very core to the company‟s very existence. they also identify political stakeholders to include policy makers, regulators and government agencies that may directly or indirectly influence the company‟s strategy and its context. technological stakeholders according to johnson et al. (2011) also possess key competitive technologies that are core to the innovative strategies and operations of the company. financial risk and management reviews, 2015, 1(1): 27-52 31 © 2015 conscientia beam. all rights reserved. perhaps most important and closely related to the substance of this study are the community stakeholders, who reside close to the business establishments and may be directly or indirectly affected by the company‟s activities. community stakeholders might not have a direct and formal influence but their activism could adversely affect the company‟s operations. managing the different expectations of all these stakeholder groups could be challenging especially where companies have internationalised with operations in multiple arenas. the importance of properly engaging all stakeholders in the management of the extractive industry of non-renewable resources as a precursor to avoiding and managing extractive industry related conflicts is succinctly articulated by the united nations interagency framework team for preventive action (2010) also known as the framework team (ft) pointing out that extractive industries may cause tensions at the local or national levels. in explaining the reasons for such tensions in its guidance notes, the ft further cited poor engagement and marginalisation of local communities and stakeholders or their exclusion from dialogue in the industry‟s development process as a precursor to opposing the exploitation of such resources from the local communities (the united nations interagency framework team for preventive action, 2010). this may lead to the use of violent and coercive strategies by these local communities against the companies involved in the extraction of such resources as a means of addressing their grievances and mounting opposition against their marginalisation. the underlying importance of an effective stakeholder engagement process in the oil and gas industry is also underscored by tullow oil plc (2012). tullow has identified its stakeholders to include any individual or group who is impacted by or can influence the direction or outcome of its projects or operations. 2.3. the issue of local acceptability of mncs’ operations in hcs the successful operations of mncs in hcs can be greatly impacted by their level of local acceptability. gardberg and fombrun (2006) have asserted that, the expectations of corporate behaviour from the local population often vary from the industry context of the particular corporation. and that companies operating in the oil and gas industry and other unfamiliar businesses often face greater resistance as local stakeholders may not only misunderstand their business processes and operations but may also fight against the liability of foreigners. companies that are in the oil and gas and other extractive industries whose businesses are considered as environmentally high-risked are likely to attract higher local expectations and attention and are therefore expected to demonstrate higher social responsibility. citing the filing of lawsuits by host country citizens of nigeria and ecuador against chevron texaco in 2003, gardberg and fombrun (2006) further opine that iocs and other mncs in the extractive industries are at a higher risk of being expropriated or nationalised and are therefore required to engage in more socially responsible activities so as to win local acceptability of their operations in hcs. klueh et al. (2009) also opine that, there are specific guidelines regarding the local acceptability of oil and gas projects in the host countries. their analysis sort to address the possible distortions of localization outcomes of oil and gas projects from rent-seeking local stakeholders as far as local content promotion is financial risk and management reviews, 2015, 1(1): 27-52 32 © 2015 conscientia beam. all rights reserved. concerned. for them, the promotion of local acceptability through local content policy promotion is not intended to pick winners and favorites but to focus on the specific public inputs that will carefully balance the structural necessities of oil and gas projects vis-à-vis the likely dangers of publicly induced distortions of such projects. thus, once iocs are adequately implementing their local content and csr obligations in hcs, they are in a position to adequately promote the local acceptability of their projects. gold mining in ghana has offered little employment to indigenous ghanaians, displaced small holder farmers and small-scale miners, led to cyanide spillage into water bodies, land degradation, dust pollution, chronic impoverishment and lost of land due to relocation inter alia (jenkins, 2005; hilson and nyame, 2006). this has led to an increasing level of community resistance to mining activities by some local communities in the country. “in an attempt to ameliorate community resistance to extractive resource activities, multinational corporations (mncs) are increasingly adopting corporate social responsibility (csr) and sustainable development as the cornerstones of community-based activities” in ghana. this is intended to gain local acceptability of their activities in the hcs. in a similar vein, hilson and yakovleva (2007) also noted that, the brawl between local “galamsey” (illegal small-scale mining) operators and the bogoso gold limited (bgl) in the prestea area of ghana is as a result of unfulfilled promises made to develop the local community. the local people are not allowing bgl operate peacefully because the new management of the company have failed to fulfil most of the commitments made to the local people by their predecessors which has waned the trust of the local community totally. in assessing the level of local acceptability of wind farm investments in the greek aegean islands, dimitropoulos and kontoleon (2009) analysed the factors that motivate local communities‟ resistance to wind farm installations in their vicinities. their study reveals that, local resistance to the wind power installations could stem from possible land intrusion, visual intrusion, impact on the ecosystem and noise pollution among others. in a related study, wolsink (2007a; 2007b) argues that the resistance of local communities against wind power installations is an actual expression of their disapproval of unfavourable top-down decisions from policy makers or the lack of incentives from prospective project owners. these are similar to concerns raised by local communities against oil and gas installations and operations in their vicinities such as marine pollution, lost of farm land due to relocation and lost of livelihood from fishing around offshore oil and gas installations. mikkilӓ (2005) provides an empirical analysis of the theoretical framework of the local „acceptability of operations‟ of corporations as a motive behind their corporate social performance (csp). the study points to the location of the company‟s installations, the environmental impacts of its operations and their contributions to local economy as some of the factors influencing the local acceptability of the operations of both national and multinational businesses in hcs. the study also points to the fact that local acceptability of operations of firms is a good indicator of csp thereby establishing a positive correlation between the csp of mncs and the level of local acceptability of their operations in the hc. even though most of these studies regarding the promotion of local acceptability of the operations of mncs in hcs were not conducted directly on the oil and gas industry, the extent to which they help in financial risk and management reviews, 2015, 1(1): 27-52 33 © 2015 conscientia beam. all rights reserved. appreciating the importance of local acceptability in the success stories of iocs cannot be overemphasised. most mncs and especially iocs are increasingly stepping-up their csr activities, practicing good stakeholder engagement and implementing local content obligations as preconditions for gaining local acceptability of their operations in the hcs. cooperation among the numerous stakeholders of the firm is therefore indispensible in managing the diverse stakeholder interests and expectations for mutual gains. an analysis of some theoretical perspectives will be relevant at this stage of the study in order to provide a framework for a better understanding of the context in which this study is conducted. 3. assessing the relationship between ioc’s activities and local acceptability from a theoretical perspective 3.1. the stakeholder theory freeman (2010) is often accredited with popularising the stakeholder theory in his work “strategic management”. according to zu (2009), stakeholder theory is a concept that is used to evaluate the social performance of corporations by analysing their relationships with their diverse stakeholders. freeman (2010) also defines stakeholders as “any group or individual who can affect or is affected by the achievement of the organisation‟s objective”. as a theoretical perspective, (freeman et al., 2010; freeman, 2010) notes that, the tenets of stakeholder theory suggest that if an integrated approach is adopted to analysing the relationships between a particular business entity and the groups or individuals who can affect or are affected by the activities of the business, then there is a better chance of dealing with the problems of value creation and trade, ethics of capitalism and managerial mind-set. stakeholder theory also views the firm as a business enterprise that seeks to aggregate the numerous interests of the various stakeholders or participants for mutual benefits without necessarily prioritising the hierarchy of interests or benefits of the stakeholders (freeman et al., 2004). as noted by donaldson and preston (1995), stakeholder theory can be used in the descriptive/empirical, instrumental and normative contexts. as far as this study is concerned, the stakeholder theory when used empirically will help to describe the kind of interactions that exist between iocs as organisational entities and their numerous stakeholders such as the local communities in their operational areas. in the course of these interactions if the stakeholders of these iocs do not accept the firm‟s corporate behaviour, this might lead to an erosion of the firm‟s legitimacy (mueller et al., 2009) to operate. it should however be noted that the empirical connotation of the stakeholder theory falls short of a complete analysis of the theory itself. this is because an indication of a mere interaction between a firm and its multiple stakeholders does not lend enough credence for a better understanding of the theory. it is not only important to clearly identify who these stakeholders are. it is equally important to clearly identify what constitutes their specific interests, what their expectations are and what benefits could accrue to them in the process. the stakeholder theory when used in its instrumental connotation seeks to address the notion that managers of firms should first strive to address stakeholder needs as a precursor to achieving other desired organisational goals such as shareholder value creation and profit maximisation (phillips et al., 2003). the instrumental underpinnings of the stakeholder theory finds applicability in this study to the extent that it financial risk and management reviews, 2015, 1(1): 27-52 34 © 2015 conscientia beam. all rights reserved. helps in examining the importance of the practice of good stakeholder engagement and management in achieving other corporate performance goals and strategic objectives. the principal focus of interest here is that iocs that engage in good stakeholder management practices will invariably (all things being equal) be more successful in their local engagement, local acceptability, profitability, stability and growth efforts. there are therefore carefully crafted reasons behind the corporate behaviour of firms including iocs as far as managing their stakeholders‟ interests are concerned. even more fundamental to the stakeholder theory is its normative underpinnings. as a normative concept, the theory identifies stakeholders as individuals or groups having a legitimate interest(s) in the operational processes and/or substantive aspects of a firm‟s corporate activity. the theory is also normative in the sense that the interests of the various stakeholders are intrinsic and based on their own merit considerations and not based on the furtherance of the interests of all other stakeholders first. in its normative context, the stakeholder theory is very relevant to this study to the extent that it provides an indication why local communities hold expectations and make demands on iocs that might be contrary to the interests of other stakeholders such as shareholders. the normative connotation of the theory also answers the question why iocs do not simply disregard these intrinsic individual or group interests and expectations but seek to adequately manage them. it is therefore based on these intrinsic value-oriented and interest-based tendencies of the normative aspects of the stakeholder theory that equally makes it managerial. this is because, as a normative concept, the stakeholder theory does not just describe existing relationships or predict cause-effect relationships between corporate entities and stakeholders, it also recommends structures and practices for managing stakeholder expectations and interests for mutual benefits. however, the stakeholder theory has been variously criticised by some writers. jensen (2001) has criticised the theory for its lack of clarity on what constitutes better or worse stakeholder engagement and value creation. phillips et al. (2003) also criticised it for its ambiguity as to what constitutes stakeholder theory proper. phillips, freeman and wicks further opine that, defending stakeholder theory is like shadow boxing partly due to the ambiguity and extensiveness of stakeholder theory itself. it is indeed true that issues of ethical considerations could be very subjective since an action which might be considered as ethically appropriate by an ioc might also be perceived as ethically inappropriate by the local community or environmental activists and vice versa. for instance, porter and kramer (2006) have highlighted that shell‟s decision to sink the obsolete brent spar oil rig in the north sea in 1995 was met with fierce protests from greenpeace and other environmental activists making significant international headlines. these protests are good indicators to iocs that external stakeholders are closely monitoring their activities and will hold them accountable for “unethical” social behaviours with potentially high financial risks for any ioc whose conduct is deemed as ethically unacceptable according to international best practices. however, despite all these criticisms, it is obvious from the many studies conducted so far that the primary aim of the stakeholder is to properly identify who the stakeholders of a firm are, what their interests and expectations are, what their level of influence are and how to properly manage these diverse expectations and interests so as to create mutual gains. it is also obvious that for the stakeholder theory to financial risk and management reviews, 2015, 1(1): 27-52 35 © 2015 conscientia beam. all rights reserved. achieve the primary objective of carefully managing stakeholder interests and expectations in order to create mutual gains for all stakeholders, then all stakeholders must be willing to engage in a cooperative behaviour. the theory of cooperation as it helps in understanding the context of this study is discussed below. 3.2. theory of cooperation cooperation is a way of life by which states, organisations and individuals unite democratically with the aim of creating mutual aid that will enable them get the largest possible access to the goods and services that they need (lyimo, 2012). keohane (2005) sees cooperation as a “mutual adjustment” instead of a simple “common interest” among parties. tjosvold (1984) has noted that, the theory of cooperation has been largely ignored by organisational researchers in their analyses of social interactions within organisations. tjosvold further opines that, cooperation does not only facilitate social interactions, it also increases productivity in businesses through cooperative interactions between organisations and stakeholders. cooperation cannot occur in isolation since it is important in all human endeavours in both bad and good times. even though axelrod (2009) presents the theory of cooperation in the context of individuals making conscious efforts to pursue their own self-interests without the aid of a central authority coercing them to cooperate with each other in the process, the theory also finds relevance in the interactions between corporations such as iocs and their stakeholders including the local communities in which they operate. in stressing on the importance of cooperation, axelrod (ibid) likened the problem of cooperation to two industrialised states with trade barriers erected between their exports. this will defeat the purpose of free trade and the mutual benefits accruing from free trade. both states therefore stand to benefit greatly if these barriers are removed. child et al. (2005) refer to cooperative strategy as “…the attempt by organizations to realize their objectives through cooperation with other organisations rather than in competition with them. it focuses on the benefits that can be gained through cooperation and how to manage the cooperation so as to realize them”. for child, faulkner and tallman, cooperation which is based on trust can also provide easier access into new markets through the cooperation of firms thereby creating mutual synergies. child, faulkner and tallman therefore envisage cooperation as synonymous with the pursuit of competitive advantage. however, cooperation does not only occur among work organisations. cooperation between firms and communities is also core to managing community tasks and social orders. the cooperation theory should therefore be applied to maintain social links between individuals and groups and not be used instrumentally to accord rewards and punishments (tyler, 2011). one of the major tenets of the theory of cooperation is the notion of generalised reciprocity (abell and reyniers, 2000) whereby one party (actor-1) in an endeavour will take the first initiative to act prudently so as to benefit the another party (actor-2) with reasonable expectation that either actor-2 or another actor (actor-3) will reciprocate the kind gesture of actor-1 anytime actor-1 requires it. taking cognisance of the fact that the needs of financial risk and management reviews, 2015, 1(1): 27-52 36 © 2015 conscientia beam. all rights reserved. stakeholders in a corporation will often meet in the near future and also given the fact that these stakeholders have the propensity of recollecting how each stakeholder behaved in a previous encounter, it is of strategic importance for all stakeholders to take cognisance of their past and current cooperative behaviour for the sake of the future. keser and van winden (2002) asserts that, the decision to cooperate or not to cooperate is informed by a party‟s perceptions and anticipation of future interactions and the tendency to engage in a cooperative behaviour is greater where parties anticipate a longer interaction with other stakeholders or parties. keser and van winden therefore perceive cooperation as a reactive and reciprocal behaviour between parties. vivoda (2009) also asserts that the engagement in “cooperative” behaviour between iocs and hcs involves a relatively harmonious relationship as well as compatible interests among all actors in the international oil industry. however zamagni and zamagni (2010) see two conflicting dimensions to the theory of cooperation; an economic or business perspective of the firm which is aimed at maximising shareholder value and a social dimension that is aimed at producing positive externalities for the other stakeholders as well as the entire community. from the literature and the theoretical frameworks that have been reviewed so far, it is obvious that most firms including iocs do not just engage in csr and prudent stakeholder management for their own sake. these undertakings by corporate entities including iocs are carried out with the motive of creating mutual value for the shareholders of the firm as well as its other stakeholders. the practices of csr and proper stakeholder engagement by firms often make local communities easily identify with such firms thereby increasing the firm‟s chances of gaining greater competitive advantage and local acceptability of its operations in the hcs as far as mncs and iocs are concerned. the stakeholder theory and the theory of cooperation as applied to this study therefore provide a better understanding of the context within which the study is carried out. it does so by identifying the factors shaping stakeholder expectations and interests and the need for a cooperative behaviour in an attempt to satisfy most if not all stakeholders and ensure peaceful co-existence. this can be very rewarding if backed by an effective local content implementation commitment on the part of these iocs. 4. assessing local content policy implementation, regulatory frameworks and local acceptability of iocs in host countries closely linked to the concepts of csr and stakeholder management in the oil and gas sector as far as local communities and hcs are concerned is the issue of the extent to which iocs are effectively implementing their local content obligations. ghana has designed its own local content policy framework to help create value for the indigenes in the petroleum sector. however, as noted by hobenu (2011), it is no news that the upstream and most midstream oil and gas activities in ghana are novel to the country likewise the availability of appropriate human capital and technical competencies to adequately engage and take charge of the activities of the financial risk and management reviews, 2015, 1(1): 27-52 37 © 2015 conscientia beam. all rights reserved. petroleum sector. hobenu (2011) has further noted that, in order for ghana‟s local content policy to be fully operational and for the indigenes to adequately profit from the gains and opportunities accruing from the petroleum sector, there is the need to build as many human capacities and technical competencies as possible. gulbrandsen and moe (2005) in commenting on the need to effectively implement local content policies to help curb the “resource curse” particularly in oil-rich developing countries, has admonished iocs to take responsibility for the economic, political and social development of the hcs in which they operate. gulbrandsen and moe have acknowledged that iocs have long engaged in or supported local activities that go beyond their core businesses in both developed and developing countries by sponsoring cultural institutions, providing support for research and science, funding and building schools and hospitals and the provision of portable water to local communities. they further agree with pursell (2001) and qiu and tao (2001) that the emerging concept of local content which reflects an increasing pressure on mncs to maximise local benefits by engaging local workforce and by accessing the services of local suppliers, is equally paramount to the survival of iocs in hcs. kaiser and pulsipher (2007) in commenting on the low participation of the local people in the oil and gas production ventures in kazakhstan noted that one of the reasons for the government‟s decision to regulate the petroleum sector is to build local capabilities through a quota system by ensuring that tender proposals for e&p rights must not only specify the iocs commitments to infrastructural and economic-social advancements of the hc but also their commitment to engage local personnel and make use of the goods and services of local related businesses. by the local content requirements of kazakhstan, kazmunaigas (kmg) which is the national oil and gas exploration and production company is guaranteed the right to be the first to tender on all new oil blocks with a minimum ownership of 50% (subsoil law, 2005; palazuelos and fernández, 2012). this practice of giving greater control of the exploration and exploitation activities of the oil and gas industries to national operators at the expense of iocs could amount to what stevens (2008) refers to as “resource nationalism” whereby states seek to maximise their gains from their natural resources. from the reviews that have been conducted on the above mentioned literature as they relate to local content development and local content policy implementation, it is obvious that hc governments often owe it a duty to ensure that the local population do benefit immensely from the petroleum exploration and exploitation activities in oil and gas producing countries. even though the local content policies of various countries may vary in terms of the proportion of local expertise that have to be engaged or developed as well as their local services engagement obligation, the import or objective of these local content policies remains the same, which is, to create maximum benefits for the local population and to bring about economic development in the host country. this is however not to say that the iocs also do not benefit from low cost of engaging local expertise and trainees and services than they would have incurred if they were to engage the financial risk and management reviews, 2015, 1(1): 27-52 38 © 2015 conscientia beam. all rights reserved. expertise of expatriates. even more important is the wide local acceptance they stand to enjoy which goes a long way to legitimise their operations, enhance their reputation, leverage their competitive advantage and promote their local acceptability against their peers who are not implementing their local content obligations to the letter (steurer et al., 2005). in this regard, an understanding of the various legal, regulatory, institutional and policy frameworks governing the petroleum industry of hcs will equally serve as a reference point for iocs in the conduct of their operations and in their bid to win local acceptability of their operations. 5. tullow oil ghana (tog) tullow oil ghana is a subsidiary of tullow oil plc. formed in the 1980s tullow oil plc expanded its operations by acquiring acreage in united kingdom‟s (uk) north sea, côte d‟ivoire, ghana, uganda, french guinea, mauritania, mozambique and liberia among others. tullow is arguably africa‟s leading independent oil exploration and production company (tullow oil plc). with interests in ghana‟s deepwater tano and west cape three points exploration blocks, tullow is the operator of ghana‟s jubilee oil field which straddles both blocks. in july 2011, tullow increased its stakes in the jubilee field to 36.5% through the acquisition of the 1.75% belonging to the eo group. tullow operates the jubilee field with four other partners namely; kosmos energy who owns 23.49%, anadarko petroleum who also owns 23.49%, the ghana national petroleum company (gnpc) who owns 13.7% with the remaining 2.81% being owned by sabre oil and gas (tullow oil ghana; obeng-odoom, 2012; public interest and accountability committee (piac), 2012). tullow ghana is committed to conducting its local business in line with the high industry standards of top itself by ensuring that ethical, health and safety and environmentally related issues are handled in line with global industry best practices. tullow has the mission of developing ghana‟s oil and gas industry to the best of its ability so as to ensure profitable and sustainable economic growth that will benefit even future generations. 6. methodology and research findings 6.1. methodology this study is based on primary and secondary data following a deductive methodological approach. the study also adopts a case study approach by using tullow ghana as a basis for understanding the relationship between the conduct of csr activities of iocs and level of local acceptability of their operations in ghana. an empirical study for tullow ghana takes place, through the distribution of a questionnaire and administration of interviews, following a qualitative analysis of the findings. qualitative research is aimed at describing and explaining events & experiences, emphasizing “…the understanding of social phenomena in natural settings” (neergaard and ulhøi, 2007). additionally as this study is case study centred, the qualitative method is most appropriate in providing specific information relating to the case study. financial risk and management reviews, 2015, 1(1): 27-52 39 © 2015 conscientia beam. all rights reserved. 6.1.1. sampling the sample size constitutes of 50 people. the selection criteria of participants for this study includes, staff of tullow ghana whose job roles are directly related to external communications, community relations or csr. staff of the ministry of energy in ghana, the ministry of lands and natural resources (mlnr) and the environmental protection agency (epa) are also targeted because of the regulatory, monitoring and assessment roles they play in the management and exploitation of the country‟s natural resources as government institutions. representatives of civil society organisations (csos) are also targeted due to the critical monitoring role they play as the voices and eyes of the ordinary citizen. finally, the study also targeted local chiefs, local community leaders and members of fishermen and fish mongers associations resident in the towns of shama, takoradi or cape three points in the western region of ghana for the past five years. this last group is also targeted because of the critical role they play as leaders and representatives of the local communications or because their sources of livelihoods have been greatly impacted by the oil and gas exploration and production activities as frontline communities to the jubilee field. the selection of respondents for the telephone interviews were based on the respondents‟ possession of extensive knowledge & experience. out of the sample of 50 respondents, 42% were females while 58% were males. a total 92% of the respondents are in the active working group with ages between 18-60 years while 8% of the respondents (basically made up of local chiefs) are above 60 years; 20% had degrees, 14% had masters while 4% had phds (respondents from the government ministries and agencies, tullow, the csos); 4% had obtained hnd/diploma certificates, 28% also attained basic education and 12% had senior high school level qualifications. however, 18% of the respondents had no formal education. 6.1.2. sampling technique for the purpose and context of this study, the purposeful and snowball sampling techniques were employed. the study started with an initial purposive sampling technique but included the snowball sampling technique during the course of the interviews as interactions with some interviewees led to the identification of the african centre for energy policy (acep) and the civil society platform on oil and gas (cspog) as very key csos in ghana‟s oil and gas industry. representatives of acep and cspog were subsequently interviewed. the study adopted an initial purposeful sampling technique because; it does not only provide relevant and accurate information to support the study but it also makes use of few observant and reflective members of the community of interest who know much about the issues relating to the research questions and who are able and willing to share their knowledge (tongco, 2007). 6.1.3. instrumentation/data collection financial risk and management reviews, 2015, 1(1): 27-52 40 © 2015 conscientia beam. all rights reserved. for the purpose of gathering empirical data, the study employed three main data collection tools were employed. these include; questionnaires, face-to-face interviews and telephone interviews. for the purpose of reliability and validity of the data obtained, a sample of ten (10) questionnaires was pre-tested across a section of the target sample. the final questionnaire was administered either through personal contact with respondents, through electronic mail, or by phone interviews. 6.2. presentation of research findings a total of 50 questionnaires were administered to respondents while a total of 4 telephone interviews were conducted as follow ups to clarify and get some further information on particular issues. from the responses that were received, it was revealed that the local communities hold very high expectations not only from tullow (100%) but also from the other iocs (76%), industry service contractors (84%), the government (100%), local chiefs (98%), local community leaders (70%), csos (64%) and members of parliament (92%) among others. it is also evident that, tullow is very popular among the frontline communities of the jubilee field and in the country in general due to the fact that tullow is the lead operator of the unified jubilee field and hence its presence is more visible in the country. even though a majority (84%) of the respondents confirmed their knowledge of some csr programmes and activities in the country and especially among the frontline communities, most (82%) of these respondents however indicated that they have not personally benefited from these csr programmes even though their communities might have benefited from them. local expectations in the areas of job creation (100% response), skills and local capacity development (100% response), granting of scholarships (98% response), provision of social amenities infrastructural development (100% response), good environmental practices (96% response), provision of fishing equipments (90% response), and the payment of royalties (92% response) among others are still very high. the local people however expressed dissatisfaction with the level of tullow‟s community engagement (38%), lack of jobs for indigenes of the frontline communities in the oil and gas industry (96% response), environmental pollution through minor oil spillage and gas flaring (100% response), poor infrastructural development (98% response), ban on fishing around offshore oil and gas installations (100% response) and disregard for cultural, religion beliefs and practices (100% response) and the increasing sexual relationships between the wives and daughters of the local people and some staff of tullow and other iocs (with 62% response) inter alia as some of the things that could affect tullow-local communities‟ coexistence. even though a total of about 62% of the respondents confirmed that the csr activities that have been implemented so far by tullow in the country have been comparatively effective, a greater percentage (between 72% to 96%) of the local communities believe that tullow could institute and undertake more csr programmes in their communities in order to drive more benefits for them and their communities. this general dissatisfaction towards tullow‟s csr activities and programmes (with 82% response) reflects in the expression of low financial risk and management reviews, 2015, 1(1): 27-52 41 © 2015 conscientia beam. all rights reserved. acceptability (with about 62% response) of tullow‟s operations in the country. however it is worth noting that, tullow started oil production in ghana only less than three years ago and has barely started the implementation of its csr programmes. as a corollary, it is early days yet to try to establish a true picture of tullow‟s csr performance so far vis-à-vis its level of local acceptability. it will therefore be interesting to investigate further in the near future in order to establish the kind of relationship that will exit between the realignment and pursuit of tullow‟s csr activities and the level of its local acceptability as tullow intensifies its csr activities in the local communities and the country at large. 7. analysis of research findings 7.1 impact of the socio-economic characteristics of respondents and study area on expectations the information obtained on the socio-economic characteristics of respondents and the study area revealed that, out of the 50 respondents, a total of only 38% had acquired either a degree, masters or phd level qualification while a majority of the respondents (40%) only had basic school level education or had no formal education at all (18%). it is noteworthy that all the 38% with degree level education are workers of tullow, the government sector, csos or some private companies that are mainly based in accra, tema or takoradi and not the typical local communities of cape three points and shama. again the total of 58% of the respondents who had only basic level education or no formal education at all are also not engaged in any formal employment unlike the 38% with higher educational qualifications who are gainfully employed. a majority of the people who constitutes this 58% are either engaged in small scale fishing or subsistence farming with very low incomes. meanwhile all these respondents are in the active working age bracket of 18-60 years. it is worth noting that, ghana‟s oil industry is not only novel, but also the industry is very technical and technology driven and most of these local populations either lack basic education or the requisite technical qualification to properly understand the technical aspects, high risk, the capital intensive nature of the industry and possibly land jobs in the mainstream oil and gas sector. given the low level of education of the local people, most of them do not understand the contractual issues involved in oil and gas licensing and production sharing contracts (pscs). public education should therefore not shy away from educating the ordinary ghanaian to clearly understand the contractual agreements between the government and iocs and what percentage of the proceeds the government is entitled to. this will help demystify the notion that government is collaborating with iocs to deprive them of their most pressing needs. as noted by hilson and yakovleva (2007), the western region has been the hub of the country‟s gold, diamond, bauxite and manganese mines even prior to the oil discovery however the region has benefited very little from mining activities and as such their expectations and fears about prospects from oil activities for the region are firmly grounded. financial risk and management reviews, 2015, 1(1): 27-52 42 © 2015 conscientia beam. all rights reserved. 7.2. managing local expectations from the study it was revealed that there are very high and sometimes outrageous local expectations towards the oil and gas industry as noted by the external communications and community relations manager of tullow ghana. it was also revealed that, the government and tullow in particular have embarked upon series of public consultative forums in an attempt to educate the local people about the operations and technicalities of the oil industry in ghana, what opportunities that are available for them and the contribution they could make to the development of better policies for the industry in order to create mutual benefits. in effect, the level of expectations of the local communities for the provision of jobs, social amenities and capacity and skills development among others are very high. once these expectations are not fulfilled, any attempt to deprive them of their main sources of livelihoods from fishing and farming as a result of the oil and gas exploration and production activities will most likely be met with an appreciable level of community resistant. as noted by idemudia and ite (2006) and gyampo (2010), the incessant conflicts in the niger delta region of nigeria are as a result of the poor management local expectations of the people in the area. government and iocs should therefore be guided by the niger delta experience by effectively engaging the local communities on regular basis so as to create peaceful coexistence and local acceptability of the operations of iocs. 7.3. promoting tullow-community relations through effective engagements the issue of effective community and cso engagement in key decision making processes is still a tussle. whereas a section of the local communities and some csos are claiming that they are hardly involved in the decision making processes of some of the activities of tullow that directly affect them as local communities (e.g. ban on fishing around the fpso), the government and tullow still maintain that there has been an effective engagement of the local communities in most of the key consultation and decision making processes way back before the oil production began in 2010. as noted by gyampo (2010), even though the government and tullow did very well by organising the national consultative forums prior to the oil production, the low involvement of csos and the sidelining of some political parties from the process by the government is regrettable. gyampo (2010) further opined that, “if indeed, civil society organizations are the true representatives of a cross section of the ordinary citizenry, then their exclusion from the processes implies the sidelining of the views of the ordinary people….anything short of this means that the nation is fully prepared and may be heading for a problem”. whereas the local communities also believe that they have being some level of disregard for their religious and traditional beliefs, norms and practices, tullow still maintains that there are no such occurrences and that some of those beliefs and practices (e.g. local ban on going to sea to fish on particular days) are more scientifically proven than being upheld as beliefs and cultural financial risk and management reviews, 2015, 1(1): 27-52 43 © 2015 conscientia beam. all rights reserved. practices (interview with a tullow staff, name withheld). it should however be noted that issues of religious beliefs, traditions and cultural practices are very sensitive and any disregard for them may create disaffection and mare iocs relationships with the local communities. this view is supported by zandvliet and pedro (2002) assertion that, the perceptions, expectations and sociocultural values held by the local communities are very crucial in shaping their relationships with iocs. an effective local engagement scheme is therefore necessary in ensuring that tullow understands the needs, expectations and cultural practices of the people and also for the people to understand tullow‟s core business and operational activities so as to create mutual coexistence. 7.4. relationship between the pursuits of csr and local acceptability the study reveals that 58% of the respondents from the local communities do agree that tullow has undertaken some forms of csr activities in their own communities. 33% of the respondents from the local communities also agree that other communities other than theirs have benefit from some of tullow‟s csr programmes since they started operations in 2010. however, 9% of the respondents from the local communities claim that neither they nor their communities have benefited of any csr programme of tullow. this category of respondents also claims that they have no knowledge of any community that has equally benefited. the implication of these responses points to the fact that the people at the very lower grassroots levels have been ignored not only from community engagement sessions but have also been marginalised when it comes to the distribution and allocation of csr benefits. a respondent from one of the fishermen groups at cape three points intimated that; the oil companies and even the government hardly involve us in their discussions and decision making processes. they have even made a law that bans us from fishing anywhere close to the fpso. as a result, there are very high levels of disaffection between these local people and the activities of iocs in the area and the level of granting of social licence to iocs to operate is on the low side. 8. conclusions, limitations and recommendations 8.1. conclusions from the onset, this study sets out to contribute to the debate on how to manage local expectations in the oil and gas industry as well as the relationships that exit between iocs and local communities in their attempt to promote local acceptability of their operations in hcs. the outcome of the study was also to provide a guide for iocs and their stakeholders in designing and implementing appropriate and acceptable global integration and local responsiveness strategies. from the research findings the following conclusions were drawn; financial risk and management reviews, 2015, 1(1): 27-52 44 © 2015 conscientia beam. all rights reserved. 8.1.1. managing local perceptions, expectations and demands the formation of local perceptions and expectations towards new oil producing countries such as ghana cannot be overemphasised. gardberg and fombrun (2006) noted that, “the particular philosophical, cultural, and economic features of the national system that the global company is entering heavily influence expectations about its role in the local community”. however the extent to which these perceptions and expectations are adequately managed is the first step at establishing very good relationships between iocs and the local communities. from the study, it is evident that some public consultative forums were conducted across the country to educate the citizens on the oil find, assess their perceptions and expectations about the nascent oil and gas industry and to solicit their views and inputs towards the development of workable policies for the industry. this first attempt was a plus. however, there seems to be very little work currently ongoing with regards to continued effects aimed at managing these expectations and perceptions even as oil production is ongoing. even where there appear to be some level of continuous education and sensitisation going on, the extent of penetration of this education does not go any further to the very people at the grassroots. these discussions only end with forums involving members of parliament, dces, local chiefs and some local community leaders but the information transmitted at such forums do not often transcend from these leaders to the very people at the grassroots. these local people are still not sensitised enough with regards to the contractual agreements between government and iocs and hence are consistently demanding that some percentage of the oil proceeds should be allocated to them since they are more impacted by the oil exploration and production activities without getting to understand that the iocs are already paying what is due the entire country to the central government. these people need to understand that apart from the community development plans and csr activities of iocs, it is the responsibility of the government to allocate to these frontline communities, a share of the revenue that is due them and in accordance with the governing laws of petroleum revenue management in the country. it is therefore important not to neglect the continuous management of the perceptions and expectations of citizens and the people of the western region in particular. this is because the people of the western region have already had a bad experience with mining sector where almost all the mining communities within the region have not recorded any significant socio-economic advancement. road networks and other infrastructural development as well as social amenities are still poorly developed despite the fact that mining activities have been ongoing in the region for decades now. the local people are also being guided by the niger delta experience and are therefore raising their perceptions and expectations of the industry and which needs to be properly managed. this is paramount because, idemudia and ite (2006) have intimated that the continuous conflicts and unrests in the niger delta region of nigeria are as a result of lack of management of local expectations within the region. financial risk and management reviews, 2015, 1(1): 27-52 45 © 2015 conscientia beam. all rights reserved. 8.1.2. achieving local acceptability through csr engagements even though tullow ghana is doing relatively well as far as the implementation of its csr programmes and obligations are concerned, there is a general sense of dissatisfaction with regards to the level of local stakeholder engagement by tullow. for instance in august 2013, tullow held a day‟s workshop on oil spillage management for the frontline communities of its operational area in the jomoro district of the western region. at the same workshop, nana epilla sam ii retorted that, the oil exploration and production business activities did not have a positive influence on their lives and implore iocs to do more to better their lives (ghana news agency, 2013). however, the people still complain that they are hardly involved in the major decision making processes of some of the activities and programmes that tullow is carrying out in their communities or other parts of the region that have a direct impact on their own livelihoods. fishing is the main occupation of the frontline communities of cape three points, shama and takoradi to some extend and as such any attempt to deprive them of their main source of livelihood will not go down well with the local people. proper engagement with the local people to educate them on the impact of some decisions such as the need for them not to fish around the fpso and other oil and gas installations offshore is important. it is indeed true that iocs and tullow for that matter might have outlined its priority areas as far as its csr activities and obligations are concerned. however it is equally important to engage the very beneficiaries of these programmes in order to identify what their most pressing needs are and how best they can fit into tullow‟s csr programme design. if tullow was adequately engaging all stakeholders including the local communities, then dces would not have expressed surprise about some of the csr activities of tullow that are ongoing. even if dces who are at the frontline of the interactions with these iocs more than the ordinary person, are unaware of some of the activities that are supposedly meant to benefit their constituents, then local communities might be right in their assertion that they have been neglected or poorly engaged in some of these decision making processes that impact directly or indirectly on their lives. this is very necessary to the extent that, “companies whose core activities involve significant financial, production, or environmental risk are expected to demonstrate higher levels of responsibility to the local communities in which they participate” (gardberg and fombrun, 2006). 8.1.3. general disaffection towards operations of iocs in the country from the data obtained from the three local communities (cape three points, shama and takoradi), there seems to be a general disaffection between the locals of the frontline communities and iocs. they are generally dissatisfied with the lack of employment opportunities for the local people within the industry, bad road networks, lack of social amenities in the area, influx of people into the region, high cost of living, increase in social vices such as armed robbery, prostitution, teenage pregnancies and frequent abortions, lost of their source of livelihood financial risk and management reviews, 2015, 1(1): 27-52 46 © 2015 conscientia beam. all rights reserved. through fishing, and the pollution of the environment inter alia. it is however important to stress that these local frustrations have not degenerated into any form of direct confrontation between the local people and the iocs unlike the occurrences in the niger delta region where the workers of iocs are being heckled and kidnapped on the daily basis. it is also worth noting that, even though the iocs and tullow might not have satisfied every single need, expectations or perceptions of the local communities through their numerous and varied csr programmes in some of the local communities so far, there are good signs that tullow and its jubilee partners are in to tell a positive story that is totally different from that of the niger delta region of ghana‟s sister country, nigeria. even though tullow maintains that it is enjoying very high level of local acceptability in ghana, the local people are divided on this position but fail to clearly demonstrate any evidence of protest or confrontation against the operations of tullow or any other ioc in the country. it is just a matter of maintaining peaceful co-existence. the study therefore contributes to existing literature because it establishes a positive relationship between good csr practice and local acceptability, providing guidelines how local expectations can be properly managed, how iocs can design and properly implement their csr obligations and the extent to which the pursuit of csr activities by iocs can help promote their local acceptability in ghana. 8.2. limitations of the study even though the study is aimed at assessing the csr strategies of iocs in promoting local acceptability in ghana, it is however limited in its scope to tog, the major international oil exploration and production company in ghana. a comparative analysis between the csr strategies of tullow and other iocs operating in ghana and how they impact on their local acceptability could however be a subject matter for further study. furthermore, the production of oil and gas in commercial quantities in ghana is barely three years old and as such obtaining specific literature on the ghanaian context is another challenge faced by this study. while it might be desirable to engage as many participants as possible in a study, it is practically impossible to study entire populations hence the need to have a representative sample of the target population to provide relevant information for the study. as stated by marshall (1996), “…choosing a study sample is an important step in any research project since it is rarely practical, efficient or ethical to study whole populations”. this is why the study limited the respondents to the selection of some key informants from; the moe, mlnr, and the epa to solicit views from a government‟s perspective; some staff of tullow ghana who provided their views from an ioc‟s perspective; the cdd, the acep, the cspog and the isodec to represent the views of csos and ngos; and the views of chiefs, local financial risk and management reviews, 2015, 1(1): 27-52 47 © 2015 conscientia beam. all rights reserved. community leaders, fishermen groups and fish mongers associations as representatives of the local population of cape three points, takoradi and shama as some of the adjoining coastal settlements who are directly impacted by the oil and gas exploration and production in the western region of ghana. furthermore, even though the study revealed that there is low penetration of the csr programmes of tullow particularly among the frontline communities and reflection of low acceptability of tullow‟s operations in ghana, the timing of this study also constitutes another limitation in arriving at the results. this is because, tullow started oil production in ghana only less than three years ago and has barely started the implementation of its csr programmes. 8.3. recommendations 8.3.1. managing perceptions and expectations despite all the noble efforts that the government and tullow has put in towards sensitising and managing local expectations, the fact still remains that ghana‟s oil industry is not only novel, but also the industry is very technical and technology driven and most of these local populations either lack basic education or the requisite technical mindset to be able to properly understand the technical aspects, high risk and the capital intensive nature of the industry. a majority of the populace also do not understand the contractual issues involved in oil and gas licensing and production sharing contracts (pscs). public education should therefore not shy away from educating the ordinary ghanaian to clearly understand the contractual agreements between the government and iocs and what percentage of the proceeds the government is entitled to. this will help demystify the notion that government is collaborating with iocs to “steal” the oil revenue instead of addressing their most pressing needs. already the western region was the hub of the country‟s gold, diamond, bauxite and manganese mines even prior to the oil discovery however the region has benefited very little from mining activities and as such their expectations and fears about prospects from oil activities for the region are firmly grounded. 8.3.2. effective public education on what constitutes local content and local participation proper from the interviews, responses and observations made during the field work, it was revealed that there was a general lack of understanding particularly among the local people with regards to what constitutes local content and local participation proper. it is indeed true that the government‟s local content and local participation approach is still undergoing parliamentary debates and subsequent presidential assent to be passed into law. however, the level of public education and public awareness of what the policy means is being clearly misconstrued by the ordinary ghanaian and more so the people of the western region. from the group discussions, it was obvious that about 95% of the local communities either misunderstand or misapply the concept of local content. instead, they understand local content and local participation to mean, financial risk and management reviews, 2015, 1(1): 27-52 48 © 2015 conscientia beam. all rights reserved. the considerations for offering employment, award of service contracts, allocation of csr programmes and the award of scholarships inter alia should be offered first and foremost to the indigenes of the western region before any other ghanaian. they fail to understand that, the fact that oil and gas were discovered closed to their region does not give them rights of ownership or title rights to the petroleum resources which invariably belongs to all citizens of the country as stipulated in the 1992 republican constitution. they also fail to understand that by local content and local participation, the policy aims at promoting the engagement of indigenous capacities and businesses of all citizens in the oil and gas value chain with no prejudice to ethnicity or region of origin or proximity to the oil bearing region. in order to properly manage local perceptions and expectations, the government, iocs, csos, parliamentarians, local chiefs and community leaders who have a good understanding of what the government‟s policy on local content and local participation actual means, should help educate the local communities as such. these tendencies and misinterpretations are divisive and ought to be properly managed before they degenerate into what is called resources generated ethnic conflicts. during the interviews, a fish monger at takoradi intimated that “our own people are not getting employed by these oil companies. instead, foreigners from northern ghana and the volta region are taking up all the jobs”. the external communications community relations manager of tullow remarked in an interview that, tullow is committed to implementing ghana‟s local content policy to the letter, but that as a corporate organisation, tullow will not compromise on competence and capabilities in favour of ethnicity. 8.3.3 promoting local acceptability of iocs and establishing long-term relationships. from the study it was gathered that an effective local community engagement in most of the discussions and decision making processes that directly affect the local communities; the implementation of an integrated csrs programmes by iocs that will foster socio-economic advancement; adherence to environmental, health and safety (ehs) standards; respect for religious and cultural beliefs values, norms and practices inter alia are some of the things cherished by the local communities and which will determine their level of acceptability of the iocs in the country. issues of culture and religion are very sensitive and should not be downplayed. periodic and effective engagement of the local people in discussions and decision making processes in order to acquaint themselves with some of the csrs and operational activities of iocs that directly impact upon the lives of these local people should be promoted. this will enable them accept and identify with such programmes reflecting their particular needs. this position is clearly supported by gardberg and fombrun (2006) assertion that, the extent to which local communities are able to clearly indentify and familiarise themselves with a particular company‟s operations could 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empirical evidence form chinese enterprises. berlin heidelberg: springer-verleg. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.tullowoil.com/ghana/index.asp?pageid=61 http://www.tullowoil.com/index.asp?pageid=13 http://www.cdainc.com/cep/mpublications/reports/visits03nigeria.pdf 88 © 2020 conscientia beam. all rights reserved. decision making of charity fund allocation: evidence from hong kong chun cheong steve fong school of business, macao polytechnic institute, macau sar. abstract article history received: 18 september 2020 revised: 13 october 2020 accepted: 19 november 2020 published: 22 december 2020 keywords social return on investment charity funding financial decision-making funding principles project selection guidelines project approval guidelines. jel classification: l31, m14. this article aims to study the financial decision-making mechanism by charity funding organizations in hong kong using case study approach. as charitable resources are limited, social return on investment (sroi) has become a commonly accepted approach by charity foundation trustees. lo kwee seong foundation in hong kong is one family supported charity foundation to exercise such kind of charity funding decision-making mechanism. funding principles and project selection guidelines were first illustrated. professional screening and selection processes were also detailed. then three approved funding proposals and another three rejected funding proposals were illustrated to demonstrate the considerations when the foundation handled the funding decision process. these cases provided evidences to explain practical issues of how sroi contributed to the charity fund allocation decision. impacts of other non-financial, especially behavioral decision-making concerns were illustrated. limitations of the case study approach were also discussed to reflect the practical concerns in company finance data collection. contribution/originality: the paper contributes the first logical analysis of the implementation of social return on investment (sroi) for financial decision-making in charity funding organizations in hong kong. a case studies of both successful and unsuccessful projects have been deployed to investigate the phenomena within the real-life context. 1. introduction financial resources for social services have always been scare in most countries. this especially applies to regions with lots of socio-economic uncertainties as hong kong. rational and systematic decision-making of resources allocation is much demanded in almost all sectors. in non-profit making social service sector, charity funds are increasingly drawn to use equitable methods to evaluate social impact of projects supported. profitability is not the concern as of profit-making organizations. fair and justified social impacts are of the prime concern. social return on investment (sroi) is one common method for funding evaluation and resources allocation effectively and efficiently (arena, azzone, & bengo, 2015). it assigned monetary values to social results, quantified in financial terms broader social benefits combining quantitative and qualitative approaches. for charity donation decision, three charity supporting styles were classified. krosch, figner, and weber (2013) suggested that people made decisions either “with the heart”, “with the head” or “by the book”. in charity organization context, decision with the heart referred to the charity foundations compared various helping projects and selected the one that made them the most emotionally touched or where they felt more compassion. it was the financial risk and management reviews 2020 vol. 6, no. 1, pp. 88-98. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.88.98 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0002-3507-9674 https://www.doi.org/10.18488/journal.89.2020.61.88.98 financial risk and management reviews, 2020, 6(1): 88-98 89 © 2020 conscientia beam. all rights reserved. emotional reason. decision-makers‟ preferences and interests were likely to play roles in the funding decisions. or the projects, the schools or hospitals maintained neighborhood relationships with the charity foundation families. they exercised much kinship and/or personal relationship so as to persuade the charity foundations. decision with the head meant the charity foundations attempted to evaluate the cost and benefit of the various helping projects and selected the one that was supposed to exert a greater impact. it dealt with the efficacy reason (cryder, loewenstein, & scheines, 2013). systematic and rational project evaluation, selection and funding schedules were to be executed. decision by the book meant the charity foundations asked themselves to what extent they have the responsibilities or obligations to support the project, and selected the project where they had relatively higher responsibilities to facilitate. this dealt with the responsibility-reason (winterich & zhang, 2014). to certain extent, funding decisions related to the decision-makers‟ responsibility awareness of the projects. some other justifications were feasible for selecting one helping project over another. for instance, charities might choose the project they regarded that would improve their public image the most, the project where the need seemed to be greater, or the project they considered would be neglected by others. in short, the three types of justifications could be identified. they related much to the emotional, efficacy and responsibility reasons. people were supposed to provide various good reasons for own choices in various helping dilemmas, and that each kind of supporting reasons (emotional, efficacy and responsibility-reasons) could be linked to one of the three helping dilemmas respectively. 2. literature review 2.1. guidelines for charity donation funding approval for charity donation funding approval, erlandsson, björklund, and bäckström (2017) focused on three types of donation: 1) the identifiable victim effect, 2) the proportion dominance effect, and 3) the ingroup effect. identifiable victim effect took place when one had to distribute resources between a project where there was a named and pictured identified victim and a comparable project without any identified victim. it inferred that counting a victim‟s name and background information would attract more donations. proportion dominance effect happened when one had to distribute resources between a high rescue-proportion project and a similar low rescue-proportion project. with such effect, people were generally more motivated to attempt to support a fixed number of victims if these were part of small reference group (e.g. eight out of ten could be supported). ingroup effect took place when one had to distribute resources between a project helping ingroup victims and a comparable project serving outgroup victims. corresponding to the ingroup effect, recipients who came from the donor‟s ingroup achieved more support than recipients from the people from outside). 2.2. charity fund evaluation and allocation using social return on investment (sroi) efficacy reason was commonly accepted for allocating charity foundation resources from organization viewpoint. to ensure continuation of funding a charity project, value for money (vfm) was often an essential concern. not-for-profit organizations (npos) and their funders increasingly preferred to use the social return on investment (sroi) method to measure the social impact of projects, organizations, or organization networks (maier, schober, simsa, & millner, 2015). there were two major merits: first, sroi analysis could provide legitimacy to npos or their funders, and second, it helped allocating resources effectively and efficiently. sroi was a simple financial assessment of socio-economic value which applied accounting principles using a stakeholder approach. it was a mechanism based on social generally accepted accounting principles that could be adopted to aid managing the social, economic and environmental outcomes. sroi was based on the idea of assigning monetary values to social and environmental results, quantifying in financial terms boarder social benefits combing both quantitative and qualitative approaches (new economics foundation (nef), 2007). there were four important areas for concern. the first was the stakeholder commitment, where the stakeholders‟ objectives financial risk and management reviews, 2020, 6(1): 88-98 90 © 2020 conscientia beam. all rights reserved. acknowledged were essential to the sroi development. the second was the materiality, where the analysis concentrated on the areas treated as significant by the stakeholders. the third was the impact map that stated cause and effect chain start from inputs to outputs, outcomes, and impacts; developing a path to recognize how the company enacted change, thereby accomplishing its work. finally, the increase of weight computed the amount of outcomes that would have happened despite what the company spent was concerned. the basic form of sroi ratio was: present value of impact / value of inputs illustrated in so and staskevicicus (2015) there were two kinds of sroi. the first was evaluative, which was conducted retrospectively and based on actual outcomes that have already occurred. the second was forecast, which predicted how much social value would be generated if the activities met the intended outcomes. this was practically useful in the planning stage of an activity, or if the existing data were insufficient to help calculating an evaluative sroi. in measureable terms, sroi compared the net benefits of a project to the investment required, similar to the return on investment (roi) measure adopted in accounting (cryder et al., 2013). for calculating sroi, emerson and cabaj (2000) stated that net benefits were treated to be two types of cash flow: net income (profit) and net savings (government savings such as additional tax revenue and reduced welfare spending), less any donated funds. the time length was supposed to be about five years, returns were then reduced to present values and compared to the funds invested to estimate sroi. the major strength of sroi analysis was based on its ability to afford „„business-like‟‟ authoritative support. it helped improving the effectiveness and efficiency of resource allocation. the npo sector‟s long-term justification did not depend on its business-like authoritative support, but on the value it created for society by providing valuable products and services, by being an effective supporter for those whose voice would otherwise not be paid attention to, and by providing a room for society structure and the expression of shared values. firstly, sroi could be a way to support a society that was oriented towards social impact. the negative situations of profit making businesses as damages to the health, environment, and employees‟ family lives may be unavoidable. sroi analysis could be an opportunity for ngos to communicate to profit making companies and government units in „„business-like‟‟ language so as to demand equal treatment with the room for movement in public debate about the value of ngos. the second suitable use of sroi analysis appeared when npos needed to inform the public which referred to simple forms of information, who focused much on finance, or who were not so aware of npos‟ social value. lastly, sroi expresses social impacts in financial term and enables npos to communicate with charity foundations, regulators, auditors, and similar groups that act traditionally under a financial paradigm. with sroi, npos can shift the focus from traditional input/output measures to social impacts. in addition, sroi can be used to inform the npo‟s employees and volunteers about the value of their work. the actual practices of sroi for charity fund project selection can be illustrated through a case study of charity foundation in hong kong. 3. method a single case study was adopted to collect data and to analyze the financial decision-making mechanism of a charity funding foundation. it was a single subject research that delivered statistical framework for making inferences from quantitative case-study data from a specific organization. it investigated a phenomenon within its real-life context. a case study does not essentially have to be just about one single entity, as there may be many observations within a case (many individuals, projects and entities across many time periods). the merit of the adoption of a single case study is it provides detailed mechanism of how a business financial decision is initiated and processed. among the 18 charity foundations in hong kong (zeshan, 2020) lo kwee seong (lks) foundation was contacted successfully and hence invited for case study. foundation vision, mission, operation routines, donation funding decision-making mechanism, and selected funding projects were detailed for study. financial risk and management reviews, 2020, 6(1): 88-98 91 © 2020 conscientia beam. all rights reserved. 4. discussion and results 4.1. case study lo kwee seong (lks) foundation lo kwee seong (lks) foundation was a charity fund established by the founder of soya bean drink, vitasoy, lo kwee seong, in 1991 in hong kong. the mission was to enrich lives of the less privileged through the spirit of philanthropy in different spectrums. this echoed the mission statement of zeshan (2020) “to improve the lives of the less privileged in world through the family‟s spirit of philanthropy.” the further elaborated mission focuses were: to promote vocational and technical education, general education, learning culture and the arts; to give financial assistance for the furtherance of health and relief of poverty and sickness; to promote social welfare and support charity; and to support hospitals, vocational or technical schools, home for the aged and art museums for the benefit of the public. for the public benefits, the wide scope objectives of this charity included support of mainly six areas: 1) education and vocational training for the people in need. 2) culture and art. 3) relief of poverty, sickness and distress. 4) facilities like home for the elderly, schools, hospitals. 5) academic, medical or scientific research. 6) social welfare and charity. the chain of social impact started from providing education for nurturing students with knowledge and techniques; nurturing students to be cultural; helping the community to relieve the weak communities with the use of knowledge in short-term, then building facilities for continuing the aids in medium-term, and finally funding research for improving the society on long-term basis. for maximizing the social benefits, such charitable settings needed to be reinforced by the foundation management, then to be recognized in the community and hence to gain social support. comparing to the other 18 charity foundations in hong kong (zeshan, 2020) lsk foundation focused on high quality and sustainable educational or vocational training projects. for sustainability and quality, social return on investment (sroi) was employed to justify the charity funding decision. 4.2. social responsibility executed through charity fund projects supported lo kwee seong said, "well-off society enjoy the best drink supply, so take care of those who are not so lucky, especially among school children and workers, becomes his responsibility." (cai, 1990). the start of lo kwee sseong (lks) foundation related to the story of vitasoy, "the drink of the poor" began in 1940. during the time of the world war ii in hong kong, lo kwee seong, the founder of vitasoy, developed a nutrient-rich, vitasoy and sold it at an affordable price for contributing to the hong kong people. this enabled the public to get enough nutrients and to establish a healthy life. in 1991, lo established lo kwee seong (lks) foundation with major objectives of supporting education; culture and arts; poverty, distress and sickness relief; construction of schools and hospitals; research for the public; social welfare and charity support. there are overlaps among these several objectives. from positive and synergetic viewpoints, these objectives closely correlate with one another as shown in figure 1. the social benefits are hence maximized. 4.3. trustee board for management similar to that of other private family foundations (zeshan, 2020) a trustee board comprising 10 lo‟s family members was established to operate lo kwee seong (lks) foundation in 1991. they handled charity project funding decision through clear and significant majority rule. the daily operation work was in charge by the foundation general manager. his routine work was to collect funding application and to screen individual application basing on the established framework as stated in table 1 below. most of the data and information of financial risk and management reviews, 2020, 6(1): 88-98 92 © 2020 conscientia beam. all rights reserved. this case study were collected from more than five interviews with the general manager, and each interview lasted for over an hour. figure-1. objectives of lo kwee seong (lks) foundation. table-1. important application guidelines – lo kwee seong (lks) foundation. application stage action 1.project idea the foundation general manager first meets the applying project leader to evaluate if the project concept may match the objectives of the long-term plan priorities and target towards people in need. 2.screening the general manger screens the project to check project quality, project nature, pilot execution track record and strategic fit partners. the project leader is required to explain why the government and other charity bodies do not fund, then in return the project leader seeks funds from the foundation. 3.coaching the project team leader seeks advice from the foundation general manager, develops selfexplanatory project plan, and prepares proposal presentation covering key pitching points. 4.project plan it should highlight background and strength of applicant partner, project goals, social issues, project contents and track record of execution, matching of target groups in need, conservative complete financial analysis, key performance indicators, expected social returns, alternative source of funders, requested donation amounts and recognition to lo kwee seong (lks) foundation. from the general manager, elson law, several charity project leaders had been guided by him after the second stage screening process. he handled the third stage coaching which was cooperative in nature for guiding the project leaders in project plan and presentation writing. he wished to collect supporting evidences and data from the applicants about budget and coverage, and value of project on social return on investment. once the applicants felt at risk of missing budget or deadline, the general manager should communicate this budget risk to the applicants. for the project applicants, adjusted future work to reflect any additional information known should be notified to the foundation. for instance, when the project was created, many of the activities further into the future may had been vague and placed in the project at a high level. on a monthly basis, this work needed to be defined in greater detail and reported to the foundation. financial risk and management reviews, 2020, 6(1): 88-98 93 © 2020 conscientia beam. all rights reserved. 4.4. approval guidance before the death of lo in 1995, four funding approval guidelines were established for the trustee board about charity project funding decisions. details are illustrated in table 2. table-2. approval guidelines – lo kwee seong (lks) foundation. approval guide action 1. due diligence for significant donation, the charity project leader is to be invited to present the project details to trustees. 2. approval trustee board voting decision: the general manager circulates recommendation letter in addition to proposals for seeking clear and significant majority approval among the trustees. 3. expected timeline from project idea to final approval, it may vary from 2 months to 6 months, important projects will likely be scheduled to be approved during the annual meeting in early september every year. 4. donation agreement main project items summary, interim reports, payment terms and attached proposals for reference will be executed and cash funds can be arranged in 2 to 3 stages for projects approved. this illustrated operational systems and procedures for funding application and approval which showed a significant contrast with erlandsson et al. (2017) that dealt with funding approval norms and preferences. 4.5. the foundation five-year plan from elson law interviewed, the foundation plan for a five-year duration 2019-2023 had been highlighted in figure 2 as follows: figure-2. 2013-2023 plan principles. seven principles of the charity funding decisions were listed out:  balanced and diversified beneficiaries.  prioritization of social needs.  target set to people in need.  cost effectiveness.  financial sustainability. financial risk and management reviews, 2020, 6(1): 88-98 94 © 2020 conscientia beam. all rights reserved.  execution by quality strategic partners.  improving cause of social issues. health, education, promotion of strategic philanthropy, human services and social development in hong kong are areas to be provided balanced and diversified beneficiaries. coverage of donation should be spread among various social groupings in needs. prioritization of social needs depends on the needy situation of the society in respective years of project application. this may change with reference to the government social welfare policies. the target is set to people in need, cost effectiveness and financial sustainability relate to the adoption of social return on investment (spoi) for project evaluation. other financial decision-making concerns are also required to be considered in the framework. execution by quality strategic partners is monitored in annual charity funding approval in charity donation. annual review and funding re-approval are scheduled for continuality and sustainability. finally, improving cause of social issues is the long-term goal of the charity endeavor. continued improvement is always the underlying mechanism. good utilization of scarce financial resources, balanced and diversified funding to beneficiaries, equitable funding of project in need, execution by quality strategic partners, and of course cost effectiveness and financial sustainability were the major concerns. following the above plan principles, elson law disclosed the following areas for supporting people in need in seven groups as shown in figure 3. figure-3. key target people in need to support. as a qualified accountant with over twenty years of managerial role in financial management in multi-national company, elson law added that he based on the following judging criteria to screen various funding projects applied:  objectives of trust deed.  financial affordability.  emphasis on vocational training.  emphasis on medical research.  soya bean drink research.  quality project nature.  sustainability in long term.  “lo kwee seong” naming right of building donated.  governance of project resources spent. after screening by the general manager, he collected data and proposals and put forward to the trustee board for funding decision as detailed in table 2 above. from the interview and the follow-up data and information http://www.zeshanfoundation.org/hk/en/project.php?cate=health http://www.zeshanfoundation.org/hk/en/project.php?cate=promotion%20of%20strategic%20philanthropy http://www.zeshanfoundation.org/hk/en/project.php?cate=human%20services%20and%20social%20development%20in%20hong%20kong financial risk and management reviews, 2020, 6(1): 88-98 95 © 2020 conscientia beam. all rights reserved. supplied, three approved projects and another three rejected projects were illustrated. for the approved projects, all had been checked to fulfill the sroi and the adoption of appropriate criteria as above. 4.6. approved project proposals 4.6.1. 1st approved proposal visually impaired youths education development. it was about the true-light blind hospital and school which has actively promoted vocational and skill training for the visually impaired in recent decades. preemployment tailored visually impaired vocation training nearly 200 youths. job matching, promotion via cedar workshops, social enterprise and were provided. the average annual allocated funds were just us$308,000, while the social return on investment was 7 times future employment income of visually impaired jobs arranged. the foundation helped to cultivate visually impaired students and strengthen their musical talents, and the students would be able to achieve self-reliance and integrate the public in the future. it provided us$71,000 donation to enable 10 visually impaired students to receive a total of 2,160 hours of professional music tutor training, which cost about us$33/hour, and enabled them to receive about 2.65 times or about us$188,000 income in a five-year time. more importantly, this let other teachers and younger schoolmates to have a new perspective on seeing future efforts. this helped to relieve unemployment of the blind youngsters. the unemployment rate of the visually impaired youth was high at about 80%, causing poverty and suffering. there were not enough continuous dedicated resources to raise awareness of potential visually impaired young people and to train visually impaired youth in the job market. the funding was helpful and beneficial to the people in need. “if we can cultivate visually impaired young people and strengthen their employment skills, they will be able to have self-reliance and hence integrate the public in the future. how can the public turn a blind eye and actively support and encourage "lo kwee seong 's heart and light guide"?, pointed out by elson law. 4.6.2. 2nd approved proposal social entrepreneurship school education (sense). this was an education programme provided to secondary school students in summer break using university campus. university student dormitories were used to offer short business vocational training lessons to secondary school students. the main goals included: 1) social care and support of disadvantaged group; 2) training of different levels of skills in entrepreneurship and innovation. entrepreneurship and innovation was the latest trend of vocational education need for hong kong secondary school students. sense was popular education programme with growing demand trend among secondary schools. it was proven potential relief of spiritual poverty for youth to improve their future social caring, innovative education to animate enriching lives. for social return and sroi, the sense programme had been continued in the past few years. the objective was to train secondary school students, through caring for the weak, caring for social affairs, promoting entrepreneurs' self-improvement spirit. at the same time, it inspired the younger generation who were worried about the future. it helped developing constructive high school youth innovative idea and problem solving skills. by experiencing the disadvantaged communities, they could self-renew and had their own positive energy and ability to create new ways of self-development. for instance, a donation of us$12.6 million could help more than 2,000 students and about 9,000 training hours. the average funding was about us$64 per student, or about us$19 per hour. the entrepreneurial spirit of vitasoy would continue to be passed on to the university's sense project. elson law said he would find out the students and teachers and let them understand that lo kwee seong foundation could help. the start-ups of "the health drink of the poor" could also succeed through constant struggle, and it was the pioneer of social entrepreneurship. financial risk and management reviews, 2020, 6(1): 88-98 96 © 2020 conscientia beam. all rights reserved. 4.6.3. 3rd approved proposal hand qing family project. this was a creative project to support young women at the grassroots level to pick up handcraft skills and hence help poverty alleviation. the project opened workshops to them for training women handcraft for improving the well-being of the families at home by producing handcraft for sales. 500 persons had been benefited, and the funding for each person was about us$208, and the profit funding required was us$104,000. the sroi was 4 times regarding the women part-time work income and the charity funding assigned. 4.7. rejected project proposals funding resources were monitored for fair share and equitable allocation and support of charity projects. besides the successful cases mentioned above, three rejected funding application cases were selected that worth study for financial decision-making of charity funds. 4.7.1. 1st rejected proposal university entrepreneur training camp. it was a three-year plan (2018-2020) of us449,000 donation to support more than 400 students to enter short-term learning programmes in world-renowned institutions. it was planned to assist about us$1,090 for each poor student. the funded students would participate in fundraising and related charity activities after returning from school for helping the project students to have continued development. the reason of rejection was that the foundation trustees interpreted it was similar to an entrepreneurship programme, and it was regarded as a business project rather than a charity project. financially, it was more expensive per student than the sense project mentioned above. sroi was lower and not persuasive than those approved projects. 4.7.2. 2nd rejected proposal food bank. food bank's service was planned to provide short-term food assistance to poor and grassroots families. in forecast, a total of 450 people would be benefited, and the total funding required was us$51,300. the average funding for each person would be us$114. when vitasoy started its business, the "poor's milk" was the original intention. the fund could assist food bank, which was to help hong kong's "poor meal." the main reason of rejection was that the majority of the foundation trustees perceived that this would support and encourage low-class immigrants. potential immigrants without contribution to professional knowhow and capital investment might be attracted by such a free meal provision scheme. trustee board members preference and decision took place before sroi consideration was forecasted. 4.7.3. 3rd rejected proposal university medical research project. it was a university research laboratory project in three sections of totally us$1 million over 3 years. the three sections included serious cancer patient treatment, middle mentally handicapped special school, and relief distress experience activities for children. the reasons of rejection were: 1) there were other similar medical research projects, and this project was not supported by sufficient financial breakdown with details. project overlapping and project application details were concerned. 2) there were various sources of fund raising to this project and were not specific to the foundation focus as illustrated in figure 2. unique source of donation from the foundation was required. 3) they were treated as non-sustainable projects. only expenditure plan was provided, revenue generation mechanism was not illustrated. future financial sustainability was much queried. financial risk and management reviews, 2020, 6(1): 88-98 97 © 2020 conscientia beam. all rights reserved. 4.8. future development through strategic giving, lks foundation identified the needs in communities and tackled their root causes through a comprehensive approach. it facilitated reciprocity and mutual respect, and encouraged dynamic and constructive co-operation with and among its grantees. to maximize the impact of its initiatives, it created synergies and leverages opportunities with funders and organizations that were dedicated to the causes that the foundation supported (zeshan, 2020). from the general manager, elson law, lks foundation‟s future development was targeted at sizeable project of over usd13 million each for exercising constructive, significant as well as long-term social impact on the community. 5. conclusion people made financial decisions either “with the heart”, “with the head” or “by the book”. there were various emotion, efficacy or responsibility reasons. as charitable resources were limited, social return on investment had become a commonly accepted measure by charity foundation trustees, lo kwee seong (lks) foundation was one family supported charity foundation to exercise such type of charity funding decision. in addition, other funding decisions affected by emotion, efficacy and knowledge had also been illustrated through the three approved and another three rejected project applications mentioned. like other exploratory research, the findings from the above case analysis should be regarded as specific and tentative. the selected funding application projects demonstrated distinguished and atypical situations to certain extent. 6. limitation the current study belonged to qualitative case studies which is restricted by the sensitivity and integrity of the researcher. the researcher was the primary gadget of information collection and analysis. however, exercise of observation and interviewing could be readily offered to ambitious case study researchers. objectivity of data collection has the prime concern. the researcher was left to rely on own characters and capabilities throughout most of this study effort (merriam, 2015). furthermore, a case study emphasized on a single unit, a single illustration, the issue of generalizability appeared more than with the other types of qualitative research. however, much could be studied from a specific case. readers could study vicariously from coming across with the case through the researcher's story description (stake, 2005). the interesting explanation in a case study could create an image: "a vivid portrait of excellent teaching can become a prototype that can be used in the education of teachers or for the appraisal of teaching" (eisner, 2017). other limitations included reliability and validity. the case study was often be criticized for its absence of representativeness, and its insufficient rigor in the collection, construction, and analysis of the practical materials that gave rise to the study. this inadequate rigor was related to the subjectivity of the researcher in interview and data collection. interview training and emphasis on objectivity in data collection should be concerned. some important issues about generalization that merited specific indication. the first issue about to a singleoutcome case study was that it was often explicitly disclaimed. criticism of generalizability was of little relevance when the intention was one of particularization. particularization related to storytelling which highlights the unique situation of the case concerned. a second issue related to the difference between statistical and analytical generalization; a single case study was obviously less suitable for the former but possibly hold important utility for the latter. it brought out the difference between descriptive and investigative, or theory-building and theorytesting (willis, 2014). funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. financial risk and management reviews, 2020, 6(1): 88-98 98 © 2020 conscientia beam. all rights reserved. references arena, m., azzone, g., & bengo, i. (2015). performance measurement for social enterprises. voluntas: international journal of voluntary and nonprofit organizations, 26(2), 640-672. cai, b. (1990). health and entrepreneurship: 50 years of vitasoy (1940-1990). hong kong: hong kong bean products co ltd. cryder, c. e., loewenstein, g., & scheines, r. (2013). the donor is in the details. organizational behavior and human decision processes, 120(1), 15-23.available at: https://doi.org/10.1016/j.obhdp.2012.08.002. eisner, e. w. (2017). the enlightened eye: qualitative inquiry and the enhancement of educational practice. old tappan, nj: macmillan. emerson, j., & cabaj, m. (2000). social return on investment. making waves, 11(2), 10-14. erlandsson, a., björklund, f., & bäckström, m. (2017). choice-justifications after allocating resources in helping dilemmas. judgment and decision making, 12(1), 60-80. krosch, a., figner, b., & weber, e. u. (2013). choice processes and their post-decisional consequences in morally conflicting decisions. judgment and decision making, 7(3), 224-234. maier, f., schober, c., simsa, r., & millner, r. (2015). sroi as a method for evaluation research: understanding merits and limitations. voluntas: international journal of voluntary and nonprofit organizations, 26(5), 1805-1830.available at: https://doi.org/10.1007/s11266-014-9490-x. merriam, s. b. (2015). qualitative research: a guide to design and implementation (4th ed.): john wile. & sons. new economics foundation (nef). (2007). measuring real value: a diy guide to social return on investment. new economics foundation. retrieved from: http://www.neweconomics.org/. so, i., & staskevicicus, a. (2015). measuring the “impact” in impact investing. mba thesis, harvard business school. stake, r. e. (2005). qualitative case studies. in n.k. denzin & y.s. lincoln (eds.) the sage handbook of qualitative research (3rd ed., pp. 443-466). thousand oaks, ca: sage. willis, b. (2014). define the main principles, and analyse the advantages and limitations of one of the following research methods: (i) single case study analysis. retrieved from: https://www.e-ir.info/2014/07/05/the-advantages-andlimitations-of-single-case-study-analysis/. [accessed july 5]. winterich, k. p., & zhang, y. (2014). accepting inequality deters responsibility: how power distance decreases charitable behavior. journal of consumer research, 41(2), 274-293.available at: https://doi.org/10.1086/675927. zeshan. (2020). zeshan foundation. retrieved from: http://www.zeshanfoundation.org/hk/en/aboutus.php?cate=introduction. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.neweconomics.org/ http://www.e-ir.info/2014/07/05/the-advantages-and-limitations-of-single-case-study-analysis/ http://www.e-ir.info/2014/07/05/the-advantages-and-limitations-of-single-case-study-analysis/ http://www.zeshanfoundation.org/hk/en/aboutus.php?cate=introduction 55 © 2019 conscientia beam. all rights reserved. analyzing the financial soundness of kuwaiti banks using camels framework musaed s. alali1+ sundus al-yatama2 1,2assistant professor, college of business studies, department of insurance and banking, the public authority for applied education and training (paaet), kuwait. (+ corresponding author) abstract article history received: 6 august 2019 revised: 11 september 2019 accepted: 15 october 2019 published: 13 november 2019 keywords camels framework kuwait stock exchange (kse) financial soundness market risk sensitivity capital adequacy kuwaiti banks. jel classification: g21; g32; g33. evaluating the financial performance of banks has always been in the center of attention among both academics and practitioners. in that matter, camels framework has always been one of the most widely used model in evaluating the financial soundness of banks and exploring the weakness areas a bank has. the model is used to distinguish good banks from bad ones. this study aims to evaluate the financial soundness of kuwaiti banks that are listed at kuwait stock exchange over the period 2011-2016 using camels framework. results obtained from this study showed that ahli united bank was the top performing bank in kuwait during the study period despite showing weakness in terms of capital adequacy and liquidity while the worst performing bank was kuwait finance house. kuwait finance house showed very poor performance in capital adequacy and management efficiency. the results from this research would be useful for the kuwaiti banks to address their weak areas and try to improve on them. contribution/originality: this study is one of very few studies which have investigated the financial soundness of kuwaiti banks using camels framework. the results highlighted the weak areas in every bank listed at kuwait stock exchange which must be addressed by the bank to improve its performance. 1. introduction due to the importance of the banking sector in every economy, maintaining a healthy banking sector is vital to the prosperity of any country. while there is an extensive literature addressing banking performance evaluation camels framework emerges as one of the most widely-used methodology for bank performance assessment, using particular financial ratios to reflect different aspects of a bank’s performance (sahajwala and van den bergh, 2000). in recent years camels model was one of the most used models for the estimation of a bank performances and soundness (baral, 2005). this model is used as a bank supervision instrument by the regulatory authorities (gilbert et al., 2000; hays et al., 2009) and also as a main model for the evaluation of the banks performances (evans et al., 2000; derviz and podpiera, 2008; atikogullari, 2009; mishra et al., 2012). camels model was developed in 1979 in the u.s. as a supervisory rating system which would help analyzing the overall condition of banks. the uniform financial institutions rating system (ufirs) commonly known as camels rating system was adopted by the federal financial institutions examination council (ffiec) on november 13, 1979. the acronym camel derives from the five main segments of a bank operations: capital adequacy, asset quality, management quality, earnings ability and liquidity. since 1996, out of the desire to stronger focus on risk, to the five components was added the financial risk and management reviews 2019 vol. 5, no. 1, pp. 55-69 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2019.51.55.69 © 2019 conscientia beam. all rights reserved. https://orcid.org/0000-0003-0802-5440 https://www.doi.org/10.18488/journal.89.2019.51.55.69 financial risk and management reviews, 2019, 5(1): 55-69 56 © 2019 conscientia beam. all rights reserved. sixth component "s", so that the camel approach became the camels approach, where “s” refers to the sensitivity to market risk (babu and kumar, 2017). lopez (1999) stated that bank supervisory agencies are responsible for monitoring the financial conditions of commercial banks and enforcing related legislation and regulatory policy. a key product of such an exam is a supervisory rating of the bank’s overall condition, commonly referred to as a camels rating. although camels rating report is important to any party that deals with the banks such as investors, depositors, creditors, and others, camels report is never released by supervisory agencies, even on a lagged basis. the report is open to banks’ top management to shed some information to them on their weakness areas in order to prevent the bank from future difficulties. dincer et al. (2011) stated that camels report can define any problems at an early stage. babu and kumar (2017) used camels model to compare the efficiency between public and private sector banks in india for the period 2013-2016. they found that private sector banks had a higher efficiency level than the public sector banks in terms of capital adequacy, management efficiency, earning capacity and liquidity. jha and hui (2012) studied the financial performance of different ownership structured commercial banks in nepal based on their financial characteristics. eighteen commercial banks for the period 2005 to 2010 were selected. the results showed that public sector banks were significantly less efficient than their counterparts. furthermore, the study revealed that return on assets was significantly influenced by capital adequacy ratio, interest expenses to total loan and net interest margin, while capital adequacy ratio had considerable effect on return on equity. mishra et al. (2012) analyzed the performance of 12 public and private sector banks over a period of eleven years (2000-2011). for this purpose, camel approach was used and they concluded that private sector banks are at the top of the list, with their performances in terms of soundness. christopoulos et al. (2011) tried to analyze whether lehman brothers’ collapse can be anticipated by using camels method. in order to achieve this objective, data for the period between 2003 and 2007 ware used. according to the results of the study, it was determined that camels analysis showed a decline of lehman brothers. türker kaya (2001) analyzed turkish banks by using camels method. data of 1997 and 2000 were used in this analysis. it was concluded that the performance of the banks in 2000 was worse than the performance in 1997. another conclusion of this study was that when camels ratings of banks increase, the probability of going bankruptcy decreases. 2. methodology this study is based on the use of financial ratios in evaluating the financial soundness of kuwaiti banks. back et al. (1994) showed that models built with financial ratios alone perform better than those built with common financial variables. capital adequacy is used as an indicator to determine the bank’s financial health and soundness. it provides protection for investors and enhancing the stability and efficiency of the bank. capital adequacy is used as an indicator to determine whether the bank has sufficient resources to bear unexpected losses in the future and how leveraged is the bank. kosmidou (2008) and dang (2011) defined capital adequacy as the sufficiency of the amount of equity to absorb any shocks the bank might encounter and it shows the internal strength of the bank to withstand losses during crisis periods. capital adequacy ratios are composed of four ratios as shown in table 1. capital to risk-weighted assets ratio is advocated to ensure that the bank can bear a reasonable amount of losses occurring during the operations and to determine the bank’s loss bearing capacity. debt-equity ratio measures the degree of leverage the bank has. having a higher debt-equity ratio indicated the aggressiveness of the bank, which would reflect less protection for depositors and creditors and vice-versa. the equity to total assets ratio gauges the bank’s total equity indicates the expansion of the bank, a higher ratio would mean that the bank is more fragile to any unexpected losses. government securities are considers the most secured investments a bank can invest in, that is why investments in government securities to total investments ratio is important indicator for measuring the ability of the bank to absorb any unexpected downfalls since these securities are the safest and most liquid financial risk and management reviews, 2019, 5(1): 55-69 57 © 2019 conscientia beam. all rights reserved. investments a bank can hold. a higher government investments to total investments ratio would indicates a conservative investment strategy by the bank which would results in a lower risk. table-1. capital adequacy ratios. capital adequacy ratios capital adequacy ratio debt-equity ratio total equity to total assets ratio government securities investments to total investments ratio it is known that assets quality determines the financial reliability and strength of the bank. in order to determine the assets quality a number of ratios are used, these ratios are presented in in table 2. the quality of assets possessed by bank determines its financial strength. the principal objective to evaluate the quality of assets is to determine the composition of non-performing assets (npas) as a percentage of the total assets. baral (2005) suggested that credit risk in the form of npas is one of the crucial factors that have an impact on the financial health of a bank. the extent of the credit risk depends on the quality of assets possessed by a bank. sangmi and nazir (2010) stated that having a low level of non-performing assets reflects the profitability of the bank and its credit rating. the assets quality of a bank is measured by the percentage of net non-performing assets to net advances. net npas are calculated by deducting net of provisions on nonperforming assets from gross npas. rajender (2009) argued that the concern of growing npas is a challenge to banks, which will adversely affect the performance of banks. the provision for credit loss to total assets shows the size of troubled loans the bank has, having a higher ratio would not only effect the performance of the bank but also its credit rating. provision on npas to npas shows the amount of funds the bank reserved against any npa default. this ratio should, in its worst case scenario, be 100% meaning that the bank is expecting all npas to default. having a ratio that is above 100% would indicate that the bank is expecting more npas to come and is building reserves for it. taking a provision above 100% is an indication of poor assets quality. change in npas indicates the way a bank deals with npas, having a declining changes would indicate that the bank is working in improving the quality of its assets and vice-a-versa. table-2. assets quality rations. assets quality ratios net npa’s to net loans and advances ratio provision for credit loss to total assets provision on npa to npa change in npa financial risk and management reviews, 2019, 5(1): 55-69 58 © 2019 conscientia beam. all rights reserved. management efficiency measures the ability of the board of directors and senior management to identify, measure, monitor, and control the risks and challenges that might face the bank. they take crucial decisions in lights of the current and future market conditions in order to minimize the risk and maximize the returns for the bank. measuring the efficiency of the bank’s management is a difficult task since it is not a quantitative measure. management efficiency is often expressed qualitatively through subjective evaluation of management discipline to standards and policies, capability to plan and be anticipatory, control systems, innovation, and quality of staff (sangmi and nazir, 2010). measures that are used in measuring management quality are listed in table 3. keeping the expenditure down and earnings up is one of the main and most difficult tasks managers face. the aim of a bank’s manager is to increase earnings and reduce expenditure and for that expenditure to total income ratio measures how successful a manager in doing so. having a low ratio would indicate management inefficiency of the bank. providing loans is the core business of any bank, utilizing the most of customer’s deposits in providing loans is a good indicator of how efficient the bank managers are. shollapur and baligatti (2010) argued that the major contributor for the bank’s income should be returns on loans since it is the main business of the bank. although providing loans is essential for any bank, the bottom line for any bank is profitability. generating the most profit from the loans a bank offers would give an indication of the bank’s management efficiency. while many studies used business per employee and profit per employee as a measurement for management efficiency, this study used profit margin per employee to measure the management efficiency. the use of business per employee as a measure of management efficiency is not quite correct since having high number of business does not necessary means higher profits, and the same thing goes to profit per employee since this ratio did not take the amount of business the employee had done to generate that profit. as a result profit margin per employee would be a more appropriate measure for management efficiency. having higher profit margin per employee is an indicator for the bank efficiency, where good bank managers would work to increase that ratio. table-3. management efficiency ratios. management efficiency ratios expenditure to income ratio loans and advances to total deposits return on loans and advances profit margin per employee the quality of earning is an important criterion in determining the bank’s ability to generate steady earnings that are ongoing into the future. dechow and schrand (2004) stated that earning quality should reflect the firm’s current operating performance which is a good indicator of future operating performance. it is also a good indicator of the bank’s profitability since it is the ultimate goal of any bank is to generate profits for its shareholders. earning quality can be measured through a number of ratios. table 4 presents the measuring ratios used. the interest rate margin is the difference between the interest rate the bank charges the borrowers and the interest rate they pay for the depositors, having a higher margin would mean that the bank is making more profit from loans than the bank with a lower margin. net profit margin is another ratio that shows the quality of earnings, having a higher ratio would mean a better earning quality for the bank. return on assets (roa) measures the net profit of the bank as a percentage of its assets, having a higher ratio means that the bank’s senior management are utilizing the assets that they have in the best possible way. return on equity (roe) shows the efficiency of the bank in utilizing its own financial risk and management reviews, 2019, 5(1): 55-69 59 © 2019 conscientia beam. all rights reserved. capital in an efficient manner. it is an important ratio that investor look at, this ratio measures the efficiency of the bank in getting the most for the investors on their investment in the bank’s stock. investors look for a high return on equity to enhance the value of their stocks. table-4. earnings quality ratios. earnings quality ratios interest rate margin net profit margin return on assets (roa) return on equity (roe) liquidity is an important factor in determining the financial performance of any bank. liquidity is seen as the ability of the bank to fulfill its obligations especially customers deposits. table 5 shows the ratios used in this category. government securities are not only the most secured investments a bank can invest in, but they are also the most liquid investments a bank can hold. having a higher government securities to total assets ratio would indicate a healthier liquidity position for the bank. liquid assets are the assets that mature within one year and so is the liquid liabilities, having a higher liquid assets to liquid liability ratio would indicate a better liquidity position for the bank when it comes to sudden liquidity shortage. banks should be aware of sudden and unexpected customer’s withdrawals, as a result having a higher liquid assets to customer’s deposits is very important. among the more concentrated liquidity ratios is the 3m liquidity gap which measures the difference between the assets maturing within the next three months and the liabilities maturing within the same period to the assets maturing within the next three months. banks make money by exploiting the yield curve, meaning that they lend for long periods and cover them with short term borrowing. taking advantage of the upward slope yield curve would cause a liquidity risk for the bank when the bank have a high negative ratio, that is why banks try to balance their maturities to reduce that risk and that ratio for that matter. table-5. liquidity ratios. liquidity ratios government sec to total assets liquid assets to liquid liabilities liquid assets to total customers deposits 3m liquidity gap to assets maturing in 3m history shows that markets are unpredictable and sudden moves might have a catastrophical consequences on the banks and their profits. table 6 shows the ratios used in assessing these market risks. banks try to diversify their income sources and for that matter banks tend to invest in securities as an alternative source in income, having a high portion of the bank’s assets invested in securities would make the bank at risk from any undesirable movements in that market. banks tend to have high total securities to total assets ratio when the markets are doing well and vice-a-versa, but that does not mean that banks are immune from getting caught in market crashes. banks financial risk and management reviews, 2019, 5(1): 55-69 60 © 2019 conscientia beam. all rights reserved. with higher total securities to total assets ratio means that they are faced with market volatility risk. christopoulos et al. (2011) argued that a bank should have a low ratio in order for it to be safe from market risk. another market risk a bank might face is the interest rate risk, aspal and dhawan (2014) used sensitivity gap ratio to measure the interest rate risk. the sensitivity gap ratio is the ratio between the risk sensitive assets to the risk sensitive liabilities. in order for the bank to be immune from interest rate risk this ratio should be 1, so that the effect of interest rate movements on assets would be offset by the effect on liabilities and vice-a-versa. when a bank have a sensitivity gap ratio that is above 1 then the bank is asset sensitive (assets reprice faster than liabilities) and if less than 1 then the bank is liability sensitive. in both cases the bank is more exposed to interest rate risk if the ratio is farther than 1 (aspal and dhawan, 2016). banks activities are expanding to other countries and for that matter other currencies in order to accommodate their customers’ needs, investing in international markets, and also for the bank’s expansion to other countries and so on. this exposure to foreign markets carry with it the risk of exchange rate risk, for example national bank of kuwait (nbk) bought a bank in egypt in 2007 in order to expand their activities there. from the period from january 2011 to december 2016, the egyptian pound went down against the u.s. dollar from 5.96 to 18.13 pounds per dollar. the same thing goes to kuwait finance house that has a subsidiary in turkey, for the same period the turkish lira went down from 1.6015 to 3.5377 lira against the u.s. dollar. this weakness in the foreign currencies would have an effect on the bank’s profitability, this effect is measured by the effect of exchange rates movements to net profit. while total securities to total assets gives an indication the exposure of the bank to the securities markets that includes bonds, equities and others, the effect of stock market movements only looks at the equity side of it and its effect on the bank’s net profit. table-6. market sensitivity ratios. market sensitivity ratios total securities to total assets sensitivity gap ratio effect of 5% exchange rate movement to net profit effect of 5% stock market movement to net profit * risk sensitive assets = net loans + net investments + money-on-call. ** risk sensitive liabilities = customer deposits + other borrowings + due’s to banks and other financial institutions. 3. data and empirical results the results presented in this paper are based on the financial statements from nine kuwaiti banks, warba bank which is the tenth kuwaiti bank was excluded from the study since it is a relatively new bank that was established in 2010 but did not start operating till 2014. the nine banks that were studied were commercial bank of kuwait (cbk), national bank of kuwait (nbk), gulf bank (gbk), alahli bank (abk), burgan bank (bbk), kuwait finance house (kfh), boubyan bank (buk), kuwait international bank (kib), and ahli united bank (aub). the results are based on the bank’s annual data covering the period 2011-2016. the data for this research were obtained from the bank’s annual reports and the database of the kuwait institute of banking studies. the results shown in this research represents the average of the ratios over the study period. with the central bank of kuwait setting a minimum capital adequacy ratio (car) of 13.5%, it can be seen from table 7 that all of the kuwaiti banks managed to meet that ratio. with kib having the highest car ratio among all banks with 23.23%. on the other hand, kfh showed the lowest car ratio of 15.98%. the average car for the nine banks under study was 18.81%. only three banks (abk, buk, and kib) had a car ratio that was above the financial risk and management reviews, 2019, 5(1): 55-69 61 © 2019 conscientia beam. all rights reserved. average, while all remaining banks were below average. debt-equity ratio shows the degree of leverage of the bank, a higher ratio would indicate that the bank is aggressive and is paying more attention to the profitability side and less to the protection of the depositors and creditors and vice-versa. taub (1975) analyzed four profitability metrics against debt-equity ratio and found a statistically positive relation between debt and profitability. abor (2005) also found a statistically positive association between total debt and bank profitability. by looking at table 7 it can be seen that kib is the most conservative bank when it comes to leveraging and gbk is the most aggressive bank. the average leverage for the banks was 7.07 times, with only four banks (kib, abk, nbk, and cbk) being leveraged less than the average. equity to total assets ratio is a good indication for banks capital adequacy. roman and sargu (2013) argued that holding a higher ratio would indicate a better position for the bank to handle any unexpected losses in the future. in that category, it can be seen that kib holds the highest equity to total assets ratio followed by abk, while gbk had the lowest ratio. for the nine banks that average ratio was 12.85%, only four banks had a ratio above the average while the remaining were below it. table-7. capital adequacy ratios. capital adequacy bank car ratio debt/equity ratio equity to total assets ratio government securities to total investments ratio group rank % rank times rank % rank % rank mean rank cbk 18.56 4 6.01 4 14.30 4 54.08 6 4.50 3 nbk 16.94 6 5.87 3 14.67 3 30.02 8 5 4 gbk 16.77 7 9.41 9 9.63 9 89.08 1 6.50 7 abk 23.04 2 5.62 2 15.33 2 66.97 4 2.50 2 bbk 16.55 8 8.02 7 11.28 7 58.03 5 6.75 8 kfh 15.98 9 7.44 6 11.91 6 35.93 7 7.00 9 buk 20.56 3 7.09 5 12.60 5 9.12 9 5.50 5 kib 23.23 1 5.52 1 15.53 1 79.12 2 1.25 1 aub 17.70 5 8.66 8 10.44 8 75.15 3 6 6 mean 18.81 7.07 12.85 55.28 with government securities being the safest investment instruments a bank can invest in, the government securities to total investment ratio indicates the quantum of safe investments a bank holds. this ratio shows how risk averse the bank is, but despite government securities being almost risk-free that comes with a cost of yielding the lowest returns. having a high ratio would indicate that the bank is conservative when it comes to investing but this would affect its profitability. in that category it can be seen that gbk is the most conservative bank in kuwait followed by kib with ratios of 89.08% and 79.12% respectively. on the other hand aub had by far the lowest ratio of only 9.12% flowed by nbk with 30.02%. taking the average score of the four capital adequacy ratios, it can be seen that kib had the best score of 2.25 followed by abk with 2.75. on the opposite side kfh had the worst score with 7.75 followed by bbk with a score of 7. when it comes to the overall ranking for banks in term of capital adequacy, it can be seen that kib was the best performer in that category followed by abk. while the worst performer was kfh followed by bbk. for the group ranking, kib came at the top of all kuwaiti banks followed by abk, while kfh came at the bottom of the list. baral (2005) argued that credit risk in the form of non-performing assets (npas) is one of the most crucial factors that have an impact on the financial health of a bank. net npas to net loan is used to determine the size of npas compared to the loans portfolio of the bank. rajender (2009) suggests that the growth of npas in a bank presents a challenge for the bank since it affects the performance of the bank. looking at table 8 it can be seen that buk has the lowest net npa’s to net loans ratio of 0.90%. this means that npas represents only 0.90% of buk loans, while gbk on the other hand has the highest ratio of 6.58%. it can also be noted that net npas to net loans financial risk and management reviews, 2019, 5(1): 55-69 62 © 2019 conscientia beam. all rights reserved. and advances ratio is in a declining trend from 2011 to 2016. the reason for the downtrend is that kuwaiti banks, as for all bank in the world, faced a growing numbers of loan defaults after the global financial crisis in 2008. provisions held for credit losses gives an indication of the severity of npas, the higher the ratio means that the bank is facing problems with npas and is taking precautionary measures against it. again buk held the lowest provisions in term of total assets of 2.43% followed by kib of 3.72%. gbk had the highest concern when it comes to npas with provisions reaching 6.47% followed by abk with 6.36%. table-8. assets quality ratios. assets quality bank net npa’s to net loans ratio provision for npa to total assets provisions on npa to npa change in npa group rank % rank % rank % rank % rank mean rank cbk 1.01 2 5.45 6 810.81 9 -22.34 2 4.75 3 nbk 1.73 3 4.17 5 259.79 7 12.41 8 5.75 7 gbk 6.58 9 6.47 9 164.94 5 -26.35 1 6.00 8 abk 3.22 5 6.36 8 217.95 6 1.77 5 6.00 8 bbk 5.73 8 4.03 4 85.42 1 11.46 7 5.00 5 kfh 5.40 6 5.97 7 129.14 3 -18.52 4 5.00 5 buk 0.90 1 2.43 1 380.37 8 34.34 9 4.75 3 kib 5.60 7 3.72 2 120.61 2 -21.94 3 3.50 1 aub 2.72 4 3.94 3 145.65 4 7.39 6 4.25 2 mean 3.65 4.73 257.19 -2.42 provisions on npas to npas can give a slight idea of the banks quality of assets. while holding a high provision which is higher than 100% of the npas is seen as a sign against any defaults in the future, it can also be seen as a sign of the level of the assets quality the bank holds. holding high provision can be seen as if the bank is holding bad or low quality assets and for that he is building provisions for it. for that it can be seen from table 8 that bbk is at the top of the list with provisions of 85.42% followed be kib. on the other hand cbk held the highest provision among the kuwaiti banks of 810.81%. on an average the kuwaiti banks hold provision of 257.19% against their npas, where six banks (gbk, abk, bbk, kfh, kib, and aub) held provisions less than the average and three banks hold higher percentage. the change in npas is a good indicator on the quality of assets the bank holds. a decrease in npas would indicate that the bank is improving the quality of assets it holds. for that matter, it can be seen that gbk is the best bank in that category with an average decrease of 26.35% on their npas over the past six years. on the other hand, buk was the worse with an average increase in their npas of 34.34%. on an average the kuwaiti banks are improving their assets quality by decreasing their npas by 2.42% annually during the past six years. in that category, assets quality, it can be seen that kib was the best performing bank in kuwait followed by aub. on the opposite side both gbk and abk came tie on being the worse in the industry. one of the key indicators of management efficiency in a bank is the expenditure to income ratio. an efficient management would work hard to reduce expenditure and increase income. having a lower ratio would give a hint over the efficiency of the bank. from table 9 it can be seen than cbk has the best expenditure to income ratio of 32.77%. this means that the bank would spend 327.7 fils to generate 1 kwd of income (1 kwd = 1000 fils), while kfh had the worse ratio of 61.63%. paying more attention to the core business of the bank is a good indicator of management efficiency. with providing loans being one of the core activities of any commercial bank, a higher loans to deposit ratio is a good measure of management efficiency. as seen from table 9 abk has the highest average loans to deposits ratio of 88.97% for the years 2011-2016 followed by gbk with 84.28%. kfh came at the bottom of the list with only 66.60% followed by nbk with 71.75%. this indicates that kfh and nbk are using the funds from deposits in activities that are not core activity of a commercial bank. while nbk is next to the bottom when it financial risk and management reviews, 2019, 5(1): 55-69 63 © 2019 conscientia beam. all rights reserved. comes to loans to deposits ratio, the bank comes at the top of the list when it comes to return on loans. nbk produced a mean return for the years 2011-2016 of 2.55% followed by aub and bbk both with 1.66%. table-9. assets quality ratios. management efficiency bank expenditure to income ratio loans to total deposits return on loans profit margin on business per employee group rank % rank % rank % rank % rank mean rank cbk 32.77 1 72.40 7 1.17 8 21.42 9 6.25 8 nbk 33.98 2 71.75 8 2.55 1 48.20 1 3.00 1 gbk 39.03 5 84.28 2 0.93 9 22.07 7 5.75 6 abk 34.62 3 88.97 1 1.44 6 31.23 4 3.50 3 bbk 44.65 6 72.86 6 1.66 2 32.40 3 4.25 4 kfh 61.63 9 66.60 9 1.61 4 21.78 8 7.50 9 buk 55.09 8 81.51 4 1.18 7 28.84 5 6.00 7 kib 46.22 7 81.71 3 1.39 5 27.42 6 5.25 5 aub 37.30 4 79.92 5 1.66 2 43.03 2 3.25 2 mean 42.81 77.78 1.51 30.71 business per employee (bpe) measures the volume of business (measured in 1000 kwd) an employee conduct per year. bbk came a head of all kuwaiti banks when it comes to the amount of business an employee handles per year with an average of 306.13 kwd followed by nbk with an average of 297.70 kwd. when it comes to profit per employee (ppe), nbk came at the top with 48.20 kwd profit generated per employee followed by bbk and at the flipside buk came at the bottom with only 23.79 kwd per employee, as seen in table 10. although both ratios bpe and ppe are essential in generating profit for the bank, they are not sufficient enough to determine the management efficiency. profit margin per employee would give a better picture of management efficiency. by looking at cbk for example, it can be seen that it is ranked 5th in terms of bpe and 6th in terms ppe which can be deceiving since their management and employees are efficient enough to utilize the business they are getting efficiently like nbk for instance. cbk employee produces a profit only 214.2 kwd for every 1000 kwd of business he or she conducts, while nbk employee produces a profit of 482 kwd for every 1000 kwd of business he or she conducts. so, when it comes to profit margin on business per employee it can be seen that nbk is the most efficient bank in kuwait in that category while cbk was the worst. as for management efficiency, nbk came at the top among the kuwaiti banks followed by aub and on the other hand, kfh came at the bottom followed by cbk. table-10. employees performance ratios. bank business per employee (1000 kwd) profit per employee (1000 kwd) profit margin on business per employee (%) cbk 144.87 32.42 21.42 nbk 297.70 142.63 48.20 gbk 116.69 25.54 22.07 abk 152.18 47.51 31.23 bbk 306.13 96.79 32.40 kfh 280.88 60.61 21.78 buk 81.85 23.79 28.84 kib 91.28 24.61 27.42 aub 127.73 55.09 43.03 mean 177.70 56.55 30.71 the interest margin is basically the average interest the bank charges on loans minus the average interest the bank borrow the funds at. a higher interest margin means that the bank is generating a higher profit from the financial risk and management reviews, 2019, 5(1): 55-69 64 © 2019 conscientia beam. all rights reserved. funds he borrows. while this may be a straight forward calculation, it may also indicates that the bank is lending riskier borrows since they pay higher interest than the others due to their bad credit. by running a regression using the interest rate margin (irm) as an independent variable and the ratio of non-performing assets to total assets (npa) as a dependent variable, the results showed no statistically significant relation between them. a granger causality test was also conduced and the results, as seen in table 11 show that there is no relation between interest rate margin and the non-performing assets to total assets ratio. table-11. granger causality test results (e-views). pairwise granger causality tests date: 10/01/17 time: 04:41 sample: 154 lags:2 null hypothesis obs f-statistic prob. npa does not granger cause irm 52 0.42537 0.6560 irm does not granger cause npa 0.70154 0.5009 when looking at the interest rate margin, from table 12 it can be seen that kfh has the highest interest rate margin of 3.65% followed by nbk having 3.31% interest margin. gbk came at the bottom of the list with 2.47%. when it comes to net profit margin, it can be seen that nbk came at the top with 44.64% meaning that out of every kwd 1000 of income the bank makes a net profit of 446.4 kwd. aub came in second place with 38.59%. on the other hand, while kfh had the highest interest margin, kfh was unable to capitalize on it and came as the worst bank by generating only 19.29% net profit from the income they make. return on assets (roa) is another important ratio to consider when evaluating the earning quality of any bank. again nbk had the highest roa ratio among the kuwaiti banks, the bank produced a return of 1.62% followed by aub with 1.20%. gbk showed the lowest roa ratio of only 1.62% followed by cbk of 0.71%. table-12. earning quality ratios. earning quality bank interest margin profit margin return on assets (roa) return on equity (roe) group rank % rank % rank % rank % rank mean rank cbk 2.55 8 20.53 8 0.71 8 5.02 9 8.25 9 nbk 3.31 2 44.64 1 1.62 1 10.41 2 1.50 1 gbk 2.47 9 21.01 7 0.69 9 7.25 5 7.50 8 abk 2.96 5 29.60 3 1.08 3 6.88 6 4.25 3 bbk 2.79 7 29.59 4 1.02 4 7.70 3 4.50 4 kfh 3.65 1 19.29 9 0.88 7 6.49 7 6.00 7 buk 3.20 4 27.38 5 0.90 6 7.44 4 4.75 5 kib 3.21 3 25.42 6 0.97 5 6.19 8 5.50 6 aub 2.86 6 38.59 2 1.20 2 12.56 1 2.75 2 mean 3.00 28.45 1.01 7.77 return on equity (roe) is a ratio that has a special interest by the shareholders. they look at it as a measure of how well their investments in the bank are doing. aub provided the best return for his stock holders by generating a mean return over the years from 2011-2016 of 12.56% followed by nbk with 10.41%. cbk was the lowest bank in terms of roe with only 5.02% followed by kib with 6.19%. as a group when taking the average score for the 5 ratio’s that were used in evaluating the earning quality, it can be concluded that nbk was for the period 2011-2016 the best performer in that area followed by aub. gbk was the last in that category followed by cbk despite having the highest change in net profit. financial risk and management reviews, 2019, 5(1): 55-69 65 © 2019 conscientia beam. all rights reserved. based on dang (2011) stated that adequate level of liquidity is positively correlated with bank profitability. this conclusion shows the importance of maintaining a healthy liquidity in the banks. liquidity indicates the ability of the bank to honor and fulfill its obligations, especially to their depositors. government securities are considered to be the safest and most liquid investment a bank can hold. having a high government securities to total assets ratio would imply that that the bank have sufficient liquid investments to cover any unexpected events. while holding a large portion of the banks’ assets in government securities would ensure that the bank has an adequate level of liquidity, it would also have an effect on the bank’s earnings since government securities offer the lowest return compared to other market investment instruments. in that ratio it can be seen that gbk has the highest ratio of 18.44% followed by kib of 18.12%. on the other hand, buk holds the lowest ratio among kuwaiti banks of only 1.40%. table-13. liquidity ratios. liquidity ratios bank g-sec to total assets liquid assets to liquid liabilities liquid assets to total customers deposits 3m liquidity gap to 3m assets group rank % rank % rank % rank % rank mean rank cbk 10.48 5 20.82 5 34.23 5 0.43 1 4.00 3 nbk 5.59 8 17.21 8 31.55 7 -59.96 8 7.75 9 gbk 18.44 1 25.54 1 38.02 2 -67.50 9 3.25 2 abk 15.54 3 20.16 6 32.60 6 -55.40 7 5.50 7 bbk 8.21 7 20.96 4 34.99 3 -36.49 4 4.50 4 kfh 8.27 6 22.29 3 34.43 4 -46.71 5 4.50 4 buk 1.40 9 11.16 9 14.37 9 -18.31 3 7.50 8 kib 18.12 2 25.19 2 41.55 1 -48.69 6 2.75 1 aub 10.64 4 19.11 7 28.71 8 -12.49 2 5.25 6 mean 10.74 20.27 32.27 -38.35 many such as demirgüç-kunt (1989) and gonzález-hermosillo (1999) used liquid assets to liquid liabilities as a measure of a banks liquidity under camels approach. having a higher ratio would mean that the bank is capable of meeting any unexpected cash outflows, and for that it can be seen from table 13 that gbk came at the top of the kuwaiti banks with a ratio of 25.54% followed by kib with 25.19%. buk and nbk were the worst performers in that ratio by holding 11.16% and 17.21% respectively. while all banks compete to get more customers deposits, these deposits are also the most unsettled deposits. for that matter banks tend to be cautious when it comes to customers deposits and as a result of that should be alert for it. having a high liquid assets to customer’s deposits ratio would indicate that the bank is prepared for and sudden or unexpected demand for these customers deposits. in that ratio, it can be seen that kib is the most prepared bank in kuwait for that scenario by holding 41.55% of their customer’s deposits in liquid assets. while on the other side, buk was the worst bank in kuwait by holding only 14.37%. on an average the kuwaiti banks hold 32.27% of their customer’s deposits in liquid assets and only three banks (nbk, buk, and aub) were below the average. the 3m liquidity gap is basically the total assets maturing within the next 3 months minus the total liabilities maturing within the next 3 months. having a negative gap would mean that the bank is holding more liabilities that assets which is not a good sign. for that matter the ratio of 3m liquidity gap to 3m assets is used to determine how much the gap represent out of the assets. the higher that ratio means that the bank would be in a better position in terms of liquidity. from table 13 it can be seen that cbk was the only bank in kuwait that have more assets maturing in the next 3 months than liabilities and for that cbk was at the top of the list. while on the opposite side gbk was the worst performer by having a gap that represents -67.50% of the assets maturing in the next 3 months. as for the liquidity ratios, kib came as the best bank in kuwait when it comes to liquidity and nbk came at the bottom of the list. financial risk and management reviews, 2019, 5(1): 55-69 66 © 2019 conscientia beam. all rights reserved. market sensitivity is another set of ratios that is used in camels analysis, it was added to the framework back in 1996 to measure the effect of changing market conditions on the bank’s performance. banks tend to be active in the financial markets most of the time which makes them exposed to changes in the securities markets. such exposure would affect the profitability of the bank. one of the ratios that is used is the total securities the bank holds to the bank’s total assets, the higher the ratio would indicate that the bank is active in the securities market which makes the bank more vulnerable to securities price movements. having a low ratio would mean that the bank would be less affected by changes in the securities prices. for that matter it can be seen from table 14 that buk has the lowest exposure to the securities markets compared to the other kuwaiti banks. while abk has the highest exposure where their investments in securities amounts to 23.17% of their total assets. on an average the kuwaiti banks hold 18.08% of their total assets in securities. table-14. market sensitivity ratios. market sensitivity ratios bank total securities to total assets sensitivity gap fx effect stock market effect group rank % rank ratio rank % rank % rank mean rank cbk 19.43 5 0.91 5 270.43 9 281.05 9 7.00 9 nbk 18.61 4 0.91 5 5.54 5 0.57 1 3.75 3 gbk 20.69 7 1.01 1 2.99 4 3.33 5 4.25 4 abk 23.17 9 1.12 8 0.24 1 3.07 4 5.50 5 bbk 14.31 3 0.84 9 36.62 8 3.78 6 6.50 7 kfh 20.16 6 0.93 3 32.02 7 9.30 7 5.75 6 buk 9.36 1 0.92 4 11.44 6 2.93 3 3.50 2 kib 22.91 8 1.10 7 1.22 3 11.54 8 6.50 7 aub 14.08 2 0.94 2 1.02 2 1.63 2 2.00 1 mean 18.08 0.96 40.17 35.24 sensitivity gap ratio is another ratio that is used, it measures the effect of changes in interest rate on the bank, the ratio is measured as risk sensitive assets divided by the risk sensitive liabilities. in this ratio the banks should try to obtain a ratio of 1 in order to neutralize the interest rate effect. when a bank have a ratio of above 1 this would mean that the bank is more exposed to higher interest rates risk. the ranks here were assigned based on the nearest to 1. for that gbk was the closest followed by aub, while bbk was the furthest with a ratio of 0.84 this would indicate that bbk is more vulnerable to interest rate movements. on an average, kuwaiti banks tend to hold more interest rate sensitive liabilities than interest rate sensitive asset where the sensitive assets represents 0.96 of the sensitive liabilities. with globalization, banks and bank’s customers tends to do business in other countries and other currencies. many banks tend to hold assets that are denominated in foreign currencies and as a result the bank is exposed to foreign exchange risk. the foreign exchange effect measures the effect of 5% change in the exchange rate of the currencies that the bank hold assets in to the net profit of the bank. cbk was the most exposed bank in kuwait, where a 5% change in the exchange rate would result in a loss that is 270.43% of the bank’s profit. this would indicate that cbk holds a huge foreign currencies denominated assets. on the other hand abk was the least bank in kuwait that would be effected by foreign exchange movements. by looking at the average for the kuwaiti banks, an unfavorable 5% move in exchange rates would result in 40.17% reduction on their net profits. the market risk is basically when a bank holds listed securities in the stock market, then any move in the stock market would have an effect on the bank’s profits. measuring that effect is shown in the stock market effect ratio where it measures the effect of 5% movements in stock market on the bank’s net profit. again cbk was the most exposed bank in kuwait when it comes to stock market risk followed by kib. nbk is the least bank in kuwait that would be effected by movements in the stock markets followed by aub. for the whole of kuwaiti banks, they would lose 35.24% of their net profit if the stock market moves 5% down. as for the aggregate score for the market sensitivity ratios, aub financial risk and management reviews, 2019, 5(1): 55-69 67 © 2019 conscientia beam. all rights reserved. came at the top followed by buk, while on the other side cbk was at the bottom of the list followed by both kib and bbk. table-15. aggregate score based on rank scores. bank c a m e l s mean rank cbk 3 3 8 9 3 9 5.83 7 nbk 4 7 1 1 9 3 4.17 3 gbk 7 8 6 8 2 4 5.83 7 abk 2 8 3 3 7 5 4.67 4 bbk 8 5 4 4 4 7 5.33 6 kfh 9 5 9 7 4 6 6.67 9 buk 5 3 7 5 8 2 5.00 5 kib 1 1 5 6 1 7 3.50 2 aub 6 2 2 2 6 1 3.17 1 when looking at the overall score for the banks, two methods were used, the first method calculated the overall score based on the bank’s rank in every group as seen in table 15. in this method, aub came as the best bank in kuwait during the period spanning from 2011 to 2016 scoring an average of 3.17 despite coming in the top in only one category and that is market sensitivity followed by kib while nbk came in third place. aub scored well in all groups except for capital adequacy and liquidity while kib, despite coming second in overall ranking, was the best performing bank in kuwait in three categories which are capital adequacy, assets quality, and liquidity but the bank performed mediocrely in management efficiency, earnings quality and market risk sensitivity. at the bottom was kfh scoring an average of 6.67 followed by both cbk and gbk with a tie score of 5.83. kfh came in last place in terms of both capital adequacy and management efficiency. by using the mean score for every bank to evaluate then bank’s performance, as seen in table 16 the overall ranking did not change much. aub still came as the best performer followed by kib and then nbk. the overall ranking did not change much at the bottom also, kfh came as the worst performer followed by cbk and then gbk. table-16. aggregate score based on mean scores. bank c a m e l s mean rank cbk 4.5 4.75 6.25 8.25 4 7 5.79 8 nbk 5 5.75 3 1.5 7.75 3.75 4.46 3 gbk 6.5 6 5.75 7.5 3.25 4.25 5.54 7 abk 2.5 6 3.5 4.25 5.5 5.5 4.54 4 bbk 6.75 5 4.25 4.5 4.5 6.5 5.25 5 kfh 7 5 7.5 6 4.5 5.75 5.96 9 buk 5.5 4.75 6 4.75 7.5 3.5 5.33 6 kib 1.25 3.5 5.25 5.5 2.75 6.5 4.13 2 aub 6 4.25 3.25 2.75 5.25 2 3.92 1 4. conclusion the banking sector is the corner stone for every economy, having a healthy banking sector would yield to a stronger economy. monitoring the banks is an essential task to diagnose any problem in its early stages and work to resolve it. the aim of this study was to shed some light on the kuwaiti banking sector and showing the area’s that needs to be addressed in each bank over the period from 2011 to 2016. results showed that while ahli united bank was the overall top performing bank in kuwait the bank showed weakness in terms of capital adequacy and liquidity while the worst performing bank was kuwait finance house showing a very poor performance in capital adequacy and management efficiency. financial risk and management reviews, 2019, 5(1): 55-69 68 © 2019 conscientia beam. all rights reserved. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references abor, j., 2005. the effect of capital structure on profitability: an empirical analysis of listed firms in ghana. the journal of risk finance, 6(5): 438-445.available at: https://doi.org/10.1108/15265940510633505. aspal, p.k. and s. dhawan, 2014. financial performance assessment of banking sector in india: a case study of old private sector banks. the business & management 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relation to/arising out of the use of the content. 16 © 2021 conscientia beam. all rights reserved. testing the validity of arbitrage pricing theory: a study on dhaka stock exchange bangladesh syed mohammad khaled rahman1+ priyanka mazumder2 1associate professor, department of business administration, shahjalal university of science & technology, bangladesh. 2ex-student of mba program, department of business administration shahjalal university of science & technology, bangladesh. (+ corresponding author) abstract article history received: 25 january 2021 revised: 23 february 2021 accepted: 19 march 2021 published: 14 april 2021 keywords arbitrage pricing theory index interest exchange. jel classification: g12. the purpose of the study was to test the validity of arbitrage pricing theory (apt) in dhaka stock exchange (dse) of bangladesh. secondary data has been used which was composed of observable macroeconomic and stock market variables. study period was from january 2013 to october 2018, making a total of 70 monthly observations. study found that interest rate and exchange rate has significant influence but market capitalization and tax rate have insignificant impact on return of ds-30 index. except exchange rate, other three variables were negatively related with ds-30 index return. 1% increases in exchange rate results 0. 993% increase in stock prices while 1% increases in interest rate results 0. 486% decrease in stock prices and vice-versa. strong negative correlation was seen between interest rate and stock index return. apt have failed to fully explain the change of ds-30 index return due to presence of two insignificant explanatory variables. this research has practical implications on stock market participants as investors’ optimal strategy largely influenced by precision of asset pricing models. this research has also policy implications for securities & exchange commission, government, and other regulators as findings of the study will assist them to develop more efficient capital market. contribution/originality: this study contributes to the existing literature of asset pricing model by judging its reliability in bangladeshi capital market. this study is one of very few studies which have investigated the validity of arbitrage pricing theory in dhaka stock exchange with the help of index of blue chip companies. 1. background of the study the capital market is a channel of direct finance. it enables mobilization of funds for investment purposes from purchaser of capital market securities or investor to issuer of securities or borrowers (imam, 2001). it is a market where savings are made available to investors as firms get capital through issuing financial assets such as bonds and equities. in other words, through capital market funds are transferred from investors to different economic entities in exchange of transfer of financial instruments (chowdhury, 2005). like other markets it has a set of rules to ensure protection of the buyers i.e. investors. capital market lies at the heart of the economic development of a country as it circulates the life blood of industrialization, i.e. the capital, in an economy; like a heart circulates blood in a human body. but it requires rigorous, conscious, and continuous human efforts to result in a fully and efficiently functioning organ of an economy. these efforts encompass some fundamentals related to the very nature of the market without establishing which the true benefits of the market cannot be harnessed. several theories and models have been developed for financial risk and management reviews 2021 vol. 7, no. 1, pp. 16-25. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.16.25 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0002-8713-6933 https://orcid.org/0000-0002-9708-0507 https://www.doi.org/10.18488/journal.89.2021.71.16.25 financial risk and management reviews, 2021, 7(1): 16-25 17 © 2021 conscientia beam. all rights reserved. estimating prices or values of financial instruments. arbitrage pricing theory (apt) is one of them. determination of asset prices through well-established models or theories is an indicator of a well-functioning capital market. 2. problem statement an investor’s appropriate investment decision largely depends on accuracy level of forecasting stock prices or values. in general, market prices of firms’ shares in dhaka stock exchange (dse) fluctuates every now and then and price variation enhances as investors’ holding periods lengthen (mollik & bepari, 2010). dse stock return behave abnormally for example stock market price crush of 1996 and 2010. many investors gained and many faced tremendous losses from the unexpected price abrupt dse trade stock. as the shares of stocks of different industries’ firms are traded in dse and the economy consists of different industries so certain macro-economic variables should have significant impact on stock prices. some macro-economic variables are treated as explanatory variable in apt and in an efficient and well developed capital market true asset prices can be forecasted through apt which guides rational investment behavior. individual and institutional investors’ investment decisions influence the degree of abnormal return and price instability. 3. theoretical framework of arbitrage pricing theory (apt) the apt is a multi-index model which along with market index describes both macroeconomic and industrial factors that changes most of the security prices to a specific direction. influence of non-market factors are incorporated. initial equation for apt test is: rit= 𝜶 + 𝜷1 x1+ 𝜷2x2 + 𝜷3x3 + ….+ 𝜷ixi + 𝜺 (dimson & mussavian, 1999) here, rit the return of ith stock at t period. 𝜶 is the intercept, 𝜷1, 𝜷2,……i are relative slopes of x1, x2,….xi macro variables. 𝜺 is the error term. the fama-french three factor model: fama and french (1993); fama and french (1995) proposed a three factor model to evaluate stock market return; e(ri )= rf + β1 [e(rm) – rf] + β2.smb+ β3.hml here, hml is the difference in return between portfolios of assets with high book to market and low book to market ratio. smb is the difference in return between portfolios of assets with small market capitalization and big market capitalization. 4. literature review and research gap lehmann and modest (2005) published a study examining the different strategies for constructing basis portfolios that are highly correlated with the factors affecting security rates of return. study found that performance of portfolios with large number of securities was better than portfolios with small number of securities. they found factor analysis as superior technique to principal components procedures. ingersoll (1984) is one of the supporters of the apt model, stating in his study that the apt does not incorporate capm’s dubious assumptions in describing simple linear relationship between security prices and various factors those have impact on rates of return. according to opinion of some researchers, although equally weighted stock market index does not truly represent market portfolio, its movement of returns should be highly associated with the true market portfolio (kandel & stambaugh, 1987; shanken, 1985). chen, roll, and ross (1986) in their study verified the soundness of the apt in us stock markets. they found several macroeconomic factors such as industrial production, variations in risk premiums, and the shifts in the yield curve have profound influence on stock’s return. the relation between risk and return for agricultural assets was examined by arthur, carter, and abizadeh (1988) who concluded that the apt was better at explaining returns for these assets than the capm. handa and linn (1993) in their study depicted a linear relationship between expected financial risk and management reviews, 2021, 7(1): 16-25 18 © 2021 conscientia beam. all rights reserved. asset returns and their factor betas; however, they also concluded that when there is more information available, predicted prices were higher while factor betas were relatively lower. on the other hand, less available information underestimated prices and overestimated factor betas. sarver and philippatos (1993) evaluated the nature of spot foreign exchange risk premiums using the apt. they tested whether the differences in the pure returns on currencies depend on systematic risk. they came to the result that single-factor apt model can describe expected exchange returns. due to non-stationarity problem of security returns, koutmos and theodossiou (1993) examined the impact of conditional heteroskedasticity in the apt with observed variables. study revealed that forming portfolios can’t remove the existence of conditional heteroskedasticity which leads to inefficient estimates of factor betas, and if ignored leads to erroneous pricing of factors. nshom (2007) analyzed 18 stocks listed in london stock exchange (lse) to explore the association between return of stock and currency exchange rates. study revealed that in case of some firms, return of stock was significantly affected by exchange rate changes. cauchie, hoesli, and isako (2004) conducted a study on the determinants of stock returns using an apt framework in the swiss stock market which is particular because it includes a large number of firms that are susceptible to foreign economic conditions. they used statistical and macroeconomic implementations of the apt on 19 industrial sector indices. they concluded that statistically determined factors were better at explaining determinants of stock returns than macroeconomic variables. altay (2003) analyzed german and turkish economies and used the factor analysis technique on key economic indicators for identifying significant factors that affect security returns in an apt framework. altay used the same economic indicators for both countries and found four factors affecting the german market while he found only 3 for the turkish market. the german market had two factors relating to unexpected economic changes. ramadan (2012) conducted a research on 12 industrial portfolios which consisted of listed stocks traded in amman stock exchange of jordan over the period 2001-2011. regressing six variables on stock return study found that four variables explained 84% changes in stock return. study also revealed that the impact changes across industries. zubairi and farooq (2012) in their research tested both capm and apt using stock returns of fertilizer and power industries listed in karachi stock exchange, pakistan. study found that macroeconomic variables were not the significant determinant of stock returns and hence apt was not valid. for testing efficiency of apt, (basu & chawla, 2012) analyzed 10 portfolios which consists of 50 stocks traded in indian stock exchange over the period 2003 to 2008. study found that apt is valid since macroeconomic variables of apt were significantly associated with portfolios’ return. iqbal, khattak, khattak, and ullah (2012) tested the validity of apt in karachi stock exchange of pakistan using four macroeconomic factors and 26 listed firms’ stocks during 2004-2008. study found that apt was valid since actual return did not significantly deviate from projected return. depending on the previous studies mentioned above, it can be concluded that some of these studies supported the apt while others don’t. all studies used different methods in testing the validity of the models, some used unconditional apt while others used conditional apt, and thus the results are inconclusive. so, here some space of investigating the validity of model on bangladesh stock market is found. although few research works were done on capital asset pricing model (capm) but no research work was done on validity of apt from the context of bangladeshi stock market. aim of the present study is to fill this research gap. 5. research objectives: the main purpose of the study is to test the validity of arbitrage pricing theory (apt) model in dhaka stock exchange (dse). the specific objectives are as follows: a. to know about some descriptive statistics of ds-30 index return and macro-economic variables used in apt model. b. to identify the strength and direction of co-movement between ds-30 index return and macro-economic variables used in apt model. financial risk and management reviews, 2021, 7(1): 16-25 19 © 2021 conscientia beam. all rights reserved. c. to explore the significance of impact of macro-economic variables on ds-30 index return. 6. hypotheses the hypotheses of the study are as follows: h0-1: exchange rate has significant effect on return of ds-30 index. h0-2: interest rate has significant influence on return of ds-30 index. h0-3: market capitalization has significant impact on return of ds-30 index. h0-4: tax rate has significant influence on return of ds-30 index. 7. research methodology 7.1. data and sample the data in this particular study consist of secondary data composed of observable variables that has been obtained from the dse library, bangladesh bureau of statistics, and bangladesh institute of bank management. this has covered the period from january 2013 to october 2018, making a total of 70 monthly observations. data has comprised of interest on commercial bank loans & advances; interest on savings of commercial banks; exchange rate of the u.s dollar, value of market capitalization, taxes paid to government by investor and rate of return of ds 30 index. 7.2. model specification the analysis has involved performing test of relative pricing model to know how much of the movement in stock returns is picked up by the several explanatory variables. from the full sample of 30 stocks, the firms selected spanned the full spectrum of stocks contained in the sample. the model for apt test is: rrdt = 𝜶 + 𝛽1 expt + 𝜷2intt + 𝜷𝟑capt + 𝜷4 taxt + 𝜺t (sharpe & cooper, 1972) here, rrdt representing rate of return on ds 30 companies at time period t is the dependent variable. returns are articulated in percentage forms for study periods. independent variables: exchange rate (expt), interest rate (intt), market capitalization (capt), and taxes paid by investors (taxt) at time period t. 𝛽1, 𝛽2, 𝛽3, 𝛽4 are coefficients of exchange rate , interest rates , market capitalization & taxes respectively while 𝛼 is constant and 𝜀t is the error of analysis  stock return –return of a stock (rrd): it depends on stock prices which is largely influenced by value creation.  exchange rateratio of two currencies (exp): an exchange rate estimates the estimation of one cash in units of another money.  interest rate (int): it is the general market interest rate which indicates the fee paid for obtaining the fund. it is the cost of borrowing for the fund receiving entity.  market capitalization (cap)-aggregate market stock value: it alludes to the all-out dollar market value of an organization's outstanding shares. it is determined by duplicating an organization's offers remarkable by the present market price of one share.  taxes mandatory charges paid to government (tax): a charge which is an obligatory budgetary charge or some other kind of toll forced upon a citizen (an individual or other lawful element) by a legislative association so as to support different open expenditures. 7.3. data analysis technique here in the study, data have been analyzed using ordinary least squares (ols) or linear least squares method. it is a method for estimating the unknown parameters in a linear regression model. for apt test a regression model for establishing an equation is formed. this equation describes the relationship of rrd with other independent variables such as exchange rates, interest rates, market capitalization and taxes. financial risk and management reviews, 2021, 7(1): 16-25 20 © 2021 conscientia beam. all rights reserved. a) data were dissected to information utilizing e-views 10. some specific tests were performed as followings: 1) descriptive measurements. 2) correlations between factors. 3) estimation of regression coefficients. 4) diagnostic tests: normality, heteroskedasticity, serial auto correlation, model stability, and multicollinearity. b) hypothesis test was performed through multiple linear regression. 8. results and discussions 8.1. descriptive statistics of variables it is necessary to comment on some preliminary features of the data for analyzing the result of the study. table 1 shows descriptive statistics for the return of ds30 and other independent variables. table-1. descriptive statistics of dependent variable and independent variables. statistics rrd exp int cap tax mean 3.249404 1.897652 0.808625 3.753781 5.075939 median 3.245375 1.894316 0.814229 3.778838 5.076294 maximum 3.358549 1.922985 0.938520 3.834866 5.311029 minimum 3.108089 1.888741 0.684845 3.443106 4.436799 std. dev. 0.059084 0.009821 0.089872 0.103793 0.137199 skewness -0.129869 1.371836 0.082612 -2.399796 1.381987 kurtosis 2.486674 3.632694 1.488254 7.121232 8.240003 probability 0.634397 0.000018 0.041589 0.000000 0.000000 sum sq. dev. 0.226910 0.006269 0.525002 0.700242 1.223524 observations 70 70 70 70 70 note: here all variables are in the percentage form. data have been compiled by the researchers and calculated in eviews10. from the table, we can see that average return of ds30 is 3.25%. the mean of tax is the largest (5.08) and the lowest one is int (.81) over the period. in term of standard deviation, highest value is tax with 0.137 followed by cap, int, rrd and exp with 0.104, 0.0899, 0.059 and 0.0098 respectively. all of the variables except exp and int have negative skewness and positive kurtosis values. 8.2. correlation between macroeconomic variables and ds-30 index table-2. correlation among variables. variables rrd exp int cap tax rrd 1 0.65223686 -0.8295003 -0.4721129 0.45743023 exp 0.65223686 1 -0.6582619 -0.8305811 0.41359074 int -0.8295003 -0.6582619 1 0.45274716 -0.5795148 cap -0.4721129 -0.8305811 0.45274716 1 -0.5046696 tax 0.45743073 0.41359074 -0.5795148 -0.5046696 1 from table 2 it is seen that relationship between rrd and int is strong and negative as the value of correlation coefficient is -0.829. moderate and positive correlation is seen between rrd and exp (0.65). negative and weak correlation is seen between rrd and cap (-0.472) while tax is positively related with rrd. 8.3. impact of macroeconomic variables on return of ds-30 index regression model paves the way of constituting the mentioned equation. the independent variable which has high coefficient value at low probability has impact rrd more. from the table 3, it is clear that constant value is 1.932. coefficient values of exp, int, cap and tax are 0.993, -0.486, -0.015 and -0.023 respectively. the probabilities are less than 5% for exp and int which means that financial risk and management reviews, 2021, 7(1): 16-25 21 © 2021 conscientia beam. all rights reserved. null hypothesis is rejected and these two macroeconomic variables has significant impact on return of ds-30 index. the other two variables cap and tax are insignificant as probabilities are greater than 5% and thus null hypothesis is accepted. from the regression model the actual equation established such as rrdt = 1.93 + 0.993 expt + (-0.486) intt + (-0.015) capt + (-0.023) taxt from the empirical study it is obvious that exchange rate significantly and positively affects stock return of ds30 companies. 1% increases in exchange rate results in 0. 993% increase in stock prices at 5% significant level in the safe range having 0.097% standard error. another variable that has significant impact is int but it is negatively related with return of ds-30 index. 1% increases in interest rate results in 0. 486% decrease in stock prices at 5% significant level having standard error 0.075%. the other two variables tax and cap have negative impact on stock prices but have insignificant impact. this supports the findings of dimitrova (2005). 1% increase in market capitalization results in 0.015% decrease in return of ds30 having standard error 0.187%. it is noted that 1% increase in tax causes 0.023% decrease in stock price and vice versa. so, it is relatively more worthy in considering exchange rate and interest rate effect for investing in stock market although market capitalization and tax rate has insignificant effect. so, apt is not fully valid for determining stock prices of ds-30 companies of dhaka stock exchange. table-3. coefficient table of regression analysis. variable coefficient std. error t-statistic prob.(p-value) decision on h0 c 1.932142 2.245506 0.860448 0.3929 exp 0.992655 0.097534 10.17746 0.0003*** h0-1 accepted int -0.486033 0.074792 -6.498472 0.0004** h0-2 accepted cap -0.015400 0.082530 -0.186598 0.8526 h0-3 rejected tax -0.022779 0.041635 -0.547117 0.5863 h0-4 rejected 8.4. model fitness and diagnosis tests tests for model fitness are quite positive in the empirical analysis. the table 4 shows the fitness of the overall model. table-4. fitness of regression model. r-squared 0.709438 adjusted r-squared 0.690385*** s.e of regression 0.032876* f-stat 37.234449** no of observations 66 note: (***), (**) and (*) indicates strongly, moderate and poor results. here r-squared is 0.709 meaning that about 71% of independent variables explain change of dependent variable rrd. summary results of model diagnostic tests are given below: table-5. overall results of diagnosis tests. name of tests specific model remarks normality test jarque-bera yes model specification test ramsey-reset test support heteroskedastiticity breusch–pagan–godfrey(bpg) test. no serial auto correlation durbin-watson test/ breuschgodfrey serial correlation lm test no testing for multicollinearity variance inflation factors (vifs) no from table 5 it is seen that the data used in the study are normally distributed. it is found that from jarquebera normality test. the estimated equation is stable and specified having 73% probabilities (ramsey reset test). the equation is free from heteroskedasticity and serial auto correlation. so, the model has passed all of the standard tests. financial risk and management reviews, 2021, 7(1): 16-25 22 © 2021 conscientia beam. all rights reserved. 9. conclusion in this study, four explanatory variables namely interest rate, exchange rate, market capitalization, and tax rate were used in apt model to assess the significance of impact of these variables on return of ds-30 index. it is found that two explanatory variables namely interest rate and exchange rate has significant influence but market capitalization and tax rate have insignificant impact on return of ds-30 index. it is also found that rise of interest rate adversely affects the return of ds-30 index. so, monetary policy has immense importance in this regard. explanatory variables used in apt model have failed to fully explain the change of return of ds-30 index due to presence of two insignificant variables. further studies can be undertaken to assess the validity of apt model by incorporating other macroeconomic variables such as inflation rate, per capital income, foreign direct investment etc. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: authors are indebted to dhaka stock exchange (dse) and bangladesh bank authority for providing necessary data and reports. they also express their gratitude to different finance scholars, academicians, and officials of dse who assist them through their invaluable suggestions, insight thoughts and constructive criticisms. references altay, e. (2003). the effect of macroeconomic factors on asset returns. a comparative analysis of the german and the turkish stock markets in an apt foreign market (pp. 217-237). germany: financ: university library of munich. arthur, l. m., carter, c. a., & abizadeh, f. (1988). arbitrage pricing, capital asset pricing, and agricultural assets. american journal of agricultural economics, 70(2), 359-365. available at: https://doi.org/10.2307/1242076. basu, d., & chawla, d. (2012). an empirical test of the arbitrage pricing theory—the case of indian stock market. global business review. global business review, 13(3), 421–432. available at: https://doi.org/10.1177/097215091201300305. cauchie, s., hoesli, m., & isako, d. (2004). the determinants of stock returns in a small open economy. international review of economics & finance, 13(2), 167-185. available at: 10.1016/j.iref.2003.07.001. chen, n.-f., roll, r., & ross, s. a. (1986). economic forces and the stock market. journal of business, 59(3), 383-403. chowdhury, t. a. (2005). an overview of bangladesh stock market (vol. 45). portfolio: chittagong stock exchange ltd. dimitrova, d. (2005). the relationship between exchange rates and stock prices: studied in a multivariate model. issues in political economy, 14(1), 3-9. dimson, e., & mussavian, m. (1999). three centuries of asset pricing. journal of banking & finance, 23(12), 1745-1769. fama, e. f., & french, k. r. (1993). common risk factors in the returns on stocks and bonds. journal of financial economics, 33(1), 3-56. available at: https://doi.org/10.1111/1540-6229.00717. fama, e. f., & french, k. r. (1995). size and book-to-market factors in earnings and returns. the journal of finance, 50(1), 131155. handa, p., & linn, s. c. (1993). arbitrage pricing with estimation risk. journal of financial and quantitative analysis, 28(1), 81100. imam, m. o. (2001). capital market development in bangladesh: problems and prospects. portfolio: chittagong stock exchange ltd. ingersoll, j. e. (1984). some results in the theory of arbitrage pricing. the journal of finance, 39(4), 1021-1039. available at: https://doi.org/10.1111/j.1540-6261.1984.tb03890.x. iqbal, n., khattak, s. r., khattak, m. a., & ullah, i. (2012). testing the arbitrage pricing theory on karachi stock exchange. interdisciplinary journal of contemporary research in business, 4(8), 839-853. kandel, s., & stambaugh, r. f. (1987). on correlations and inferences about mean-variance efficiency. journal of financial economics, 18(1), 61-90. koutmos, g., & theodossiou, p. (1993). apt with observed factors and conditional heteroskedasticity. managerial finance, 19(3/4), 24-39. financial risk and management reviews, 2021, 7(1): 16-25 23 © 2021 conscientia beam. all rights reserved. lehmann, b. n., & modest, d. m. (2005). diversification and the optimal construction of basis portfolios. management science, 51(4), 581-598. mollik, a., & bepari, m. k. (2010). instability of stock beta in dhaka stock exchange, bangladesh. managerial finance, 36(10), 886-902. available at: https://doi.org/10.1108/03074351011070251. nshom, a. m. (2007). the association of exchange rates and stock returns. master’s thesis, umea school of business, umea university, sweden ramadan, i. z. (2012). the validity of the arbitrage pricing theory in the jordanian stock market. international journal of economics and finance, 4(5), 177-185. available at: http://dx.doi.org/10.5539/ijef.v4n5p177. sarver, l., & philippatos, g. c. (1993). the arbitrage pricing theory and foreign exchange risk premia. managerial finance, 19(3/4), 40-67. shanken, j. (1985). multi-beta capm or equilibrium apt? a reply. journal of finance, 40(4), 1189-1196. sharpe, w. f., & cooper, g. m. (1972). risk-return classes of new york stock exchange common stocks, 1931-1967. financial analysts journal, 28(2), 46-54. zubairi, h. j., & farooq, s. (2012). testing the validity of capm and apt in the oil, gas and fertilizer companies listed on the karachi stock exchange. paper presented at the financial markets & corporate governance conference. appendix 1. jarque-bera normality test: : variables are normally distributed. : variables are not normally distributed. 0 2 4 6 8 10 12 14 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 series: resid sample 1 67 observations 66 mean 6.30e-16 median 0.004404 maximum 0.083677 minimum -0.075474 std. dev. 0.031849 skewness 0.025388 kurtosis 2.894579 jarque-bera 0.037653 probability 0.981350 figure-a.1. normality test. from figure a-1, it is revealed that p value of obtaining such a value from chi square is 0.9814(>0.05). normality assumption of this study is not rejected. 2. detection of heteroskedasticity: : the error variance is homoscedastic. : the error variance is not homoscedastic. table-a-1. heteroskedasticity test (breusch-pagan-godfrey (bpg) test). f-statistic 1.029456 prob. f(4.61) 0.3994 obs *r-squared 4.173610 prob. chi-square(4) 0.3830 scaled explained ss 3.377274 prob. chi-square(4) 0.4968 http://dx.doi.org/10.5539/ijef.v4n5p177 financial risk and management reviews, 2021, 7(1): 16-25 24 © 2021 conscientia beam. all rights reserved. from table a-1, it is seen that the observed chi-square value 0.4968 has high p value of 0.40 which suggesting that it is failed to reject null hypothesis. so, the model does not suffer from heteroskedasticity. 3. model specification test (ramsey-reset test): : no specification error : having specification error table-a-2. ramsey-reset test (omitted variables: squares of fitted values). value df probability t-statistic 0.462769 60 0.6452 f-statistic 0.214155 (1,60) 0.6542 likelihood ratio 0.235151 1 0.6277 table a-2, showed that the p value of ramsey’s reset test f-statistics value is quite high (0.65>0.05). so, we must accept null hypothesis and say that the equation is not mis-specified. 4. detection of serial auto correlation: : there is no positive auto correlation : there is positive auto correlation table-a-3. bruschgodfrey serial correlation lm test. f-statistic 40.72243 prob. f(2,59) 0.083 obs *r-squared 38.27382 prob. chi-square(2) 0.0012 table-a-4. durbin watson test. r-squared 0.579906 mean dependent var 6.30e-16 adjusted r-squared 0.537185 s.d. dependent var 0.031849 s.e. of regression 0.021667 akaike info criterion -4.726075 sum squared resid 0.027697 schwarz criterion -4.493839 log likelihood 162.9605 hannan-quinn criter. -4.634308 f-statistic 13.57414 durbin-watson stat 1.881036 prob (f-statistic) 0.000000 table a-4, showed that the estimated value of durbin-watson value is 1.88 which is near 2.0. it means that we may accept null hypothesis. so, there is no serial correlation in the study. for further testing, breusch-pagan lm test also has been used which is shown in table a-3. here, we see that p value .083 is above the level of significance (.05). so, null hypothesis is accepted. 5. multicollinearity test: : there is significant correlation among independent variables. : there is no significant correlation among independent variables. financial risk and management reviews, 2021, 7(1): 16-25 25 © 2021 conscientia beam. all rights reserved. table-a-5. results of multicollinearity test. variable coefficient variance uncentered vif centered vif c 5.042298 307900.5 na exp 0.951302 209191.9 5.517513 int 0.005594 226.0663 2.717109 cap 0.006811 5865.005 4.412733 tax 0.001734 2729.313 1.962352 table a-5 showed that no variable has centered vif more than 10. so, we can say that variables do not suffer from strong relation within themselves or multicollinearity. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 50 © 2021 conscientia beam. all rights reserved. likelihood of insurance coverage on damages due to level of insecurity in nigeria: logistic modeling approach orumie ukamaka cynthia1 desmond chekwube bartholomew2+ chukwudi paul obite3 kiwu chizoba lawrence4 1department of mathematics and statistics, university of port harcourt, port harcourt, rivers state, nigeria. 1email: amakaorumie@yahoo.com tel: +2348064099683 2,3,4department of statistics, federal university of technology owerri, owerri, nigeria. 2email: desmond.bartholomew@futo.edu.ng tel: +2347033811698 3email: chukwudi.obite@futo.edu.ng tel: +2347031143410 4email: lawrence.kiwu@futo.edu.ng tel: +2348061580923 (+ corresponding author) abstract article history received: 12 july 2021 revised: 16 august 2021 accepted: 3 september 2021 published: 23 september 2021 keywords insurance risk management binary logistic regression model likelihood test employment education. jel classification: c10, c15. insurance serves as a protection against the unexpected and it is one of the most effective risk management tools that protect individuals from being bankrupt due to various contingencies. the binary logistic regression model approach was used to model the described dataset; the model so obtained was statistically significant. all the levels of education were statistically significant in predicting the odds of having insurance cover except for primary education level. also, employment status and age were statistically significant in predicting the likelihood for insurance cover in nigeria. the results showed that individuals who move from no formal education to obtain higher education level are 21.66 times more likely to obtain insurance cover and individuals who move from no formal education to obtain secondary education level are 2.63 times more likely to obtain insurance cover. the odd ratio is not significant for moving from no formal education to primary education and therefore should not be interpreted. further, individuals who move from being unemployed to being employed are more likely to obtain insurance cover. education has the highest impact in predicting the likelihood for one to have insurance cover in nigeria. this paper recommends overhauling of the educational system in order to revamp this sector. contribution/originality: the paper's primary contribution is finding that it assessed the impact of each level of the categorical predictor variables in predicting likelihood of insurance in nigeria. 1. introduction it is usually impossible to avert an unexpected happening but one can have some protection against such unexpected occurrences. insurance serves as a protection against the unexpected. insurance is a legal agreement between two parties – the individual (insured) and the insurance company (insurer). the insurer promises to compensate for financial losses of the insured on happenings of the insured contingency. the insured is required to pay a premium usually monthly, quarterly or yearly in return for the promise made by the insurer. insurance is one of the most effective risk management tools that protect individuals from being bankrupt due to various contingencies. insurance is put in place to safeguard and protect citizens should certain unexpected evils happen. there are different types of insurance scheme and one can choose any of them as advised by financial experts. financial risk and management reviews 2021 vol. 7, no. 1, pp. 50-59. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.50.59 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0002-0344-768x https://orcid.org/0000-0003-0541-1442 https://orcid.org/0000-0002-8688-8842 https://orcid.org/0000-0003-1074-7207 mailto:amakaorumie@yahoo.com mailto:desmond.bartholomew@futo.edu.ng mailto:chukwudi.obite@futo.edu.ng mailto:lawrence.kiwu@futo.edu.ng https://www.doi.org/10.18488/journal.89.2021.71.50.59 financial risk and management reviews, 2021, 7(1): 50-59 51 © 2021 conscientia beam. all rights reserved. financial experts will always advise that people should have all the insurance policies as it may be very difficult to determine the unexpected evil that will come and the exact insurance you need. there are five types of insurance recommended by most financial experts namely: life, health, long-term disability, automobile and home insurance. the life insurance covers for one’s funeral expenses and also to take care of those they left behind. the life insurance is very important if the person is the breadwinner of the family and has many people depending on him. the health insurance is also important because one serious illness can make a family to be bankrupt. a research of 900 americans who presented personal bankruptcy case between 2013 to 2016, medical problem was the major reason for bankruptcy (ramos et al., 2019). many people think they may not need the long-term disability insurance, but the statistics from social security administration showed that one-fourth of all workers will become disabled and will not be able to work before they get to their retirement age. this is different from health insurance; health insurance will take care of the medical bills but it would not take care of the daily expenses for the days when one is unable to work for weeks, months, or ever again. the automobile insurance covers for expenses for car accident and help guard against any litigation that might come up from the accident. auto insurance also protects vehicles of the insured against vandalism, theft or a natural disaster. home insurance covers for losses and damages caused to your home resulting from accidents like fire and other natural calamities. insurance is necessary and important since it grants peace of mind to people. a business owner can take on certain business opportunities because they can shift the risk. some extant literature reveals that works have been done on insurance and some of these literatures are reviewed as follow: nkengmenche (2020) studied different factors to ascertain how they affect the fast growth of life insurance in cameroon. they discovered that poor integrity by the insurance companies, high cost of premiums, non-availability of the insurance companies in some part of the country, lack of disposable income, inefficiency in settling claims, and poor customers and distribution channels have a significant effect. in the fast growth of life insurance in cameroon. the result of nkengmenche (2020) is similar to what salami (1996) discovered, that poor marketing relation and poor premium price has made many customers to allow their policies to lapse. beck and webb (2003) discovered that high income level per capital countries, countries with more developed banking sector, countries with low inflation rate, high private savings and real interest rate are more likely to purchase large amount of life insurance coverage. they also found out that education, life expectancy and dependency ratio of the young have no significant effect on the purchase of life insurance. buzatu (2013) studied the influence of behavioral factors on insurance decision using the romanian approach. he found out that different client approaches by the insurance companies, specific protection of clients based on the clients’ behavioral issues, and financial awareness in the field significantly affect peoples’ insurance decision. park and lemaire (2012) found out that countries with a large fraction of people with islamic beliefs are less likely to buy an insurance policy. hammond, houston, and melander (2007); truett and truett (2004) and burnett and palmer (2004) identified higher education as one of the factors that influences an individual in purchasing an insurance policy to protect their dependents. yildirim and cakar (2015) identified different factors that influences insurance companies’ preference for insurance agencies operating in turkey. using information from a face-to-face interview from forty-nine agencies, they discovered that financial opportunities provided to agents, ability to pay the claims of policyholders by insurance companies, communication, and providing assistance are the major factors influencing insurance companies’ preference of insurance agencies. a recent paper by ugwuanyim, onwuegbuchunam, bartholomew, and anikpe (2021) also found that claims settlement affects the volume of premiums received by insurance companies in nigeria. insecurities have been a serious problem in nigeria since the early 2000s. armed militants were after oil industry infrastructure and kidnapping. years later, it extended to farmer-herder conflicts, islamic insurgents in northern nigeria, cultism, election violence, banditry involving fulani herdsmen, etc. these insecurities have led to unexpected loss of properties and lives; and many health related issues (ebiede, 2021). those with an insurance financial risk and management reviews, 2021, 7(1): 50-59 52 © 2021 conscientia beam. all rights reserved. cover always have some protection against such unexpected occurrences and can shift the risk to the insurer while those without any insurance cover suffer a lot and may become bankrupt due to the sudden financial burden the unexpected damages had caused. in this study, the researchers, seek to know the factors that influences peoples’ choice of having an insurance cover in nigeria, and to identify the relative risk of having an insurance based on some selected predictor variables. thus, the researchers want to solve the classification problem (insured or not insured) using binary logistic regression modeling based on some selected predictor variables in nigeria by estimating the following: the relative risk in employment status for insurance cover in nigeria with reference to employed individuals (as control level), the relative risk in education level for insurance cover in nigeria with reference to no education individuals (as control level), the relative risk in individual age for insurance cover in nigeria. section 2 comprises the materials and method, whereas section 3 is the analysis, results output and interpretation. sections 4 is the summary, conclusion and recommendation. 2. materials and method this section discusses the statistical methodology used in this study. 2.1. binary logistic model consider a model with three predictor variables (employment status, education level and respondent’s age), 1x 2x , 3x , and one binary (bernoulli) response variable  (insurance cover) which we denote ( )1== . linear relationship is assumed to exist between the predictor variables and the log-odds (also called logit) of the response. this linear relationship can be written in the following mathematical form as expressed in equation 1 (where  is the log-odds, b is the base of the logarithm, and i  are parameters of the model):  = += − = 3 1 0 1 log i iib x    (1) exponentiating the log-odds gives the odds ratio or relative risk: in equation 2          = + = − 3 1 0 1 i i x i b    (2) by simple algebraic manipulation, dividing numerator and denominator by              = + 3 1 0 i i x i b  , the probability that 1=y is given in equation 3 ) 3 1 0 ( 1 3 1 ) 0 ( 1 1 3 1 0 3 1 0  = +=               +  = +− =               +  = +  = + =                         i i x i s i i x i bi i x i b i i x i b b     (3) financial risk and management reviews, 2021, 7(1): 50-59 53 © 2021 conscientia beam. all rights reserved. where bs is the sigmoid function with base b (usually taken as e ) are fixed. the above formula shows that once i are fixed, we can easily compute either the log-odds that 1=y for a given observation, or the probability that 1=y . this study is based on a dataset extracted from the 2018 nigerian demographic and health survey report. with a total of one hundred and twenty-two thousand seven hundred and eighteen (122,718) respondents and no missing data. since the outcome variable is binary count data with some categorical predictor variables, binary logistic model instead of anova-type analysis is most suitable for modeling the outcome variable (haeil, 2014). the data is described in table 1 giving the first – ten rows because the data is too large. table-1. data description. s/n education level employment status age insurance cover 1 4 0 16 0 2 4 0 17 1 3 4 1 16 0 4 4 0 16 0 5 3 1 16 0 6 4 1 17 0 7 4 1 17 0 8 4 1 17 0 9 4 0 17 0 10 4 0 18 0 the first 10 rows of the dataset displayed in table 1 was to enable description of the data used for the study. the response (outcome, dependent) variable called insurance cover is binary in nature. there are three predictor variables: education level, employment status and respondent’s age. two of the predictor variables (education level and employment status) are treated as categorical variables while respondent’s age as continuous. the variable education level takes on the values 1 through 4 (1=higher education, 2 = secondary school, 3= primary school and 4 = no education) and employment status takes on the values 0 through 1 (1 = employed and 0 = not employed). the response variable takes on the values 0 through 1 (1 = insured and 0 = not insured). the basic descriptive statistics of the data is displayed in table 2. 3. data analysis, results and discussion the dataset is analyzed using r programming software, version 4.10 and the results are displayed in tables and figures below. table-2. descriptive statistics. education level employment status age insurance cover mean 35.88115843 standard error 0.022618605 median 36 mode 35 standard deviation 7.92355258 sample variance 62.78268548 maximum 4 1 49 1 minimum 1 0 15 0 count 122718 122718 122718 122718 iqr 12 https://en.wikipedia.org/wiki/sigmoid_function financial risk and management reviews, 2021, 7(1): 50-59 54 © 2021 conscientia beam. all rights reserved. 3.1. results and discussion the minimum, median, mean and maximum age of the respondents were 15 years, 36 years, 36 years and 49 years as shown in table 2. to further understand the nature of the dataset, cross tabulation of the categorical predictor variables with the response variable is displayed in table 3. table-3. cross tabulation. not employed employed education level not insured insured total not insured insured total grand total higher education 984 132 1,116 5,328 1,125 6,453 7,569 secondary school 4,854 210 5,064 22,736 633 23,369 28,433 primary school 3,899 76 3,975 19,768 144 19,912 23,887 no education 22,082 211 22,293 40,183 353 40,536 62,829 grand total 31,819 629 32,448 88,015 2,255 90,270 122,718 from table 3, out of the total 122,718 respondents whose responses were used for this study, 26% (32,448) were unemployed while 74% (90,270) were employed. out of the 26% that were unemployed, 98.1% (31,819) were also not insured and 1.9% (629) was insured. on the other hand, out of the 74% that were employed, 97.5% (88,015) were not insured and 2.5% (2,255) were insured. this has reassured that employment status can explain some level of information about insurance cover in nigeria since being employed increased the percentage insured by 0.6% (2.5% 1.9% = 0.6%). again, out of the 2.5% (2,255) that were employed and insured, the percentage of people with higher education was 50%, secondary school was 28%, primary school was 6% while with no formal education was 16%. this is an indication that education interacts with employment status to predict the likelihood of being insured in nigeria. as a way of data screening to avoid misclassification, the boxplot was used to check the presence of outlier in the numerical predictor variable (age) and the output is shown in figure 1. no presence of outlier in the variable since none of the data points fall outside the lower and upper whiskers. figure-1. outlier detection by box and whiskers plot. having visualized the dataset, we proceed with the logistic modeling using the variables as described. the output of the logistic model is displayed in table 4. the output in table 4 as generated by using the glm() function of the r console with family set as “binomial” to implement equation 1 contains the regression coefficients, their standard errors, the z-statistic value and the corresponding p-values. age, employment status and two levels of education level are statistically significant (their corresponding p-values are less than alpha 0.05). the logistic regression coefficients give the change in the log odds of the binary response for a one-unit increase in the predictor variable. financial risk and management reviews, 2021, 7(1): 50-59 55 © 2021 conscientia beam. all rights reserved. table-4. logistic regression model output. deviance residuals: min 1q median 3q max -0.7309 -0.2192 -0.1413 -0.1281 3.2060 coefficients: estimate std. error z value pr(>|z|) (intercept) -5.55867 0.11265 -49.346 < 2e-16 *** education_level1 3.12055 0.05358 58.237 < 2e-16 *** education_level2 1.28911 0.05601 23.015 < 2e-16 *** education_level3 0.03621 0.08049 0.450 0.653 employment_status0 0.21277 0.04898 4.344 1.40e-05 *** age 0.02126 0.00267 7.962 1.69e-15 *** signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 (dispersion parameter for binomial family taken to be 1) null deviance: 27334 on 122,717 degrees of freedom residual deviance: 23267 on 122,712 degrees of freedom aic: 23279 number of fisher scoring iterations: 7 thus, the following interpretations follow: • for every one unit change in age, the log odds of insured (versus not insured) increases by 0.02. the indicator variables for employment status and education level have slightly differently interpretation. since the reference levels for the two categorical variables are employed (1) and no education (4), we interpret as follow: • interviewing an unemployed individual versus interviewing an employed individual, changes the log odds of being insured by 0.213. • interviewing an individual with higher education versus interviewing an individual with no education, changes the log odds of being insured by 3.121. • interviewing an individual with secondary education versus interviewing an individual with no education, changes the log odds of being insured by 1.29. • interviewing an individual with primary education versus interviewing an individual with no education, changes the log odds of being insured by 0.036. though, this change is not statistically significant (p-value 0.653 is greater than alpha 0.05) below the table of coefficients in table 4 are fit indices, including the null and deviance residuals and the aic. the confidence intervals for the regression coefficients by using the confint() function is displayed in table 5. the confidence intervals displayed are calculated using the profiled log-likelihood function. table-5. confidence interval for the regression coefficients. 2.5 % 97.5 % (intercept) -5.78048289 -5.33889321 education_level1 3.01609921 3.22618518 education_level2 1.17967364 1.39928610 education_level3 -0.12337317 0.19233219 employment_status0 0.11616508 0.30820585 age 0.01603154 0.02649908 we further test for an overall effect of employment status and education level (the categorical predictor variables) using the wald test() function of the aod library in r. the order in which the coefficients are given in the table of coefficients of table 4 is used as the order of the terms in the model. thus, the wald test output is displayed in table 6. financial risk and management reviews, 2021, 7(1): 50-59 56 © 2021 conscientia beam. all rights reserved. table-6. wald test for the significance of categorical predictor variables in the logit model. wald test: chi-squared test: x2 = 4336.1, df = 3, p(> x2) = 0.000. the chi-squared test statistic of 4,336.1, with three degrees of freedom is associated with a p-value of 0.000 (less than alpha 0.05) indicating that the overall effect of the categorical predictor variables is statistically significant. further, we also tested additional hypotheses about the differences in the coefficients for the different levels of education level. to contrast these three terms (higher, secondary and primary education coefficients) , we multiply one of them by 1, and the other by -1. the other terms in the model (employment status and age coefficients since they one term per variable) are not involved in the test, so they are multiplied by 0. the result of this additional hypothesis is shown in table 7. table-7. wald test for significant difference in education level parameters. wald test: chi-squared test: x2 = 398.8, df = 3, p (> x2) = 0.000 the chi-squared test statistic of 398.8 with 3 degree of freedom is associated with a p-value of 0.000 (less than alpha 0.05), indicating that the difference between the coefficient for education level = 1, the coefficient for education level = 3 and education level = 2 is statistically significant. in order to further understand the coefficients of the logit mode, the coefficients were exponentiated and the result interpreted as odds-ratios. to get the exponentiated coefficients, the exp () function was used. the odds ratios with their corresponding confidence intervals are displayed in table 8. table-8. odds ratio and 95% confidence interval. odds ratio 2.5 % 97.5 % (intercept) 0.003853907 0.003087224 0.004801182 education_level1 22.658847100 20.411515243 25.183403384 education_level2 3.629564494 3.253312294 4.052305986 education_level3 1.036873981 0.883933745 1.212073089 employment_status0 1.237106448 1.123181268 1.360981112 age 1.021487334 1.016160736 1.026853299 now the following interpretations follow: • for a one unit increase in age, the odds of being insured (versus not being insured) increase by a factor of 1.021 (1.021 – 1.000 = 0.021), that is about 2.1% increase in the likelihood to obtain an insurance cover. • moving from no education to higher education increases the odds of being insured by a factor of 22.66 (22.66 – 1.00 = 21.66), that is about 2166% increase in the likelihood to obtain an insurance cover. • moving from no education to secondary education increases the odds of being insured by a factor of 3.63 (3.63 – 1.00 = 2.63), that is about 263% increase in the likelihood to obtain an insurance cover. • moving from no education to primary education has an impact which is not statistically significant. thus, we do not report the odds ratio. • odds of being insured increases by 1.24 (1.24 – 1.00 = 0.24) when moving from employed individual to unemployed individual. this means that there will be 76% increase in the likelihood of being insured for every one unit increase in the number of employed people in nigeria. financial risk and management reviews, 2021, 7(1): 50-59 57 © 2021 conscientia beam. all rights reserved. the model summary table is displayed in table 9. the nagelkerke r-square indicates that 16.3% of the total variations in insurance cover are present due to the variations among the three predictor variables. table-9. model summary. step -2 log likelihood cox & snell r square nagelkerke r square 1 23266.995a 0.033 0.163 further, graphs of predicted probabilities are used to understand and/or present the model. therefore, the plot with the predicted probabilities is presented in figure 2. recall that 1 represents higher education, 2 represents secondary education, 3 represents primary education and 4 represents no formal education in the levels of education as displayed. the plot in figure 2 shows that the model predicted probabilities for insurance cover increases significantly with age for only those that are with higher education, followed by those with secondary school education while it remained almost the same for those with primary education or no formal education at all. figure-2. plot of the predicted probabilities. 4. summary, conclusion and recommendation this section discusses the summary of the findings of this work, the conclusion based on the findings and recommendations. 4.1. summary the binary logistic regression model was used to model the described dataset; the model so obtained was statistically significant. all the levels of education were statistically significant in predicting the odds of having insurance cover except for primary education level. this may be because primary education level is not enough for the individual to fully understand the dividends of insurance cover. also, employment status and age were statistically significant in predicting the likelihood for insurance cover in nigeria. based on the findings of results of this work in section 3, the answers to our research objectives follow: financial risk and management reviews, 2021, 7(1): 50-59 58 © 2021 conscientia beam. all rights reserved. table-10. summary of findings. variable relative risk (p-value) interpretation higher education 21.66 (significant at 5%) this means that individuals who move from no formal education to obtain higher education level are 21.66 times more likely to obtain an insurance cover. secondary education 2.63(significant at 5%) this means that individuals who move from no formal education to obtain secondary education level are 2.63 times more likely to obtain an insurance cover. primary school 1.03 (not significant at 5%) the odd ratio is not significant and therefore should not be interpreted. employment status 1.24 (significant at 5%) this means that individuals who move from being unemployed to being employed are 76% that is 1 (1.24 – 1.00 = 0.24) = 76% more likely to obtain an insurance cover. the subtraction from 1 is because the reference level was unemployed status. respondent’s age 2.1 (significant at 5%) this means that increasing age increases the odds of obtaining of obtaining insurance cover by 2.1. finally, 16.3% of the total variations in the classification of whether or not an individual has an insurance cover in nigeria occurred due to the variations among the three predictor variables (education level, employment status and age), see table 9. 4.2. conclusion table 10 has revealed that the likelihood of obtaining insurance cover increases for those at the upper end of the education distribution. this particular finding is not in agreement with the findings of beck and webb (2003) but in agreement with two studies in the preceding year (burnett & palmer, 2004; hammond et al., 2007; truett & truett, 2004). it is also observed that employment status and age of the individual contributes to the purchase of insurance in nigeria. however, educational level has the highest impact (odds = 21.66), followed by age (odds = 2.1) and then employment status (odds = 0.76). 4.3. recommendation it has been revealed by this study that there is need to put more efforts in inclusive and equitable quality education which is one of the major 2030 agenda for sustainable development goals (sdg). this particular sdg will help promote lifelong opportunities for all, ensure that all learners acquire the knowledge and skills to promote sustainable development and increase the likelihood for insurance cover so that individuals who lose their loved ones or their lives through terror and insecurity situation in nigeria have something to beckon. there is also need to bring insurance sensitization to the younger age distribution and provide employment opportunities to the teaming population of youths in nigeria. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: all authors contributed equally to the conception and design of the study. references beck, t., & webb, i. (2003). economic, demographic, and institutional determinants of life insurance consumption across countries. the world bank economic review, 17(1), 51-88. available at: https://doi.org/10.1093/wber/lhg011. burnett, j. r., & palmer, a. (2004). examining life insurance ownership through demographic and psychographic characteristics. journal of risk and insurance, 51(3), 453-467. available at: https://doi.org/10.2307/252479. financial risk and management reviews, 2021, 7(1): 50-59 59 © 2021 conscientia beam. all rights reserved. buzatu, c. (2013). the influence of behavioral factors on insurance decision–a romanian approach. procedia economics and finance, 6, 31-40. available at: https://doi.org/10.1016/s2212-5671(13)00110-x. ebiede, t. m. (2021). how insecurity affects the lives of everyone in the niger delta. the conversation. retrieved from https://theconversation.com/how-insecurity-affects-the-lives-of-everyone-in-the-niger-delta-158182. haeil, a. (2014). effect modeling of count data using logistic regression with qualitative predictors. engineering, 6(12), 758-772. available at: https://doi.org/10.4236/eng.2014.612074. hammond, j. d., houston, d. b., & melander, e. r. (2007). determinants of household life insurance premium expenditures: an empirical investigation. journal of risk and insurance, 34(3), 397-408. available at: https://doi.org/10.2307/250854. nkengmenche, g. n. (2020). factors affecting the successful uptake of life insurance in cameroon: zenithe insurance company, buea, cameroon, centria university of applied sciences. retrieved from: https://www.theseus.fi/bitstream/handle/10024/337180/njukang%20golden.pdf?sequence=2&isallowed=y. [accessed 22/09/2021]. park, s., & lemaire, j. (2012). the impact of culture on the demand for non-life insurance. astin bulletin: the journal of the iaa, 42(2), 501-527. ramos, j. c., lieberman-cribbin, w., gillezeau, c., alpert, n., gerven, m. v., tuminello, s., & taioli, e. (2019). medical bankruptcy: still common despite the affordable care act. ajph, 109(3), 431-433. available at: https://doi.org/10.2105/ajph.2018.304901. salami, k. a. (1996). development of life business-role of the african life reinsurance. paper presented at the african insurance organization (aio) seminar of life assurance, mombasa kenya, november 27-28. truett, & truett. (2004). risk and insurance in village india. econometrica, 62(3), 539-592. available at: https://doi.org/10.2307/2951659. ugwuanyim, g., onwuegbuchunam, d., bartholomew, d., & anikpe, c. (2021). performance evaluation of motor insurance companies: panel data evidence from nigeria. journal of transportation technologies, 11(3), 325-334. available at: https://doi.org/10.4236/jtts.2021.113021. yildirim, i., & cakar, r. (2015). a study of the factors affecting the insurance company preferences of insurance agencies in turkey. international journal of business and management studies, 7(1), 1-15. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.theseus.fi/bitstream/handle/10024/337180/njukang%20golden.pdf?sequence=2&isallowed=y http://www.theseus.fi/bitstream/handle/10024/337180/njukang%20golden.pdf?sequence=2&isallowed=y 26 © 2021 conscientia beam. all rights reserved. a blockchain research review mohammad tariq hasan1+ mahadi hasan miraz2 farhana rahman sumi3 shumi sarkar4 1assistant professor, school of business and economics, united international university (uiu), bangladesh. 2assistant principle, inasis yab and muamalat, universiti utara malaysia (uum), malaysia. 3,4assistant professor, department of business studies, university of information technology and sciences (uits), bangladesh. (+ corresponding author) abstract article history received: 8 june 2021 revised: 12 july 2021 accepted: 16 august 2021 published: 6 september 2021 keywords blockchain meta-analysis cryptocurrency bitcoin decentralize technology. jel classification: m1; g1; g15. blockchain technology was first introduced as bitcoin’s underlying technology which is one type of distributed ledger that consists of replicated, shared, and synchronized data over the internet. this study extends prior studies on blockchain. a fundamental framework for a blockchain research classification was proposed by analyzing 230 articles related to the study of blockchain published in asia and around the world from 2016 to 2020. the study applies a comprehensive meta-analysis based on findings, literature sources, research objectives, research methods, and context. the objective of the study is to summarize the current blockchain research, its constraints, and future trends. meta-analysis is characterized by the process of theory construction. it is a powerful tool to analyze the literature in a descriptive form which will guide for further study. research shows that the study at home is more decentralized, non-systematic, and has failed to gain a certain research depth—moreover, it lacks quantitative analysis. future research will focus on digital currency, internet financing, and the risk of blockchain technology research. contribution/originality: this study contributes to the existing literature by examining the previous studies in the period of 2016-20 which help us to comprehend the scope of study on blockchain. 1. introduction the blockchain was first published in satoshi nakamoto's 2008 article "bitcoin: a peer-to-peer electronic cash system” (nakamoto, 2008). he proposes an electronic currency: bitcoin, based on the p2p (miraz, hasan, & sharif, 2019a; miraz, hasan, & sharif, 2020a) system design's decentralized structure to solve a trust problem (luther, 2016). further study of the blockchain diversifies its application. in january 2015, the "bretton woods system 2015 white paper" was published at the bitcoin conference in miami, usa (cao, cao, wang, & lu, 2017). the three phases were proposed for blockchain development: the blockchain 1.0 phase, an encrypted digital currency (miraz, hasan, & sharif, 2019b; miraz, hasan, sumi, sarkar, & majumder, 2020b). it is reflected mainly in the bitcoin application: blockchain 2.0 stage, smart deal (gatteschi, lamberti, demartini, pranteda, & santamaría, 2018). blockchain is used on financial or economic markets (miraz et al., 2019a; miraz et al., 2020a) and extends into inventories, bonds, futures, loans, mortgages, ownership rights, ipp, and other agreements (chu & gao, 2019). financial risk and management reviews 2021 vol. 7, no. 1, pp. 26-35. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.26.35 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0003-0810-5395 https://orcid.org/0000-0003-3008-7090 https://orcid.org/0000-0002-3991-901x https://orcid.org/0000-0003-3730-5222 https://www.doi.org/10.18488/journal.89.2021.71.26.35 financial risk and management reviews, 2021, 7(1): 26-35 27 © 2021 conscientia beam. all rights reserved. blockchain 3.0 phase, a very innovative step of the application (maesa & mori, 2020). it is widely used in certain public services worldwide (hou, 2017). all walks of life are very interested in blockchain development and think its prospects are excellent (cao et al., 2017). the academic community believes that blockchain does involve the financial industry and subverts the entire society's operation (cao et al., 2017). regulators are more concerned that blockchain will change and have an impact on economy (shanaev, sharma, ghimire, & shuraeva, 2020). moreover, the blockchain redefines human life and has a high value for research (lu, 2019). the british government published an essential report on blockchain technology in december 2020 (ali, ally, & dwivedi, 2020). in the story called "distributed book technology: beyond the blockchain," the federal government in great britain explores the distributed account technology similar to blockchain technology and examines blockchain's potential in the traditional financial sector (lu, 2019). in addition, few researchers also analyze the potential of blockchain (miraz et al., 2020a; miraz et al., 2020b; miraz, hasan, sumi, sarkar, & majumder, 2020c). the people's bank of asia set up a digital money technical team as early as 2014 and held a unique digital currency seminar in december 2020. during this seminar, they examined how blockchain technology can produce virtual currency to improve financial activities' efficiency, convenience, and transparency (böhme, christin, edelman, & moore, 2015). and at the beginning of 2020, a billion us dollars were invested in the capital market to accelerate chain development (chishti & barberis, 2016). this trend shows that the paper synthesizes blockchain classifications for domestic and academic papers globally (alzahrani & daim, 2019; aste, 2019; miraz & ali, 2018; miraz et al., 2019a; miraz et al., 2019b; nawang & azmi, 2020; pandya, mittapalli, gulla, & landau, 2019; sarwar, nisar, & khan, 2019; schaupp & festa, 2018; șcheau, crăciunescu, brici, & achim, 2020; sovbetov, 2018; xiong & tang, 2020; yang, 2016; zulhuda & sayuti, 2017), then proposes a blockchain classification framework and describes blockchain characteristics (lu, 2018). this paper's importance is that, by summarizing the blockchain study, it helps us to comprehend the present research situation and clarify the work that needs to be further improved to promote blockchain research in asia (abou maroun, daniel, zowghi, & talaei-khoei, 2018; al-amin, sharkar, kaiser, & biswas, 2021; maesa & mori, 2020; miraz & ali, 2018; miraz et al., 2019b; miraz 2020; miraz et al., 2020d; perera, nanayakkara, rodrigo, senaratne, & weinand, 2020; yang, 2016). 2. the blockchain concepts and features the blockchain technique is superior to centralized data storage because it is decentralized (zhang & chen, 2019). blockchain does provide an element of opportunity for economic and political change (malherbe, montalban, bédu, & granier, 2019). both the nodes checked the details of the block together (lu, huang, azimi, & guo, 2019). the features (nathan, govindarajan, saraf, sethi, & jayachandran, 2019) of the blockchain are: 1. the system does not rely on centralized administration or hardware organizations (latif, idrees, ahmad, zheng, & zou, 2021; lee, azamfar, & singh, 2019; li et al., 2021; lin, shen, zhang, & chai, 2018). 2. taking away faith. data sharing is not required among the device nodes. therefore, such a node cannot deceive all other nodes. 3. time management. each node in a cluster secures the database. 4. impurities. editing a single node does not affect all nodes in the network, and those edits cannot be used to change the information and data stored. 5. tracing. the block includes information that can be correlated and traceable back to the front of the blocks per data. 6. anonymity privacy. the confidence and privacy aspects can be lost when the details about the interaction between the nodes is publicly revealed. financial risk and management reviews, 2021, 7(1): 26-35 28 © 2021 conscientia beam. all rights reserved. 3. research and analysis of literatures in order to examine the current literature on the blockchain, we have used "blockchain" as a keyword in google scholar, academia, emailed search engine, elsevier search engine, etc. finally, 230 items of literature have been selected for the study based on the following criteria: 1. the selected article from january 2016 to december 2020. 2. literature related to a blockchain. 3. focused on published articles. 3.1. analysis of literature sources our current journal classification is based on society's existing library classification system. as for the social sciences in asia, there are as many as 230 journals that will be sorted—according to the scientific citation database, organized into two groups. total social science publications include finance, social science, business administration, technology, and economics. it is feasible that publications will cross several categories. table 1 shows that there are many aspects of the research that are focused on blockchain technologies. there is a positive trend in academic research on blockchain technology, fascinating more scholars to investigate other areas of knowledge. table-1. literature sources. journal classification classification subtotal proportion economics 123 53.4% management 37 16% technology 54 23.4% comprehensive social science journals 7 3% comprehensive university journals 9 4% total 230 100% 3.2. analysis of literature research subjects the 230 literature chosen would be broken into nine sections. the sections are finance, fintech, ict, accounting, credit, big data, internet energy, the current status, threats, and others. banking and finance is categorized into seven sectors as "digital currencies", "payment", "bills", "banks", "internet banking", "supply chains" and "big financial market". the figures are illustrated in table 2. table-2. analysis and types of manuscripts. no. research subjects qualitative quantitative percentage 1 finance 39 17 24.35% 2 fintech 29 14 18.70% 3 ict 20 14 14.79% 4 accounting 9 15 10.44% 5 credit 8 9 7.40% 6 big data 5 6 4.80% 7 energy internet 8 5 5.66% 8 the status quo, future and risks 8 11 8.27% 9 others 5 8 5.46% total 131 99 100 % blockchain has the most studies in finance, with about 68 (39+29) publications by the end of year 2020. seven sub-topics describe the topic: financial risk and management reviews, 2021, 7(1): 26-35 29 © 2021 conscientia beam. all rights reserved. 3.2.1. finance fifty-six articles consider blockchain the underlying protocol, comprising 24.35% of all the papers. few researchers provided the three basic concept assumptions for digital currencies; the central bank accounts model, the retention of the current financial system, and commercial banks issue the common currency (rugeviciute & mehrpouya, 2019; shanaev et al., 2020; sulaiman & rahim, 2019). blockchain technology is a technological breakthrough for addressing the issue of trust. blockchain financial technologies will minimize settlement processes and costs of businesses. through this, banks will have access to all rewards and threats from the distributed blockchain book (wong, tan, lee, ooi, & sohal, 2020). it has a significant impact on financial intermediation because banks used these new technologies. it affects the economy, money, central banking, economic structure, and settlement of payments (asaduzzaman, hasib, & hafiz, 2020; aste, tasca, & di matteo, 2017; ayedh, echchabi, battour, & omar, 2020). peer-to-peer transfers, authentication, exact property, and intelligent administration are the platform's main components. blockchain technology is an alternative to internet payment networks (abou maroun et al., 2018; al-amin et al., 2021; ali, ali, alsaawy, khalid, & musa, 2019; ali et al., 2020; miraz et al., 2020e). it has a significant role in credit decision-making. this research shows that the link block modified the new financial credit system entirely and reduced financial risk and fraud risk. another researcher studied the impact of blockchain on smart contracts and for small enterprise credit. supply chain financing services are mainly provided to small-sized enterprises (kim & laskowski, 2018; ku-mahamud, omar, bakar, & muraina, 2019; miraz 2020; wong et al., 2020). also, it will provide a variety of financing products to the investors that small and mediumsized businesses need. the banker would not have the opportunity to bring financial resources because there is no core credit security for businesses (bashir, 2018; beck, stenum czepluch, lollike, & malone, 2016; berg, novak, potts, & thomas, 2018; biswas & gupta, 2019). now, blockchain technology lets information input into the data base have the guarantee of time-stamp and unalterable nature. also, chain block articles have analyzed the impact of chain block on a financial domain (bronder, 2018; cao et al., 2017; carson, romanelli, walsh, & zhumaev, 2018). first, blockchain was introduced to economic infrastructures. it was then generalized to the settlement processes of shares and cash systems, the central depository of stocks, and the lending institutions. 3.2.2. fintech blockchain is mainly used in the fintech research field (fosso wamba, kala kamdjoug, epie bawack, & keogh, 2020; miraz & ali, 2018). it took the most research attention for research (rugeviciute & mehrpouya, 2019; sulaiman & rahim, 2019). from the fintech ground, the researcher collected forty-three articles, and the ratio was 18.70%. 3.2.3. ict blockchain opened a new paradigm in the ict sector (ku-mahamud et al., 2019; miraz & habib, 2016; miraz et al., 2019a; miraz 2020; miraz et al., 2020a; miraz et al., 2020b; miraz, mohd sharif, hassan, & hasan, 2020f; morkunas, paschen, & boon, 2019; wong et al., 2020). in the field of ict, the research analyzed thirty-four articles with 14.79%. 3.2.4. accounting almost all of the literature in asia deals with accountancy. another academic explained that the blockchain would help to improve audit performance and lower the costs associated with auditing. besides, individual businesses have started designing self-audit programs to liberate manual accounting work and bring about a fundamental shift in the corporate model. some have simultaneously started developing auditing software. financial risk and management reviews, 2021, 7(1): 26-35 30 © 2021 conscientia beam. all rights reserved. 3.2.5. credit there are 7.4% of total study engaged in credit issues. someone else called attention to the researcher's insistence that credit is vital in allocating economic and social capital allocation. it is difficult to ascertain whether large amounts of knowledge may be accurate or not blockchain lowers global borrowing costs, thus providing a credit infrastructure. another researcher suggested using digital credit to bypass behaviors that make transactions impossible to reverse. 3.2.6. big data big data documents 4.8% of the literary study. because of the big data, far predicted that everyone would be able to take responsibility for their own data while gaining data access to reduced prices. 3.2.7. energy internet artificial intelligence accounts for 5.66% of internet blockchain. in three words: the energy internet consists of three parts: power generation, delivery, and storage. this researcher points out that electricity, money, and power transmission, and capital are a better fit for blockchain technology's distributed book structure. nonetheless, some issues persist, such as inefficiency and storage redundancy. 3.2.8. the status quo, future, and risks blockchain architecture literature, upcoming issues, and vulnerabilities represent 8.27% of the risk landscape. the researcher discusses the financial services applications, public institutions, the media, healthcare, elections, domain names, and many other fields and draws attention to the significant consequences of blockchain for privacy and alternative business models. 3.2.9. other this paper includes 5.46% literary works and canons and cannot be put into either of the above groups. he also addressed three possible military use applications for blockchain technology: intelligence operations, handling arms life cycles, and logistics. they have also summarized the challenges posed in the area of military-specific blockchain technology: to incentivize users to contribute to a community, another researcher proposed using the cat claw coins to create a blockchain ecosystem to teach the users. 3.3. analysis of literature research methods several different testing methods exist, the majority of which come from quantitative and qualitative perspectives, including classification, study and literature interpretation (saunders, lewis, & thornhill, 2003; saunders, lewis, & thornhill, 2009; scheurich, 1997). the methods and techniques used in quantitative research include methods and techniques for measuring social phenomena, the intensity of social relationships, and shifts in the amount (sekaran & bougie, 2016; taherdoost, 2016; urbach & ahlemann, 2010). the theory is confirmed by a combination of statistical investigation, expert analysis, reliable statistics, and experimental methods (sekaran & bougie, 2016; taherdoost, 2016; urbach & ahlemann, 2010; weijters & baumgartner, 2012; wong et al., 2020; yusof et al., 2018; zikmund, babin, carr, & griffin, 1991). figure 1 described the scenario of previous literature on blockchain where 57% study used qualitative method and rest 43% used quantitative method. the primary methodology of qualitative forecasting is done by forecasters' experience and on the assessment of events based on their viewpoints and trajectories. the procedure is more useful for those who don't have complete data. financial risk and management reviews, 2021, 7(1): 26-35 31 © 2021 conscientia beam. all rights reserved. figure-1. literature methods. the qualitative research's primary means of gauging findings from table 2 reveals that it can be considerably better than the quantitative approaches used in table 2 (100%). people concentrate on the qualitative aspects of study due to developing the blockchain in asia, inhibiting the latter's growth. we advocate the use of blockchain technologies to advance to the quantitative findings also, as soon as possible in this case. 3.4. research limitation since asian blockchain analysis has not been systematized, finding papers on it is a challenge. in future studies, the fidelity of the reference citations should be increased. as a result, the scarcity of english-language resources, this paper only deals with a few topics. this study does not make a comparison of asia and western studies. 4. conclusion based on our assessment of blockchain's viability, market potential, and competition, we arrive at the following conclusions: in the year of 2020, the number of academic research papers related to the blockchain increased by an exponential factor. the media's interest in domestic scholars has increased lately because of digital money growth. significant amounts of trade are conducted in both bitcoins and lehman dollars. also, the financial periodicals found in libraries come from economics and technological courses. there is a distinct difference between technical papers and publications. these are mostly concerned with the concept of blockchain and magazines that are primarily about its application in business. creative idea: fintech seems to have an absolute edge over 187 articles (accounting for 63.4% of the search results) that cover topics like digital currencies, banks, and finances as a whole. the last category of the journal also revolves around the research's current subject. many organizations worldwide are devoting their efforts to understanding and exploring how blockchain technology can lower their financial burden and expenses. domestic researchers can then strive to increase their study's quantity to fulfill their role in influencing policy. asian and foreign researchers should concentrate further in the future on the decentralized blockchain theory. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: all authors contributed equally to the conception and design of the study. references abou maroun, e., daniel, j., zowghi, d., & talaei-khoei, a. 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(2017). whither policing cryptocurrency in malaysia? iium law journal, 25(2), 179-196. available at: https://doi.org/10.31436/iiumlj.v25i2.342. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.might.org.my/event/malaysia-blockchain-distributed-ledger-technology-outlook-2019-report-blockchain-in-government-consultative-session/ http://www.might.org.my/event/malaysia-blockchain-distributed-ledger-technology-outlook-2019-report-blockchain-in-government-consultative-session/ 60 © 2021 conscientia beam. all rights reserved. performance evaluation of chinese commercial banks based on the malmquist index wenjing xie1+ meiling he2 guohui huang3 lu he4 fan lin5 wen-tsao pan6 1,2,3,4,5,6hunan university of science and engineering, school of economics and management, hunan, yongzhou, lingling, district, china. 1email: 1269244811@qq.com tel: 17077378829 2email: 1438758365@qq.com tel: 15399977785 3email: 2062705347@qq.com tel: 18176775344 4email: he1125@foxmail.com tel 18373461057 5email: 1403561680@qq.com tel: 18674686031 6email: teacherp0162@126.com tel: 13426703155 (+ corresponding author) abstract article history received: 4 august 2021 revised: 6 september 2021 accepted: 30 september 2021 published: 22 october 2021 keywords dea malmquist performance evaluation technological progress performance analysis business performance analysis efficiency evaluation commercial bank. jel classification: g29. commercial banks have the function of promoting the raising and rational distribution of funds in economic construction in china. commercial banks are also important in promoting the smooth development of socialist economic activities and the development of national economy and other socialist productive economic activities. at present, one of the biggest difficulties faced by china's commercial banks is the improvement of their efficiency and competitiveness in the face of continuous development and change. this paper establishes the efficiency evaluation model of commercial banks using the dea-based malmquist index; it also uses a data envelopment analysis (dea) to analyze the financial data of nine listed banks in china from 2011 to 2020, studies the efficiency of commercial banks in china, and finds the efficiency differences. based on empirical research, this paper puts forward corresponding suggestions. the research shows that the key to dealing with this situation depends on the banks’ effective utilization of scientific and technological innovation and technological progress. in order to achieve the goal of innovative and sustainable development of commercial banks, it is necessary to integrate the continuous developments of science and technology with finance. contribution/originality: the paper's primary contribution is finding that in the face of continuous technological innovation and technological progress, the effective way to improve the performance of chinese commercial banks is to effectively integrate technology and finance. 1. introduction with the development of china and the progress of technology, the financial industry is becoming more and more efficient, the growth of the market and the main bodies of operation are also increasing, and the competition in the chinese and the international financial industries is becoming more and more fierce. the operating efficiency of commercial banks not only represents their sustainable development level, but also feeds back the potential of efficient resource allocation. as an important indicator of a company's operation, efficiency evaluation plays an important role in the sustainable development of banks. banks can judge their own strength level through the results of efficiency evaluation, plan in advance and formulate the route of future development. the main activity of commercial banks is to offer industrial and commercial loans and deposits for profit. commercial banks play a role in planning money, credit goods and other financial services. the existence of commercial banks is conducive to financial risk and management reviews 2021 vol. 7, no. 1, pp. 60-66. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.60.66 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0003-2388-6943 https://orcid.org/0000-0002-7624-7400 https://orcid.org/0000-0002-3946-5775 https://orcid.org/0000-0002-9083-4046 https://orcid.org/0000-0001-9907-6635 https://orcid.org/0000-0002-0999-5257 mailto:1269244811@qq.com mailto:1438758365@qq.com mailto:2062705347@qq.com mailto:he1125@foxmail.com mailto:1403561680@qq.com mailto:teacherp0162@126.com https://www.doi.org/10.18488/journal.89.2021.71.60.66 financial risk and management reviews, 2021, 7(1): 60-66 61 © 2021 conscientia beam. all rights reserved. promoting capital flow, reducing the cost of transaction processes, saving transaction time, improving the efficiency of resource allocation and promoting economic development. yu-dan (2018) proposed the improvement of the efficiency of china’s commercial banks by increasing the proportion of technology input, developing intermediary business, reducing the non-performing loan ratio, and increasing the capital adequacy ratio (yu-dan, 2018).the zhao and zhao (2021) representative cited the following reference papers: (yu-dan, 2018). zhao and zhao (2021), after much research in terms of scale efficiency, pure technical efficiency and operation efficiency, stated that listed commercial banks perform better than non-listed commercial banks. therefore, one of the ways to improve the efficiency of commercial banks is to increase the listing construction of commercial banks (yu-dan, 2018).the operating efficiency of banks has great potential for development, and there are imbalances and mismatches in bank input and output. the aim of this study is to measure the financial data of nine listed banks in china from 2011 to 2020 through the dea-based malmquist index method, clearly understand the correlation between input and output indicators, explore the effect of technological progress on bank efficiency, and find answers on how to improve the efficiency of chinese commercial banks. 2. literature discussion bank efficiency can reflect the competitiveness and operating level of banks in the industry. the level of resource allocation of banks is reflected by the ratio of their inputs and outputs. li and hu (2015) mentioned that, at this stage, there are three types of methods for exploring bank efficiency: one method is to use non-parametric data envelopment analysis (dea) to explore bank efficiency; the second method is to analyze bank efficiency based on relevant financial indicators; the third method is to use the parameter analysis method to construct a multiple linear regression model using the cost of production function. using the dea-based malmquist index method to analyze the financial data of nine listed banks in china from 2011 to 2020 is the main content of this article. dea is a linear programming method based on the research of farrell (1957), who analyzed the technical efficiency of only one input and one output and clarified a way to help companies analyze the efficiency of measurement under multiple input conditions. charnes, cooper, and rhodes (1978) developed the ccr linear programming model to further analyze the technical efficiency of multiple inputs and outputs. dea can be applied to a bank's input and output indicator system. in view of the different national conditions and economic environments, the interpretation of bank input and output is also different. it is easier for commercial banks to manipulate input factors, so the use of inputoriented models to evaluate efficiency is more in line with the actual situation. zhang and lei (2019) analyzed the financial data of 15 commercial banks from 2006 to 2015 as a sample and concluded that bank efficiency decreases from high to low from joint-stock banks, city commercial banks to state-owned banks, and the difference between these three diminishes with the passage of time. feng (2020) found that, based on the data envelopment method, excessive input and insufficient output are due to uneven resource allocation and insufficient management capabilities. banks in china need to optimize the allocation of resources through internal adjustments to solve the problem of low operating capabilities and improve their efficiency. yang, chen, and tan (2020) used a two-stage slack-based measure (sbm) model that considers undesired outputs to analyze the efficiency of 24 commercial banks in china, and found that the traditional dea model may overestimate the efficiency of banks (yang et al., 2020). an, hou, and li (2021) concluded, based on the efficiency measurement of the three-stage dea-tobit model, that increasing the total amount of commercial bank loans can promote economic efficiency and resource allocation efficiency while hindering the improvement of management technology efficiency. one of the conditions for realizing the rapid development of economic benefits is to improve the innovation ability of commercial banks. cao and du (2021) analyzed the financing efficiency of listed commercial banks that issue preferred shares in china. the research data showed that one of the ways to improve financing efficiency is to allow listed commercial banks to issue equity-type preferred shares, which can increase the company's financial leverage and reduce the debt-to-asset financial risk and management reviews, 2021, 7(1): 60-66 62 © 2021 conscientia beam. all rights reserved. ratio. as a result of their study, cao & du called on commercial banks to promote technological innovation. call on commercial banks to promote technological innovation. 3. research method 3.1. dea-based malmquist index method the data envelopment analysis (dea) model is an analytical tool used to identify the efficiency of resource allocation within a company; however, one of its disadvantages is that it cannot analyze the numerical changes of efficiency in different periods. traditional dea models can be divided into the ccr model (based on constant returns to scale) and the bcc (banker charnes cooper) model (based on variable returns to scale), which is also the difference between them. fare, grosskopf, and norris (1994) proposed the dea-based malmquist model, which combines the malmquist index theory with the dea method to describe the dynamic changes in efficiency. suppose there is n decision-making unit (dmu) and each dmu obtains s types of outputs through m types of inputs in the t period. t mj t j t j t j t xxxx )...,( ,2,1= represents the investment index value of the jth dmu in period t . t nj t j t j t j t yyyy )...,( ,2,1= represents the output indicator value of the jth dmu in period t , and they are all positive numbers ( tt ,...,2,1= ). assuming that ),( tt yx represents the input and output of period t , ）（ 11, ++ tt yx represents the input and output of the t+1 period. in ),(),( 111 +++ tt c ttt c t yxdyxd 、 , the c return to scale is stable, and ),(),( 111 +++ tt c ttt c t yxdyxd 、 is the output distance function in the corresponding period. under the technical conditions in period t , the change in technical efficiency from period t to period t + 1 is expressed as equation 1 and equation 2, respectively: ),( ),( 11 tt c t tt c t t yxd yxd m ++ = (1) ),( ),( 1 111 1 tt c t tt c t t yxd yxd m + +++ + = (2) we calculate the geometric mean of the two malmquist indices in equation 1 and equation 2 to obtain equation 3: 2 1 1 11111 111 ] ),( ),( ),( ),( [),,( tt c t tt c t tt c t tt c t ttttt yxd yxd yxd yxd yxyxmtfp + +++++ +++ == ， (3) the malmquist index is combined with dea to analyze the development of efficiency changes by calculating the change in productivity from period to period. the differences between total factor productivity and factor productivity are as follows: total factor productivity refers to the comprehensive productivity of various factors in a certain period of a business process. the factors here refer to all other material factors except labor and capital, including organizational innovation, technological progress, and production innovation. scale efficiency change (sech) and pure technical efficiency change (pech) constitute technical efficiency change (effch), technical efficiency (effch) and technological progress (tech) constitute total factor productivity (tfp), and equation 4 is obtained: sech×pech×techch =effch ×techch =tfpch （4） financial risk and management reviews, 2021, 7(1): 60-66 63 © 2021 conscientia beam. all rights reserved. effch represents the change in technical efficiency from period t to period t+1; techch represents the technological progress index from period t to period t+1; tfpch represents the change of tfp from period t to period t+1; sech represents the change of scale efficiency from period t to period t+1; pech represents the pure technical efficiency change from period t to period t+1. input-oriented and output-oriented are two methods of the dea-based malmquist index method: (1)how to minimize the input when the output level is determined;(2)how to maximize output when the input level is determined. since bank input factors are easier to control than output factors, a more appropriate method is the output-oriented dea-based malmquist index method. 3.2. selection of indicators this paper selects nine listed banks in china as samples: bank of china, industrial and commercial bank of china (icbc), agricultural bank of china, bank of communications, construction bank, industrial bank, china citic bank, china everbright bank, and minsheng bank. the relevant indicator data comes from the financial statements of each bank for each year. input and output indexes constitute the efficiency evaluation index system. we referred to previous studies to select bank operating expenses, total shareholder equity, and deposits as input indicators, and we selected total profit and interest income as output indicators (see table 1). table-1. input and output indicators of efficiency. indicator type index variable unit input indicators operating expenses x1 100 million yuan deposits taken x2 100 million yuan total shareholder equity x3 100 million yuan output indicators interest income y1 100 million yuan total profit y2 100 million yuan 4. empirical analysis the malmquist index and dea can analyze the dynamic changes of technological progress efficiency. this situation is also applicable to commercial banks. in table 2, the technological progress efficiency of the nine listed banks from 2011 to 2020 is decomposed and the results are as follows: table-2. the average malmquist decomposition index of the technological progress of commercial banks in each year technical efficiency index (effch) technological progress index (tech) pure technical efficiency index (pech) scale efficiency index (sech) total factor productivity index (tfp) 2011–2012 0.995 1.014 0.988 1.008 1.010 2012–2013 1.006 1.004 0.997 1.011 1.009 2013–2014 0.975 1.009 0.992 0.983 0.984 2014–2015 0.920 1.004 0.951 0.969 0.924 2015–2016 0.905 1.235 0.853 1.061 1.163 2016–2017 1.007 1.000 1.083 0.929 1.007 2017–2018 0.956 1.000 0.987 0.970 0.956 2018–2019 0.977 1.000 1.021 0.959 0.977 2019–2020 0.942 1.000 0.974 0.969 0.942 average 0.965 1.030 0.983 0.984 0.997 analysis was carried out according to the values of the technical efficiency (effch) index, total factor productivity (tfp) index, scale efficiency (sech) index, technological progress (tech) index, and pure technical efficiency (pech) index, and the values were compared with 1. if the value of tfp is greater than 1, it indicates that the total factor efficiency has improved; if the value of effch is greater than 1, it indicates that there is technical financial risk and management reviews, 2021, 7(1): 60-66 64 © 2021 conscientia beam. all rights reserved. efficiency; if the tech value is greater than 1, it indicates that there is technological progress; if the value of sech is greater than 1, it indicates that the expansion of the scale improves efficiency; if the value of pech is larger than 1, it indicates that there are other factors that can promote efficiency. it can be seen from table 2 that, on the whole, the m index of chinese commercial banks from 2011 to 2020 is less than 1, indicating that the efficiency of technological innovation of chinese commercial banks has declined, with an average annual decline of 0.3%, where the decline from 2014 to 2015 reached 7.6 %. when tech is greater than 1, 1 is greater than sech, and most of effch is less than 1. if the m value is less than 1, it can be concluded that the nine commercial banks sampled from 2011 to 2020 have shown a decline in technological innovation efficiency. from this, we can see the scale efficiency change index of less than 1 is an important factor in the decline in efficiency of technological innovation of the sampled commercial banks. in addition, the average value of sech is less than 1, and pech fluctuates around 1, which means that it is in the stage of diminishing returns to scale. this means that the scale of commercial banks has not reached the optimal level with the continuous introduction of new technologies and technological progress. the degree of progress does not match the scale, and it has not reached the stage of increasing scale benefits. the operating efficiency of banks still has a lot of room for improvement, and the imbalance and mismatch of bank input and output hinders the improvement of the efficiency level regarding technological innovation. the detailed malmquist index of each commercial bank's technological innovation efficiency and its decomposition are detailed in table 3 below. table-3. malmquist index and its decomposition of urban technological innovation efficiency of commercial banks. effch tech pech sech tfp people’s bank of china 0.969 1.007 0.986 0.987 0.974 industrial and commercial bank 0.952 1.207 1.000 0.952 1.187 agricultural bank of china 0.961 1.005 0.994 0.970 0.965 bank of communications 0.968 1.003 0.969 0.999 0.971 china construction bank 0.958 1.009 1.005 0.960 0.965 china's industrial bank 0.963 1.018 0.975 0.991 0.980 china citic bank 0.970 1.002 0.982 0.989 0.972 china everbright bank 0.971 1.002 0.960 1.013 0.973 china minsheng bank 0.970 1.013 0.973 0.998 0.982 in the table, effch, tech, pech, sech and tfp respectively represent technical efficiency index, technical progress index, pure technical efficiency index, scale efficiency index and total factor productivity index. from the perspective of banks, industrial and commercial bank of china (icbc), china construction bank and china everbright bank have developed better than the other six banks in the past ten years. it shows that the resource structure allocation of these three banks is relatively reasonable. the technological progress indexes (tech) of all nine banks are greater than 1, which shows effectiveness; the pure technical efficiency index of the industrial and commercial bank of china and china construction bank is equal to 1 or more than 1, respectively, which means that the invested resources are used efficiently; icbc’s tfp is greater than 1, indicating that the efficiency of all factors has improved; everbright bank's scale efficiency index (sech) is greater than 1, indicating that the expansion of scale has improved efficiency. icbc recently increased its investment in financial science and technology innovation. it has not only achieved results in 5g, cloud computing, and big data, but has also achieved great results in areas such as artificial intelligence and blockchain. in 2020, icbc’s investment in information technology increased by 20% year-on-year and it invested 207.8 billion yuan in funds. at the same time, china construction bank focused on building a new generation of core systems in 2010 and won the people’s bank of china’s “2017 banking technology development award” to form efficient financial technology innovation capabilities. in terms of technology-driven processes, china construction bank has established a series of platforms in cloud computing, artificial intelligence, 5g, blockchain and other fields, and its innovative business continues to financial risk and management reviews, 2021, 7(1): 60-66 65 © 2021 conscientia beam. all rights reserved. develop. everbright bank insists on promoting business development with innovative technology and has established a scientific and technological innovation fund, including scientific research expenses and marketing. everbright bank also established the everbright digital finance academy. while cooperating with a number of institutions with technological innovation as the core theme, it launched a double investment plan in science and technology, and it supported financial technology innovation projects in terms of employees by cultivating innovative talents. 5. conclusion based on the analysis of the financial data of nine listed banks in china from 2011 to 2020, we can draw the following conclusions. first, commercial banks need to adapt to the changing times and circumstances, increase capital investment, strengthen technological empowerment, further support businesses, improve customer service capabilities, and promote their own high-quality development. second, from 2011 to 2020, the technical progress indexes of the nine listed banks showed a trend of volatility and that technology was steadily improving. third, we have calculated that the technological progress indexes (tech) are greater than 1, the scale efficiency change indexes (sech) are less than 1, most of the technical efficiency indexes (effch) are less than 1, and the m value is less than 1. therefore, it can be concluded that the efficiency of technological innovation of the nine commercial banks sampled from 2011 to 2020 has declined. fourth, strengthening financial innovation capabilities can improve the efficiency of chinese commercial banks. technological attributes are the core and most basic attributes of new finance. one of the ways to improve the competitiveness of commercial banks is to promote the production of new financial products by increasing capital investment in innovative technologies. finally, the overall operating performance of these nine banks is diminishing returns to scale. banks can reduce the corresponding costs by reducing investment, which can improve their operating efficiency. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: all authors contributed equally to the conception and design of the study. references an, b., hou, z., & li, c. 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(2019). an empirical analysis of the measurement of the efficiency of my country's commercial banks and its influencing factors-based on the panel data of 15 banks. journal of xi'an university of finance and economics, 32(04), 7581. zhao, f., & zhao, j. (2021). using the dea model to analyze and countermeasures to the problems in the operating efficiency of city commercial banks. economist, 2021(05), 106-114. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 1 © 2021 conscientia beam. all rights reserved. modelling stock returns volatility and asymmetric news effect: a global perspective kingsley onyekachi onyele1+ emmanuel chijioke nwadike2 1michael okpara university of agriculture, umudike, umuahia, abia state, nigeria. 2federal university of technology, owerri, owerri, imo state, nigeria. (+ corresponding author) abstract article history received: 2 november 2020 revised: 4 december 2020 accepted: 21 december 2020 published: 11 january 2021 keywords stock returns volatility stock market asymmetry garch. jel classification: c58; g10; l16. this paper modelled stock returns volatility using daily s&p global 1200 index from 1st september, 2010 to 30th september, 2020. the s&p 1200 represents a free-float weighted stock market index of global equities covering seven (7) regional stock market indices and approximately 70% of the global market capitalization, hence was used to compute global stock returns. the data analysis was carried out with generalized autoregressive conditional heteroskedasticity (garch) techniques. of the variant garch models specified in this study, the symmetric garch-m (1,1) and the asymmetric tgarch (1,1) models were found suitable for the estimation. the findings from the garch-m and tgarch models revealed explosive volatility persistence and strong asymmetric news effect in the global stock market, respectively. the implication of volatility persistence is that current volatility shocks influenced expected returns over a long period. the asymmetric news effect showed that negative news (bad news) spurred stock returns volatility than positive news (good news) especially in 2020 which was due to the covid-19 crisis as shown by the plot of the conditional variance. these results were consistent with the empirical findings of a number of studies in emerging markets. hence, the study concludes that the global stock market exhibited high volatility persistence and leverage effect during the sampled period. contribution/originality: this study contributes to the literature by modelling global stock returns volatility and asymmetric news effect using a new stock index (s&p 1200 global index). the paper contributes the first logical analysis that volatility of s&p 1200 returns is explosive and largely influenced by news available in the global markets. 1. introduction in both developed and developing economies, the stock market is an integral component of the financial system that contributes immensely to capital formation, wealth creation and economic growth. although it plays a prominent role in economic prosperity by deepening the financial system, problems occasioned by volatility of stock returns has immensely influenced the effective functioning of the global market. according to literature allied to stock markets, volatility is the level of uncertainty or risk associated with the value of financial assets (engle & patton, 2001). periods of higher volatility connotes significant variation in the value of financial assets while lower volatility suggests that the value of financial assets does not dramatically change overtime (banumathy & azhagaiah, 2015). this volatility risk could cause financial shocks to investors, thus creating challenges of low capital investments in financial assets, vulnerability in market-making, loss of investors’ confidence and fickle stock financial risk and management reviews 2021 vol. 7, no. 1, pp. 1-15. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.1.15 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0001-5177-0230 https://www.doi.org/10.18488/journal.89.2021.71.1.15 financial risk and management reviews, 2021, 7(1): 1-15 2 © 2021 conscientia beam. all rights reserved. prices and returns (bello, 2020; chiang & doong, 2014; wang & yang, 2017). consequently, in a highly volatile stock market, it is difficult for quoted companies to raise sufficient funds as rational investors prefer stocks with less volatile returns/prices unlike the risk takers (onyele, opara, & ikwuagwu, 2017). though, returns volatility in the stock market may not necessarily be destructive all the time, but volatility persistence in market returns, especially in developed markets will likely lead to a crash in the global financial market due to increasing financial integration (onyele. & ikwuagwu, 2020). volatility of stock returns is majorly triggered by investors’ expectations and perceptions of daily information (news effect) in the market. when there is upsurge in returns volatility as a result of news effect, efficiency and liquidity is altered as market participants receive the news with different mindset (ho & hung, 2012). in reality, however, bad news will accelerate returns volatility more than good news which may be interpreted by investors as higher risk-return tradeoff (jegageevan, 2015). since returns on financial assets is a function of the market risk, risk takers are expected to receive a rate of return that will compensate for the risk taken in making such long-term funds (such as, debentures, common share, bond and mortgage loan) available to economic units (edem & ogbonna, 2020). this explains the long age maxim of efficient market hypothesis (emh) that all available information is correctly reflected in stock prices and thus stock prices rapidly react to any novel information at the moment it reaches the market participants (brealey & meyers, 2003). this informational fundamental comprise changes to firms’ operations, modifications in macroeconomic policies, twist in the level of investors’ risk-return preference, financial integration, natural disaster, etc. (onyele, ikwuagwu, & onyekachi-onyele, 2020; sansa, 2020). myriad of studies has indicated that stock markets at different time period exhibits volatility persistence, riskreturn tradeoff or asymmetric news effects; hence, it can be said that no conclusive model can fit every stock market all the time. notwithstanding, enormous studies has been done for developed stock markets such as the united states, united kingdom, japan, etc. while some other studies focused on emerging stock markets like china, india, etc. (see, (banumathy & azhagaiah, 2015; caporale, karanasos, yfanti, & kartsaklas, 2019; khedhiri, 2008; lai, cheong, & lee, 2019; wei, 2009)). in the developing markets of africa, there have been research efforts towards modelling volatility of stock market returns and asymmetries in nigeria, south africa, kenya, morocco, egypt, etc. (bello, 2020; jebari & hakmaoui, 2017; kuhe, 2018; ndei, muchina, & wawure, 2019). these empirical studies, though with varying findings, used country specific market indices (such as, the dow jones, s&p 500, ftse 100, nikkei index, nifty index, nse index, etc.) but the current study confirmed the stylized facts using the s&p global 1200 index that represents a free-float weighted stock market index of global equities covering seven (7) regional stock market indices and approximately 70% of the global market capitalization. in view of this research gap, the main goal of this paper is to model stock returns volatility and asymmetric news effects in the global stock market using the s&p global 1200 index. the rest of the paper is organized as follows; section 2 presents the literature review on issues concerning the modelling of stock market returns volatility. sections 3 captures the model, data and methodology used for the estimation while section 4 presents the results and discussions. the conclusions of the study are documented in section 5. 2. literature review 2.1. stylized facts there are quite a number of stylized facts regarding volatility of stock market returns that has been confirmed by prior studies. consequently, a good volatility model should reflect these stylized facts to a large extent. features of stock returns series such as volatility clustering, volatility persistence, risk-return tradeoff and asymmetric news effect (leverage effect) has been confirmed in several empirical works. these stylized facts have been discussed below as follows: financial risk and management reviews, 2021, 7(1): 1-15 3 © 2021 conscientia beam. all rights reserved. a) non-normal distribution: distribution of stock returns as well as other financial time series are not normal or exhibits fatter tails also referred to as excess kurtosis (fama, 1995; mandelbrot, 1963). hence, stock returns series are usually leptokurtic with fourth moment above 3. this stylized fact is common and it has been confirmed by many empirical studies. b) volatility clustering volatility clustering is a situation where small and large values (of either signs) in the return series is likely to occur in clusters, that is, small moves being accompanied by large changes (fama, 1995; mandelbrot, 1963). this implies that volatility could be time-varying, that is, excessive volatility comes and goes over a period of time (arouri, lahiani, lévy, & nguyen, 2012; cong, 2017). c) volatility persistence: stock returns volatility is highly persistent or has long memory if it is characterized by insignificant autocorrelations of absolute or squared returns (owidi & mugo-waweru, 2016). persistence in volatility of stock returns series majorly affect future market volatility under influence of shocks. the implication of such volatility persistence is that today’s volatility shocks will affect the expectation of volatility over many periods in the future. hence, volatility persistence is sequentially beneficial in forecasting future stock returns. d) returns are mean reverting: a mean-reverting volatility is interpreted to imply a level of normal volatility to which volatility will eventually return. long-run predictions of volatility would often converge to this same level of normal volatility, not minding when the predictions were made (engle & patton, 2001). though, many studies opined that meanreversion is a feature of volatility, they might be differences on the level of normal volatility and whether it is constant over all the time (bello, 2020; owidi & mugo-waweru, 2016). e) asymmetric news effect: one of the assumptions of volatility models is that the conditional variance of financial assets is influenced symmetrically by negative and positive innovation. for example, the garch (1,1) model permits the variance to be influenced by the square of the lagged innovation only, totally ignoring the effect of positive or negative innovation. regarding stock returns, it is particularly said that positive and negative shocks/news would affect volatility (wei, 2009). sometimes, asymmetry is likened to a leverage effect and a risk premium (risk-return tradeoff) at other times (engle & patton, 2001). here, news of higher volatility lowers demand for a particular stock due to risk aversion, which is accompanied by the increased volatility as predicted by the news. 2.2. theoretical underpinning theoretically, studies on stock returns volatility are often anchored on the efficient market hypothesis (emh) which was developed by fama (1970). the emh explains why stock prices is seen to follow a random walk. according to fama (1970) an efficient market is one in which all available information are reflected in the stock prices. according to the emh, the intrinsic value of shares and other financial assets is defined by the future discounted value of cash flows accruing to investors (fauzel & fauzel, 2016). hence, if the stock market is efficient, all available information must be reflected in stock prices. this is needful for the assessment of a firm’s performance in the future, therefore the intrinsic and market value of a share should be equal (dukes, bowlin, & macdonald, 1987; lo & mackinlay, 1988). hence, an information that may alter firm’s profitability in the future must be reflected in the share price immediately, else any delay in information diffusion to price would lead to irrationality as availability of some information could be exploited to predict or forecast profitability (bohl & henke, 2003; financial risk and management reviews, 2021, 7(1): 1-15 4 © 2021 conscientia beam. all rights reserved. fama.. 1991). as such, in an efficient market, it is assumed that changes in share prices are unpredictable since there is random arrival of information. using equation 1 the random walk model is specified as follows: (1) where, = share price at time . = share price at time . random error with zero mean and finite variance. equation 1 shows that share price at time is equivalent to its price at time in addition to a specific value that depends on arrival of unpredictable new information between and . in other words, does not depend on previous price changes. there are three levels of efficient markets among which is the weak-form efficiency whereby the information content of interest is historical prices (fama, 1970). the weak form efficiency suggests that current stock prices reflect all information of previous prices and that investors cannot apply technical analysis of any form in their investment decisions (to determined undervalued or overvalued stocks) but can research firm’s financial statements to boost their chances of gaining returns higher than that of the market. on the other hand, the semi-strong form is hinged on the notion that investors cannot use either fundamental or technical analysis to obtain higher returns in the market since all publicly available information is used in the computation of current stock prices and that only information that is not available to the public (private information) can aid investors boost their returns above that of the market. the advocates of the strong form version states that all available information (both public and nonpublic) is completed reflected in the current stock prices, that is, there is no type of information that can make an investor make returns higher than the market, not even insider knowledge give investors a predictive edge over the entire market. the building block of this study is the weak form of market efficiency. 2.3. empirical review on the empirical sphere, studies on stock returns volatility dates back to the 1980s but the empirical studies have improved in recent times. the first reason adduced to this development is the fact that different data on stock market indices has been computed globally. availability of these data has empowered researchers to conduct studies on stock returns volatility in less developed, emerging and developed countries across the world. the second reason for the current development in the literature is associated with advancement in econometric estimation methods as captured by various garch models applied in the literature. the econometric estimation models are built on the weak-form emh, showing evidence of volatility persistence and asymmetric volatility/news or leverage effect. notable among earlier studies are bollerslev, chou, and kroner (1992); bollerslev (1986); ding, granger, and engle (1993); engle (1982) who confirmed presence of volatility in financial times series. on the other hand, recent empirical studies on the subject emerged with different results due to time period, methodology and geography covered by the various studies. the gap identified in the empirical literature is that none of the prior empirical works had investigated stock returns volatility and asymmetric news effect using return series from s&p global 1200 index (see components of s&p global index in table 1 in section 3). financial risk and management reviews, 2021, 7(1): 1-15 5 © 2021 conscientia beam. all rights reserved. most recently, bello (2020) used garch(1,1) and daily data from 2008-2018 to analyze stock returns volatility and found high volatility persistence in the nigerian stock market. in another study, musa, adamu, and dauran (2020) applied pgarch and revealed that volatility persistence in the nigerian stock market reduced significantly after unexpected shocks between 1987 and 2019. in southern asia, iqbal, saeed, and shah (2020) used garch(1,1) model to analyze daily returns series from 2007 to 2019 and found explosive volatility of stock returns. also, using daily data from 1999 to 2016, edem and ogbonna (2020) showed evidence of returns volatility persistence and asymmetric news effect in the nigerian stock market. in malaysia, lai et al. (2019) used daily time series data spanning from 1996 to 2016 with garch (1,1) model to show that stock returns of oil & gas sector were most volatile. in kenya, ndei et al. (2019) analyzed the nairobi stock market from 2010 to 2017 using garch(1,1) and tgarch(1,1) and revealed persistent returns volatility, leverage effects, and absence of riskreturn trade-off. using daily time series from 1997 to 2018, caporale et al. (2019) showed that volatility persistence in the korean stock market was driven by buy and sell trades depending on the type of investor trading and phase of business cycle. in a comparative analysis of america, europe, far east, brics stock markets from 1997 to 2008, tsuji (2018) found evidence of persistent asymmetric volatility in all the markets. on the other hand, using the garch (1,1) model and daily return series from 1997 to 2008, de gaetano (2018) found that returns in the brics market was time varying. in a study of emerging markets, abdennadher and hallara (2018) applied garch(1,1) on daily time series spanning from 2005 to 2015 and found that returns volatility varied with structural changes. kuhe (2018) observed high volatility persistence in stock returns in the nigeria stock market from 1999 to 2017. using frictionally integrated egarch model, jebari and hakmaoui (2017) reported strong volatility persistence in the moroccan stock market from 1993 to 2017. in other studies, wang and yang (2017) observed that long-term returns volatility in the shanghai stock exchange, china was driven by negative returns. using tgarch, aguda (2016); owidi and mugo-waweru (2016); ndwiga and muriu (2016) showed that stock returns volatility decreased with asymmetric effects in nigeria and kenya respectively. ahmad, ahmed, vveinhardt, and streimikiene (2016); babikir, gupta, and owusu-sekyere (2010) and babikir et al. (2010) found that the asian and south african markets exhibited volatility persistence of returns. again, using the symmetric garch (1,1) model, adewale, olufemi, and oseko (2016) found high volatility persistence with no leverage effect in nigeria. banumathy and azhagaiah (2015); jegageevan (2015); sethapramote and prukumpai (2012) and khedhiri (2008) found that stock returns volatility was driven by bad news in india, sri lanka, thailand and uae, respectively. using bivariate garch, wang, huang, and padmanabhan (2015) found volatility persistence of stock returns in the united states. bentes and da cruz (2010) analyzed the g7 markets using garch, igarch and figarch and found persistent stock returns volatility in germany, italy and france, but less returns volatility in japan. comparing african markets, alagidede and panagiotidis (2009) found evidence of leverage effects. chiang and doong (2001) revealed that bad news was responsible for volatility persistence in most asian markets. berument and kiymaz (2001) found that highest and lowest stock returns volatility in the united states was observed on wednesday and monday, respectively. in japan, bekaert and wu (2000) indicated that returns volatility persistence and feedback at firm level is driven by strong asymmetries in the conditional covariances. 3. methodology and data 3.1. methodology the degree of volatility which is also termed “conditional variance of a financial asset” must be estimated in a model that best show its time varying conditional variance (engle, 1982; tsay, 2010). financial time series depend on three basic factors, viz; their own previous values (that is, autoregressive), past information (that is, conditional) and exhibit non-constant variance (that is, heteroscedasticity) which forms the bedrock of the popular autoregressive conditional heteroscedasticity (arch) model. hence, the presence of these fundamental features financial risk and management reviews, 2021, 7(1): 1-15 6 © 2021 conscientia beam. all rights reserved. should be well captured in the proposed volatility model(s) to be adopted in a research study of this nature (cont, 2005). recent econometric techniques within the scope of garch family models provide the tool for solving this research problem. in this paper, as originated by bollerslev (1986) and applied in recent empirical studies bello (2020); ndei et al. (2019); banumathy and azhagaiah (2015); jegageevan (2015) the garch model was adopted to unravel stock returns volatility from a global perspective. in the garch model, the conditional variance is a function of its previous own lags. stock returns volatility is determined by the magnitude of coefficients and . if the addition of both parameters is equal to or approximately one (1), then volatility of the return series is said to be persistent and vice versa. in its simplest form, the symmetrical garch models (mean and variance equations) is specified as displayed in equations 2 and 3: mean equation: variance equation: where, represents the stock market return at time . denote the average return of the market. indicate the residual return. in a garch model, the conditional variance equation is directly fitted into the mean equation, leading to the garch-m model (mean-reversion garch). regarding the garch-m model, the coefficient in the mean equation represents the risk premium. if is positive, it indicates that there is positive relationship between stock return and its volatility, that is, an increase in mean return is determined by a rise in conditional variance as a proxy of higher risk. as a matter of fact, a positive and significant indicates presence of risk-return tradeoff or risk premium. in the garch-m model, stock return is dependent on its own volatility and as such a simple garchm (1,1) model is specified as shown in equations 4 and 5: mean equation: variance equation: the shortcoming of symmetric garch models is that the conditional variance does not react asymmetrically to fluctuations in returns. as a result, a number of models known as asymmetric models such as egarch and tgarch, amongst others, have been developed to deal with this issue. in consonance with banumathy and azhagaiah (2015) to ascertain the relationship between asymmetric volatility and stock returns, the exponential garch (egarch) and the threshold garch (tgarch) models were applied. the egarch model is hinged on logarithmic expression of the conditional variability. with the egarch model, the presence of leverage effect can be tested (nelson, 1991). the presence of leverage effect or asymmetry is tested based on the hypothesis that financial risk and management reviews, 2021, 7(1): 1-15 7 © 2021 conscientia beam. all rights reserved. . the impact is said to be symmetric if . the egarch model is expressed as shown in equation 6 below: where, denote the log of the conditional variance. represents the leverage term or asymmetry with regards to the threshold garch (tgarch), in tandem with zakoian (1994) the following equation 7 was applied: where, is the asymmetry or leverage parameter. in the tgarch model, good news and bad news on the conditional variance. here, the impact of good news is while the impact of bad news is . as such, supposing is positive and significant, negative shocks would have a greater impact on prior to estimating the garch models, the distributional properties of the return series were considered. to specify the distributional properties of the daily return series of s&p global 1200 index, the descriptive statistic was carried out. also, to ensure that stock returns are stationary as one of the conditions required for the application of garch models, unit root tests were conducted using the augmented dickey-fuller test (adf) and philips-perron (pp) tests (dickey & fuller, 1979; phillips & perron, 1988). 3.2. description of data the daily time series data of s&p global (spg) 1200 index used for this study spanned from the trading days between 1st sept., 2010 and 30th sept., 2020. the spg daily data was sourced from (https://www.spglobal.com/spdji/en/indices/equity/sp-global-1200/#overview). the spg rate of returns series (r_spg) within the sampled period was calculated as natural logarithm (ln) of the first difference associated with daily closing stock prices. the formula used for computing the r_spg is as shown in equation 8: where, represent the logarithmic spg daily returns for time t. denote the closing price at time t. shows the corresponding price in the period at time . https://www.spglobal.com/spdji/en/indices/equity/sp-global-1200/#overview financial risk and management reviews, 2021, 7(1): 1-15 8 © 2021 conscientia beam. all rights reserved. table-1. components of s&p global 1200 index. country/region index united states s&p 500 hong kong, singapore, south korea and taiwan s&p asia 50 australia s&p/asx 50 eurozone, denmark, norway, sweden, switzerland and uk s&p europe 350 brazil, chile, colombia, mexico and peru s&p latin america 40 japan s&p/topix 150 canada s&p/tsx 60 as detailed in table 1, the s&p global (spg) 1200 represents a weighted stock index of global equities covering thirty-one (31) countries, seven (7) regional stock markets and about 70% of global market capitalization, including all ten (10) global industry classification standard (gics) sectors. 4. results and discussions the logarithmic of the s&p global 1200 index from 1st sept., 2010 to 30th sept., 2020 have been plotted in figure 1: figure-1. trend of s&p global 1200 index. having computed the daily spg returns using equation 8, figure 2, shows evidence of volatility clustering for r-spg over the sampled period (1st sept., 2010 to 30th sept., 2020) which is one of the stylized facts of financial time series. there was higher volatility clustering during the trading days in 2011 and 2020 due to the european and us debt crisis as well as the recent covid-19 pandemic. on the other hand, the histogram captured by figure 3 shows that the return series are not normally distributed based on kurtosis (19.35118 > 3) and p-value (0.0000) of the jarque-bera test which rejects the normality distribution of the r_spg series. the non-normal distribution of the r_spg confirmed the stylized fact that distribution of financial returns series is largely leptokurtic. -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 r_spg figure-2. time plot of daily r_spg. financial risk and management reviews, 2021, 7(1): 1-15 9 © 2021 conscientia beam. all rights reserved. 0 200 400 600 800 1,000 1,200 -1.0 -0.5 0.0 0.5 1.0 series: r_spg sample 9/01/2010 9/30/2020 observations 2624 mean 0.003703 median 0.007905 maximum 1.105218 minimum -1.313233 std. dev. 0.125186 skewness -1.120008 kurtosis 19.35118 jarque-bera 29780.08 probability 0.000000 figure-3. r_spg normality testing. next, the study proceeded with the augmented dickey fuller (adf) and philip-perron (pp) unit root tests in order to investigate the level of stationarity of the r_spg series. on the other hand, the presence of arch effect in the return series was confirmed by the arch-lm test. details of the unit root and the arch-lm test results. as presented in table 2 below, the r_spg series has no unit root from the adf and pp test approaches. the probability values of the adf and pp t-statistics are less than 0.05 which led to the conclusion that the r_spg series for the sampled period is stationary, hence both the adf and pp tests reject the hypothesis of nonstationarity of the r_spg series at all levels of significance. on the other hand, the arch-lm test which was used to investigate the presence of arch effect on the returns series is highly significant since the p-value (p < 0.05), leading to the rejection of the null hypothesis of “no arch effect” in the residuals. based on the outcome of these preliminary tests, the appropriateness of the garch family models was justified. table-2. unit root test results. adf @ level pp @ level t-statistic prob.* t-statistic prob.* test statistic -19.00810 0.0000 -50.50163 0.0001 test critical values: 1% level -3.432657 -3.432657 5% level -2.862445 -2.862445 10% level -2.567297 -2.567297 arch-lm test statistics: f-statistic 290.1747 prob. f(1,2620) 0.0000 obs*r-squared 261.4407 prob. chi-square(1) 0.0000 4.1. estimation of garch models the best fit garch models are those with the highest adjusted r-squared, lowest aic and sic, no serial correlation and heteroscedasticity in the residuals (engle, 1982). evidence of no serial correlation and heteroscedasticity is when the p-values of the q-statistics and f-statistic are statistically insignificant. however, all the models passed the serial correlation and heteroscedasticity tests but varied slightly in other selection criteria such as the aic and sic, log likelihood and coefficient of determination. having, x-rayed the various garch models, the symmetric garch-m (1,1) and asymmetric tgarch (1,1) models were selected. the symmetric garch(1,1) and garch-m(1,1) are reported in table 3: financial risk and management reviews, 2021, 7(1): 1-15 10 © 2021 conscientia beam. all rights reserved. table-3. estimated result of garch (1,1) and garch-m (1,1) models. parameters garch-m (1,1) garch-m (1,1) mean equation: (mean return) 0.007780{0.0000}*** 0.006100 {0.0028}*** ⋌ (risk premium) -0.245237 {0.2066} variance equation: (constant) 0.000367{0.0000}*** 0.000368{0.0000}*** (arch effect) 0.187895{0.0000}*** 0.187645{0.0000}*** (garch effect) 0.796539{0.0000}*** 0.796632{0.0000}*** (persistence coefficient) 0.984434 0.984277 log likelihood 2429.474 2430.389 aic -1.848627 -1.848562 sic -1.837433 -1.835130 adjusted r-squared -0.008763 -0.016122 residual diagnostics: serial correlation (q-statistic probabilities) q > 0.05 (no autocorrelation) q > 0.05 (no autocorrelation) heteroscedasticity: f-statistic 0.612562 {0.4339} 0.534893 {0.4646} note: ** and *** indicate rejection of the null hypothesis @ 5%, and 1 % levels of significance, respectively. figures in parenthesis { ) are the probability values. from table 3, though the sic and aic associated with the garch (1,1) and garch-m (1,1) varied slightly, the adjusted r-squared (-0.016122) of the latter is greater than that of the former in absolute value. hence the garch-m was accepted as the best fit model for the symmetric garch. it can be seen that the sum of arch and garch coefficients of the garch-m (1,1) model is 0.984442. this indicates that volatility of the r_spg series was highly persistent. it then suggests that the r_spg for the sampled period is mean reverting. this finding is in line with those of bello (2020); jebari and hakmaoui (2017); wang and yang (2017); ahmad et al. (2016); wang et al. (2015); banumathy and azhagaiah (2015) that stock markets of nigeria, morocco, china, asian countries, united states and india exhibited high volatility persistence. also, ndei et al. (2019); caporale et al. (2019); aguda (2016); berument and kiymaz (2001) are of the view that stock returns volatility is persistent but varied with time, business cycle, etc. on the other hand, the estimated coefficient of the risk premium in the mean equation is positive and statistically insignificant which indicates that volatility has no significant impact on expected returns of the global stock market which indicates lack of risk-return trade-off. this means that higher market risk arising from the conditional variance (volatility) did not necessarily trigger higher returns in the global market. in consonance with ndei et al. (2019); banumathy and azhagaiah (2015) this implies that investors were not compensated for taking additional investment risks, but contrary to ndwiga and muriu (2016); alagidede and panagiotidis (2009) who found significant and positive risk premium in kenya and selected african countries respectively. the plot of the conditional variance presented in figure 4 below depicts that volatility of r_spg was high within the trading days in late-2011 and early 2012 probably due to the us and european debt crisis. there was also increased volatility in the trading days within the third quarter of 2015 and decreased towards the end of the fourth quarter of the same year. volatility increased and dropped within the trading days in the second quarter of 2016. r_spg volatility was also evident in the trading days of the first and fourth quarters of 2018 probably due to financial risk and management reviews, 2021, 7(1): 1-15 11 © 2021 conscientia beam. all rights reserved. the us/china trade war (see, wang, yao, and bonne (2020)). again, the r_spg experienced explosive volatility during the trading days in the first and second quarters of 2020 which later trended downwards towards the trading days in the third quarter due to the covid-19 pandemic and the lockdown restrictions. however, the downward trending variance curve during the trading days in the third quarter of 2020 is due to the easing of covid-19 lockdown restrictions across the world. .0 .1 .2 .3 .4 .5 .6 .7 .8 .9 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 conditional variance figure-4. conditional variance of the r_spg series. in a bid to capture the asymmetries in the r_spg series, the egarch and tgarch models were estimated as reported in table 4. table-4. estimated result of egarch (1,1) and tgarch (1,1) models. parameters egarch (1,1) tgarch (1,1) mean equation (mean return) 0.003613 {0.0180}** 0.004534 {0.0056}*** variance equation (constant) -0.347425 {0.0000}*** 0.000353 {0.0000}*** (arch effect) 0.247916 {0.0000}*** 0.075499 {0.0000}*** (asymmetric effect) -0.129350 {0.0000}*** 0.192600 {0.0000}*** (garch effect) 0.965908 {0.0000}*** 0.810012 {0.0000}*** (persistence coefficient) 1.213824 0.985511 log likelihood 2474.041 2459.418 aic -1.881846 -1.870696 sic -1.868414 -1.857264 adjusted r-squared -0.005529 -0.006363 residual diagnostics: autocorrelation (q-statistic probabilities) q > 0.05 (no autocorrelation) q > 0.05 (no autocorrelation) heteroscedasticity: f-statistic 0.037119 {0.8472} 0.831677 {0.3619} note: ** and *** indicate rejection of the null hypothesis @ 5%, and 1 % levels of significance, respectively. figures in parenthesis { } are the probability values. financial risk and management reviews, 2021, 7(1): 1-15 12 © 2021 conscientia beam. all rights reserved. from table 4 above, it can be seen that the tgarch emerged with the lowest aic and sic as well as the highest adjusted r-squared in absolute value. hence, the tgarch was chosen as the best fit model. looking at the tgarch estimates, the coefficients of α and β are statistically significant at 1% level. the sum of the arch (α) and garch (β) parameters is 0.985511 which is approximately unity (1), implying that conditional variance (volatility) was explosive. the leverage effect coefficient is positive and statistically significant at 1% level, which indicates that bad news or negative shocks exert greater influence on volatility of r_spg than good news which provides evidence of leverage effect. this implies that the global stock market exhibited persistent returns volatility with leverage effects (asymmetric news effects). studies such as edem and ogbonna (2020); ndei et al. (2019); tsuji (2018); banumathy and azhagaiah (2015); jegageevan (2015) lend credence to the existence of volatility persistence and leverage effects in various stock markets, but adewale et al. (2016) found no significant leverage effect in the nigerian stock market. 5. conclusion and recommendations this study modelled stock returns volatility and asymmetric news effect in the global stock market over the period 1st sept., 2010 to 30th sept., 2020. the global stock market index was measured by the s&p global 1200 (see description in table 1). generalized arch models such as garch (1,1), garch-m (1,1), egarch (1,1) and tgarch (1,1) were estimated for the empirical investigation. however, the symmetric garch-m (1,1) and asymmetric tgarch (1,1) best fit the estimation when compared to other variants of garch model. from the estimation results, it was found that volatility of r_spg was highly persistent. though, the estimation results of garch-m (1,1) showed that higher volatility did not result to higher r_spg, implying lack of risk-return tradeoff. on the other hand, the tgarch (1,1) confirmed evidence of asymmetric volatility process in the global stock market, implying presence of leverage effect where bad news influenced r_spg volatility more than good news. in summary, the empirical results significantly suggest that stock returns volatility in the global market persisted over a long period with no significant risk-return trade off, and that negative shocks or bad news exerted greater effect on global stock returns volatility than positive shocks or good news, especially in the trading days in 2020 which could be due to the covid-19 crisis. based on the findings of this study, market regulators across the globe need to ensure market stability so as to accommodate diverse risk-classes of international investors by modelling and aligning trading rules and regulations of both developed and emerging stock markets since these markets are largely integrated. as the empirical results showed evidence of leverage effect in the global stock market, it is recommended that regulators avail reliable platforms for information flow through software application and other possible means to facilitate the ease of accessing market information which in turn drives investors investment decisions. hence, market stability and better information dissemination will reduce the magnitude of stock returns volatility and improve transparency in the global stock market. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: both authors contributed equally to the conception and design of the study. references abdennadher, e., & hallara, s. 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(1994). threshold heteroskedastic models. journal of economic dynamics and control, 18(5), 931-955.available at: https://doi.org/10.1016/0165-1889(94)90039-6. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://dx.doi.org/10.19044/esj.2016.v12n4p79 http://dx.doi.org/10.2139/ssrn.3080693 http://www.msci.com/www/blog-posts/the-coronavirus-market-impact/01732620365 12 © 2022 conscientia beam. all rights reserved. performance and dividend policy of state-owned banks before and after covid-19 i wayan budi artha1+ tri widyastuti2 irvandi gustari3 1,3pancasila university, jakarta, indonesia. 2bhayangkara jakarta raya university, jakarta, indonesia. ¹email: budiartha121@gmail.com tel. +62 8126781192 ²email: triewidhiastuti@yahoo.com tel. +62 81311271470 ³email: irvandigustari@yahoo.com tel +62 8117043112 (+ corresponding author) abstract article history received: 1 march 2022 revised: 6 april 2022 accepted: 20 april 2022 published: 9 may 2022 keywords market capitalization profitability credit quality liquidity dividend policy covid-19 pandemic. the purpose of this study was to analyze the performance and dividend policy of stateowned banks before and after the covid-19. the research period is 2018-2021, with the sampling technique is saturated sampling, where all members of the population are used as samples. the analytical tool used is the different test (t-test) supported by the spss program. the results show that the performance of state-owned banks, namely market capitalization, profitability, credit quality and liquidity is different before and after the covid-19, while the dividend policy is not different. the market capitalization and profitability of state-owned banks have decreased and liquidity has improved after the covid-19, as a result of deteriorating credit quality. deteriorating credit quality after the covid-19 resulted in decreased loan productivity and increased loss reserves and banks were more careful in distributing credit so that the liquidity was getting looser which resulted in decreased profitability. contribution/originality: this study contributes to the existing literature, is useful in science in the banking sector about banking performance and dividend policy, especially state owned banks, after 2 years of the covid-19 pandemic, are there any differences in performance and dividend policy before and after the covid-19 pandemic. although the average performance is different, which is slightly decreased, the average dividend policy is not different. 1. introduction during the covid-19 pandemic, which began to spread in early 2020 in indonesia and the policy of restricting social mobility of the people implemented in various regions, the performance of the national banking system was depressed, including state owned banks. the performance of the banking industry during the covid-19 pandemic decreased slightly, but the decline was not as severe as compared to other industries such as hotels, transportation and others, considering that there was a restructuring stimulus for msmes debtors affected by covid 19 given by the financial services authority vide pojk no: 11 /pojk.03/2020 dated march 13, 2020 regarding national economic stimulus as a countercyclical policy for the impact of the spread of the 2019 coronavirus disease and has been updated with pojk no: 48 /pojk.03/2020 dated december 1, 2020 and pojk no: 17/pojk.03/ 2021 on september 10, 2021. state owned banks, which are often referred to as government banks / persero banks, consisting of bri, mandiri, bni and btn banks have a very important role as development agents in order to improve the national economy and participate in maintaining national stability (latumaerissa, 2017). the role of state owned banks is financial risk and management reviews 2022 vol. 8, no. 1, pp. 12-19. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v8i1.2989 © 2022 conscientia beam. all rights reserved. mailto:budiartha121@gmail.com mailto:triewidhiastuti@yahoo.com mailto:irvandigustari@yahoo.com https://www.doi.org/10.18488/89.v8i1.2989 financial risk and management reviews, 2022, 8(1): 12-19 13 © 2022 conscientia beam. all rights reserved. increasingly important and strategic after the covid-19 outbreak, namely as a distributor of government programs including the distribution of social assistance and distribution of people's business credit (kur) in the context of national economic recovery. so far, the profits of state owned banks are still largely supported by interest income from lending. for this reason, the provision of sound credit based on prudential principles should be carried out properly (indonesian bankers association, 2018). poor credit quality has an impact on lower loan productivity and the amount of loss reserves that must be established. this will have an impact on the decline in profitability and bank capital. in 2020 (one year of the covid-19 pandemic) the performance of state owned banks experienced a decline, but as the indonesian economy improved in early 2021 (although it was still a covid-19 pandemic), the performance of state owned banks in 2021 had shown a positive performance that grew well especially profitability. the fluctuations in the profitability of state owned banks will have an influence on the company's dividend policy which in turn will also affect the development of stock prices / market capitalization values of the company. then after 2 (two) years of the covid-19 pandemic, how is the performance and dividend policy, is there a difference or not from before covid-19. based on the description above, the objectives of this research are: 1. analyzing whether there are differences in the performance of state owned banks before and after covid-19. 2. analyzing whether there are differences in the dividend policy of state owned banks before and after the covid-19. 2. literature review 2.1. company performance 2.1.1. market capitalization according to wijaya (2017) the company's goal is to maximize the company's wealth or value for shareholders. the value of companies that go public (public companies) is reflected in the market price of the company's shares (market capitalization). market capitalization is basically the value of shares outstanding in the market, but this market capitalization value cannot be used to assess how big the assets are owned by the company. to assess market capitalization, it can be calculated by multiplying the share price by the number of shares outstanding (hartono, 2016). the value of market capitalization for a company can be used to show how much the total value of the company. as a consideration for investment decisions, the value of market capitalization provides an overview for investors about the strength of the company as well as encourages investors' interest to include the company's shares in their portfolio. 2.1.2. profitability return on asset (roa). profitability is the company's ability to generate profits. profitability analysis is indispensable for long term investors (hery, 2019). roa is a ratio used to measure the performance of banks in managing their assets to generate profits (indonesian bankers association, 2016). roa is a ratio that shows the effectiveness of a company or bank in managing its assets to earn income for the bank. the greater this ratio indicates the greater the level of effectiveness of the bank in managing its assets. net interest margin (nim). nim is the ratio between net interest income and average earning assets. net interest income is interest income minus interest expense, while productive assets that are taken into account are productive assets that generate interest (budisantoso & nuritomo, 2017). operational costs to operational income (ocoi). ocoi is the ratio of total operating expenses to operating income. the lower one illustrates that the bank maximizes its operating income compared to its relatively small operational costs or that the bank's operations are more efficient (indonesian bankers association, 2016) to reduce financial risk and management reviews, 2022, 8(1): 12-19 14 © 2022 conscientia beam. all rights reserved. the ocoi, especially during the covid 19 pandemic, banks need to diversify their income, especially those from non interest income (li, feng, zhao, & carter, 2021). banks should also maintain the quality of the loans disbursed, so that the provision for losses can be controlled, considering that the formation of large loss reserves has an effect on increasing operational costs (ocoi) which results in a decrease in bank profitability. the increase in ocoi will reduce the profitability of topak and nimet (2016); hasan, manurung, and usman (2020) and karamoy and joy (2020). 2.1.3. credit quality non performing loan (npl). non performing loans in the bank's business are commonplace, but banks must take action to prevent / minimize the emergence of non performing loans in banks. so far, the quality of credit (non performing loans) in banks is calculated based on the amount of non performing loan (npl), which consists of collectibility credit 3 (substandard), collectibility 4 (doubtful) and collectibility 5 (bad), both gross npl and net npl. after deducting loss reserves (indonesian bankers association, 2016) and syafril (2020). loan at risk (lar). lar is the ratio of collectibility credits 3, collectibility 4 and collectibility 5 (npl) plus loans in special mention (collectibility 2) and current loans (collectibility 1, but from restructuring proceeds) to total loans. restructuring is the loosening of credit terms, such as interest, term and others. in accordance with pojk no: 14/seojk.03/2017 dated march 17, 2017 concerning assessment of the soundness of commercial banks, the lar component is often referred to as low quality credit. this provision implies that the banking business can continue to run and even increase, then the bank as an intermediary institution should manage its credit by adhering to the principle of prudence. credit distribution activities contain risks that can affect the profitability, health and business continuity of banks (subagio, 2015). for this reason, banks must manage the loans they provide in a healthy manner based on the principle of prudence, starting from the formation of credit organizations, credit culture, credit products, credit processes including supervision and monitoring (indonesian bankers association, 2018). 2.1.4. liquidity liquidity is a bank's ability to meet its obligations, especially its short term obligations. viewed from the asset side, liquidity is the ability to convert all assets into cash, while from the liability side, liquidity describes the bank's ability to meet funding needs through an increase in the liability portfolio. one of the important ratios related to liquidity is the loan to deposit ratio (ldr), which is the ratio of loans extended to third parties in rupiah and foreign currencies, excluding loans to other banks, to third party funds (current accounts, deposits and savings) in rupiah. and foreign exchange, excluding interbank funds (indonesian bankers association, 2016). 2.2. dividend policy one good way to communicate a bank's financial performance to its shareholders is by paying dividends. dividend policy is a decision whether the profits earned by the company will be distributed to shareholders as dividends or will be retained in the form of retained earnings for investment financing in the future. if the company chooses to distribute profits as dividends, it will reduce retained earnings and further reduce the total sources of internal funds or internal financing. on the other hand, if the company chooses to retain the profits earned, the greater the ability to form internal funds. dividend policy must be analyzed in relation to spending decisions or determining the overall capital structure (sartono, 2016). according to gumanti (2013) stated that dividends can be paid in cash (cash dividend) or in the form of additional shares (stock dividend). cash dividends are often referred to as regular dividends, which are usually paid four times a year (quarterly), twice a year (mid-annually) and once a year. there are times when companies distribute special dividends, namely dividends paid in addition to regular dividends. one measure of dividend policy financial risk and management reviews, 2022, 8(1): 12-19 15 © 2022 conscientia beam. all rights reserved. is the dividend payout ratio (dpr), which is the amount of net income distributed to shareholders. according to the bird in the hand theory, investors prefer cash dividends rather than being promised a return on investment (capital gain) in the future because receiving cash dividends is a form of certainty which means reducing risk. this is in accordance with the type of investor who is risk averse. according to sartono (2016) managerial considerations in determining the dividend payout ratio (dpr) are the company's fund needs, liquidity, borrowing ability, shareholder status and dividend stability. according to kabbani, richter, and elbannan (2020) that dividends act as a signaling tool to convey the bank's overall stability and positive growth prospects. dividends also act as a control mechanism to reduce agency costs between shareholders and managers. sharma (2018) states that a company's dividend decision can be seen as a source of signals indicating that the company is profitable with good project investments opportunities will pay higher dividends to present themselves differently from other companies that have lower profit projects. omar and echchabi (2019) states that dividend payments are used as the basis for company valuation and stock recommendations. 3. research methods the population in this study is state owned banks, as many as four banks, namely bank bri, mandiri, bni and btn. the sample in this study was saturated sampling, that is, all members of the population were used as samples. the research period is for 4 (four) years, namely 2018 to 2021, namely 2 (two) years (2018 2019) before covid-19 and 2 (two) years (2020 2021) after covid-19. this study uses quantitative analysis (creswell & david, 2018). the data used is secondary data in the form of panel data which has been documented for 4 (four) years on a quarterly basis. this quantitative research is used to find out whether there are differences in the performance and dividend policy of state owned banks before and after the covid-19, using the different test (t-test) with spss (ghozali, 2018). 4. results and discussion 4.1. description analysis descriptive statistics are used to see an overview of the data used. to obtain a comprehensive picture of the variables used in this study which includes the mean, extreme values (maximum and minimum values) and their standard deviations. the results of descriptive statistical tests on the variables used are presented in table 1. table 1. descriptive statistics. variable n minimum maximum mean std. deviation market capitalization 64 8.90 616.68 229.80 180.29 roa 64 0.13 3.68 2.11 1.01 nim 64 3.06 7.64 5.13 1.26 npl 64 1.75 4.91 3.08 0.77 lar 64 7.88 34.11 18.35 8.37 ocoi 64 63.01 98.12 77.57 9.39 ldr 64 79.71 114.24 92.52 8.93 dpr 64 0.00 85.00 39.06 23.99 valid n (listwise) 64 4.1.1. market capitalization the average market capitalization of state-owned banks is idr 229.80 trillion. the market capitalization of state owned banks is a market driven capital market on the indonesia stock exchange, where state owned banks' shares are blue chip stocks that are actively traded. the maximum value of the market capitalization variable is idr 616.68 trillion, owned by bank bri in q4 / 2021, while the minimum value of the market capitalization variable is owned by bank btn of idr 8.90 trillion in q1/2020. bank btn's market capitalization fell drastically in q1/2020 financial risk and management reviews, 2022, 8(1): 12-19 16 © 2022 conscientia beam. all rights reserved. when compared to its market capitalization at the end of 2019 of idr 22.45 trillion. this is due to the very small profit in 2019 which was only idr 209 billion, due to high npl and lar pressures and the influence of the covid19 pandemic. bank btn's npl in december 2019 was 4,73% and the lar of 18.91% and in q1/2020 the npl still rose close to 5%, namely 4.91% and the lar also increased to 22.44%. the increase in npl and lar will increase the loss reserve that must be formed. the high npl and lar became a signal for investors to release bank btn shares so that the share price fell quite drastically from idr 2,120 per share to idr 840 per share. 4.1.2. profitability return on asset (roa). the average roa of state owned banks is 2.11%, very good. this shows that state owned banks are able to manage their assets to generate profits properly. the maximum roa variable of 3.68% is owned by bank bri in q4/2018, while the minimum value of the roa variable is 0.13% owned by bank btn in q4/2019. net interest marigin (nim). the average nim of state owned banks is 5.13%, quite good and still high when compared to the nim of asean countries ranging from 1.7% 3.7%. the maximum value of the nim variable is 7.64%, obtained by bank bri in q2/2018. the nim of bank bri is indeed quite high because bank bri focuses on serving msmes that have large margins. minimum nim value of 3.06%, owned by bank btn in q4/2020. the low nim of bank btn in 2020 was due to a high npl of 4,91 % and hight lar of 34.11% which resulted in a decrease in loan productivity, where loan interest income decreased, in addition to cof which was still high because bank btn still relied on expensive funds, which was reflected in the composition of cheap funds. (casa – current account saving account) of the total funds raised is still small, namely an average of 45.12%. operational costs to operational income (ocoi). the average ocoi of state owned banks is 77.57%, which is still high. this shows that in terms of efficiency, state owned banks need to further improve their efficiency so that their ocoi decreases, namely by accelerating digital transformation and increasing collaboration with other business entities such as increasing “laku pandai” (officeless financial services for inclusive finance) and closing office networks that are no longer available. productive again. the minimum ocoi value of 63.01 % was owned by bank mandiri in q1 / 2019, while the maximum ocoi value of 98.12% was owned by bank btn in q4 / 2019. bank btn's ocoi was high due to an increase in npl and lar respectively from 2.82% and 15.40% in 2018, to respectively 4.73% and 18.91% in 2019, which resulted in an increase in the cost of loss reserves that must be formed so that operational costs increased, while on the other hand income from loan interest decreased due to lower loan productivity due to the increase in the npl and lar. 4.1.3. credit quality non-performing loan (npl). the average npl of state-owned banks is 3.08%, which is high because during the covid-19 period, the npl crawled up even though a lot of bad loans had been written off. the minimum npl value of 1.75% is owned by bank bni in q2 / 2019, while the maximum npl value of 4.91% is owned by bank btn in q4 / 2020. loan at risk (lar). the average lar of state owned banks is 18.35%, which is very high because during the covid-19 period, state owned banks carried out a lot of credit restructuring, which bri amounted to idr 198,78 trilion, mandiri amounted to idr 108.83 trillion, bank bni amounted to idr 106.99 trillion and bank btn amounted to idr 59.07 trillion. the minimum lar value of 7.88% is owned by bank bni in q4 / 2018, while the maximum lar value of 34.11% is owned by bank btn in q4 / 2020. 4.1.4. liquidity loan deposit ratio (ldr). the average ldr of state owned banks is 92.51%, very good. this shows that state owned banks are able to maintain liquidity and their intermediary functions well. the minimum ldr value of financial risk and management reviews, 2022, 8(1): 12-19 17 © 2022 conscientia beam. all rights reserved. 79.71% is owned by bank bni in q4 / 2021, while the maximum ldr value of 114.24% is owned by bank btn in q2 / 2019. 4.1.5. dividend policy dividend payout ratio (dpr). the average dpr of state owned bank is 39.06%, which is quite good. state owned banks are able to provide prosperity to share holders through the distribution of dividends, including their contribution to the state budget, in addition to the noble task carried out by state owned banks as development agents, namely carrying out government programs and maintaining national economic stability. the maximum dpr variable of 85.00% is owned by bank bri for 2021 performance, while a minimum of 0.00% (not paying dividends) is carried out by bank btn for 2020 performance. 4.2. performance and dividend policy of state owned banks before and after covid-19 with the covid-19 pandemic causing the economy to slow down and even become minus since q2/ 2020, many debtors cannot do business due to restrictions on activities / social mobility which have an impact on deteriorating credit quality / increasing banking npl and lar, even though state owned banks have done many things credit restructuring by utilizing the policies provided by the financial services authority. it was recorded that until the end of december 2020, state owned banks had restructured msmes debtors affected by covid-19 amounting to idr 473.67 trillion, which resulted in a large increase in the lar of state owned banks, namely bank bri by 28.28%, bank mandiri by 22.33%, bank bni by 28.74% and bank btn by 34.11%. in 2021 economic growth has been positive so that npl and lar have started to decline and the banking performance of state owned banks has started to improve. the increase in the npl and lar of state owned banks resulted in a decrease in loan productivity so that the nim decreased. the increase in npl and lar will also increase the burden of provision for losses. the increase in loss reserves will have an impact on increasing on banking of operational costs to operating income (ocoi). from the results of the different test (t-test), the average npl and lar of state owned banks before copid19 were 2.63% and 11.58% respectively, after the covid-19 the average npl and lar increased respectively to 3.52% and 25.13%. the difference between npl and lar before and after covid-19 is very significant. deteriorating credit quality / increasing npl and lar will affect the profitability, market capitalization and dividend policy of state owned banks. the different tests (t-test) of market capitalization, profitability (roa, nim and ocoi), credit quality (npl and lar), liquidity (ldr) and dividend policy (dpr) before and after covid-19 are presented in table 2. table 2. results of different tests (t-test) market capitalization, profitability, credit quality, liquidity and dividend policy of state owned banks before and after covid-19. variable average before covid-19 average after covid-19 sig.(2tailed) remark market capitalization idr 244.96 trillion idr 214.63 trillion 0.000 different roa 2.54% 1.67% 0.000 different nim 5.44% 4.81% 0.000 different npl 2.63% 3.52% 0.000 different lar 11.58 % 25.13% 0.000 different ocoi 74.21% 80.92% 0.000 different ldr 96.71% 81.71% 0.000 different dpr 36.88% 41.25% 0.067 not different due to the covid-19 pandemic, the profitability of state owned banks has decreased. the average profitability (roa) of state owned banks is different, before covid-19 it was 2.54% and after covid-19 it decreased to 1.67%. the decline in profitability was due to worsening credit quality, namely the increase in the average npl and high financial risk and management reviews, 2022, 8(1): 12-19 18 © 2022 conscientia beam. all rights reserved. lar which resulted in the average nim decreasing from 5.44% to 4.81% and the average ocoi increasing from 74.21% to 80.92% . the restrictions on social mobilization of the community and the deteriorating credit quality and negative economic growth in 2020 resulted in state owned banks slightly putting the brakes on their credit distribution so that their bank liquidity was getting better / looser. this is indicated by the average ldr before covid-19 which was 96.71%, which decreased to 81.71% after covid-19. from the different test (t-test) roa, nim, ocoi and ldr are all significant with sig. (2 tailed) < 0.05), meaning that there is a difference in average profitability and liquidity before and after the covid-19. the decline in the profitability of state owned bank will certainly affect the value of its market capitalization. the market capitalization value of state owned banks is significantly different. the average market capitalization of state owned banks before covid-19 was idr 244.96 trillion, down to idr 214.63 trillion after the covid-19. a fairly large decline in profitability is not necessarily followed by a large decrease in dividend policy. the dividend policy (dpr) both before and after covid-19 was not significantly different, although there was a slight increase, namely the average dpr before covid-19 was 36.88% to 41.25% after covid-19. the dividend policy of state owned bank is not different because the state owned bank's dividend policy is a little "interference" from the ministry of soes as the majority shareholder. however, the dividend payment policy of state owned banks still pays attention to performance. state owned banks with good performance (still good after covid-19), such as bri the dividend policy has increased to 85 percent and mandiri the dividend payment is quite high at 60 percent. even though the profitability of state owned banks has decreased, the dividend policy remains unchanged and this has a positive effect on market capitalization. this finding supports the bird in the hand theory where dividend policy gives a positive signal to investors. this illustrates that most state owned bank investors are more risk averse. 5. conclusions and recommendation 5.1. conclusion 1. there are differences in the performance of state owned banks before and after the covid-19. profitability and market capitalization have decreased, credit quality has deteriorated and only liquidity has improved. 2. there is not difference in the dividend policy of state owned banks before and after the covid-19. 5.2. recommendation 1. the deteriorating credit quality of state owned banks must be taken seriously by management, given that the deteriorating credit quality reduces loan productivity and increases reserves for losses which have a direct impact on profitability. 2. state owned banks should maintain their dividend policy and benchmark other banks so that their dividend policy is reasonable and not high. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. references budisantoso, t., & nuritomo. (2017). banks and other financial institutions. jakarta: salemba empat. creswell, j. w., & david, c. j. (2018). research design qualitative, quantitative, and mixed methods approaches (5th ed.). usa: sage publications, inc. ghozali, i. (2018). multivariate analysis application with ibm spss 25 program. semarang: publishing agency diponegoro university. gumanti, t. a. (2013). dividend policy theory, empirical and implications. yogyakarta: upp stim ykpn publisher. financial risk and management reviews, 2022, 8(1): 12-19 19 © 2022 conscientia beam. all rights reserved. hartono, j. (2016). portfolio theory and investment analysis (11th ed.). yogyakarta: bpfe. hasan, m. s. a., manurung, a. h., & usman, b. (2020). determinants of bank profitability with size as moderating variable. journal of applied finance and banking, 10(3), 153-166. hery. (2019). banking management. jakarta: publisher pt. grasindo. indonesian bankers association. 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(2017). financial management concepts and applications. jakarta: pt. grasindo. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 36 © 2021 conscientia beam. all rights reserved. modeling and estimation of cumulative abnormal return using vecm sri ambarwati1 eka sudarmaji2+ herlan masrio3 ismiriati nasip4 1,2,3fakultas ekonomi and bisnis, university of pancasila, jalan srengseng sawah, pasar minggu jakarta, indonesia. 1email: sriambarwati@univpancasila.ac.idtel: 081282688334 2email: esudarmaji@univpancasila.ac.idtel: 087884964643 3email: herlan@univpancasila.ac.idtel: 0816946278 4bina nusantara university, indonesia. 4email: ismiriati.nasip@binus.ac.idtel: 08121085535 (+ corresponding author) abstract article history received: 24 june 2021 revised: 30 july 2021 accepted: 19 august 2021 published: 21 september 2021 keywords vecm characteristics ipo ca5d ca30d macroeconomics. jel classification: c10, g10, g41. this paper examined how firm-level idiosyncratic risk varies over time. it affected initial public offering (ipo) in the presence of pump-and-dump and flipping trends during the early trading of ipo stocks in the indonesia stock exchange. the paper used the ipo data taken from 181 companies during the year 2015-2019. it revisited the relationship between cumulative abnormal return thirty-days (car30d) and cumulative abnormal return five-days (car5d) and the characteristics (ipo floating shares, ipo fund and price) and macroeconomics condition (inflation rate). it also used the cointegration analysis and vecm model. the paper found that both lnfloat and lnprice had causal evidence in the long-run causality or short-run with cumulative abnormal return thirty days (car30d). we also noted that idiosyncratic risk exposure depends on ipo characteristics. it was crucial for firms going public in hot-issue markets, undervalued ipos, and high idiosyncratic-risk issues. the model suggested that those series should cointegrate firstly. however, the variable of lnipofund had causal evidence in the short-run causality only. contribution/originality: this paper expected to fill the gap and confirmed what ipo characteristics and macroeconomics variables were significant and could predict that the ipo categorized into hot-issue markets, undervalued ipos, and high idiosyncratic-risk issues. 1. introduction the theoretical model's explanation is simple: ipo anomalies generally include underpricing, long-term underperformance, and hot issue/cold issue based on the assumption that the investor is rational, and the average company or underwriter of the stock is not mistaken on ipo share price valuation. practical explanations that ipo anomalies happened due to price stabilization by companies/underwriters resulted in irrationality/overreaction from investors. therefore, this research created a model and estimated cumulative abnormal returns for thirty days (car30d) and cumulative abnormal returns for five days (car5d) to find an explanation of ipo anomalies in indonesia by using the vecm. the model captured ideas behind ipo stock anomalies offered in the indonesian capital market. phenomena ipo started when the initial return rate of ipo was positive (high) and sometimes unfavorable. the phenomenon was usually related to phenomena listing stocks in demand/not in demand (hot/cold). this ipo initial return rate cycle occurred when some ipo stocks surge significantly due to phenomena underpricing. financial risk and management reviews 2021 vol. 7, no. 1, pp. 36-49. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2021.71.36.49 © 2021 conscientia beam. all rights reserved. https://orcid.org/0000-0002-8512-4971 https://orcid.org/0000-0002-6074-5114 https://orcid.org/0000-0002-7240-1589 https://orcid.org/0000-0002-7248-9322 mailto:sriambarwati@univpancasila.ac.id mailto:esudarmaji@univpancasila.ac.id mailto:herlan@univpancasila.ac.id mailto:ismiriati.nasip@binus.ac.id https://www.doi.org/10.18488/journal.89.2021.71.36.49 financial risk and management reviews, 2021, 7(1): 36-49 37 © 2021 conscientia beam. all rights reserved. however, the movement of ipo stocks would then tend to underperform in the market in its long-term performance. there were always stock price movements that were much worse. the general explanation of underpricing ipo was based on the irrationality and overreaction of investors. unfortunately, it did not provide an economic reason why they failed to behave rationally and why investors consistently always overreact. a sample of stock price indexes or composite indexes was taken from companies listed on the indonesia stock exchange. the number of companies that had already conducted an ipo was obtained from the indonesia stock exchange. it consists of primary-board and emerging-board between january 2015 and december 2019. the authors selected several external and internal variables as two naturally different variables. vecm's econometric methodology was used to test the ar=0 hypothesis for each ipo share already listed on idx. authors combined company returns, calculated using the average abnormal return: aart = (1/n) σi ari,t, and the average abnormal return, used aart = (1/n) σi ari,t and the average abnormal return, used d. while some companies' car or cumulative abnormal return values, used formulas (aar) average abnormal return or cumulative abnormal return (car) . meanwhile, the initial return (ir) calculation on the first day of listing used ir = (lnrij/lnrijt-1). ipos with oversupply or high demand got a positive initial return on a positive average, while oversupply, ipos experienced negative initial returns. a good proxy for oversupply was the level of oversupply and trading volume on the secondary market; the more significant the oversupply, the greater the total shares bought and sold immediately on the secondary market. the empirical literature had shown that macroeconomic factors and the frequency of ipos were in a relationship. therefore, we presented the following hypothesis: we wanted to test that the vecm might explain the relationship between endogenous factors or the company's characteristics. the exogen factors or 'macroeconomic' factors with the thirty-day cumulative abnormal return (car30d) and the five-day cumulative abnormal return (car5d) were examined. 2. literature review in recent years, ipo research had also occurred and increased with the taking of capital market research in several developing countries such as china (chang, chen, chi, & young, 2008; chen & kao, 2006; mok & hui, 1998; tian, 2011), india (bansal & khanna, 2012; deb & mishra, 2009), new zealand (vos & cheung, 1992), bangladesh (islam, ali, & ahmad, 2010), indonesia (indriani & marlia, 2013; manurung, juwono, & siswanti, 2019; manurung & manurung, 2019) and more. the launch of new ipo capital markets such as reit and listed property trust (lpt) had also become very popular to discuss in the literature (bairagi & dimovski, 2011; chen & lu, 2006; dimovski, 2010) in it about phenomena 'flipping' (bayley, lee, & walter, 2006; dimovski, 2010) there was a link between idiosyncratic risk and ipo return rates. the idiosyncratic risk was often used to measure information asymmetry (campbell & taksler, 2003). some empirical studies (beaulieu & bouden, 2020; fu, 2009) found a positive relationship between volatility and idiosyncratic risk. the authors argued that investors need high premiums to hold idiosyncratic risky stocks. however, arena, haggard, and yan (2008) and ang, hodrick, xing, and zhang (2006) showed negative relationships in their findings. ang et al. (2006) explained pricing that stocks with high idiosyncratic risks were more sensitive to market volatility risks, thus lowering the return rate. vidalgarcía, vidal, and nguyen (2016) also highlighted the importance of idiosyncratic risk factors in determining ipo performance in european markets. therefore, they noted that more portfolios (especially in spain and the netherlands) contained positively idiosyncratic risks, whereas all portfolios were very damaging in the uk. beaulieu and bouden (2020) found that idiosyncratic risk at the firm level positively affected the ipo's return in the jjtjt rrar −= n ar aar n 1j jt t  = = n ar car n 1j t tt jt t,t 2 1 21  = = = financial risk and management reviews, 2021, 7(1): 36-49 38 © 2021 conscientia beam. all rights reserved. case of the ipo. this paper investigated whether ipo-specific risks were essential in ipo pricing, given the high asymmetry of information occurring within the first 30 days of stock ipo trading. 3. method & data the authors built a model vector error correction (vecm). vecm was used to estimate and predict the future value of potential cumulative abnormal returns (car) on ipo stocks. var & vecm served to analyze the innovative structure of the ipo model. based on this vecm model, the authors tried to prove and identify dynamic relationships of endogenous and exogen variables within the ipo model. first, several testing stages checked the root unit to see the behavior of time series economic data. it could be seen as the initial step in constructing a time series model, whether the data used stationary or not, which could be achieved using the dickey-fuller augmented test (dickey & fuller, 1979) secondly, test the cointegration and causality of granger temporal were using the maximum probability approach of johansen (1988); lastly, the third stage included replacing vecm and testing its exogenity variables. the process of forming vecm could be seen in figure 1. figure-1. var and vecm model correction process. the var model explained the endogenous alteration of past data with other endogenous. var model parameters predicted using ordinary least square (ols) or the smallest square method. in general, the var model for k-variables, i.e., each equation was an equation with one of the other variables and a deterministic trend component. a common form, var(p) with endogenous k-variable yt = (y1t, ..., yet) can be written, equation 1. yt = a0 + it-i + ut, t = 0, ±1, ±2, ... (1) financial risk and management reviews, 2021, 7(1): 36-49 39 © 2021 conscientia beam. all rights reserved. with ai, i = 1,...,p is a dimensional coefficient matrix (k x k), ut is k-dimensional white-noise with e(ut ut)) = u the definitive white-noise. for in-sample, observations could be written in linear form. y=x , with matrix covariance the best order selection criteria used four criteria to select the best order (p) using final prediction error (fpe), akaike information criterion (aic), hannan-quinn criterion (hq), schwarz information criterion (sic). the vector error correction model was used to analyze multivariate time series data that was not stationer. the var model that had a linear cointegration relationship would be the vecm model, which could be written, equation 2. δyt = αβtyt-1 + γ1δyt-1 + … + γp-1δyt-p+1+ ut 0, γi = (i a1 … at) (2) the α and β had dimensions n x r, where n was the number of variables, and r was the cointegration degree. the degree of cointegration indicated some long-term relationship between the changes yt of the model we create. hence, cointegration was the main requirement of using vecm, where the degree of cointegration was determined using the johansen test. short-term and long-term restrictions occurred in var and vecm models. short-term restriction occurred if one variable could not immediately respond to changes or shocks in another variable. while long-term restriction occurred when there was a cointegration or long-term relationship between the variables used. at the end of modeling, irf and pevd would be analyzed and reviewed. the final results, along with the best models, whether stationer or stationer, could be used as a reference in forecasting ipo events. step in the johansen test, namely: h0: there was r, where r = 0.1,... k-1 cointegration equation, no cointegration or long-term relationship between variables. h1: there was a cointegration equation, a cointegration, or a long-term relationship between variables. trace tests were used, where the test criteria were rejected h0 if the trace test statistical value was more than the critical value of mackinnon-hang-michelis. the authors used akaike's information criteria for optimum lag (p) selection, better known as the akaike information criterion (aic). where the aic was defined as follows: aic(p) = logdet (σu (p)) + , with (σu (p)) = t-1 ût ût, where t was the sample size, and k was the number ofendogenous variables. value of p* that minimizes the criteria of information in intervals of 1, pmax to be observed or selected. 4. result there were 181 companies listed on the mainboard and development board for 2015-2019 on indonesia stock exchange. the ipo funds rose, amounting to 129.51 trillion rupiahs or equivalent usd 8.93 billion (1usd=idr 14,500), see table 1. financial risk and management reviews, 2021, 7(1): 36-49 40 © 2021 conscientia beam. all rights reserved. table-1. number of ipo companies, acquisition fund and number of shares. description 2015 2016 2017 2018 2019 total ipo funds (bio idr) 7,324.6 11,424.7 34,318.8 61,657.2 14,786.6 129,511.9 shares float (million) 23,950.1 24,817.5 9,439.0 168,454.0 39,745.5 266,406.1 companies 17 15 36 58 55 181 table-2. descriptive statistic. description n minimum maximum mean std. deviation statistic statistic statistic statistic std. error statistic 1st initial return 181 -1.8 1.7 0.326 0.0291 0.3910 car-5days 181 -0.8 2.1 0.546 0.0417 0.5616 car-30days 181 -0.8 2.6 0.385 0.0432 0.5809 the descriptive statistical test resulted in the values of initial return (ir), cumulative abnormal return fivedays (ca5d). cumulative abnormal return thirty-days (ca30d) in table 2 above showed an average of 0.326, 0.546, and 0.385 with maximum data distribution of 2.60. it also showed a minimum of -1.80, -0.08 -0.08 with standard deviations of 0.0291, 0.0417, and 0.0432 for ir, ca5d, and ca30d. we concluded that for all ipo shares, the average ca5d than ir and ca30d. hence we claimed that under-pricing performed on the indonesia stock exchange provided that the lowest minimum value existed in the ir variable. at the same time, the highest limit found in the ca30d due to the buy & hold practices, sudarmaji, ambarwati, hubbansyah, and shinta (2020). based on empirical studies by sudarmaji et al. (2020) this article revealed that underpricing strategy led to pump-and-dump & flipping strategy occurred on the indonesia stock exchange. the underpricing strategy could be written in the following ways: ca30dit = 1 + β1ca5dit + β2inflationrit + β3lnipofundit + β4lnpriceit+β5lnfloatit + ε it where ca30d represented an abnormal cumulative return of thirties days. ca5d was a cumulative return of five days. inflation was an inflation rate. lnipofund showed the amount of fundraising at ipo. lnprice was the ipo stock price, and lnfloat showed the total number of shares floating in the ipo; subscript i (i = 1, . . ., n) and t (t = 1, . . ., t) indicated, respectively, individual ipo shares and periods. the lower ipo prices, lower ipo fundraising, a small number of floating ipo stocks traded, and an increase in inflation were expected to increase five days' cumulative return. in the end, it prompted an abnormal cumulative thirty days. on the other hand, the higher ipo prices, the large number of floating ipo shares traded, and the high inflation rate were expected to decrease to an abnormal cumulative return rate in the next thirty days. 4.1. unit roots test the most common and widely used test for stationary data tests was the dickey-fuller augmented test criteria (adf test). this test had the following equations presented. ∆yit =1+2+ 2yit−1+ik+ ik ∆yit−k+ε εit; = 1= 1, 2, 3, ..., n; t = 1, 2, 3, ... t where: ∆yt was the first difference from y; = 1, as a constant value or intercept. 2 was the regression coefficient for trends; was the regression coefficient for y lag; was a regression coefficient for y lag differences; lagdifference; ε was a term of error; p was lag, and t was the time. financial risk and management reviews, 2021, 7(1): 36-49 41 © 2021 conscientia beam. all rights reserved. table-3. individual unit-root analysis of inflationr, lnprice, lnipofund and lnfloat augmented dickey-fuller test statistic ca30d ca5d inflationr lnprice lnipofund lnfloat t-stat prob. * t-stat prob. * tstat prob. * tstat prob. * t-stat prob. * t-stat prob. * -12.21 0.00 -13.42 0.00 15.01 0.00 14.21 0.00 -15.01 0.00 -13.88 0.00 test critic al value s: 1% level -3.47 -3.47 -3.47 -3.47 -3.47 -3.47 5% level -2.88 -2.88 -2.88 -2.88 -2.88 -2.88 10% level -2.58 -2.58 -2.58 -2.58 -2.58 -2.58 the test results of table 3 above showed that overall, the ca30d and ca5d variables show stationary in the level value. meanwhile, inflation, lnipofund, lnprice, and lnfloat showed stationary in the first difference, with statistical test scores smaller than critical scores on the adf of 0.01. based on autoregressive reverse root data and characteristic polynomial roots, the authors concluded that the vecm model formed in a stable state since all the roots were inside the circle unit see figure 2. figure-2. inverse roots of ar. 4.2. optimal lag selection the optimal lag length was two based on akaike information criterion (aic) and schwarz bayesian criterion (sbc). table 4. table-4. var lag order selection for inflationr, lnprice, lnipofund and lnfloat lag logl lr fpe aic sc hq 1 409.361 na 0.000 -4.316 -3.660139* -4.050109* 2 448.134 72.16641* 5.22e-10* -4.348369* -3.036 -3.816 3 469.084 37.541 0.000 -4.174 -2.206 -3.376 4 491.691 38.942 0.000 -4.020 -1395 -2.955 5 511.561 32.848 0.000 -3.833 -0.552 -2.502 6 527.157 24.702 0.000 -3.597 0.340 -2.000 7 551.994 37.613 0.000 -3.468 1.125 -1.605 8 571.371 28.002 0.000 -3.276 1.973 -1.146 financial risk and management reviews, 2021, 7(1): 36-49 42 © 2021 conscientia beam. all rights reserved. 4.3. johansen cointegration test the integration analysis findings used johansen's maximum likelihood method using maximum eigenvalue and trace statistics were listed in table 5. both produce evidence to refute the null hypothesis that vectors for vector integration at an actual 5 percent rate. table-5. cointegration test. unrestricted cointegration rank test (trace) hypothesized trace 0,05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.358515 268.4658 95.75366 0.00 at most 1 * 0.313162 189.4393 69.81889 0.00 at most 2 * 0.226732 122.5724 47.85613 0.00 at most 3 * 0.208252 76.80324 29.79707 0.00 at most 4 * 0.15403 35.23798 15.49471 0.00 at most 5 * 0.030228 5.463616 3.841466 0.02 * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values hypothesized max-eigen 0,05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.358515 79.02651 40.07757 0.00 at most 1 * 0.313162 66.86693 33.87687 0.00 at most 2 * 0.226732 45.76917 27.58434 0.00 at most 3 * 0.208252 41.56526 21.13162 0.00 at most 4 * 0.15403 29.77436 14.2646 0.00 at most 5 * 0.030228 5.463616 3.841466 0.02 note: * denotes rejection of the hypothesis at the 0.05 level. **mackinnon-haug-michelis (1999) p-values. 4.4. vector error correction model based on these results, the short-term relationship existed between ca50d and ipo prices, lower ipo funds, and the floating number of ipos in terms of pump-and-dump & flipping strategies on the indonesia stock exchange in 2015-2019, see table 6 table-6. the short-run causality from vecm estimates result. ca5d(-1) inflationr(-1) lnfloat(-1) lnipofund(-1) lnprice(-1) -0,011 56.194 0.447 -0.585 1.774 -0,266 -35.789 -0.223 -0.187 -0.241 [-0.04014] [ 1.57017] [ 2.00574] [-3.12333] [ 7.34775] variable lnfloat and lnprice influenced positively on pump-and-dump & flipping strategy (ca30d). it meant that a change in the stock (float) and the price change would cause the pump-and-dump & flipping strategy to occur by 0.447 percent and 1,774 percent. meanwhile, on the variable amount of funds to be raised in an ipo or ipofund negative influenced on the pump-and-dump & flipping strategy (ca30d), in other words, a null hypothesis was accepted. it meant that if there were a change in the amount of money to be raised (lnipofund) would cause the possibility of the pump-and-dump & flipping strategy to drop by -0.585 percent. the exact process was repeated in other models to test the short-term causality between past slowdowns in inflation (inflation) and rising share prices in five trading days (ca5d). for variable inflation (inflation) and share price increased within five trading days (ca5d), there was no short-term link to the pump-and-dump & flipping (ca30d) strategy. statistically, (inflation) and the increase in the share price in ca5d had a probability value of chi-square, which was <0.05; thus, the null hypothesis was accepted. it meant that there was no short-term financial risk and management reviews, 2021, 7(1): 36-49 43 © 2021 conscientia beam. all rights reserved. causality between (inflation) and the increase in the share price in five trading days (ca5d) and the pump-anddump & flipping strategy (ca30d). in table 7, the results of estimates of six models showed three models had long-term causality, namely the floating number (lnfloat), cumulative abnormal five days (ca5d), and the ipo price (lnprice). meanwhile, three modes did not have long-term causality, namely lnipofund, inflation, and ca30d. there was one model in ca5d that had long-term causality in 5% significant long-term causality. statistically, the first model showed that the ect coefficient was -0.097, which meant the long-term balanced relationship was valid between the stock's variable ipo floating number (lnfloat) and the ca30d. it implied that -9.70 that imbalance of the previous period shocks reunited a long-term balance in the current period negative for lnfloat. in other words, there were long-term causality variable ipo floating numbers lnfloat, lnprice, lnipofund, inflation, ca5d, and ca30d. in the second model, there was a negative effect on the previous year's variable ipo floating number (lnfloat), which showed the coefficient value of −0.905. it meant that the 1% increase in lnfloat reduced ca30d by 90.50%. these findings suggested that an increase in lnfloat would negatively impact ca30d in indonesia. likewise, the third model in the floating number (lnfloat), which has an ect coefficient of 0.432, meant that there was the validity of the long-term equilibrium relationship between lnfloat and ca30d; this implied that the 43.2% imbalance of the previous period shocks reunited into a long-term balance in the current period positively. in other words, there was long-term causality of lnprice, lnfloat, lnipofund, inflation, ca5d, and ca30d. however, lnfloat-2 and lnprice-1 indicated that they had a significant effect on the ca30d. table-7. the short-run causality from vecm estimates result. error correction: d(ca30d) d(ca5d) d(inflationr) d(lnfloat) d(lnipofund) d(lnprice) cointeq1 -0.120 -0.097 0.000 0.432 -0.294 -0.905 -0.078 -0.059 0.000 -0.140 -0.186 -0.117 [-1.55279] [-1.65867] [-1.43697] [ 3.07581] [-1.57851] [-7.72162] d(ca30d(-1)) -0.859 -0,009 0.000 0.133 1.501 0.875 -0.446 -0,337 -0.001 -0.808 -1.073 -0.675 [-1.92436] [-0.02770] [-0.05949] [ 0.16465] [ 1.39895] [ 1.29712] d(ca30d(-2)) 0.042 0.297 0.000 0.015 0.775 0.370 -0.444 -0.335 -0.001 -0.803 -1.066 -0,671 [ 0.09387] [ 0.88619] [ 0.16843] [ 0.01870] [ 0.72707] [ 0.55196] d(ca5d(-1)) 0.512 -0.439 0.000 -0.570 -1.620 -0.328 -0.585 -0.442 -0.001 -1.060 -1.407 -0.885 [ 0.87489] [-0.99175] [ 0.32261] [-0.53772] [-1.15192] [-0.37029] d(ca5d(-2)) -0.552 -0.751 0.000 -0.169 -0.803 -0.229 -0.588 -0.445 -0.001 -1.066 -1.414 -0.890 [-0.93742] [-1.68896] [ 0.23076] [-0.15836] [-0.56759] [-0.25722] d(inflationr(1)) -36.676 -29.238 -0.107 125.889 10.348 -110.921 -64.850 -49.037 -0.076 -117.464 -155.909 -98.055 [-0.56556] [-0.59624] [-1.39705] [ 1.07172] [ 0.06637] [-1.13121] d(inflationr(2)) -66.233 -58.043 -0.018 115.326 79.351 -48.277 -65.230 -49.325 -0.077 -118.154 -156.824 -98.630 [-1.01538] [-1.17676] [-0.23984] [ 0.97607] [ 0.50599] [-0.48948] d(lnfloat(-1)) 0.059 0.036 0.000 -0.902 -0.051 0.131 financial risk and management reviews, 2021, 7(1): 36-49 44 © 2021 conscientia beam. all rights reserved. error correction: d(ca30d) d(ca5d) d(inflationr) d(lnfloat) d(lnipofund) d(lnprice) -0.084 -0.064 0.000 -0.153 -0.203 -0.128 [ 0.69979] [ 0.56741] [ 1.29681] [-5.90183] [-0.25036] [ 1.03013] d(lnfloat(-2)) -0.153 -0.118 0.000 -0.435 -0.156 0.079 -0.082 -0.062 0.000 -0.149 -0.197 -0.124 [-1.85919] [-1.90252] [ 1.40073] [-2.92939] [-0.79260] [ 0.63745] d(lnipofund(1)) -0.086 -0.055 0.000 0.219 -0.555 -0.125 -0.079 -0.059 0.000 -0.142 -0.189 -0.119 [-1.08913] [-0.91723] [-1.34373] [ 1.53508] [-2.93334] [-1.05371] d (lnipofund(2)) 0.069 0.058 0.000 0.059 -0.203 -0.045 -0.074 -0.056 0.000 -0.134 -0.178 -0.112 [ 0.93572] [ 1.04327] [-1.45927] [ 0.43907] [-1.14363] [-0.40698] d(lnprice(-1)) 0.219 0.167 0.000 -0.617 0.091 0.201 -0.122 -0.092 0.000 -0.220 -0.292 -0.184 [ 1.80026] [ 1.81160] [ 1.23710] [-2.79971] [ 0.31117] [ 1.09538] d(lnprice(-2)) -0.049 -0.038 0.000 -0.252 -0.009 0.111 -0.091 -0.069 0.000 -0.165 -0.219 -0.138 [-0.53580] [-0.54924] [ 1.13267] [-1.52735] [-0.04237] [ 0.80159] c 0.001 -0.001 0.000 0.000 -0.010 -0.011 -0.047 -0.036 0.000 -0.086 -0.114 -0.071 [ 0.01650] [-0.01474] [ 0.04731] [ 0.00542] [-0.09223] [-0.15659] r-squared 0.411 0.389 0.066 0.411 0.342 0.539 adj. r-squared 0,.64 0.341 -0.008 0.364 0.290 0.502 however, lnfloat-2 and lnprice-1 indicated that it has a significant effect on the ca30d. the third model estimated results in ca5d show a long-term balance between lnprice, lnfloat, lnipofund, inflation, ca30d and ca5d at a significant 5% rate. however, in part, only lnfloat-2 and lnprice-1 showed an insignificant effect on the ca30d. on the other hand, the fourth, fifth, and sixth models showed no long-term causality of variable lnfloat, lnprice, lnipofund, inflation, ca5d, and ca30d. statistically, variable lnfloat, lnprice, lnipofund, inflation, ca5d did not affect ca30d. 4.5. innovative accounting approach 4.5.1. impulse-response function based on figure 3 below, the ca30d responded to the ca5d variable shock, inflation, lnfloat, and lnprice began to surprise with opposing trends, including variables in the lnipofund variable. long-term dynamics response on lnfloat, lnipofund, and lnprice occurred in the 2nd period. variance decomposition described how many variance errors were predicted from certain effect variables described by innovations resulting from other effect variables in the system for some time. 4.5.2. variance decomposition variance decomposition described the variance proportion of errors from different impact factors of co30d on the indonesia stock exchange. it described the relative effect that could explain each variable's contribution to the system variable. variance decomposition results were presented in table 8. for ca30d, the lnprice variable shock financial risk and management reviews, 2021, 7(1): 36-49 45 © 2021 conscientia beam. all rights reserved. was the most significant factor in explaining its variability. most variables had a surprising account in the third period. subsequently, we would highlight the most critical shocks that can change each effect that was decomposed. the empirical evidence indicated that 93.68 % of ca30d was due to its innovative shocks. the variable ca5d was mainly affected by ca5d, and the variable lnprice was 91.866 % and 2.896 %, respectively. at the same time, 2.461 % was ca5d due to its innovator shocks with a standard error of 0.851%. variable inflation component was mainly affected variable inflation by 84.874 % by its shocks. 94.874 % of the inflation rate was explained by one standard deviation shock in its innovative shocks. variable inflation component was mainly affected variable inflation by 84.874 % by its shocks. likewise, the variable lnfloat component was mainly affected by its lnfloat by 82.20 % and the ca5d by 26.43 %. the variable lnipofund component was mainly affected by its lnipofund by 49.00 % and by the lnfloat by 40.09 %. the variable lnprice component was mainly affected by its lnprice by 19.80 %, by the ca30d and lnipofund by 44.80 % and 30.76%, respectively. figure-3. impulse responses variables due to shocks. -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to ca30d -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to inflationr -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to lnfloat -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to lnprice -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to lnipofund -.2 .0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 10 response of ca30d to ca5d -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to ca30d -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to inflationr -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to lnfloat -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to lnprice -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to lnipofund -.0004 .0000 .0004 .0008 1 2 3 4 5 6 7 8 9 10 response of inflationr to ca5d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to ca30d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to inflationr 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to lnfloat 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to lnprice 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to lnipofund 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnfloat to ca5d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to ca30d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to inflationr 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to lnfloat 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to lnprice 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to lnipofund 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnprice to ca5d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to ca30d 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to inflationr 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to lnfloat 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to lnprice 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to lnipofund 0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10 response of lnipofund to ca5d -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to ca30d -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to inflationr -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to lnfloat -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to lnprice -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to lnipofund -.2 .0 .2 .4 .6 1 2 3 4 5 6 7 8 9 10 response of ca5d to ca5d response to cholesky one s.d. innovations financial risk and management reviews, 2021, 7(1): 36-49 46 © 2021 conscientia beam. all rights reserved. table-8. ca30d variance decomposition. variance decomposition of ca30d: period s.e. ca30d ca5d inflationr lnfloat lnipofund lnprice 1 0.630 100.000 0.000 0.000 0.000 0.000 0.000 2 0.681 99.395 0.314 0.237 0.016 0.036 0.002 3 0.739 92.174 1.978 1.323 0.989 0.160 3.376 4 0.826 92.817 1.680 1.121 1.021 0.619 2.743 5 0.885 93.331 1.466 1.034 1.038 0.566 2.564 6 0.933 93.027 1.470 1.182 1.061 0.554 2.705 7 0.986 93.280 1.315 1.196 0.949 0.645 2.615 8 1.035 93.453 1.213 1.181 0.916 0.647 2.589 9 1.079 93.534 1.145 1.205 0.879 0.656 2.581 10 1.124 93.677 1.064 1.214 0.822 0.675 2.548 variance decomposition of ca5d: 1 0.476 97.009 2.991 0.000 0.000 0.000 0.000 2 0.518 96.457 3.268 0.260 0.010 0.001 0.004 3 0.558 90.658 3.106 1.605 0.843 0.155 3.633 4 0.624 90.807 3.401 1.354 0.862 0.595 2.982 5 0.670 91.376 3.158 1.258 0.864 0.529 2.814 6 0.706 91.302 2.885 1.428 0.886 0.517 2.983 7 0.747 91.454 2.800 1.445 0.791 0.589 2.922 8 0.784 91.647 2.665 1.432 0.759 0.587 2.910 9 0.817 91.766 2.539 1.459 0.729 0.591 2.917 10 0.851 91.887 2.461 1.470 0.682 0.603 2.897 variance decomposition of inflationr: 1 0.001 0.331 0.000 99.668 0.000 0.000 0.000 2 0.001 0.631 0.012 98.237 0.156 0.882 0.082 3 0.001 1.782 0.009 95.857 0.212 2.034 0.107 4 0.001 1.550 0.008 95.753 0.183 2.260 0.246 5 0.002 1.509 0.009 95.466 0.192 2.522 0.302 6 0.002 1.647 0.011 95.151 0.211 2.686 0.294 7 0.002 1.625 0.010 95.109 0.200 2.746 0.309 8 0.002 1.618 0.009 95.017 0.202 2.828 0.326 9 0.002 1.638 0.009 94.918 0.207 2.897 0.331 10 0.002 1.638 0.008 94.874 0.204 2.938 0.338 variance decomposition of lnfloat: 1 1.141 0.002 6.510 1.052 92.435 0.000 0.000 2 1.189 0.275 6.121 2.448 90.365 0.369 0.421 3 1.300 0.720 6.657 3.481 85.835 0.912 2.395 4 1.470 0.773 6.825 3.188 84.407 1.862 2.944 5 1.544 0.776 6.638 3.292 84.366 2.011 2.917 6 1.638 0.784 6.712 3.481 83.699 2.097 3.226 7 1.738 0.868 6.760 3.560 83.079 2.305 3.428 8 1.818 0.889 6.731 3.637 82.740 2.449 3.554 9 1.899 0.895 6.735 3.693 82.471 2.538 3.667 10 1.979 0.921 6.746 3.742 82.202 2.625 3.764 variance decomposition of lnipofund: 1 1.514 2.381 7.495 0.526 35.777 53.821 0.000 2 1.626 2.095 6.508 0.498 37.197 51.833 1.870 3 1.742 2.129 6.313 0.892 36.751 51.926 1.989 4 1.941 2.170 6.157 0.997 38.434 50,206 2.037 5 2.068 2.010 5.720 1.070 38.934 50.024 2.243 6 2.189 1.993 5.630 1.177 39.075 49.804 2.321 7 2.317 1.983 5.443 1.225 39.464 49.496 2.390 8 2.431 1.925 5.295 1.269 39.766 49.279 2.466 9 2.539 1.907 5.205 1.318 39.918 49.138 2.514 10 2.645 1.889 5.101 1.350 40.099 49.001 2.560 variance decomposition of lnprice: 1 0.952 7.993 1.866 0.045 1.175 59.596 29.325 2 1.012 9.635 1.659 1.345 2.175 54.983 30.203 financial risk and management reviews, 2021, 7(1): 36-49 47 © 2021 conscientia beam. all rights reserved. 3 1.068 16.937 1.506 1.284 2.321 50.404 27.549 4 1.101 19.864 1.432 1.252 2.184 48.730 26.538 5 1.136 21.376 1.515 1.216 2.515 48.439 24.939 6 1.170 23.577 1.438 1.148 2.451 47.679 23.707 7 1.205 26.006 1.371 1.083 2.397 46.610 22.533 8 1.236 27.670 1.343 1.031 2.466 45.935 21.554 9 1.267 29.232 1.307 0.982 2.453 45.387 20.639 10 1.298 30.765 1.267 0.936 2.436 44.798 19.798 5. conclusions the paper investigated long-term causality between lnfloat, lnprice, lnipofund, inflation, ca5d, and ca30d using vecm-based granger causality models from 2015-2019. empirical results showed long-term and short-term causality between variables at significance rates of 1%, 5%, and 10% in indonesia. the main results for the granger's presence and causality direction were lnfloat, and lnprice had causal evidence in long-term or short-term causality with cumulative abnormal return thirty days (car30d). however, the lnipofund had evidence of cause in short-term causality alone. on the other hand, there was no evidence of a cause of variable inflation and ca5d for long-term causality and short-term causality with cumulative abnormal return thirty days (car30d). funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. acknowledgement: all authors contributed equally to the conception and design of the study. references ang, a., hodrick, r. j., xing, y., & zhang, x. 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(1992). new zealand ipo underpricing: the reputation factor. small enterprise research, 1(1), 13-22. available at: https://doi.org/10.5172/ser.1.1.13. granger casualty furthermore, to investigated the direction of causality between the cumulative abnormal thirty days (ca30d), the cumulative abnormal five days (ca5d), inflation (infaltion), ipo fund (lnipofund), ipo price (lnprice) and ipo float (lnfloat) in the context of the time-series data. then the vecm granger causality equation model can be seen as follows: ø ∆ca30dt = α1t + ∑ n−1 ρ1t,l∆ca5dt−1 + ∑ n−1 β1t,l∆inflationt−1 +∑ n−1 γ1t,l∆lnipofundt−1 + ∑ n−1 δ1t,l∆lnpricet−1 +∑ n−1 ø1t,l∆lnfloatt−1 +ectt−1 +ε1t (5) i=1 i=1 ∆ca5dt = α2t + ∑ n−1 ρ2t,l∆ca30dt−1 + ∑ n−1 β2t,l∆inflationt−1 +∑ n−1 γ2t,l∆lnipofundt−1 +∑ n−1 δ2t,l∆lnpricet−1 +∑ n−1 ø2t,l∆lnfloatt−1 +ectt−1 +ε2t (6) i =1 i =1 financial risk and management reviews, 2021, 7(1): 36-49 49 © 2021 conscientia beam. all rights reserved. ∆lnflationt = α3t + ∑ n−1 ρ3t,l∆ca30dt−1 + ∑ n−1 β3t,l∆ca5dt−1 i=1 i=1 +∑ n−1 γ3t,l∆lnipofundt−1 +∑ n−1 δ3t,l∆lnpricet−1 +∑ n−1 ø3t,l∆lnfloatt−1 +ectt−1 +ε3t. (7) i = 1 i = 1 ∆lnipofundt =α4t +∑ n−1 ρ4t,l∆ca30dt−1 +∑ n−1 β4t,l∆ca5dt−1 i=1 i=1 +∑ n−1 γ4t,l∆inflationt−1 +∑ n−1 δ4t,l∆lnpricet−1 +∑ n−1 ø4t,l∆lnfloatt−1 +ectt−1 +ε4t i = 1 i = 1 (8) i = 1 i = 1 ∆lnpricet = α5t + ∑ n−1 ρ5t,l∆ca30dt−1 + ∑ n−1 β5t,l∆ca5dt−1 i=1 i=1 +∑ n−1 γ5t,l∆inflationt−1 +∑ n−1 δ5t,l∆lnipofundt−1 +∑ n−1 ø5t,l∆lnfloatt−1 +ectt−1 +ε5t. (9) i = 1 i = 1 ∆lnfloatt = α3t + ∑ n−1 ρ6t,l∆ca30dt−1 + ∑ n−1 β6t,l∆ca5dt−1 i=1 i=1 +∑ n−1 γ6t,l∆inflationt−1 +∑ n−1 δ6t,l∆lnipofundt−1 +∑ n−1 ø6t,l∆lnpricet−1 +ectt−1 +ε6t. (10) i = 1 i = 1 where t is period (t = 1..., t); l is lag of each variable; ect is error correction term and ε1t, ε2t, ε3t, ε4it,ε5t, ε6t, is assuming error rates on the model (error term). views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 22 © 2020 conscientia beam. all rights reserved. the relationship between creative accounting risks and auditing risks from the perspective of external auditors in saudi arabia wejdan hassan m. ghamri lecturer in accounting, college of business, university of jeddah, saudi arabia. abstract article history received: 14 february 2020 revised: 17 march 2020 accepted: 20 april 2020 published: 12 may 2020 keywords creative accounting external auditors auditing risks saudi arabia. jel classification: a10. the present study aimed to identify the relationship between creative accounting risks and auditing risks from the perspective of external auditors in saudi arabia. the sample comprised licensed auditors who serve in saudi statutory audit offices. the outcomes showed that external auditors were aware of creative accounting risks. in addition, their professional technical factors, such as professionalism, commitment to training programs and continuing education, mentorship, considering professional standards in auditing, good planning for external auditing, their supervision of auditing teamwork, and auditing fees, enormously helped identify creative auditing practices. there were no statistically significant differences in the external auditors' estimates of the effect of creative accounting risk on auditing risks according to the variables of (academic qualification, professional qualification, occupation, and experience). no statistically significant differences were found in the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to these variables. the research recommends giving concern to the concept of creative accounting risks, and set the standards and procedures that the auditor must follow to address these practices because of their negative effects on the reliability of the financial statements. contribution/originality: this study was the first in saudi arabia to identify the external auditors' views on the impact of creative accounting risks on auditing. the findings will encourage statutory audit offices to consider detecting creative accounting practices, and thus confidence in financial reports is promoted. 1. introduction constant expansion in the size and financial transaction s of the economic institutions has increased the relevant negatives and creative accounting practices which appeared in several terms, such as creative accounting, aggressive or fraudulent accounting, and profits smoothing, earnings management, income smoothing, cosmetic accounting, disclosure management, massive complex, …etc. the researcher claims that although the above-mentioned terms differ, the management adopts them to achieve unreal improvement in profit or financial status through exploiting the gaps in external auditing methods, or taking advantage of the alternative accounting policies which allow the company to use accounting standards in developing the measurement and disclosure methods to prepare inaccurate financial statements and avoid particular contractual issues (alsahli, 2007; matar, 1997). this manifests that reducing the risk of creative accounting practices in auditing is complicated, so the concerned ones constantly strive to uncover those practices, increase awareness, scientifically prove their seriousness for auditing, and reduce them (alkhashawi & aldossary, 2008). financial risk and management reviews 2020 vol. 6, no. 1, pp. 22-39. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.22.39 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0001-6703-3489 https://www.doi.org/10.18488/journal.89.2020.61.22.39 financial risk and management reviews, 2020, 6(1): 22-39 23 © 2020 conscientia beam. all rights reserved. 2. statement of the problem because of the economic problems of the institutions, departments attempt to benefit from the flexibility offered by accounting standards to adopt creative accounting through influencing and directing decisions within the law to achieve their personal goals. the researcher contends that auditing plays an important role in reducing creative accounting risks, and promoting financial reports quality. moreover, the auditor is responsible for identifying creative accounting risks, and making the financial statements report. this requires conducting adequate auditing procedures based on the concept of auditing risks to be sure that financial statements have no material misstatements resulting from creative accounting practices. accordingly, the study seeks to address the issue by posing the following major question: what is the relationship between creative accounting risks and auditing risks from the perspective of external auditors in saudi arabia? this major question can be subdivided into two minor ones: 1. what is the perspective of the external auditors on creative accounting methods adopted by companies in saudi arabia? 2. what is the responsibility of the external auditor for detecting creative auditing practices from the perspective of external auditors in saudi arabia? 3. significance reviewing the previous local, arabic and foreign pieces of literature demonstrated lack in the papers and studies that addressed the topic under study. thus, significance of the present study stems from the fact that it is the first one to address such issue in saudi arabia. hence, it will enrich scientific research, especially with regard to assessing the external auditors' views on the impact of creative accounting risks on auditing. the researcher also expects that the field study, which is conducted in saudi arabia, will encourage statutory audit offices to consider detecting creative accounting practices, so confidence in financial reports is promoted. 4. objectives the present study aims to identify the relationship between creative accounting risks and auditing risks from the perspective of external auditors. the major objective can be subdivided into the following minor objectives:  identify the effect of creative accounting risk on auditing, define the difference between accounting error; accounting fraud; and creative accounting, and address the debate among researchers on methods; procedures and detection of creative accounting, as well as its impact on the reliability of financial data and reports.  identify the external auditors' perspectives on creative accounting practices. 5. hypotheses  there are no statistically significant differences at significance level (α≤ 0.05) in the external auditors' estimates of the effect of the creative accounting risks on auditing risks according to the study variables.  there are no statistically significant differences at significance level (α≤ 0.05) in the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the study variables. 6. methodology the study adopted the descriptive analytical approach. for the descriptive approach, the researcher read relevant books, periodicals, arabic and foreign articles, as well as theoretical and field papers to develop the foundations on which the concept of creative accounting is based. thus, the researcher can provide a background on financial risk and management reviews, 2020, 6(1): 22-39 24 © 2020 conscientia beam. all rights reserved. creative accounting risks and their relationship to auditing risk. moreover, the researcher read the relevant previous pieces of literature, which constitute the study domains. for the analytical field approach, a survey was conducted; the data obtained from the questionnaire, which was distributed to answer the questions and test the hypotheses of the study, were analyzed; and the outcomes were interpreted using the appropriate statistical methods. 7. limits  spatial limits: the study was conducted at saudi statutory audit offices available on the official website of the saudi organization for certified public accountants (socpa) and (2) questionnaires were sent to each office.  temporal limits: the study was conducted for the academic year 2019/2020. 8. theoretical framework 8.1. creative accounting according to agostini and favero (2012) creative accounting is "the process by which creativity organizes the accounting outcomes required in advance, rather than neutral and consistent outcomes ". hammad (2006) defines it as "a broad term that comprises all practices that adjust the presented financial outcomes as well as financial status, and change the attitude towards the performance of the institution. it is a comprehensive term that describes all measures (i.e. aggressive accounting, profit management, mitigating income fluctuations, or fraudulent financial reporting). amora and sharifi (2011) define it as "providing accounting information in the form of high-quality information, which benefits beneficiaries, so they always search for it, and wish to obtain it. according to bataineh (2010) it denotes adopting some tricks and accounting methods to raise the profile of the joint stock company in terms of the strength of its financial status, volume of net profits, or its competitive; financial and transaction al status. the researcher claims that although the above-mentioned definitions differ, they agree that creative accounting is a procedure adopted by the management to achieve unreal improvement in financial statements through exploiting the weaknesses in external auditing methods as well as measurement and disclosure methods to present inaccurate financial numbers and achieve particular goals. therefore, the auditor should be distinguished with credibility, transparency and the ability to adopt standards with which he can easily detect fraud and its percentage. 8.2. positive and negative aspects of creative accounting despite controversy on creative accounting practices, most researchers agree that it has two aspects: i. positive aspect: accountants resort to imagination to explain financial, economic and legal innovations which lack standard accounting solutions when they occur. in other words, it helps find unfamiliar accounting solutions and procedures that help make decisions, provide high quality accounting information, as well as renews and develops accounting methods and procedures (amora & sharifi, 2011; karim, fowzia, & rashid, 2011). ii. negative aspect: creative accounting involves adopting tricks, methods of misrepresentation and numbers manipulation, i.e. adjustments arising from financial engineering, to demonstrate a particular situation in accordance with its effect on the balance sheet and the company outcomes to serve the interests of certain parties or conceal facts. jameson (1988) stated that creative accounting practices do not violate law or accounting standards, so they are consistent with the law not with the spirit of the law. however, they distort financial outcomes and corporate positions, as well as mislead users of accounting information (amora & sharifi, 2011; karim et al., 2011). financial risk and management reviews, 2020, 6(1): 22-39 25 © 2020 conscientia beam. all rights reserved. the researcher supports the negative aspect of creative accounting practices because they transform reality into a desired state to achieve personal interests that may contradict the others', and this is a deception in the financial report. furthermore, deception fundamentally affects the financial reports. transformation process may be considered fraud in the financial statements. she also asserts that most researchers classify it as fraud in the financial reports, and others classify it as management fraud. although some creative accounting methods are acceptable, they result in incorrect and misleading financial statements. figure 1 shows the nature of creative accounting practices. figure-1. nature of creative accounting practices. 8.3. creative accounting the researcher claims that creative accounting is the accountant’s ability to find new things, i.e. ideas, solutions, methods, procedures or practices when using his/her skills and creative personal experience to devise new accounting methods that help find accounting solutions and achieve particular goals for the benefit of certain parties although they may conflict with the others' interests and fail to achieve the overall benefit. hamada (2010) clarifies the common aspects of creative accounting practices, as follows:  exploitative practices adopted in selecting accounting estimates.  unavoidable practices.  general and common practices.  reasonable practices.  fraudulent practices that convert real numbers to unreal ones.  legal practices that are within the framework of international accounting principles and standards.  practices harmful to internal and external parties. hammad (2006) reports that creative accounting practices involve the whole methods used in financial numbers manipulation, including intentional and unintentional selection, deceptive and unethical application of accepted accounting principles, fraudulent financial reports, and the steps that manage profits or reduce income fluctuations. saleh and fatiha (2010) indicates that creative accounting comprises several characteristics, such as the accountant's ability to analyze and synthesize, visualize and use intuition, have courage and self-confidence, and develop his/her self through self-criticism. the researcher contends that accounting error is unintentionally committed, but the values of the financial statements involve items against the accepted accounting principles. when it is detected, the necessary adjustments are made to correct the items of the financial statements. in addition, it signifies distortion, negligence, or unintentional exclusion that occurs because the personnel of accounts department ignore accounting standards. whereas, fraud is associated with the attempt be hidden to cause intentional misrepresentations that cannot be easily detected. moreover, its detection is related to the strength or weakness of the internal control system, and the auditor's ability to detect and observe the distortions. sacks (2004) states that what distinguishes accounting fraud from accounting error is that fraud is intentionally committed, and occurs either in misleading financial statements, or in financial assets embezzlement. in addition, no comprehensive system is available for detecting accounting fraud. thus, the auditor may fail to detect it despite the appropriate planning for auditing process. table 1 shows the similarities and differences between error, fraud and accounting creativity. financial risk and management reviews, 2020, 6(1): 22-39 26 © 2020 conscientia beam. all rights reserved. table-1. similarities and differences between accounting error, accounting fraud, and creative accounting. accounting error accounting fraud creative accounting illegal procedure illegal procedure legal procedure unintentional intentional intentional easy detection difficult detection difficult detection misleading financial statements misleading financial statements misleading financial statements note: all cases have the same result, i.e. presenting misleading financial statements. 8.4. the relationship between creative accounting risk and auditing risk the topic of creative accounting risk and auditing risk has grabbed the attention of numerous affiliations because the higher the quality of auditing process, the less the auditing risk. hence, the auditor feels confident to express his/her neutral technical opinion on the validity and reliability of the financial statements. accordingly, auditing risk is a substantial but unintended failure in the financial statements (bernoth & wolff, 2006). 8.5. audit risk components 8.5.1. inherent risk inherent risk is embedded in the nature of the institution, industry, or account. it also denotes the exposure of a transaction, an account, or a balance in the financial statements to a serious error with no internal control procedures. risk always occurs if the financial statements are inaccurate. the administration may insert incorrect data to show an increase or decrease in net profit. thus, more return is obtained and the amount of zakat or taxes reduces. various examples reflect such improper actions. therefore, the auditor must properly know the activity and the financial status of the company as well as the surrounding circumstances, and verify that the creators of financial statements encounter no pressure. consequently, he/she can accurately assess inherent risk when planning for auditing process, which increases the effectiveness of his/ her decisions in detecting those errors and irregularities that cause fundamental distortion in the financial statements (alanqari, 2007; almaqtari, 2011). the standard of auditing risks and relative significance issued by the saudi organization for certified public accountants (2000) defines the inherent risk as “the possibility that the company statements conceal serious errors and fraud assuming the absence of internal control procedures.” (item 142). the american auditing standard no. (47) defines it as “the financial statements certainty of creative accounting practices assuming the absence of internal control structure” (farag, 2009). 8.6. control risk it denotes that the internal control may not prevent or detect fundamental errors in one or more elements in the financial statements. it may involve the risk of accessing confidential data files, as well. hence, the auditor should identify the elements, efficiency, and weaknesses of the internal control structure on one hand. on the other hand, he/she should conduct commitment tests to justify control risk reduction below the maximum level (almaqtari, 2011). the standard of auditing risks and relative significance issued by the saudi organization for certified public accountants (2000) defines control risk as “serious errors and fraud are not prevented or detected in the statements on time because of the internal control weakness.” (item 143). control risks have a direct correlation with the effectiveness of designing and implementing internal control in achieving the establishment's goals related to preparing its financial statements. it is an internal risk that the auditor cannot influence, but he/she should only evaluate it to define the required auditing procedures which reduce the detection risk to the acceptable level (kharwat, 2009). the american auditing standard no. (47) defines it as “the creative accounting risks that occur in a particular certainty in the financial statements and cannot be prevented or detected by the internal control procedures "(farag, 2009). financial risk and management reviews, 2020, 6(1): 22-39 27 © 2020 conscientia beam. all rights reserved. 8.7. detection risk it implies that the auditor may fail to detect the errors in the financial statements that have not been prevented or detected by internal control accounting system. in addition, it is the only element that the auditor can control by increasing or decreasing the basic tests, which are carried out in the stages of planning and implementing auditing process. accordingly, the auditor should analyze and evaluate inherent risk, as well as carefully examine and estimate control risk to reduce detection risk to the lowest possible level. the standard of auditing risks and relative significance issued by the saudi organization for certified public accountants (2000) defines it as" the auditor's inability to detect serious error or fraud in one of the certainties. it is associated with the effectiveness of auditing procedure, and how the auditor applies it. these risks partially stem from uncertainty elements arising from the auditor's failure to examine 100% of the account balance or type of transaction, and from other uncertainty elements that exist even if the auditor examines 100% of the account balance or a type of transactions. other uncertainty elements arise from performing inappropriate auditing, poor application of an appropriate procedure, or misinterpretation of auditing results. other uncertainty elements may be reduced to a negligible level through adequate planning, supervision, and implementation of the office's auditing work in accordance with appropriate control standards ”(item 144). the american auditing standard no. (47) defines non-detection risks as “the inability of auditing procedures to detect creative accounting practices that exist in a particular certainty in the financial statements.” international standard no. (400) defines creative accounting risks as (non-detection risk) as “the risks resulting from not detecting the auditing procedures the auditor performs creative accounting practices in the account balance or in a type of transactions. this may be distortion in itself or if added to other creative accounting practices in the balances of other accounts or other types of transactions” (farag, 2009). 8.8. major elements of creative accounting risks and their effect on auditing quality 8.8.1. litigation risk litigation risk is one of the factors that influence auditing profession, as well as accounting information and its quality. the auditor is sued when the client claims that he/she did not do the task competently, i.e. the auditor failed to detect creative accounting practices in the financial statements, or detected them, but never reported them. several studies addressed the factors affecting the auditor's litigation as clarified in (financial hardship, growth in ownership, long / short auditing period, auditor's independence, adjusted opinion, and size of the customer's establishment). 8.9. sanctions risk it represents the penalties and sanctions which regulators impose on the auditor because of his/her issues with the client. they affect his/her salary, behavior and professional reputation. 8.10. damaging the auditor's professional reputation damaging the auditor's reputation is an aspect of creative accounting risks because of his/ her litigation or sanctions. his/her reputation is a determinant of his/her professional performance quality. fearnley, beattie, and brandt (2005) state that auditing risks can be countered by auditing the account balances annually, and testing compliance with internal control systems through paying frequent visits to the company's control systems, especially the automated ones. combating creative accounting risk is difficult and complicated. thus, auditors seek to know the developments of creative accounting to detect and reduce its risk. hamada (2010) argues that the role of audit committee should be activated to diminish creative accounting practices and carry out the following procedures and tasks: financial risk and management reviews, 2020, 6(1): 22-39 28 © 2020 conscientia beam. all rights reserved.  supervise and oversee the financial reports, as well as investigate and disclose the adopted accounting policies in light of the objectives of the financial reports.  support and improve the quality of the external audit function through appointing experienced and competent auditors, help the external auditor do his/her tasks and maintain independence, coordinate between the external auditor and the internal auditor and consider their observations, and oversee the services of the external auditor to increase the investors and external parties' confidence in financial reports.  examine the activities, plans and results of the internal auditing, and evaluate its performance.  evaluate internal control systems to address weaknesses and strengthen them.  audit committees oversee the company's business to ensure a high level of disclosure, transparency, and appropriateness for its clients.  risk management in companies: supervise risk management, help the administration design risk management strategy according to different types of risks, comprehend the relationship between risk management and financial reports, assess fraud risk at every level of the management, help identify risks to take advantage of opportunities and reduce uncertainty, and assess adequacy of risk control; including external risks. 8.11. factors of creative accounting risks according to hammad (2006) and farag (2009) they are the characteristics that reflect creative accounting practices in the company, and are defined, as follows:  risk factors related to management characteristics and their impact on control environment: they are closely related to the management capabilities, pressures, and its relationship with internal control as well as the financial reporting.  risk factors related to industry circumstances: they involve the economic and organizational environment where the facility operates.  risk factors related to operational characteristics and financial stability: they are associated with the complicated nature, transactions, financial status, and profits of the facility. accordingly, farag (2009) claims that factors of creative accounting risks should be classified based on the triangle of creative accounting risks which involve the three following factors:  motivational factors: the management's willingness to do creative accounting practices in the financial statements.  opportunities-related factors: the opportunity to perform creative accounting practices and the possibility of their occurrence in the financial statements. these factors are represented in weakness of the internal control structure.  logical justifications: the ability of those involved in creative accounting practices to justify their action, especially in light of opportunities availability, because they usually have the ability to deceive. risk model reveals that the auditor successfully detect these practices if he is able to:  properly identify factors of creative accounting risks.  assess creative accounting risks accordingly.  establish audit procedures that reduce the risks of material distortions in the financial statements resulting from undetected creative accounting practices. 9. literature review alwashali (2010) measured the auditors' perception of the responsibility to assess and detect management fraud and their response to fraud risks, as well as the relative effect of their characteristics on detecting management fraud. financial risk and management reviews, 2020, 6(1): 22-39 29 © 2020 conscientia beam. all rights reserved. hamada (2010) covered the activities carried out by the audit committees to reduce creative accounting practices, and the views of external auditors and members of audit committee on the role of audit committee in reducing these practices. to achieve the study objective, the deductive inductive approach was adopted. the researcher distributed a questionnaire to some external auditors and members of the audit committee in joint-stock companies in syria. the questionnaire comprised the audit committees' activities when carrying out their tasks to reduce these practice in companies. salome, ogbonna, marcel, and echezonachi (2012) addressed the impact of creative accounting on accountants' performance when reporting financial statements and data in nigeria, the financial reporting system, the process of choosing an accounting policy, and handling financial reports. they also aimed to verify whether a well-designed framework of accounting regulations can reduce creative accounting practices in the financial reports of companies. the study employed empirical survey. (227) out of (500) participants were selected. almaqtari (2011) investigated improving quality, addressing changes of the competitive environment in auditing market, and reducing audit risks through highlighting the auditor's professional role in improving audit risks estimates in yemen. moreover, a field study, focusing on the yemeni business environment and involving a sample of auditors, was conducted. the results of the theoretical and field study highlighted the importance of the auditor's professional specialization in auditing which improves the efficacy of audit risk assessment represented in control risk, detection risk, and inherent risk. this is accomplished through the accurate defining of compliance tests, improving the decisions of audit process planning, reinforcing the auditor's independence, detecting profit management cases, upgrade professional competition among audit offices, and reducing the cases of using experts. the aforementioned variables reflect the quality of professional performance. this agreement reflects the auditors' perception of the importance of auditing specialization in improving the quality of professional performance. karim et al. (2011) tackled causes, techniques, and consequences of creative accounting. findings of the descriptive statistics revealed that the perceptions of the three categories of the participants are different about the various aspects of creative accounting .they also showed the opinions and concerns of internal auditors, external auditors and accountants on these practices continuity. they study revealed that creative accounting is a global one and accounting policy choice represents a particular problem for both developed and developing countries. furthermore, various methods encourage managers to engage in creative accounting. in addition, accountants who accept the ethical challenge that creative accounting raise need to be aware of the scope for both abuse of accounting policy choice and manipulation of transactions. alqateesh and alsufi (2011) shed light on the most important methods adopted in creative accounting and their impact on the reliability of accounting data. they also aimed to identify creative accounting practices and the auditor's role in such practices. the study adopted the descriptive analytical approach and (50) questionnaires were distributed to some audit offices in jordan. the results exhibited that the public joint stock companies in amman stock exchange do not manipulate obligations, revenues, expenses, assets and property rights using creative accounting practices. abu tammam (2013) aimed to identify creative accounting practices used in cash flow statements, and its impact on the reliability of the financial statements included in cash flow statements. to achieve the study objective, the researchers addressed two types of data: preliminary data and secondary data. the sample comprised (261) accountants, auditors, financial analysts, and financial data users. the study manifested the effect of using creative accounting practices on the reliability and relevance of cash flow statements. in addition, there were no statistically significant differences in the participants' opinions on the accountants, auditors, financial analysts, and financial statements users' perception of the procedures that can be employed to reduce the effects of creative accounting on cash flow statements. financial risk and management reviews, 2020, 6(1): 22-39 30 © 2020 conscientia beam. all rights reserved. alazmi (2015) addressed how to counter auditing risks resulted from creative accounting practice, narrow expectations gap, and achieve the desired quality of auditing process using various mechanisms to prevent creative accounting practices, enhance the reliability of accounting information, and narrow the gap of credibility and confidence in auditing profession, the study adopted the inductive deductive approach. the results showed statistically significant differences between the methods of creative accounting practices and auditing quality. in addition, auditing process is responsible for exposing the faults of creative accounting. alzain (2017) tackled the role of constant auditing in increasing confidence in the electronic financial statements of the sudanese banks, and reducing their manipulation as well as online penetration risk. the study aimed to increase transparency of financial statements in sudanese banks, reduce manipulation of profit rates in the electronic financial statements, and develop new auditing methods that increase the efficacy of the information presented to users. significance of the study lies in activating the role of constant control in reducing the risks of the electronic availability of financial statements in the sudanese banks and helping the statements users make the proper decisions regarding their investments in these banks. the modern methods used by banks increased the penetration risks for the reports presented to the internal and external users. the results demonstrated that constant auditing reduces creative accounting practices in income statement, financial status and cash flows. moreover, delivering training to internal auditors and arranging internal and external courses increase their ability to detect errors. additionally, constant auditing reduces manipulation in the electronic financial reports. the study recommended giving concern to appointing qualified employees at internal audit department. furthermore, professional organizations should transfer internal auditors to learn modern methods of detecting errors. in addition, instant examination of the sites, on which the bank’s financial reports are published, has to be conducted. ali and jellaba (2017) addressed the impact of creative accounting on the quality of accounting information in the banks' financial statements and how far the accountant's ethical behavior contributes to its emergence. the study demonstrated the necessity of increasing concern for the accountant's ethical aspect in order not to adopt creative accounting practices. the study recommended applying relative consistency to accounting methods and policies to help compare the financial statements. abu alkhair (2018) addressed the role of the international auditing standards in reducing creative accounting practices in the financial statements. the study adopted the descriptive approach by presenting various definitions and terms relevant to the subject using the preliminary and secondary information obtained from books, journals, studies and periodicals. it also utilized statistical package for social sciences (spss) and analytical approach. the results revealed that accounting information resulting from financial statements prepared in accordance with the requirements of auditing standard no (500) for evidence in accurate financial statements. moreover, the auditor knows that the more the risks, the more evidence he/she uses. he/she also has the right to select the evidence appropriate for the examined account. furthermore, accounting information resulting from financial statements prepared in accordance with the requirements of audit standard no. (560) for the consequences, following the budget date has a high degree of relevance and objectivity that helps the statements users to make correct economic decisions. in addition, failure to modify data of the financial reports affected by the consequences following the balance sheet date exposes enterprises to numerous crises and losses, such as paying taxes on fictitious profits and distributing fictitious profits, which cause their capital erosion. alsayaghi (2018) investigated modern methods of control to disclose creative accounting practices and reduce risks. the study adopted the historical deductive approach to define the study domains and the descriptive analytical approach to collect data using the questionnaire that was distributed to (150) joint stock companies and sudanese banks. the results demonstrated that adopting modern methods of control contributes to exposing creative accounting risks in sudanese banks. moreover, there was positive relationship between adopting modern methods of control and risks reduction in the sudanese banks in khartoum. financial risk and management reviews, 2020, 6(1): 22-39 31 © 2020 conscientia beam. all rights reserved. most previous pieces of literature separately covered auditing risks and creative accounting risks, where most studies that addressed auditing risks focused on the external auditor's contribution to mitigating their impact on the financial statements. in addition, majority of studies clarified the concept, nature, causes, ethical aspects, and consequences of creative accounting practices and the external auditor's roles in reducing them. moreover, the relationship between creative accounting risks and auditing risks has not been adequately covered. thus, the present study attempts to shed light on it. 10. sampling the sample comprises (138) licensed saudi statutory audit offices available on the official website of the saudi organization for certified public accountants (socpa). the statement involved names, addresses, telephone numbers of the offices as well as names and number of the licensed auditors who were approximately (200). accordingly, the researcher distributed (200) questionnaires to a random sample of auditors serving in in saudi statutory audit offices. the researcher collected 143 questionnaires with a percentage of (71.5%). the researcher could not collect the other questionnaires because the auditors lacked cooperation. only (3) incomplete questionnaires were excluded, so (140) questionnaires with a percentage of (70%) were valid for the analysis. table 2 shows the characteristics of the sample. table-2. characteristics of sample according to its variables. variable category number percentage scientific qualification bachelor 118 84.3 master 22 14.3 doctorate 2 1.4 total 142 122.2 professional qualification saudi fellowship 22 15.7 american fellowship 11 7.9 british fellowship 3 2.1 other 124 74.3 total 142 122.2 occupation auditor 51 36.4 senior auditor 42 32.2 auditing director 47 33.6 total 142 122.2 experience less than five years 19 13.6 5-10 years 31 22.1 more than ten year 92 64.3 total 142 122.2 the table exhibits that the percentage of bachelor was the highest (84.3%) compared to that of the other qualifications. 10.1. data collection the questionnaire was adopted as a tool to collect the data essential to answer the questions and test the hypotheses. it is a tool frequently used in many arabic and foreign studies to evaluate opinions because it is transparent and comprehensive. it first indicated title, objectives and concepts of the study. it was divided into two sections, as follows: financial risk and management reviews, 2020, 6(1): 22-39 32 © 2020 conscientia beam. all rights reserved. 10.2. first section it involves the participants' personal data and four items (scientific qualification, professional qualification, occupation, and experience) to measure the differences in external auditors' estimates of the study domains according to the above-mentioned variables to test the study hypotheses. 10.3. second section it comprises the questionnaire questions which measure the questions and hypotheses of the study. it contains the two following domains:  first domain: it evaluates the impact of the creative accounting risks on auditing risks from the perspective of external auditors to test the first hypothesis. accordingly, it was divided into two parts: the first involves (20) items showing examples of creative accounting practices selected from the previous pieces of literature, particularly the study of alqari (2010) which covered the most prevalent practices in saudi arabia, to answer the question of the study from the external auditors' perspective on those practices in terms of their consistency or inconsistency with the accepted accounting principles, or whether they are classified as accounting fraud; to identify their impact on auditing risk; and to the answer the major question on defining the relationship between creative accounting practices and auditing risks. the second part comprises (7) items. the first part adopts three-point likert scale (contrast the accepted accounting principles, does not contrast the accepted accounting principles, and accounting fraud). however, the second part adopts five-point likert scale (strongly agree, agree, undecided, disagree, and strongly disagree).  second domain: it measures the external auditors' perspective on their responsibility to detect creative accounting practices to test the second hypothesis. it consists of (7) items and adopts 5-point likert scale (strongly agree, agree, undecided, disagree, and strongly disagree). 10.4. validity and reliability to verify the questionnaire validity, it was reviewed by distinguished reviewers from the faculty members at accounting department, faculty of economics and administration, king abdulaziz university, as well as some external auditors who serve in saudi statutory audit offices to evaluate the participants' opinions and to benefit from their experience in accounting and auditing. the researcher asked the reviewers to express their opinion about how far the items matched their objective, and how far the items were clear and comprehensive, and to adjust, add, or delete some items. to verify the tool reliability, the researcher applied it to a pilot sample consisting of (30) participants selected from and out of the study population. then, cronbach's alpha was calculated. table 3 shows cronbach’s alpha reliability coefficient. table-3. tools reliability coefficients according to cronbach's alpha. item domain reliability coefficient creative accounting risks in auditing risks creative accounting practices 2.92 relationship between creative accounting risks and auditing risks 2.88 the external auditor's responsibility to detect creative accounting 2.89 table 3 shows that reliability coefficients for the domain of creative accounting risks in auditing risks were (0.88) and (0.92), and (0.89) for the external auditor's responsibility to detect creative accounting. financial risk and management reviews, 2020, 6(1): 22-39 33 © 2020 conscientia beam. all rights reserved. 11. results and discussion to answer the first question, arithmetic means and standard deviations of the participants' responses on the creative accounting practices of the companies were estimated. the researcher classified the arithmetic means as follows: less than or equal (1.66) is consistent with the accepted accounting principles, above (1.66) and less than or equal (2.33) is inconsistent with the accepted accounting principles, and above (2.33) is fraud. table 4 shows arithmetic means and standard deviations of the participants' responses on the creative accounting practices of the companies. table-4. arithmetic means and standard deviations of the participants' responses on the creative accounting practices of the companies. accounting method mean standard deviation percentage classification degree consistent inconsistent fraud postpone sales recording to obtain an increase in sales in the next fiscal year. 2.56 2.58 4.3 35.7 62.2 fraud the holding company does not disclose the subsidiaries losses. 2.44 2.55 2.9 52.2 47.1 fraud send goods to potential customers, and record them as sales to expedite approving their revenue. 2.44 2.68 12.7 34.3 55.2 fraud exaggeration or reduction in the inventory assessment. 2.44 2.59 5.2 46.4 48.6 fraud transfer current expenses to previous or following accounting periods. 2.39 2.53 2.1 56.4 41.4 fraud conceal liabilities or restrictions of some assets, such as mortgage, security, and leasing. 2.39 2.56 3.6 54.3 42.1 fraud intentionally improve liquidity ratios by not including due installments from long-term loans throughout the year. 2.36 2.62 7.9 48.6 43.6 fraud overestimate the value of intangible assets. 2.34 2.65 12.2 45.7 44.3 fraud change the classification of short-term investments to long-term investments to avoid the effects of falling prices 2.31 2.64 9.3 52.2 42.7 consistent keep accounting books open for some days despite the end of their fiscal year to record some expected sales (in agreement with customers). 2.31 2.63 9.3 52.7 42.2 consistent possess the assets of a subsidiary through rights merger (book value). then, sell them to make gains added to profit with no disclosure. 2.22 2.61 12.7 58.6 32.7 consistent overestimate future profits corresponding to revenue expenditure (advertising expenses) 2.22 2.65 12.9 54.3 32.9 consistent financial risk and management reviews, 2020, 6(1): 22-39 34 © 2020 conscientia beam. all rights reserved. inventory is stagnant or obsolete. 2.19 2.74 19.3 42.9 37.9 consistent non-recurring revenues are categorized as operating earnings. 2.16 2.53 7.1 72.2 22.9 consistent influence depreciation rate through changing the adopted depreciation method. 2.13 2.62 13.6 62.2 26.4 consistent classify some operating expenses as non-recurring losses in income statement. 2.12 2.58 11.4 65.2 23.6 consistent revenue is rapidly recorded although sale process has not been confirmed yet. 2.11 2.52 8.6 71.4 22.2 consistent capitalization of research and development expenses with no requirements for capitalization. 2.11 2.44 5.2 79.3 15.7 consistent overestimate or underestimate the asset life. 2.29 2.65 17.1 57.1 25.7 consistent underestimate allowance for doubtful account 2.23 2.61 17.1 62.9 22.2 consistent table 4 indicates that, according to the perspective of the saudi external auditors on the creative accounting methods adopted by the companies, some methods contradict the accepted accounting principles, while others are classified as fraud. however, none is classified as" does not contradict accounting principles". this result asserts that creative accounting practices affect the reliability of financial reports as well as auditing risks if they are not detected or reported. (60%) of creative accounting practices contradicted the accepted accounting principles, and (40%) was classified as fraud. the researcher contends that creative accounting practices are considered fraud because they affect the reliability of financial reports regardless their impact degree. thus, auditors must take into account, when assessing auditing risks, factors and practices of creative accounting and report them to enhance the quality of financial reports. in addition, the accounting practices classified as fraud are represented, as follows: postpone sales recording to obtain an increase in sales in the next fiscal year ranked first; with arithmetic mean ( 2.56), the holding company does not disclose the subsidiaries losses, and send goods to potential customers as well as record them as sales to expedite approving their revenue ranked second; with arithmetic mean ( 2.44), transfer current expenses to previous or following accounting periods and conceal liabilities or restrictions of some assets, such as mortgage; security and leasing ranked third, with arithmetic mean ( 2.39), and overestimate the value of intangible assets raked fifth and last, with arithmetic mean ( 2.34). moreover, the accounting practices that contradict the accepted accounting practices are represented, as follows: change the classification of short-term investments to long-term investments to avoid the effects of falling prices and keep accounting books open for some days despite the end of their fiscal year to record some expected sales (in agreement with customers) ranked first; with arithmetic mean ( 2.31), possess the assets of a subsidiary through rights merger (book value) and sell them to make gains added to profit with no disclosure as well as overestimate future profits corresponding to revenue expenditure (advertising expenses) ranked second; with arithmetic mean ( 2.20), inventory is stagnant or obsolete ranked third; with arithmetic mean ( 2.19), non-recurring revenues are categorized as operating earnings ranked fourth; with arithmetic mean ( 2.16), influence depreciation rate through changing the adopted depreciation method ranked fifth; with arithmetic mean ( 2.13), classify some operating expenses as non-recurring losses ranked sixth; with arithmetic mean ( 2.12), revenue is rapidly recorded although sale process has not been confirmed yet as well as capitalization of research and development expenses with no requirements for capitalization ranked seventh; with arithmetic mean ( 2.11), overestimate or underestimate financial risk and management reviews, 2020, 6(1): 22-39 35 © 2020 conscientia beam. all rights reserved. the asset life ranked eighth; with arithmetic mean ( 2.09), and underestimate allowance for doubtful account ranked last; with arithmetic mean ( 2.03). to answer the second question, arithmetic means and standard deviations of the participants' responses at the level of each item and at the total level were estimated. the researcher classified the arithmetic means, as follows: less than or equal (2.33) is low, above (2.33) and less than or equal (3.66) is moderate, and above (3.66) is high. table-5. arithmetic means and standard deviations of the participants' responses on the relationship between creative accounting risks and the auditing risks. item rank arithmetic mean standard deviations relationship degree the higher the quality of auditing process, the fewer the accounting practices risks. 1 4.41 2.74 high failure to detect errors and manipulation in financial statements increases accounting practices risks. 2 4.27 2.78 high accounting practices risks are considered when estimating auditing risks. 3 4.14 2.82 high accounting practices risks form a substantial element of auditing risks if the auditor does not detect them and report the financial statements accurately. 4 4.12 2.77 high accounting practices risks is relevant to nondetection risk which has to be combined with control risk and inherent risks to identify the accepted auditing risk. 5 4.27 2.75 high accounting practices help conceal the actual performance of companies as well as distortion in financial statements. 6 4.26 1.25 high the fewer control risks and inherent risks that the auditor conceives, the more the detection of accounting practices that the auditor accepts. 7 3.93 2.94 high total 4.14 2.53 high table 5 reveals that the mean of the participants' estimates of the relationship between creative accounting risks and auditing risks, and at the total level was high, with arithmetic mean (4.14), and standard deviation (0.53). this result asserts the strong relationship between creative accounting risks and auditing risks. the degree of all items was high. classification of the items was, as follows: "the higher the quality of auditing process, the fewer the accounting practices risks" ranked first, with arithmetic mean (4.41) and a degree (high). this result demonstrates the participants' agreement on the negative relationship between auditing quality and creative accounting practices. in other words, performing auditing process competently results in detecting and handling errors and fundamental irregularities, fundamentally represented in creative accounting practices, which positively reflect on the quality of financial reports. "the fewer control risks and inherent risks which the auditor conceives, the more the detection of accounting practices that the auditor accepts" ranked last, with arithmetic mean (3.93) and a degree (high). this result asserts the researcher's perspective that creative accounting risk is major part of detection risk because it is associated with the auditor's procedures. it also asserts the participants' agreement that there is an inverse relationship between detection risks, control risks and inherent risks. the fewer control risks and inherent risks, which the auditor conceives, the more detection risks of accounting practices that the auditor accepts. conversely, the more control risks and inherent risks, which the auditor conceives, the fewer detection risks of accounting practices that the auditor accepts. to test validity of the first hypothesis, arithmetic means and standard deviations of the external auditors' estimates of the effect of creative accounting risks on auditing risks according to the variables (academic qualification, professional qualification, occupation, and experience) were estimated. financial risk and management reviews, 2020, 6(1): 22-39 36 © 2020 conscientia beam. all rights reserved. table-6. arithmetic means and standard deviations of the external auditors' estimates of the effect of creative accounting risks on auditing risks according to the study variables (academic qualification, professional qualification, occupation, and experience). variable category arithmetic mean standard deviation scientific qualification bachelor 4.14 2.53 master 4.13 2.61 doctorate 4.21 2.32 professional qualification saudi fellowship 4.22 2.64 other fellowships 4.13 2.52 occupation auditor 4.12 2.46 senior auditor 4.21 2.64 auditing director 4.29 2.49 experience less than five years 4.26 2.46 5-10 years 3.98 2.65 more than ten year 4.21 2.52 table 6 reveals significant differences in the arithmetic means of the external auditors' estimates of the effect of the creative accounting risk on auditing risks according to the variables of (academic qualification, professional qualification, occupation, and experience). the researcher used multiple anova to identify whether the differences are statically significant or not. table-7. adopting multiple anova to identify differences in the external auditors' estimates of the effect of the creative accounting risk on auditing risks according to the study variables. variance source sum of squares freedom degree mean squares f-value significance level scientific qualification 2.192 2 2.295 2.337 2.715 professional qualification 2.122 1 2.122 2.362 2.548 occupation 2.991 2 2.496 1.756 2.177 experience 2.687 2 2.344 1.217 2.299 error 37.258 132 2.282 total 2442.428 142 table 7 shows no statistically significant differences at the significance level (α 2.25≥ ) in the external auditors' estimates of the effect of creative accounting risk on auditing risks according to the variables of (academic qualification, professional qualification, occupation, and experience) which verifies the hypothesis validity. to test validity of the second hypothesis, arithmetic means and standard deviations of the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of (academic qualification, professional qualification, occupation, and experience) were estimated. table-8. arithmetic means and standard deviations of the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of (academic qualification, professional qualification, occupation, and experience). variable category arithmetic mean standard deviation scientific qualification bachelor 3.89 2.59 master 3.71 2.63 doctorate 3.64 1.11 professional qualification saudi fellowship 3.66 2.64 other fellowships 3.92 2.59 occupation auditor 3.83 2.62 senior auditor 3.78 2.55 auditing director 3.95 2.64 experience less than five years 3.78 2.66 5-10 years 3.76 2.65 more than ten year 3.91 2.57 table 8 manifests significant differences in the arithmetic means of the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of (academic financial risk and management reviews, 2020, 6(1): 22-39 37 © 2020 conscientia beam. all rights reserved. qualification, professional qualification, occupation, and experience). the researcher used multiple anova to identify whether the differences are statically significant or not. table-9. adopting multiple anova to identify differences in the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the study variables. variance source sum of squares freedom degree mean squares f-value significance level scientific qualification 2.731 2 2.366 1.216 2.365 professional qualification 2.858 1 2.858 2.383 2.125 occupation 2.866 2 2.433 1.23 2.324 experience 2.238 2 2.119 2.331 2.719 error 47.518 132 2.362 total 2136.796 142 table 9 shows no statistically significant differences at the significance level (α 2.25≥ ) in the external auditors' estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of (academic qualification, professional qualification, occupation, and experience) which verifies the hypothesis validity. 12. recmmendations  provide constant concern to the external auditors' qualification and using new technologies to accomplish their work through delivering continuous training and educational programs for the personnel serving in statutory accounting offices to improve and develop their performance to match the ongoing developments of business.  the external auditor must analyze the control system and factors of creative accounting practices to prevent creating inaccurate financial reports whose users need to know the results of assessing their strength to reduce auditing risks.  emphasize the importance of the external auditor's consideration of creative accounting when estimating auditing risks, and paying attention to his/her responsibility to detect and report them to improve the quality of financial reports.  professional organizations should give concern to the concept of creative accounting risks, and set the standards and procedures that the auditor must follow to address these practices because of their negative effects on the reliability of the financial statements.  constantly arrange prepare specialized scientific, financial, and legal conferences and seminars, and prepare brochures that expose creative accounting risks and their negative effects on the future of companies and economy and its local, regional and global reputation.  encourage researchers to conduct further studies that help reveal creative accounting practices because their methods are constantly evolving and changing because of the established fact that human creativity has no limitations. funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. references abu alkhair, a. a. a. 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(2012). the effect of creative accounting on the job performance of accountants (auditors) in reporting financial statementin nigeria. kuwait chapter of arabian journal of business and management review, 33(845), 1-30. saudi organization for certified public accountants. (2000). standard of auditing risks and relative significance. riyadh: saudi organization for certified public accountants. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 1 © 2023 conscientia beam. all rights reserved. determinants of the dividend payout policy of multinational companies in bangladesh: evidence from dhaka stock exchange tarik hossain1+ md. miraz khalifa2 raju ahmmed3 1,2,3department of accounting and information systems, comilla university, bangladesh. 1email: online.tarik@yahoo.com 2email: mdkhmiraz@gmail.com 3email: rajuahmmed642@gmail.com (+ corresponding author) abstract article history received: 29 november 2022 revised: 4 july 2023 accepted: 10 august 2023 published: 30 august 2023 keywords bangladesh capital adequacy ratio corporate tax ratio determinants dhaka stock exchange dividend payout policy multinational national companies. this study tries to establish the important factors influencing the dividend payout policy of the multinational companies (mncs) in bangladesh in order to assist investors in making the best possible investment decisions. data for this study was collected from several mncs listed on the dse from 2015 to 2021. the relationship between the dependent variable, dividend payout ratio (dpr) and selected independent variables such as return on equity (roe), liquidity ratio (leqr), leverage ratio (levr), firm size (fs), dividend payout ratio of previous year (pdpr), corporate tax ratio (ctr) and capital adequacy ratio (car) is evaluated using pearson's correlation and ordinary least squares (ols) regression models for data analysis and hypothesis testing. the regression analysis results showed a mixed result. the roe and ctr are significantly related to dpr. higher roe and ctr emphasis a higher dividend for stock holders. the fs is significantly negatively related to dpr. due to the costs associated with paying for the profits of substantial assets, large firms pay lower dividends. other variables such as leqr, levr, pdpr, ctr and car have no significant impact on the dpr. the investors and the concerned authorities can consider roe, ctr and fs to forecast the future dividend for the mncs in bangladesh. contribution/originality: this research is important in finding out the crucial factors influencing the dividend payout policy of multinational national companies (mncs) in bangladesh. this research is one of the fundamentals in bangladesh where additionally ctr and car are used as independent variables. 1. introduction a dividend is a distribution of profits by a company to its shareholders for their investment. it is the proportion of gain provided by the company as the return on investment to the owners of their shareholdings. the company's dividend payout strategy is influenced by different microand macro-economic factors in addition to commercial success. companies provide dividends considering the present financial conditions and longterm strategic plans. investors invest their funds to get a return as a dividend or capital gain (tarik hossain, 2013; hossain, nesa, dowla, & akter, 2021). here dividend is a very integral factor to consider in making investment decisions. due to uncertain situations, sometimes companies fail to provide handsome dividends to investors. almalkawi, rafferty, and pillai (2010) argued that dividends are not only the return on investment but also the symbol of performance. potential investors always want to ensure that they will get a handsome and stable return from their investment (hossain, 2020b; hossain, chowdhury, & begum, 2014). there are many theories developed financial risk and management reviews 2023 vol. 9, no. 1, pp. 1-10 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v9i1.3454 © 2023 conscientia beam. all rights reserved. https://orcid.org/0000-0002-5426-5130 https://orcid.org/0009-0003-3960-2789 https://orcid.org/0009-0008-6976-737x mailto:online.tarik@yahoo.com mailto:mdkhmiraz@gmail.com mailto:rajuahmmed642@gmail.com https://www.doi.org/10.18488/89.v9i1.3454 financial risk and management reviews, 2023, 9(1): 1-10 2 © 2023 conscientia beam. all rights reserved. by different researchers about dividend distribution policy. most of the theories tried to find out the basis for predicting the dividend of the company. however, no theory can precisely predict the company's future payout. zameer, rasool, iqbal, and arshad (2013) concluded that dpr defers among the countries due to varying rules, regulations, tax policies and different capital markets and institutions. dividend payout decision is the managerial decision of distributing to the owners and retaining for expanding business and reinvestment of profit. the choice to pay out dividends is a difficult and crucial one (abor & bokpin, 2010) because of the intense competition worldwide that makes it impossible to make large profits (faruky, uddin, & hossain, 2011). businesses require substantial funding for growth and development in addition to satisfying investors with a sufficient payout. the distribution of dividends and reinvestment are inversely related to each other and collectively significantly influence organizational success. the company should make dividend payout decisions carefully to maximize shareholder wealth. the dpp of companies operating in emerging economies is reasonably different from developed (glen & singh, 2004) and underdeveloped countries. it also differs from country to country (frankfurter & wood jr, 2002), economy to economy (aivazian, booth, & cleary, 2003) and from time to time (sarig, 2004). the types of businesses and corporate formations also affect the dpp. numerous studies have been done about the factors that determine the dpp both nationally and internationally for various kinds of companies. many researchers used determinants such as profitability, liquidity, leverage, corporate tax policy, firm size, capital adequacy and the dividend payout ratio of the previous year. in bangladesh, the majority of research focuses on local businesses. research on manufacturing businesses listed on the dse was carried out by islam and adnan (2019). recently, there has not been a dpp study on mncs in bangladesh that focuses on dse. this study will enrich the dpp literature and facilitate investors and concerned stakeholders in making perfect decisions. mncs play a vital role in economic development worldwide. investors like to invest in mncs to get higher returns and minimize risk. the dividend is an essential way of getting a return on investment in the capital market. many factors influence the dividend policy of mncs such as roe, leqr, levr, ctr, car, fs, and pdpr. in bangladesh, very few studies have analyzed the factors influencing the dpp of the mncs. this study will add value to the existing literature. the potential investors will be able to know the probable upcoming dividend for their decision-making. the mncs will also be able to realize the expectations of their owners. this research aims to analyze the impact of different variables on the dpr to find out the potential influence of the dpr on the mncs in bangladesh. 1.1. objectives of the study the aim of this study is to establish the aspects influencing the dpp of mncs in bangladesh. the specific objectives for this study are as follows: i. to establish the potential aspects of dpp for mncs in bangladesh. ii. to find out the impact of different determinants on the dpr. 2. literature review several studies focus on the many determinants of dividend payout policy worldwide. however, no specific determinants are found for the companies to determine future dividends. the dividend of the company largely depends on the present conditions of the company and its future plans. al-kuwari (2009) found that profitability has a significant affirmative influence and the leverage ratio has a significant negative impact on the dpr. al-shubiri (2011) in jordan concluded that leverage is negatively affected and profitability is positively affected by the dpr. ahmed and muktadir-al-mukit (2014) found corporate tax and profitability. the current ratio is one of the vital determinants of dpr. financial risk and management reviews, 2023, 9(1): 1-10 3 © 2023 conscientia beam. all rights reserved. 2.1. profitability profitability is the ability of a company to earn profit by employing its capital (hossain, 2022). it is a sign of successfully operating the business and properly using the assets. many researchers argue that profitability is the vital determinant of dpr (alfisah & kurniaty, 2019; baker & jabbouri, 2016; fama & french, 2001; fitri, hosen, & muhari, 2016). it indicates the ability of the company to pay dividends to its shareholders. when the company cannot generate more profit, it will be very difficult to pay more dividends. in dividend signaling theory, miller and modigliani (1961) found an affirmative association between profitability and dpr and also concluded that dividend payout represents a sign of a firm’s financial condition and future prospects. it also ensures the wealth maximization of the firm. according to anil and kapoor (2008), profitability is the most important sign of dpr. adaoglu (2000) researched emerging markets and argued that the main determinants of cash dividends are current-year earnings and emerging market firms follow unstable dividend payout policies which is also supported by mahira (2012) and islam and adnan (2019). le, nguyen, and tran (2019); al-kuwari (2009); naceur, goaied, and belanes (2006); patra, poshakwale, and ow-yong (2012); amidu and abor (2006) and jabbouri (2016) found a significant affirmative connection between profitability and dpp. ritha and koestiyanto (2013) argued that profitability has a negative influence on the dpr. the profitability of a firm can be measured by its return on equity (roe). 2.2. liquidity the liquidity of a company indicates its ability to pay current and short-term debt obligations (hossain, 2020a). standard liquidity is very important for successfully operating a business. high liquidity increases the cost while low liquidity increases the risk. sometimes companies reduce the dividend to ensure the payment of current debt obligations (le et al., 2019) as the cash dividend decreases the cash of the firm. companies mainly consider liquidity positions when making dividend decisions (alshammari, 2012; deshmukh, goel, & howe, 2013; islam & adnan, 2019; khan & ahmad, 2017). okpara and godwin (2010) also found a significant optimistic relationship between liquidity and dpp. 2.3. leverage leverage is the ratio between the debt and equity of a firm. the leverage ratio focuses on financing and other external sources. more leveraged firms mean more financed from debts and less leveraged firms means more financed from equity. diverse opinions were found about the influence of leverage on the dpr. gugler and yurtoglu (2003) found an opposite relationship between financial leverage and dpp which is also supported by alkuwari (2009) and alzomaia (2013). ritha & koestiyanto 2013)argue that there is a positive relationship between leverage and dpr. le et al. (2019) suggested reducing the leverage ratio. 2.4. corporate tax corporate tax is the income tax imposed on the company on the basis of corporate income for a period of time. it is a compulsory payment for the company and no direct benefits are received from providing corporate tax. after deducting corporate tax, net income can be distributed to shareholders as a dividend. higher-income generates higher taxes and also pursues higher dividends. ahmed and muktadir-al-mukit (2014) concluded in dse that corporate tax is a strong determinant of dpr. amidu and abor (2006) and rehman and takumi (2012) also concluded that there is a positive relationship between corporate tax and the dpr. 2.5. capital adequacy ratio (car) capital adequacy is the availability of capital to smoothly operate the business. the capital adequacy ratio can be measured by dividing the total assets by the total equity of a firm. more car means a higher proportion of financial risk and management reviews, 2023, 9(1): 1-10 4 © 2023 conscientia beam. all rights reserved. capital financed by owners. rahma and syarif (2020) found an affirmative influence of car on the dpr. yesyurun (2021) found in indonesia that car has a noteworthy impact on the dpr. 2.6. firm size firm size represents the volume of a company in terms of specific factors such as total assets and total sales. there are various findings about the relationship between dpp and business size. the life-cycle theory developed by deangelo, deangelo, and stulz (2006) concluded that firm size and dpp are positively related. fama and french (2001) also concluded that small firms pay little or no dividend. le et al. (2019) found an insignificant relationship between firm size and dpp decisions. hoque, hossain, and saha (2022) argued that fs significantly affected the financial performance of the companies. 2.7. dividend payout ratio of the previous year the previous year’s dividend payout ratio is very important for determining the future dividend. sometimes companies try to maintain the consistency of dpr annually. owners expect a higher dividend compared to previous years (hossain, 2021). according to research on the jakarta islamic index by fitri et al. (2016), the dpr from the prior year had an influence on the dpp decision. islam and adnan (2019) studied manufacturing companies listed in the dse of bangladesh and argued that most of the firms follow the preceding years’ pattern of dividend payment for dividend decision-making. imran (2011) also found that the dividend of the previous year positively influences the dpr of the company. 2.8. conceptual scheme the conceptual framework which focuses on the interactions between independent, control and dependent variables, is shown below. figure 1. conceptual framework. figure 1 illustrates the relationship among the dependent variable dpr, the independent variables roe, leqr, levr, ctr and car and the control variables fs and pdpr. 3. research methodology 3.1. research instruments the variables of this research have been adopted from several research articles in the literature review. return on equity (roe) is adopted by le et al. (2019) as a proxy for a firm’s profitability measures. the variable liquidity (leq) has been taken from okpara and godwin (2010); leverage (lev) from alzomaia (2013); firm size (fs) from fama and french (2001); dividend payout ratio of previous year (pdpr) from fitri et al. (2016); corporate tax ratio (ctr) from rehman and takumi (2012) and capital adequacy ratio (car) from yesyurun (2021). the financial risk and management reviews, 2023, 9(1): 1-10 5 © 2023 conscientia beam. all rights reserved. dependent variable is used as the dividend payout ratio (dpr) in this research to justify the dividend payout policy (dpp). 3.2. sample, population and data collection in bangladesh, fifteen mncs listed in the dse are working. eleven mncs are chosen at random to gather data from 2015 to 2021. this study examines the effects of the independent variables on the dependent variable using a total of 77 data entries. 3.3. data analysis procedures and hypotheses the statistical software spss 16 has been used to process and analyze the collected data. the descriptive statistics are presented and explain the variables. the ols regression is conducted to test the impact of the independent variables on the dependent variable dpr. the study will test the following hypotheses: i. h01: profitability is positively related to the dpr. ii. h02: liquidity is positively related to the dpr. iii. h03: leverage is negatively related to the dpr. iv. h04: the corporate tax ratio is positively related to the dpr. v. h05: the capital adequacy ratio is positively related to the dpr. vi. h06: firm size is positively related to dpr. vii. h07: the dpr of the previous year is positively related to the dpr. 3.4. model specification the dpr is a function of five independent and two control variables such as roe, leqr, levr, cte, car, fs and pdpr. the model is specified as model: dprit= β0+ β1roeit + β2leqrit + β3levrit + β4ctrit + β5carit + β6fsit + β7pdprit + ε it 3.5. data and variables the variables and measurement scales are presented below: in table 1, all the variables (dependent, independent and control) are used in this study with abbreviations and measurement scales. table 1. list of variables. variable abbreviation measurement dividend payout ratio dpr total common dividend (cash)/net income after tax and depreciation return on equity roe net income divided by shareholder's equity liquidity leqr current ratio (current assets/current liabilities) leverage levr financial leverage ratio (book value of debt/total assets) corporate tax ratio ctr corporate tax/profit before tax capital adequacy ratio car equity capital / total assets firm size fs firm size (natural logarithm of total assets) dividend payout ratio of the previous year pdpr previous year dividend payout ratio. 4. empirical results and discussions 4.1. descriptive statistics the descriptive statistics are presented in table 2. financial risk and management reviews, 2023, 9(1): 1-10 6 © 2023 conscientia beam. all rights reserved. table 2. descriptive statistics. variables mean std. deviation variance skewness kurtosis dpr 0.5946 0.33060 0.109 -0.349 1.166 roe 34.6886 40.2788 1622.377 1.973 5.184 leqr 1.3232 0.69710 0.486 0.487 0.255 levr 0.5613 0.15863 0.025 -0.133 -0.939 ctr 0.1625 1.4793 2.188 -8.242 71.261 car 0.4413 0.1599 0.026 0.111 -0.995 fs 10.2604 0.4998 0.250 0.283 -1.215 pdpr 0.5840 0.3506 0.123 -0.302 0.772 for the variable dpr, the mean, standard deviation, variance, skewness and kurtosis are 0.5946, 0.3306, 0.1090, -0.3490, and 1.166, respectively. the mean, standard deviation, variance, skewness and kurtosis for roe are 34.6886, 40.27875, 1622.377, 1.973, and 5. 184, respectively. the average leq ratio is 1.3232 with standard deviation, variance, skewness, and kurtosis as follows 0.6971, 0.486, 0.487, and 0.255, respectively. the average lev ratio is 0.5613 with standard deviation, variance, skewness and kurtosis as follows: 0.15863, 0.025, -0.133, and -0.939, respectively. the mean value of the ct ratio is 0.1625 with standard deviation, variance, skewness, and kurtosis as follows: 1.47924, 2.188, -8.242, and 71.261respectively. the average ca ratio is 0.4413 with standard deviation, variance, skewness, and kurtosis as follows: 0.15981, 0.026, 0.111, and -0.995, respectively. the mean value of the fs is 10.2604 with standard deviation, variance, skewness, and kurtosis as follows: 0.49978, 0.250, 0.283, and -1.215, respectively. the average pdpr is 0.5840 with standard deviation, variance, skewness, and kurtosis as follows: 0.35053, 0.123, -0.302, and 0.772, respectively. 4.2. correlations analysis the correlation results of the variables are displayed in table 3. here the dependent variable dpr is positively correlated with roe, leqr, levr, ctr and pdpr and negatively related to car and fs. table 3. correlations results. variables dpr roe leq lev ctr car fs pdpr dpr sig. (2-tailed) 1 roe sig. (2-tailed) 0.334** 1 0.004 leqr sig. (2-tailed) 0.075 -0.257* 1 0.524 0.024 levr sig. (2-tailed) 0.054 0.344** -0.745** 1 0.646 0.002 0.000 ctr sig. (2-tailed) 0.361** 0.146 0.094 -0.206 1 0.002 0.206 0.415 0.073 car sig. (2-tailed) -0.055 -0.353** 0.749** -0.992** 0.227* 1 0.642 0.002 0.000 0.000 0.047 fs sig. (2-tailed) -0.270* 0.010 -0.616** 0.410** -0.103 -0.420** 1 0.020 0.930 0.000 0.000 0.374 0.000 pdpr sig. (2-tailed) 0.098 0.220 0.014 0.159 -0.210 -0.160 -0.231 1 0.445 0.078 0.914 0.206 0.093 0.204 0.064 note: **. significant at 1%. *. significant at 5%. financial risk and management reviews, 2023, 9(1): 1-10 7 © 2023 conscientia beam. all rights reserved. the values that are one percent significant are indicated by ‘**’ and the values that are 5% significant are indicated by ‘**’. the relationship of dpr with roe, ctr, and fs is two-tailed significant while the relationships with leqr, levr, car, and pdpr are insignificant. the correlation of roe with car, fs and pdpr is positive and leqr and ctr are negative. the relationship between roe with leqr, levr and car is significant. the correlations of leqr with levr, and fs are negative and with ctr, car and pdpr are positive whereas the relationship of leqr with levr, car and fs is two-tailed significant. the association of levr with fs and pdpr is affirmative and with ctr and car is negative while the association with car and fs is twotailed significant. the correlation of ctr with car is two-tailed and significantly positive and the relationship with fs and pdpr is negative and insignificant. the correlation of car with fs and pdpr is negative and the relationship with fs is significant. the correlation of fs with pdpr is negative and not significant. table 4. model summary. r r square adjusted r square std. error of the estimate change statistics durbinwatson r square change f change sig. f change 0.549a 0.302 0.213 0.293 0.302 3.396 0.004 1.708 note: a. predictors: (constant), pdpr, leqr, ctr, roe, fs, levr, car. dependent variable: dpr. 4.3. regression analysis table 4 represents the model summary of regression analysis for the dependent variable dpr and the independent variables pdpr, leqr, ctr, roe, fs, levr and car. the f-value is 3.396 which is significant at the 1% significance level and the durbin-watson value is 1.708. in this study, regression analysis can be conducted for the dependent variable dpr. the r, r2 and adjusted r2, r2 change values are 0.549, 0.302, 0.213, and 0.302 respectively. table 5 represents the coefficients of regression for the dependent variable dpr. the standardized beta coefficient of roe is 0.216. this value is significant at the 10 percent confidential level. at a 10% significance level, the roe of the mncs positively influences the dpr. so h01 is accepted. the profitability of the mncs positively impacts the dividend payout policy. the independent variable leqr has 0.136 standardized beta coefficients but is insignificant. the h02 is rejected due to an insignificant confidential interval level. liquidity does not influence the dpr of mncs in bangladesh. the independent variable levr has -0.441 standardized beta coefficients but is not significant. table 5. regression coefficients. model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) 3.359 2.233 3.359 1.504 0.138 roe 0.002 0.001 0.216 1.668 0.100 leqr 0.065 0.094 0.136 0.683 0.497 levr -0.919 1.858 -0.441 -0.495 0.623 ctr 0.082 0.028 0.365 2.901 0.005 car -1.463 1.884 -0.707 -0.777 0.441 fs -0.173 0.100 -0.261 -1.724 0.090 pdpr 0.021 0.119 0.022 0.174 0.862 note: dependent variable: dpr. the h03 is also rejected because of the insignificant confidential interval level. the leverage ratio of the mncs negatively affects the dpr but the interference is insignificant. the standardized beta coefficient of ctr is 0.365. this value is significant at a 5% confidential level. at a 5% significance level, the ctr of the mncs positively financial risk and management reviews, 2023, 9(1): 1-10 8 © 2023 conscientia beam. all rights reserved. influences the dpr. thus, h04 is accepted. the corporate tax ratio of the mncs positively impacts the dividend payout policy. the independent variable car has -0.707 standardized beta coefficients and the p-value is 0.441 which is insignificant. the h05 is rejected due to the insignificant confidential interval level and the negative impact of car on the dpr. the standardized beta coefficient of fs is -0.261 with a p-value of 0.090. at a 10% significance level, the fs of the mncs negatively influences the dpr. the h06 is rejected because of the negative impact of fs on the dpr. the firm size of the mncs significantly negatively affects the dividend payout policy. the standardized beta coefficient of pdpr is -0.022 with a p-value of 0.862. this value is insignificant. thus, h07 is rejected because of an insignificant confidential interval. the previous year's dividend payout ratio does not influence the dpr of the mncs in bangladesh. 5. conclusion the mncs operating in bangladesh are very important for the country as well as investors. the multinational company has become large and strong due to its huge opportunities for capital, skills and markets. mncs are taken into consideration by potential investors in order to make profitable investments. investors can invest in mncs by considering the following influential factors in dividend payout policy. first, the roe is positively significant for dpr. the roe represents the profitability of the firm. more roe indicates more profitability which means more dividends. secondly, the ctr significantly influences the dpr of mncs. higher taxes paid by the mncs pay for higher dividends. third, the fs is negatively related to the dpr which represents that the smaller firm pays more dividends and vice versa. fourth, the liquidity ratio, leverage ratio, capital adequacy ratio, and previous year dividends cannot significantly influence the dpp of the mncs. further research should be conducted to provide insights into the important aspects of dpp for multinational corporations operating in bangladesh. funding: this research is supported by comilla university, bangladesh (grant number: co.u/reg./research related project-485/2013/17895(41)). institutional review board statement: not applicable. transparency: the authors state that the manuscript is honest, truthful, and transparent, that no key aspects of the investigation have been omitted, and that any differences from the study as planned have been clarified. this study followed all writing ethics. competing interests: the authors declare that they have no competing interests. authors’ contributions: the conception, design, analysis and interpretation of the results, t.h.;collected the data, m.m.k. and r.a. all authors have read and agreed to the published version of the manuscript. references abor, j., & bokpin, g. a. 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(2013). determinants of dividend policy: a case of banking sector in pakistan. middle-east journal of scientific research, 18(3), 410-424. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://dx.doi.org/10.11118/ejobsat.v4i2.132 https://doi.org/10.1016/j.ribaf.2016.01.018 https://doi.org/10.5171/2017.538821 https://doi.org/10.18488/journal.aefr.2019.94.531.546 https://doi.org/10.1086/294442 https://doi.org/10.2139/ssrn.889330 https://doi.org/10.1080/09603107.2011.639734 https://doi.org/10.31933/dijms.v2i2.449 https://doi.org/10.1093/rof/8.4.515 1 © 2022 conscientia beam. all rights reserved. predictive creditworthiness modeling in energy-saving finance: machine learning logit and neural network herlan1 eka sudarmaji2+ m. rubiul yatim3 1,2,3faculty of economics and business, university of pancasila, jalan srengseng sawah, pasar minggu jakarta, indonesia. 1email: herlan@univpancasila.ac.id tel: 0816946278 2email: esudarmaji@univpancasila.ac.id tel: 087884964643 3email: mrubiulyatim@univpancasila.ac.id tel: 081384467762 (+ corresponding author) abstract article history received: 14 december 2021 revised: 17 january 2022 accepted: 31 january 2022 published: 8 february 2022 keywords creditworthiness esco machine learning logit regression lcca retrofit finance. jel classification: c25, c53, q48. customer's creditworthiness was becoming more crucial for esco. machine learning was used to predict the creditworthiness of clients in retrofit financing processes. machine learning was used to predict the creditworthiness of clients in esco financing processes. this research aimed to develop a retrofitting scoring model to leverage a machine learning and life cycle cost analysis (lcca) to evaluate alternative financing for energy efficiency saving in indonesia. the model was built on the logistic regression model and artificial neural networks model of machine learning. the model was developed and tested using the python algorithm, and the proposed model's efficiency was demonstrated. the logistic regression calculations showed that the accuracy value of prediction data with test data was 88.3562 % and 87.67% for artificial neural networks and logistic regression models. the prediction rate result that refers to the correct predictions among all test data for artificial neural networks and logistic regression model was 92.20% and 91.98%, respectively. meanwhile, the percentage of customers who were correct to all customers predicted to default was 94.41% for artificial neural networks and 93.81% for the logistic regression model. credit models were helpful to evaluate the risk of consumer loans. finally, the quality and performance of these models were evaluated and compared to identify the best one. the logistic regression and neural network models obtained were good and very similar, although the neural network was slightly better. contribution/originality: this study gained a deeper understanding of the obstacles in promoting energy efficiency practices in indonesia's building energy efficiency and esco. therefore, the results of this study have implications for management science, management practices in the company and commercial building industry in indonesia, and the government as a regulator. 1. introduction this research looked at the influence of an energy-efficiency program on one method of lowering energy consumption: switching to energy-saving lighting. the figure shows the example comparative measurement between led energy-saving and conventional lightings shown in table 1. authors defined retrofits as the replacement of conventional lightings equipment with new led energy-saving, or the construction of new infrastructure to increase energy efficiency and lower utility costs before the old equipment was damaged or reached the end of its economic life (dobbs et al., 2013; frankel, heck, & tai, 2013; husin, ahmad, ab wahid, & kamaruzzaman, 2017; mcwilliams & walker, 2005). under this model, retrofit projects would need investment, and the worth of the retrofits would be determined by the investment payback time (heesen & madlener, 2016; kumbaroğlu & madlener, 2012). the value financial risk and management reviews 2022 vol. 8, no. 1, pp. 1-11. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v8i1.2919 © 2022 conscientia beam. all rights reserved. https://orcid.org/0000-0002-7240-1589 https://orcid.org/0000-0002-6074-5114 mailto:herlan@univpancasila.ac.id mailto:esudarmaji@univpancasila.ac.id mailto:mrubiulyatim@univpancasila.ac.id https://orcid.org/0000-0002-9465-9601 https://www.doi.org/10.18488/89.v8i1.2919 financial risk and management reviews, 2022, 8(1): 1-11 2 © 2022 conscientia beam. all rights reserved. of the investment determined the payback time, energy expenses, and operational hours of the equipment (angelis & nussbaum, 2015; fuller & petersen, 1996; ruparathna, hewage, & sadiq, 2017). the operational hours of led were used to determine the performance of the company's financial plans. table 1. comparative measurement between led and tld. no description tld led tube 1 energy consumption (watt) 72 16 2 operational hours 8 8 3 electricity consumption/kwh year 210.24 46.72 4 electricity bill/kwh 1.125 1.125 5 electricity cost in idr 236.520 52.560 6 life cycle in hours 10.000 15.000 7 life cycle in years 3 5 8 lamp price 12.450 81.000 9 differences in life cycle tld vs. led 6.225 10 energy cost/year 242.745 52.560 11 difference energy saving tld vs. led 190.185 12 energy saving in % 78.35% two independent finance agreements were used for retrofitting: the energy saving performance contract (espc) and the energy saving agreement (esa). the key idea was that the espc and esa stipulated that the client pays the esco from the savings in energy costs. the flow of duty, privileges, and the entity participating in the retrofitting finance plan is shown in figure 1. one of the reasons the authors investigated energy efficiency was technical improvements. in many regions, the employment of cutting-edge technology has created hurdles to embracing energy-saving energy technologies, resulting in inefficiencies in energy usage. researchers speculated that sophisticated technology users could struggle to manage it fornara, pattitoni, mura, and strazzera (2016); heesen and madlener (2016); stern (2011). all of these variables were converted into transaction costs. as a result, the authors understood how energy conservation works and the repercussions and how its creative business model, investment value, and new innovative financing choices would benefit everyone. our research intends to develop a credit risk modeling methodology to lower the risk of credit granted to retrofitting projects while increasing esco benefits. figure 1. energy efficiency financing (wsgr, 2015). financial risk and management reviews, 2022, 8(1): 1-11 3 © 2022 conscientia beam. all rights reserved. consequently, the goal of this research was to determine the optimum modeling with the highest performance and accuracy. the research employed the same methodologies and principles as epa-energy start (the united states environmental protection, 2008) to assess the project's feasibility. the most important aspects to examine were the initial upfront investment, revenue factors, extra revenue factors, payback duration, investment returns, and client attributes. as a result, the firm's financial state was assessed first, followed by the return rate (payback). the hurdle rate was the agreed-upon criterion for passing the investment profitability test. if the irr meets or exceeds predicted profits, the investment is profitable. a stream of future cash flows discounted with the project's risk provided the correct rate of return. as the cost of capital and risk grows, the amount of profit required would need more investment. last but not least, the investor qualities must be taken into account. the approach was almost identical to banks' determining a customer's creditworthiness. in addition to the cost of credit default risk, the cost of retrofitting aspects is an essential factor. the retrofitting process is the same as every other loan process. financial selection criteria were generally measured through credit reports. some of the problems that can be identified were 1) what the ml model can use variable determinants to predict the occurrence of retrofitting credit risk?, and 2) what is the right strategy to mitigate credit risk in the retrofitting service process at esco?. the paper seeks to demonstrate how ml can help esco cope with energy efficiency projects with real case studies. the paper investigates case studies conducted between june 2020 and january 2021. as a result, interview procedures were updated to obtain information directly from company directors, chief executives, and general managers. in this paper, the authors use a case study, where the esco provider was mws, and the customer was shj' the authors refer to pseudonyms for the research. until recently, mws decided that credit for retrofitting projects was traditionally done, i.e., ensuring that customers met the criteria and covered all risks. ultimately, esco management decided on a retrofitting project based on this individual analysis, where the final decision was made by acclamation based on this analysis. here we designed a retrofitting risk modelling system for esco using the ann and lr model of ml. as a result, a sound credit risk modeling system could assist mws in predicting credit risk. predictive analytics aims to build analytic models that predict the target size of interest. the target was used to direct the learning process during the optimization process. there are two types of predictive analytics depending on the size of the target, regression and classification. an example of a variable target in the regression was the creditworthiness of shj. as for the target, classification was a category, the binary classification between default and non-default. according to halladay (2013), predictive analytics includes a variety of statistical techniques used for data analysis today, historically, economically, and even unstructured data such as sentence text and images. this information was used to identify some risks and opportunities and capture relationships between these factors. these analyses were used to make more accurate predictions about future events and explore patterns in data studies that lead to better decision-making. furthermore halladay (2013) also presents the evolution of predictive analysis development. the evolution began with project feasibility, which focused on project analysis and internal corporate data, continuing to be business intelligence that already uses corporate external data integrated with internal company data and can answer why and evaluate the project from a strategic perspective. finally, the authors decided to develop the data into predictive analytics, focusing on predictive modeling and forecasting tools. sarosa (2012); lee and lee (2015) predictive analytics was a process that includes a series of methodologies that can manage various large-scale data-driven problems faced by many entities. it was a repetitive process that connected several statistical methods of sampling, model estimation, model prediction, and evaluation to form a credit scoring system. according to halladay (2013), an essential stage in developing information about predictive analytics was setting the goals of the prediction itself to determine the business problems that must be solved. while according to lee and lee (2015), some essential things that cannot be ignored in organizing predictive analytics work are the collection and sampling of data, model estimation, model prediction and evaluation, and model adjustments. financial risk and management reviews, 2022, 8(1): 1-11 4 © 2022 conscientia beam. all rights reserved. observing the credit default events in the retrofitting process in the energy efficiency industry must be understood as a flow business process. when starting the marketing process, officers look for prospective customers, the data verification/validation process, the credit analysis process, the verdict process, and the disbursement process. with the above explanation, this research was expected to provide some of the following benefits: 1) the use of machine learning in its particular retrofitting practice on granting energy efficiency project credit is a new practice and is starting to grow in indonesia. therefore, this research is expected to contribute to science, especially accepting technological innovation to produce efficiency in the energy efficiency industry. 2) the results of this research are expected to be one of the sources of information about retrofitting practices with machine learning to detect credit risk. 3) this research can be helpful to be one of the references for decision-makers in the energy efficiency industry, namely problematic credits carried out by either outsiders or parties in the provision of retrofitting credit. 4) providing information about alternative detection models, and 5) creating a culture in the energy efficiency industry using machine learning-based technology innovations. 2. literature review neural networks and logistics have a long history, and many individuals have worked on their development throughout the years. in recent years, many fields have created outcome prediction models based on artificial neural networks ("an") and logistic regression analysis ("lr"). according to empirical investigations, logistic regression (lr) was the most remarkable statistical analytic technique for creditworthiness (lessmann, baesens, seow, & thomas, 2015). the authors of this research look at esco's procedures for determining client creditworthiness. the authors looked at which elements influenced esco's final retrofitting project. to begin, the authors evaluate applications using traditional methods such as upfront investment, income factors, extra income variables, return durations, investment returns, and criteria related to client characteristics. the authors then employ machine learning (ml) neural networks and logistic regression to forecast the likelihood of future behaviors (lessmann, baesens, seow, & thomas, 2015). in most cases, logistic regression is utilized in the credit score model. the creditworthiness model (wiginton, 1980) used a logistic model. cramer (2004) later created some other types of logistic regression. according to the experimental data, the border logistic regression approach has a greater classification accuracy. overall, while the creditworthiness model performs well in machine learning, it needs big raw data. logistic regression is one of the techniques borrowed by machine learning from statistics. it was a method for solving binary classification problems (two class values). the authors write a logistic regression algorithm for machine learning in this paper. the logistics function was also called the sigmoid function. an s-shaped curve can take an absolute value number and map it into values between 0 and 1, but never precisely at that limit. logistic regression hypotheses tend to limit functions between 0 and 1 . in machine learning, the authors use sigmoids to map probability predictions. the authors expect the classifier to provide a set of outputs or classes based on probability when passing input through the prediction function and returning a probability score between 0 and 1. logistic regression becomes a probability model. in this paper, the prediction models creditworthiness stated as 'credit default' or 'default note.' the first-class can 'default,' and the logistic regression model can be written as a possible 'default' or p (creditworthiness=default|credit-score). it can be written in another way; the authors model the probability that the input (x) belongs to the default class (y =1); hence the authors can write this formally as p(x) = p(y=1| x). logistic regression was a binary classification approach that may predict when the item has only two potential values. for example, depending on age, yearly income, height, weight, and other factors, the researchers could determine whether a person was a male (0) or female (1). logical regression was more straightforward than a neural network. artificial neural networks have been widely used for the credit-scoring problem (lee & chen, 2005; west, 2000). different anns have been suggested to tackle the credit scoring problem more recently. in the empirical result, the financial risk and management reviews, 2022, 8(1): 1-11 5 © 2022 conscientia beam. all rights reserved. neural networks achieve the highest average correct classification rate compared with the lr model, considering that results were very close abdou and pointon (2011). when a complicated nonlinear connection between credit scoring's features was shown, the ann model offered a considerable benefit; according to west (2000) and hájek (2011) ann and lr are techniques for categorization problems with a finite number of options (e.g., not a continuous value). many people utilize the sigmoid and softmax functions to solve multiclass-classification issues in logistic regression. the structure of neural networks was relatively specific, with one input layer, at least one hidden layer, and eventually one output layer. both ann and lr have supervised machine learning algorithms with two primary goals: 1) training the model and 2) predicting it. both algorithms face the same challenge: determining the optimum parameter value. 3. method in creditworthiness research, result prediction models based on artificial neural networks and logistic regression analysis have been created. both of these strategies have benefits and drawbacks. both of these strategies have benefits and drawbacks. this study investigated the efficacy of artificial neural networks and logistic regression models in predicting credit default occurrences in the energy efficiency industry's retrofitting. a test with a roc value of one perfectly differentiates two outcomes, but a test with a roc value of 0.5 was entirely worthless and performed no better than chance. this study takes the form of a case study at the esco firm mws, and the authors employ a 'pseudo name' for the company's name to safeguard an institution's security. an empirical research approach was applied in this study. empirical evidence can show the truth of a particular event using this technique. as a result, the core data for this study was based on incident data from mws's business database. the research focuses on mws adopting retrofitting practices with their own esco model on energy management or conservative energy projects or activities. mws was intended to introduce the latest pss model in their own esco model with their capital in indonesia. mws conducts simple financial analysis to finance retrofitting projects to determine the appropriate project's value, risk, and liquidity effects. energy efficiency projects need to be considered on par with others to succeed. mws uses financial analysis to assess whether investments generate reasonable returns while not damaging the consumer base. this research was conducted intensively from july 2020 to june 2021. activities include research preparation, data collection, data analysis process, and reporting of research results in research conducted in jakarta and bekasi. the implementation of the research begins with the collection of data until the final report of the research takes ± ten weeks. customer's creditworthiness and retrofitting default risks were becoming more crucial for esco. therefore, upon lcc analysis, mws was conducted to assess the cooperative's causal relationship by using the characteristics of problems in causal relationships between creditworthiness variables and other variables. dependent variables were retrofitting feasibility, i.e., rejected project or accepted project. the independent variables, namely initial upfront investment, revenue factors, additional revenue factors, payback period, investment returns, and customer characteristics, were the most significant factors that need to consider; see table 2. the process of developing the predictive model includes data access, data preparation, development of a training set, selection of an algorithm, training the model, the model testing, valuation of the model, and implementation. the simulation runs were repeated several times with different configurations to improve results. the visualization of the findings can be achieved in a variety of ways. a logistic regression and artificial neural networks using ml have been done. the data analysis approach was a credit score prediction model using machine learning to choose the appropriate model in this research. in this research, a definitive inference test, in addition to hypothesis testing, was also conducted. the research looked at the relationship between independent and dependent variables. the frame of mind of this research can be explained in four parts, namely identifying research and research-gap problems in the 1st stage; financial risk and management reviews, 2022, 8(1): 1-11 6 © 2022 conscientia beam. all rights reserved. analysis of the causative factors/impact in stage 2; and problem mapping with theoretical models and discussion of results analysis in the third and fourth stages. table 2. variable, membership function dan range. no aspect input variable membership function range 1 project agreement agreement type esa & espc esa = 0.8 1.0 espc = 0.5 0.7 2 upfront investment tolerance factors high risk, medium & low risk high risk: tolerance > 1.5bio medium risk: tolerance >750mio & <=1.5bio low risk: tolerance <=750mio 3 revenue factors project margin high, medium & low high: margin > 30% medium: margin 10 30% low: margin > 10% 4 additional revenue factors interest loan high, medium & low high: interest loan > time deposit rate medium: interest loan = time deposit rate low: interest loan < time deposit rate 5 payback period payback years high risk, medium & low risk high risk: years > 3years medium risk: 1 3 years low risk: years <= 1 6 investment return npv high, medium & low high: npv >30% of upfront investment medium: npv ~ 10%-30% of upfront investment low: npv < 10% of upfront investment 7 customer type of customer high risk, medium & low risk high risk = 1 medium= 0.5 1 low risk = 0.2 0.5 4. results 4.1. performance evaluation criteria the confusion matrix offered data for comparing the system's (model) classification results to the actual classification results. the error matrix was another name for the confusion matrix. the confusion matrix was a matrix table that described the classification model's performance on a set of test data whose actual values were known. in the confusion matrix, four terms indicate the categorization process' findings were true positive (tp), true negative (tn), false positive (fp), and false negative (fn). the following is a basic case example of predicting whether or not a customer defaults on the payment. true positive (tp) data that was expected to be right was found to be true. for instance, a customer who fails on a retrofitting payment (class 1) forecasts that the customer will also default on payment (class 1). true negative (tn) it was projected that negative data would be actual. customers that do not default on retrofitting payments (class 2), for example, are predicted to not default on payments by the model (class 2). type i error — false positive (fp) — negative data was forecasted as positive data. customers who, for example, do not default on retrofitting payments (class 2) but are predicted to default on payments by a model (class 1). type ii error: false negative (fn) – positive data was supposed to be negative. a customer, for example, defaults on a retrofitting payment (class 1), but the model predicts that the customer would not default on the payment (class 2). in some cases, the type ii error was more dangerous. we can relate that statement to the example of the credit default prediction above. if the customer does not default but was predicted to default (fp), then in the following financial risk and management reviews, 2022, 8(1): 1-11 7 © 2022 conscientia beam. all rights reserved. prediction, esco can find out the actual situation that the customer did not default. however, if customers default but are predicted not to default (fn), the company will find the actual situation very late, and esco will suffer financial losses. so, it can be said that type ii error was dangerous. the confusion matrix will tell how well the model we make. in particular, the confusion matrix also provides information about tp, fp, tn, and fn. it was beneficial because the classification results generally cannot be adequately expressed in one number only. the confusion matrix allows us to see from whom to predict the credit default quickly, how much to default and not. the confusion matrix in the image below shows that companies were said to not default in the ann – 473 companies, but 470 companies were declared not to default when using the lr model (tp). according to the lr (tn) model, the ann model predicts 43 companies default correctly and 42 companies according to the lr (tn) model. the correct prediction (tp) was in the diagonal table in the upper left corner, so visually, it was straightforward to see the prediction error because it was in the table outside the left corner diagonal; the confusion matrix is depicted in figure 2. figure 2. confusion matrix – artificial neural network & logit model. the result showed that the model's accuracy was generally measured based on correctly classified instances. both ann and lr models were chosen to optimize predictive accuracy. the term accuracy refers to the model's ability to categorize data correctly. as a result, accuracy was defined as the proportion of accurate predictions (both positive and negative) to the total data. to put it another way, accuracy was the degree to which the projected value was near to the actual (actual) value. the accuracy value can be obtained by equation tp = (tp+tn) / (tp + tn + fp + fn). from the binary classification confusion matrix example above, calculating the accuracy value can answer the question, what percentage of customers were correctly predicted to default or who do not default from all customers? based on figure 2, the accuracy of ann was (473+43) / (473+43+28+40) = 88.36%, on the lr model was shown (470+42) / (473+42+31+41) = 87.67%. the prediction rate result on the ann model that refers to the percentage of correct predictions among all test data was as follows: true positive rate (tpr) = 473 /(473+40) = 92.20%, tpr or sensitivity or recall was the percentage of correctly classified cases of creditworthiness. on the lr model it shown 470 /(470+41) = 91.98%. true negative rate (tnr) = 43 /(43+28) = 60.56%, tnr or specificity was the percentage of correctly classified cases. on the lr model, it shown 42 /(42+31) = 57.53%. tpr was the number of positive examples classified as positive, and tnr was the number of negative examples classified as negative. on the other hand, precision refers to the degree of agreement between the desired data and the model's predicted outputs. consequently, precision was defined as the ratio of accurate positive predictions to correct positive expected outcomes. of all the positive classes that have been correctly predicted, how many data were truly positive. the tp / (tp+fp) equation can obtain the precision value. from the binary classification confusion matrix example above, financial risk and management reviews, 2022, 8(1): 1-11 8 © 2022 conscientia beam. all rights reserved. calculating the precision value can answer the question, what percentage of customers were correct to default out of all customers predicted to default? the answer for the precision rate of ann were 473 / (473 + 28) = 94.41% and on lr model 470 / (470 + 31) = 93.81%. based on lessmann et al. (2015) the authors need to build evaluation criteria to quantify the misclassification of default assessment models. this article utilized this relative ratio to create a cost indicator that indicates the credit risk assessment model's misclassification cost. we also constructed the cost of credit risk as false negative rate (fnr) = fn / (fn + tp) = 40/(40+743) = 7.80% and false positive rate (fpr) = fp / (fp + tn) = 28 / (28+43) = 5.59%. on the other hand, fnr and fpr on the lr model were 8.02% and 6.19%, respectively. fnr was the number of positive examples classified as negative (i.e., type i error), and fpr was the number of negative examples classified as positive (i.e., type ii error). lessmann reported that the ratio of misclassification costs associated with type ii and type i errors was 5:1, which (abdou, 2009) used. hence the cost of credit risk become = 5 x (7.80% + 5.59%) or 66.93% based on ann model and 71.06% based on lr model. a roc curve (receiver operating characteristic curve) showed the classification performance. the receiver operating characteristics (roc) curve, which shows the false positive rate (fpr) on the y-axis versus the true positive rate (tpr) on the x-axis over a range of threshold values, was formerly a standard technique. figure 3. roc curve – artificial neural network & logit model. simultaneously, the ann algorithm-based model showed the best result under the roc curve metric in the other area. the ideal roc curve is parallel to the y-axis, which is impossible to accomplish in practice. the model that comes closest to it will be the best. under the roc curve value (auroc), a number between 0 and 1 was traditionally used to summarize the roc curve. the better the model, the greater the auroc. auc was a composite measure of success that considers all possible classification thresholds. the model's likelihood rates a random positive example higher than a random negative example was one way to view auc. a receiver operating characteristic curve (roc curve) was a graph that shows how well a classification model performs overall classification thresholds. two parameters were plotted on this curve. tpr vs. fpr was plotted on a roc curve at various classification thresholds. lowering the classification threshold causes more things to be classified as positive, resulting in more false positives and true positives. a typical roc curve for ann was 0.73, and lr was at 0.72, shown in figure 3. 4.2. creditworthiness success analysis logistic regression was a subset of a neural network classifier. the researchers can simulate a logistic regression model using a neural network with one hidden node with the identity activation function and one output node with zero bias and logistic sigmoid activation. in principle, anything researchers can do with logistic regression with a neural network. therefore, theoretically, a neural network was always better than logistic regression, or more precisely, a neural network can do no worse than logistic regression. the esco was more worried about elements financial risk and management reviews, 2022, 8(1): 1-11 9 © 2022 conscientia beam. all rights reserved. that enhance the likelihood of successful retrofitting than whether the model correctly forecasts the probability of credit risk scoring. this conclusion was made under the methods used by liang and he (2020) and cai et al. (2016) to assess the success of credit risk and loan prediction models. thus we picked the logistic regression model over a neural network in this part. in addition, this section investigates all factors that influence the likelihood of effective retrofitting. table 3 showed the results of the model's p-value was 1,852 x 10^-187, which was less than 0.01 or 1% as was thought 'excellent. the p=value of each variable as a list under p>|z| was less than 0.01 or 1%. pseudo rsquared was 0.4810 or 48.19%. from the pseudo-r-square value, all independent variables' influence on dependent variables (retrofitting project) was 48.19%. obtained multinomial logistics regression model for log category ratio retrofitting project=1(take) and retrofitting project =0 (hold and reject) was -6.5619 + -4.0780 (project agreement) + 0.5237 (upfront investment) + 2.0639 (revenue factors) + 0.4995 (additional revenue factors) + 0.5579 (investment return) + 1.3236 (customer) 0.7805 (type of customer). table 3. logistic results. expert_judge=0=1 coeff std. error z p>|z| [0.025] [0.975] constant (6.562) 0.694 (9.445) 0.000 (7.992) (5.202) project agreement (4.078) 0.280 (14.546) 0.000 (4.627) (3.529) upfront investment 0.524 0.104 5.058 0.000 0.321 0.727 revenue factors 2.064 0.139 14.826 0.000 1.791 2.337 additional revenue factors 0.500 0.105 4.768 0.000 0.294 0.705 investment return 0.558 0.104 5.366 0.000 0.354 0.762 customer 1.324 0.118 11.255 0.000 1.093 1.554 type of customer (0.781) 0.170 (4.603) 0.000 (1.113) (0.448) 5. conclusion this research briefly compares logistic regression and artificial neural networks with shared roots in statistical pattern recognition. predictive modeling for creditworthiness detection was done in this report. the model was built on the lr and ann model of machine learning. the model was developed and tested using the python algorithm, and the proposed model's efficiency was demonstrated. the logistic regression calculations showed that the accuracy value of prediction data with test data was 88.3562 % and 87.67% for ann and lr models. the prediction rate result that refers to the correct predictions among all test data for ann and lr model was 92.20% and 91.98%, respectively. the percentage of customers who were correct to the default of all customers predicted to default were 94.41% for ann and 93.81% for the lr model. this case study reveals that the ann model was better than the lr model, especially when a complex nonlinear relationship was presented between credit features. it was in line with the other empirical research that a neural network was always better than logistic regression. more precisely, a neural network can do no worse than logistic regression. on the other hand, the vast opportunities in retrofitting projects come with significant risks. the biggest issue was that the company was hampered by a lack of knowledge about the clients' reputation. the customer's creditworthiness was critical to esco's survival. the project's numerous factors, particularly the qualitative customer characteristic, were vital factors to consider. as a result, esco companies increasingly rely on machine learning techniques. the research aimed to determine how to construct a predictive model using machine learning techniques and whether it would be easy, convenient, and accessible for non-experts. we found that the machine learning methods for creditworthiness prediction in retrofitting projects were fresh and worth a shot. machine learning used the logistic regression model's predictive efficiency by pre-processing data using ann and lr models. it was hoped that this new practice would grow in popularity and become standard among escos. unfortunately, current machine-learning-based creditworthiness scoring practices lack explainability and interpretability. in terms of the credit approval process, most of these algorithms are called black boxes. under the circumstances, esco must penalize the retrofitting project. as a result, since retrofitting was a new industry, the credit approval process was financial risk and management reviews, 2022, 8(1): 1-11 10 © 2022 conscientia beam. all rights reserved. challenging to communicate to consumers. the most important thing for esco to deal with the project was friendship and know-how with the client. predictive modeling for creditworthiness detection was done in this report. the model was built on the lr and ann models of machine learning. the model was developed and tested using the python algorithm, and the proposed model's efficiency was demonstrated. some of the limitations of this research related to creditworthiness prediction research were based on case studies and limited to esco companies, namely mws. the prediction was reflected in the scoring value that can be an early warning signal (ews) tool for managers in 'mws' companies in mitigating bad credit risk. the other limitation was that this research related to creditworthiness scoring with various industries was more varied considering the different business processes and models. this research was based on the energy efficiency industry, especially in the case study of mws companies. moreover, the research was finally limited to the effectiveness of efforts to prevent credit jams with alternative approaches compared to traditional approaches on mws companies. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. references abdou, h. a., & pointon, j. (2011). credit scoring, statistical techniques and evaluation criteria: a review of the literature. intelligent systems in accounting, finance and management, 18(2-3), 59-88.available at: https://doi.org/10.1002/isaf.325. abdou, h. a. p. j. (2009). intelligent systems in accounting, finance, and management. intelligent systems in accounting, finance, and management, 16(1–2), 21–31. angelis, d. i., & nussbaum, d. (2015). cost analysis. military cost-benefit analysis: theory and practice, 113-135. cai, d. j., aharoni, d., shuman, t., shobe, j., biane, j., song, w., . . . lou, j. (2016). a shared neural ensemble links distinct contextual memories encoded close in time. nature, 534(7605), 115-118.available at: https://doi.org/10.1088/17412552/ab2ffa. cramer, j. a. (2004). a systematic review of adherence with medications for diabetes. diabetes care, 27(5), 1218-1224. dobbs, r., pohl, h., lin, d.-y., mischke, j., garemo, n., hexter, j., & nanavatty, r. 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(2005). home energy article : a systems approach to retrofitting residential hvac systems: lawrence berkeley national laboratory (issue april). ruparathna, r., hewage, k., & sadiq, r. (2017). economic evaluation of building energy retrofits: a fuzzy based approach. energy and buildings, 139, 395-406.available at: https://doi.org/10.1016/j.enbuild.2017.01.031. sarosa, s. (2012). adoption of social media networks by indonesian sme: a case study. procedia economics and finance, 4, 244– 254.available at: https://doi.org/10.1016/s2212-5671(12)00339-5. stern, p. c. (2011). contributions of psychology to limiting climate change. american psychologist, 66(4), 303–314. the united states environmental protection, a. (2008). energy star ® building upgrade manual energy star ® building upgrade manual contents (office of air and radiation 2008 edition). west, d. (2000). neural network credit scoring models. computers & operations research, 27(11-12), 1131-1152. wiginton, j. c. (1980). university of washington school of business administration cambridge university press. journal of financial and quantitative analysis, 15(3), 757–770. wsgr. (2015). innovative financing for renewable energy innovative financing for renewable energy article innovative financing for renewable energy. retrieved from: https://digitalcommons.pace.edu/pelr. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 52 © 2020 conscientia beam. all rights reserved. international financial reporting standards adoption and earnings management: the fundamental effect framework nwaubani, anthony nzeribe chizue ceo runt consultants ltd. (nigeria) and formerly of department of banking & finance nnamdi azikiwe university awka, nigeria. abstract article history received: 9 july 2020 revised: 13 august 2020 accepted: 2 september 2020 published: 21 september 2020 keywords accounting and financial scandals modern firm conflict of interest accounting principles incurred loss model accrual concept expected credit loss model flexibility financial statement manager‟s discretion. jel classification: g21, g28, m41 & m48. the study mainly examined effect of adoption of international financial reporting standards on earnings management and earnings quality in banks using a new approach fundamental effect framework. specifically, effect on profit after tax, net interest income and ratio of loan loss provisioning of the nigerian banks were examined. ex-post facto research design was adopted. secondary data on nine listed deposit money banks were analyzed using paired student t-test. the banks were those whose annual financial reports for 2011 and 2012 were available and contained figures under nigerian gaap and ifrs-equivalent of the 2011 figures. findings revealed that ifrs adoption in nigeria results in insignificant rise in earnings management and low earnings quality as measured by profit after tax and ratio of loan loss provision but leads to insignificant reduced earnings management and improved earnings quality in terms of net interest income. it is concluded that though some individual banks recorded significant reduction in earnings management under ifrs, fundamentally, the adoption in has no significant effect on earnings management and earnings quality of the banks based on the reported performance as at the date of the mandatory adoption in nigeria. the study recommends inter-alia that ifrs foundation and the national reporting authorities in all ifrs jurisdictions should monitor implementation and application of ifrs9 to minimize likely manger‟s discretion under the “forward looking expectedcredit loss” model of the ifrs 9. contribution/originality: this study examined the effect of adoption of international financial reporting standards on earnings management and earnings quality in banks using a new approach fundamental effect framework. 1. introduction the evolution of the modern firm could be linked to the development of the international financial markets which followed industrial revolution in the 20th century (chassagnon, 2011). as noted by kapás (2008) the industrial revolution which began in britain served as a catalyst for the emergency of the modern firms in the 1920s. the modern firm contrasts with the traditional firm whose entire operations are carried out by an entrepreneur with the sole objective of profit maximization (jhingan & stephen, 2009; nwaubani & orikara, 2019). the complex structures, divisions and varied objectives of the modern firm necessitated the separation of ownership financial risk and management reviews 2020 vol. 6, no. 1, pp. 52-78. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/journal.89.2020.61.52.78 © 2020 conscientia beam. all rights reserved. https://orcid.org/0000-0002-4767-6759 https://www.doi.org/10.18488/journal.89.2020.61.52.78 financial risk and management reviews, 2020, 6(1): 52-78 53 © 2020 conscientia beam. all rights reserved. of the firms from their day to day management. the separation involves the professional managers and management teams running the businesses on behalf of the owners. the managers are expected to render periodic reports of their performances before the owners of the firms. over time, the quest of the owners for managers to show proper accountability has become statutory as governments get involved in providing codes of corporate governance and enabling environments to protect the interests of the varied stakeholders. the company law of various countries mandates the executive management of a firm to prepare and lay before the shareholders/owners of the firm, annual accounts and reports showing the performance of the company. the financial statements are what potential investors and creditors look at when they make the decision whether or not to do business with the firm. however, over the decades and particularly in the recent decades, the world has witnessed some of the worst accounting and financial scandals traceable to misrepresentation of facts and figures in financial reports (corporate finance institutecfi, 2020). colossal financial losses were recorded leaving behind ruins in corporate and individual lives. some of the scandals involved satyam computer services (2009, india), bernie madoff (2008, usa), lehman brothers (2008, usa). in 2018 alone, the world witnessed notable accounting scandals resulting in collapse of many big names in the corporate world such as carilliona uk construction giant, patisserie valeriealso a uk café chain, general electric-us, ted baker-uk among others (blackburn, 2019). preparation of financial statements is guided by accounting principles and concepts prescribed by accounting standards. the accounting concept which forms the fundamental basis of preparation of financial statements of private sector business activities is the accrual concept. this concept requires that revenues and expenses be recorded in the period in which they occur and not when they are received or paid. the accounting standards also allow some level of flexibility in the application of the principles and concepts. the flexibility in turn has allowed management of firms to bring to bear, their personal professional discretion in deciding how to apply some of the accounting principles. as posited by maigoshi, latif, and kamardin (2016) in order to influence earnings managers adopt some strategies to manage the accrual concept. some of the strategies involve: bad debt estimation, inventory valuation approach, depreciation policy, revenue recognition method among others. for instance, the managers bring their professional personal judgment to bear on how much loan loss provision to make and the appropriate period the provision relates to. the manger‟s personal judgment around these items affects the reported earnings and earnings quality. this discretional judgment of the managers can therefore be exploited to manage reported earnings of the firm. in a simple context, earnings management can be seen as the exploitation of the flexibility in the application of some accounting principles over some transactions with the intent to produce financial statements which meets predetermined earnings level of the preparers. the predetermined earnings may be misleading as they may not represent the real earnings. according to hill (2019) earnings management involves making financial reports look better through creative exploitation of the discretion in the application of the accounting techniques. in the opinion of hasan and rahman (2017) earnings management negatively affects quality of financial reports. in nigeria earnings management practices have increased in recent years and are linked to the collapse of commercial banks in nigeria (farouk & isa, 2018). the issue of poor financial reporting in nigeria was considered to have exacerbated the effect of the 2007-2009 global financial crisis which swept through the nation‟s banking system in 2009 (sanusi, 2010). the international financial reporting standard (ifrs) were developed to narrow the discretional judgment and promote global unified application of the accounting principles. the adoption of the ifrs has the potential of reducing earnings management and enhancing earnings quality. adoption of ifrs by a country entails an attempt to change the country‟s accounting standards with international financial reporting standards (nwaubani & okoro, 2018). according to the authors, the need for each country to adopt the ifrs is clearly appreciated among stakeholders. the adoption is expected to improve transparency in financial reporting and enhance financial financial risk and management reviews, 2020, 6(1): 52-78 54 © 2020 conscientia beam. all rights reserved. reporting quality by reducing earnings management (hasan & rahman, 2017; manju & mahadevaswamy, 2016). the nigerian banking sector was one of the sectors that mandatorily adopted the ifrs on january 01, 2012 (herbert, tsegba, ohanele, & anyahara, 2013; sanusi., 2012). to evaluate the real effect of ifrs adoption on earnings management and earnings quality, the fundamental effect approach first established and applied in nwaubani and okoro (2018) is followed in this study. the fundamental effect approach/framework focuses on the fundamental difference between application of ifrs and country‟s generally accepted accounting principles (gaap) with respect to certain accounting principles and issues. this approach is elaborated under statement of the problem and methodology. 1.1. objective of this study the main objective of this book is to examine the effect of adoption of international financial reporting standards (ifrs) on earnings management and earnings quality in banks. specific objectives are: 1. determination of effect of ifrs adoption on average profit after tax (apat) of the nigerian banks. 2. examination of the effect of ifrs adoption on average net interest income (anii) of the nigerian banks. 3. evaluation of the effect of ifrs adoption on average ratio of loan loss provisioning (llp/tla) of the nigerian banks. the hypotheses were formulated and tested at 5% significance level in null form as stated below: ho1: ifrs adoption has no significant effect on average profit after tax (apat) of the nigerian banks. ho2: the effect of ifrs adoption on average ratio of loan loss provisioning (llp/tla) of the nigerian banks is not significant. ho3: ifrs adoption does not have significant effect on average net interest income (anii) of the deposit money banks. 1.2. statement of the problem a number of empirical studies have been carried out on the effect of ifrs adoption on earnings management and earnings quality in banks in and outside nigeria. the studies adopted various models. for instance, odoemelam, okafor, and ofoegbu (2019) –nigeria employed fixed effects approach in modified ohlson model, malofeeva (2018) russia adopted multiple linear regression model covering post adoption period, hasan and rahman (2017) bangladesh adopted extended modified jones model with multiple regression known as chung, firth, and kim (2005) model, uwuigbe, agba, jimoh, olubukunola, and rehimetu (2017) nigeria employed pre and post adoption approach with regression model, hassan (2015) -nigeria followed pre and post adoption model with two steps multiple regression framework while mechelli and cimini (2013) european union and rudra and bhattacharjee (2012) –india employed multiple regression with constructed composite index of earnings management and dummy variable the pre and post adoption era approach commonly adopted for a study of this nature, is ordinarily affected by a lot of concomitant factors during the post adoption period. factors such as economic conditions, financial, regulatory and enforcement of reforms in the post adoption era normally affect performance outcomes in the period. adopting the fundamental effect approach, first conceptualized and adopted in nwaubani and okoro (2018) focuses on the ifrs-equivalent of the relevant gaap performance indexes at the date of adoption. therefore, the fundamental effect framework attempts to establish the effect of the ifrs adoption on earnings management and earnings quality based on the fundamental differences between the two standard regimes devoid of the influence of the concomitant factors during the post adoption period. this framework is adopted for this study and constitutes a major motivation for the study. financial risk and management reviews, 2020, 6(1): 52-78 55 © 2020 conscientia beam. all rights reserved. another challenge associated with previous empirical works is the conflicting outcomes over the effect of ifrs adoption on earnings management and quality. while odoemelam et al. (2019) -nigeria, hassan (2015) -nigeria, sellami and slimi (2016) -south africa and mechelli and cimini (2013)-eu documented less earnings management and enhanced earnings quality in the post ifrs adoption era; mongrut and winkelried (2019) – latin america, malofeeva (2018) russia, uwuigbe et al. (2017)-nigeria, uwuigbe, emeni, uwuigbe, and ataiwrehe (2016) nigeria and rudra and bhattacharjee (2012)-india reported increased earnings management and less earnings quality in the period after the adoption. even said (2019)canada reported no effect. part of the motivation for this study is an attempt based on the fundamental effect framework at resolving the conflicts. 2. conceptual framework 2.1. earnings management earnings management involves the use of discretional judgment by managers in financial reporting and in handling financial transactions in order to present a misleading financial reports to stakeholders (ceccobelli & giosi, 2019). in the view of tuovila (2019) earnings management refers to the exploitation of the application of the company's accounting practices by management to achieve some financial expectations which may not be real. earnings management can also be viewed as management action intentionally carried out with the aim of achieving desired results which do not represent the real outcomes (goel, 2016). according to mechelli and cimini (2013); chen, tang, jiang, and lin (2010) earnings management could be seen as the manipulation of firms‟ economic performance with the intention to mislead the stakeholder and users. going further (mechelli & cimini, 2013) share the opinion of callao and jarne (2010) that earnings management equally manifests when insiders manipulate real transactions so as to influence the earnings level for selfish reasons. the authors posit that this practice is commonly used during strict accounting regulatory controls. in the opinion of maigoshi et al. (2016) earnings management is seen as a situation where managers employ accounting judgments to handle a transaction in a manner that misrepresent the true economic position of the firm in order to influence the outcomes of contractual agreements that are dependent on reported accounting numbers. two of the early definitions of earnings management were given by schipper (1989) and healy and wahlen (1999). while schipper, views earnings management as “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain”, healy and wahlen considers earnings management as a reasonable and legal management decision making and reporting intended, to achieve stable and predictable financial results. 2.1.1. categorization of earnings management earnings management could be categorized into accrual-based earnings management and real earnings management (maigoshi et al., 2016). in accrual-based earnings management, managers play around accounting estimates based on allowed discretions in application of accounting principles over items such as bad debt estimation, depreciation policy, revenue recognition method, inventory valuation approach among others to influence reported earnings (goel, 2016; maigoshi et al., 2016). accrual-based earnings management does not affect the cash flow or cash position of the reporting entity as it revolves mainly around non-cash expenses such as depreciation, loan loss provisioning to alter the reported earnings. accrual-based earnings management can be either discretional or non-discretional. non-discretionary accrual based earning management involves obligatory payments which the firm has recognized in its books at the end of the accounting period, but is yet to make the actual payment. few typical examples include performance induced bonus and tax liabilities. in discretional accrual based earnings management on the other hand, managers apply their discretional judgment in the accounting treatment of the transactions in order to influence the reported earnings (goel, 2016). financial risk and management reviews, 2020, 6(1): 52-78 56 © 2020 conscientia beam. all rights reserved. in contrast to accrual-based earnings management, real earnings management involves altering the timing or structure of real activities of a firm with the intention of altering the firm‟s earnings. in this case the firms deliberately alter their operating activities to meet earnings target usually in the short run (braam, nandy, weitzel, & lodh, 2015). the structure or timing of real activities such as disposal of fixed assets, production, advertising expenses among others are deliberately changed with the aim of achieving a desired earnings level. for instance management may decide to dispose their assets by their year end to enhance both earnings and liquidity. also it may structure staff loans such that they would be completely paid off before year end in order to project a firm with low volume of risk assets. furthermore, in a case of a deposit money bank, management may tactfully suspend lending particularly close to its year end in order not to exceed a desired risk assets threshold. real earnings management directly influences cash flow position of the organization. it features more in highly regulated and monitored firms and is often common with politically exposed organizations in order to conceal gains from political connections. this is because real earnings management is not easily detected compared to accrual earnings management. also organizations may employ real earnings management in order to avoid taxes on profits, by making use of offshore subsidiaries. management. it is opined that firms have been shifting from accrualbased earnings management practices to real earnings management (ali & kamardin, 2018). 2.1.2. earnings management and financial reporting fraud according to mongrut and winkelried (2019) the discretion available to the managers within the legal framework could be exploited by the managers to manipulate accounts in order to create favorable financial performance. such manipulation may overstate profits, understate or conceal losses. this view is consistent with the opinion of jones (2011) who describes accrual earnings management as creative accountinga term which refers to accounting practices that may comply with requirements of accounting standards but deviate from the substance of the requirements. the deviation is considered to give the preparers/firm some undue advantages over the users of the accounts. jones identifies excessive complication and the use of creative ways of characterizing income, assets and liabilities and the intent to mislead the users as key features of creative accounting. other terms used interchangeable with earnings management are innovative accounting, aggressive accounting, cooking the books (seen as fraudulent) among others. creative accounting often connotes financial reporting fraud as the lines of distinction between the two terms are blurred. however, rosner (2003) considers quantitative materiality as the major factor which distinguishes aggressive accruals management from financial reporting fraud. in rosner‟ s view, material earnings overstatement is considered fraudulent while earnings management involving lower or immaterial earnings manipulations is seen as legitimate earnings management. 2.1.3. motive for earnings management earning management is made possible by the permissible flexibility allowed by accounting standards in the application of some accounting rules and principles. the mangers/executives exploit this flexibility to produce financial statements that inflate or level earnings (tuovila, 2019). the question is what could motivate a firm/manager to engage in earnings management? the answer may be found in the structure and complexities of the modern firm. in a typical modern firm, the management is separated from the ownership with the managers running the business on behalf of the shareholders/owners. this structure introduces the age-long issue of conflicting interests of stakeholders and information asymmetry between the owners of the firm and the management/managers (gavana, gottardo, & moisello, 2019). the conflict of interests could extend to major shareholders and minority shareholders. to ensure that managers act in the best interest of the owners of the firm, enhancement of their interest is tied to performance of the organization. in this scenario when the organization is doing well, the managers are also seen to be doing well, and vice versa. https://en.wikipedia.org/wiki/offshore_financial_centre financial risk and management reviews, 2020, 6(1): 52-78 57 © 2020 conscientia beam. all rights reserved. the motives for engaging in earnings management/creative accounting depend on the interested parties involved. according to jones (2011) some of the interested parties include managers, investment analysts, auditors, regulators, shareholders among others. while creative accounting provides the managers with the leeway to deliver the performance they desire, the existing shareholders seem interested in increase in share prices. by contrast, other parties/ groups are harmed due to creative accounting. specifically, some of the suggested motives for which firms engage in earnings management (goncharov & zimmermann, 2007; malofeeva, 2018; tuovila, 2019) include: 1. aspiration of top executives to receive bonus-related pay tied to the firm‟s earnings performance. 2. the desire to influence the companies' stock prices particularly during initial public offers – ipos. 3. the urge to ensure that firm‟s performance seems to meet or beat analysts‟ forecast. 4. the desire to comply with restrictive loan covenants. 5. an attempt at reducing tax payments. 6. the desire to level/smooth earning in order to present an image of consistent profits over accounting periods with little fluctuations. 7. the intention to cover up fraud. 8. the desire to influence offer prices in management buyouts and mergers and acquisitions. 9. the intention to influence outcome of contract bids tied to accounting numbers. 2.2. accounting standards: meaning and relevance in the global business community according to nwaubani and okoro (2018) and akabom-ita (2013) accounting standards are the principles, opinions, interpretations, rules and regulations which guide organizations in preparing their financial reports. financial performances of business entities are communicated to the various stakeholders through financial reports. the reality of borderless businesses implies that stakeholders of the 21st century firms often cut across many economies. the relevance of accounting standards in the global business community drives from financial reporting and mainly appreciated in the pointer they provide on how accounting information should be recorded, reported in the financial statements and interpreted so as to make the information reliable, useful and relevant to the global users. however, because of the national peculiarities, national accounting standards differ across nations. it is believed that such differences negatively affect the quality and the relevance of accounting information (ding, hope, jeanjean, & stolowy, 2007; nwaubani & okoro, 2018). 2.2.1. national and international accounting standards there are national and international accounting standards though the former could be seen as losing relevance because of the push for adoption of the latter. national accounting standards are set by the accounting standards board of each nation while international accounting standards are accounting standards issued by the international accounting standards board (iasb) and its predecessor, the international accounting standards committeeiasc (icaew, 2018; nwaubani & okoro, 2018). the international standards consists international financial reporting standard (ifrss) and international accounting standards (iass). ifrs are standards issued by iasb under the supervision of ifrs foundation after 2001 when iasc was reconstituted into iasb while ias were standards issued by iasc from 1973 to 2001.some iass have been amended for improvement or replaced by relevant ifrss while others are still in force. the international accounting standards are designed to apply to the general purpose financial statements of all profit-oriented entities including government business enterprises (deloitte global services limited deloitte/iasplus, 2020a). government business enterprises (gbes) are defined by the international public sector accounting standards board(ipsasb) as equally profit-oriented entities. as noted by the authors, general purpose financial statements are meant to meet the informational needs of shareholders and other enlarged stakeholders over the performance of the profit-oriented entities. the following are components of a complete set of financial risk and management reviews, 2020, 6(1): 52-78 58 © 2020 conscientia beam. all rights reserved. financial reportsstatement of financial position, a statement of comprehensive income, a statement of cash flows, a statement of changes in equity, a summary of accounting policies, and explanatory notes. the ifrs are a single set of high-quality global accounting standards for promoting transparency and consistency in financial reporting (ifrs foundation, 2020). the global business community had long expected the ifrs. therefore, concerted efforts are being made to promote their global adoption. the 2019 global status report by the international federation of accountants (ifac) on ifrs adoption documents that the adoption has been on the rise with over 95% of the 173 ifac member organizations having fully or partly adopted the standards (ifac, 2019). this view is also supported by the profiling of jurisdictions carried out by deloitte touche and tohmatsu in which ifrs adoption information was sort for in 175 jurisdictions. the outcome equally indicates a rise in the ifrs adoption (deloitte/iasplus, 2020b). 2.2.2. accounting standards in nigeria: sas and ifrs international financial reporting standards (ifrs) were officially adopted in nigeria on january 1, 2012 (nwaubani & okoro, 2018). the january 01, 2012 date was for banks and other significant public quoted entities while other entities were expected to follow suite on future dates (baba, 2013). specifically, other public interest entities and small and medium enterprises (smes‟) in nigeria had december 31, 2013 and december 31, 2014 respectively as their effective adoption dates. however, when a complete version of ifrs 9 – a standard on financial instruments (loan loss provisioning issues) was issued by international accounting standards board (iasb) on 24 july 2014, banks were required to adopt it mandatorily from january 01, 2018 (deloitte global services limited deloitte/iasplus, 2020a). the banks in nigeria also complied with the adoption date. the generally accepted accounting principles (gaap) in the country before the 2012 date were as specified in the statement of accounting standards (sas) which were issued by nigerian accounting standards board (nasb). the sas represented the nigerian national accounting standards. nasb was established in 1982 as the only recognized independent body in nigeria responsible for the development and issuance of statement of accounting standards covering all sectors of the economy and regulatory agencies of government (edogbanya & kamardin, 2014). nasb was initially a private initiative of institute of chartered accountants of nigeria(ican). however, from january 2012, nasb was replaced by financial reporting council of nigeria (frc) a federal government parastatal under the supervision of the federal ministry of industry, trade and investment. it was established by the financial reporting council of nigeria act, no. 6, 2011. one of the responsibilities of frc is development and publishing of accounting and financial reporting standards to be followed in the preparation of financial statements of public entities in nigeria (financial reporting council (frc) of nigeria-frc, 2020). 2.2.3. credit impairment recognition models of ias 39 and ifrs 9: the emergency of ifrs 9 the international accounting standards (ias) 39 financial instruments: recognition and measurement, was first issued in 1998 and was subjected to various amendments until april 2009 when it was amended for annual improvements to ifrs (deloitte global services limited-deloitte, 2017). ifrs 9 was later in november 2009 issued in part to replace ias 39 in phases until full replacement of ias 39 was achieved. the final and complete version of the ifrs 9 was issued in 2014 with a mandatory effective implementation date of january 01, 2018 (subject to local endorsement requirements). the implementation of the final version of the ifrs 9 marked an end to ias 39 as the final version supersedes all previous versions of the ifrs 9. the credit impairment recognition model under ias 39 until its final replacement was an „incurred loss model‟ which required that credit losses should not be recognized until a credit loss event occurred (ernest & young, 2014). the authors were of the opinion that the incurred loss model of ias 39 suggestively contributed to the delay in recognizing the credit losses which lead to the global financial crisis of 2007. the incurred loss model was considered as a serious setback for the ias39. as a result of this obvious lapse, there was global outcry for a review financial risk and management reviews, 2020, 6(1): 52-78 59 © 2020 conscientia beam. all rights reserved. of this standard. the g20 in playing a leading role tasked world accounting standard setting bodies to develop a single set of high-quality global standards. in answer to this clarion call, the international accounting standards board had to quickened its project to change ias 39 in phases (pricewaterhousecoopers -pwc, 2014). the impairment requirements of the final version of the ifrs 9 are based on a forward-looking “expected credit loss“(ecl) model. the “forward-looking “expected credit loss” model involves considerable manager‟ discretion over how loan loss provisioning would be affected by information on expected changes in macroeconomic conditions (pricewaterhousecoopers -pwc, 2014). the model has three stages: assets with12-months expected credit loss (ecl), assets with lifetime ecl without objective evidence of impairment and assets with lifetime ecl which have objective evidence of impairment at the reporting date. the allowance for considerable management discretion in deciding how the expected credit loss would be affected by macroeconomic conditions could be seen as still a window for earnings management by firms. 2.2.4. clarification on applicable international accounting standards for banks on official adoption date in nigeria for purposes of clarity, it is necessary for the author at this point to identify which international accounting standard was in force for banks on the january 01, 2012 date of official adoption in nigeria. this clarification is necessary because the term “international accounting standards” generally refers to both iass and ifrss. prior to the official adoption date in nigeria, the deposit money banks in nigeria were preparing their annual reports according to the requirements of nigerian gaap/sas and matters concerning risk asset impairment were addressed as required by sas10/cbn prudential guidelines (pwc, 2011). as reported by deloitte global services limited-deloitte (2017) the ifrs 9 issued in november, 2009 passed through phased amendments until the final version was achieved/issued in july 2014 with implementation date of january 01, 2018. this implies that on the january 01, 2012 date of mandatory adoption of ifrs in nigeria, ifrs 9 was not in force rather, the applicable international standard/ifrs on that date was ias39. in view of this fact, and the fundamental effect frame work adopted in this book, analysis herein is focused on sas10/cbn prudential guideline and ias 39. as already hinted credit loss provisioning under ias39 was based on “incurred loss‟ model while sas 10 prescribed “perceived loss” approach. the incurred loss approach leads to delay in recognizing and treatment of credit impairment and thus appears to become a legitimate tool for earnings management. this delay could be likened to postponement of the evil days. furthermore, it could be seen as a disregard for the age-long accounting principle of conservatism. the outcome of this manager‟s action gives rise to false higher reported earnings figure which otherwise would have been less if a conservative or more conservative approach had been followed. on the other hand, the sas10/cbn prudential guidelines required more conservative approach as they incorporated and treated informed-anticipated impairments. this approach was most likely to produce lower earnings but of improved quality. the lower earnings stems from early recognition of credit impairment and suspension of interest on subsequent bad and doubtful loans. it may be noted that apart from ias 39 and ifrs 9, there are other international standards either as ias or ifrs applicable to the banks. some of them include ifrs 1-for first time adoption, ias 1-for presentation of financial statements, ifrs 3-for business combinations, ifrs 7for financial instruments disclosures, ias 7 for statement of cash flow among others. 2.3. theoretical framework the theoretical framework of this study is anchored on the agency theory and theory of the firm. 2.3.1. the agency theory the agency theory is credited to stephen ross and barry mitnick who published their works in 1973 (mitnick, 2006; nwaubani, 2019). as mitnick (2006) put it “the first scholars to propose, explicitly, that a theory of agency be created, and to actually begin its creation, were stephen ross and barry mitnick, independently and roughly financial risk and management reviews, 2020, 6(1): 52-78 60 © 2020 conscientia beam. all rights reserved. concurrently”. ross is said to have originated the economic theory of agency while mitnick is the first to propound the institutional aspect of agency theory. however, the basic concepts in the two approaches are considered similar. some authorities such as jensen and meckling (1976) and fama (1980) have also been credited with doing pioneering work on some aspects of the agency theory particularly in the area of conflict of interests in relation to the modern firm (daly, 2015). the agency theory focuses on the nature of the principal-agent relationship, the rights and duties of the parties involved, the agency problems and its mitigants using regulations, various corporate governance practices and observations aimed at controlling decisions and actions of the agents in the modern firm (nwaubani, 2019). the thrust of the agency theory is the problem of conflicting interests among the parties in the relationship/contract (daly, 2015). with respect to the modern firm, the directors and managers are the agents of the shareholderstheir principal. the divergence of interests between the principal (shareholders) and the agents (directors and managers of the firms) is known as the agency problem which makes it necessary for the shareholders to adopt ways of monitoring the mangers and motivating them towards maximizing interests of the shareholders. many approaches open to the firms/owners towards monitoring the interests of directors/managers include among others, adoption and observation of national corporate governance codes, adoption and implementation of national and international accounting standards such as the international financial reporting standards (ifrs) as made mandatory by legislation. these actions attract agency costs to the firm. the agency problem tends to conflict with objective decisions that are in the best interest of the shareholders and other stakeholders because of likely personal interests of the agents. the agency problems are integral part of the agency theory which in turn intertwined with the firm theory. the agency theory is relevant to this study since the banks are typical modern firms with the owners/shareholders being clearly separated from the directors/managers who handle the daily running of the banks. with the management being handled by managers separate from the shareholders, principal-agent relationship is established with attendant agency problems. mandatory adoption and implementation of international financial reporting standards (ifrs) is obviously one of the ways the shareholders could mitigate divergent activities of the managers in areas of earnings management via loan loss provisioning. ifrs standards promote transparency by improving the international comparability and quality of financial statements (ifrs foundation, 2020). equally, the ifrs adoption could be employed by managers(agents to exploit the allowable discretions to drive their interest through management of earnings in order for them to earn higher performance bonuses to the detriment of the shareholders. 2.3.2. the firm theory the firm theory on the other hand, could be considered to involve a number of economic theories which explain and predict the nature of the firm, its existence, behavior, structure, and relationship with all stakeholders and the market (nwaubani, 2019). the traditional firm is a single business entity whose entire operations are carried out by an entrepreneur with profit maximization as the main objective (jhingan & stephen, 2009). it measures profit as the difference between a firm‟s total revenue and total cost and maintains that for the objective of profit maximization to be realized, the firm is expected to maximize its revenues and minimize or stabilize its costs. the traditional firm is in contrast to the modern firms which are characterized by varied goals, separation of ownership from management, complex structures and stakeholders and naturally corporate politics (nwaubani, 2019). modern firms are run by managers/directors while shareholders are the owners with separate roles and motives from those of the managers. one of the key originators of the neo-classical firm theory is ronald coase who propounded the transaction cost theory of the firm (teer, 2003). according to ronald coase, people are motivated to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm. transaction cost is the cost of providing for some good or https://en.wikipedia.org/wiki/ronald_coase https://en.wikipedia.org/wiki/transaction_cost financial risk and management reviews, 2020, 6(1): 52-78 61 © 2020 conscientia beam. all rights reserved. service through the market mechanism rather than having it provided from within the firm. the need for a rethink of the neo-classical/ traditional firm theory was supported by the empirical studies of adolf berle and gardiner means, who observed that separation of ownership from control was a new feature of large american corporations then (cheffins, 2018; cheffins & bank, 2009). in the 1960s the profit maximization view of the neo-classical/traditional theory of the firm faced stiff challenge from alternatives theories of the firm notably, the managerial and behavioral theories. the managerial theorists consider that managers would seek to maximize their own interestssalary, prestige, status, power, job security, sales growth at the expense of the owners of the firm who are separate from the mangers. such actions of the mangers would have implications for firm behavior in contrast to profit-maximizing goal. some notable managerial theories of the firm include the theories developed by baumol (1959); baumol (1962); marris (1964) and williamson (1964). the behavioral theories of the firm just as their managerial counterparts, faulted the neoclassical theory of the firm assumption of profit maximization as the main motive for the existence of the firm. the thrust of the behavioral theories is the explanation of how wide range of decisions are taken within the firm and the outcomes of such decisions in terms of contributions to value added among others (todeva, 2007). the decisions are influenced by varied and conflicting interests which derive from ownership rights, responsibilities, control over resources and power among others. the rationality of the decisions is limited as the usual complexities and uncertainties under which firms operate constitute a barrier to the cognitive ability of the decision makers. therefore, the rationality of the decisions can be described as bounded (augier & prietula, 2007). key pioneers of the behavioral theories include (cyert & march, 1963; simon, 1955, 1956). both managerial and behavioral theories of the firm recognize the separation of ownership from control, complexities, varied interests and motives and conflict of interests and the principal-agency issues associated with the modern firm. the relevancy of the firm theory to this study derives from the fact that managers could in pursuit of their interests exploit some discretional aspects in the international financial reporting standards (ifrs) as it is adopted, to report low quality but high earnings which do not serve the interests of the shareholders in the long run. according to yahaya, kutigi, and mohammed (2015) empirical studies have documented that the extent of discretionary behavior by managers which give rise to earnings management depends on accounting regime (such as ifrs), the economic cycle, among others. equally, the mandatory adoption of the ifrs could limit the divergent activities of the managers and compel them to disclose more vital information about performance of the firm for the benefits of the owners. as noted by ifrs foundation (2020) ifrs standards strengthen accountability by reducing the information gap between shareholders and the managers/agents and providing information required to hold management to account. 2.4. review of empirical literature extensive research works have documented a growing gap between firms‟ market indicators and financial information, particularly reported earnings (lev, 2018). according to the author, reported earnings of most firms are no longer real. the author is basically, referring to earnings management and by extension, quality of accounting information. this is because level of earnings management is one of the criteria for measuring accounting quality (yahaya, yusuf, & dania, 2015). also according to kouki (2018) earnings management is seen by several studies as a measure of the accounting quality. in this empirical review, an attempt is made to bring to the fore the empirical views of previous researchers on the influence of ifrs adoption on earnings management and earnings quality in banks. the empirical review is categorized into two: review from within nigeria and review from other countries across the world. in both categories, the empirical evidence of the trend of the influence of ifrs adoption on earning management is provided. the trend gives an insight into how earnings management has https://en.wikipedia.org/wiki/adolf_berle https://en.wikipedia.org/wiki/gardiner_means https://en.wikipedia.org/wiki/gardiner_means financial risk and management reviews, 2020, 6(1): 52-78 62 © 2020 conscientia beam. all rights reserved. affected earnings quality and hence quality of accounting information as a result of ifrs adoption by the banking sector. 2.4.1. empirical review from nigeria dang, zubairu, and ame (2018) examined the effect of mandatory ifrs adoption on accrual-based earnings management / quality of financial reporting of deposit money banks (dmbs) in nigeria using differenceindifference (d-in-d) design. panel data regression approach was used in analyzing the data collected from secondary sources. the finding showed that mandatory ifrs adoption has no significant effect on accrual-based earnings management of dmbs in nigeria. elosiuba and okoye (2018) examined the effect of the ifrs adoption on performance of banks listed on the nigerian stock exchange. secondary data on eight selected listed banks were collected for the period 2011 and 2012 representing gaap and ifrs adoption periods respectively. the data covered four performance indices namely profitability liquidity, loan grants and market value. gray comparability index for the banks was computed for each of the banks on each variable. then the one sample test was employed for the analyses while the t-statistic was used to test the hypotheses. the results showed that mean values for profitability, liquidity and market value are greater in the ngaap era of 2011 than in the ifrs period of 2012, implying that the ifrs adoption has negative impact on bank profitability and liquidity. with respect to the profitability, the outcome could be seen to imply that the ifrs adoption resulted in reduced earnings management hence lower profitability. uwuigbe et al. (2017) examined the ability of current earnings in predicting future earnings of listed nigerian banks in nse after the adoption of ifrs. secondary data on 11 listed banks in nigeria were collected for the period 2010-2014 with pre-adoption period as 2010 -2011 and post-adoption period as 2013 -2014. the data were analyzed using panel data regression with the aid of statistical packages for social sciences (spss 21).finding indicated a reduction in the ability of current year earnings to predict future earnings after ifrs adoption. the reduction implies increased earnings management in the post ifrs adoption which tends to align with the view of lev (2018). eneje, obidike, and chukwujekwu (2016) examined the effect of ifrs adoption on the mechanics of loan loss provisioning for nigerian banks. the authors analyzed how the change in the recognition and measurement of loan loss provision affects the accounting quality of the banks. secondary data obtained from the deposit money banks‟ annual reports covering the 2005 to 2015 were used. descriptive statistics and the ordinary least square multiple regression approach were used to analyze the data. it was found that the limitation to recognize only incurred losses under ias 39 significantly reduces income smoothing thereby improving earnings quality but delays recognition of future expected losses thus reducing asset quality. hassan (2015) examined the effect of ifrs adoption on earnings management of deposited money banks in nigeria via selected firm attributes. balanced panel data from a sample of 14 listed banks covering a period six years of 2008 to 2013 were used. the six years was categorized into pre and post adoption years. multiple regression approach with chung et al. (2005) model for estimating discretionary component of loan loss provisions was adopted in analyzing the data. the outcome showed that earnings quality of listed deposit money banks in nigeria in the post ifrs adoption period recorded significant improvement when compared to pre adoption era along the selected firm-attributes (leverage, profitability, liquidity, bank size and bank growth). the improved earnings quality in post adoption year translates to reduced earnings management. yahaya, et al. (2015) examined the effect of ifrs adoption on earnings management behavior of quoted deposit money banks in nigeria. specifically the study investigated how the change in the recognition and measurement of banks‟ loan loss provision, affects earnings management behavior. secondary data on a sample of 15 listed deposit money banks for the periods 2004 to 2008 (before voluntary adoption) and 2009 to 2013 ( post adoption-voluntary and mandatory adoption) were used. the data were analyzed employing multiple regression in which ifrs adoption was captured as 1. findings financial risk and management reviews, 2020, 6(1): 52-78 63 © 2020 conscientia beam. all rights reserved. revealed that non-performing loans remained relatively stable over the adoption period with slight rise in earnings. these findings are indication that earnings management is not significantly affected by the ifrs adoption. abata (2015) evaluated the impact of ifrs adoption on financial reporting practice in the nigerian banking sector. the study employed comparative index approach for the analysis and thereafter used t-test for testing for significant difference. the sample consisted of 14 listed banks and secondary data were used. the outcomes confirmed that ifrs adoption has positively and significantly impacted on financial reporting in the nigerian banking industry. the significant positive effect on financial reporting indicates that the adoption improves earnings quality and reduced earnings management. yahaya, et al. (2015) examined the effect of the adoption of the international financial reporting standards on the financial statements of listed deposit money banks in nigeria. ex-post facto design was employed -comparing the period 2004 to 2008 and 2009 to 2013. the study made use of logistic regression with dummy variable as the dependent variable while the independent variable were: profitability growth, leverage, liquidity, size, investment and age. the result indicated that ifrs adoption has positively impacted the overall financial performance including earnings quality of banks in nigeria. 2.4.2. review from outside nigeria in latin america, mongrut and winkelried (2019) examined the effect of earnings management in the six largest latin american economies argentina, brazil, chile, colombia, mexico, and peru. panel data on 871 listed firms (including banks) for the period 2000 to 2016 and extracted from thomson reuters eikon database were used. the firms operated in 18 of the 20 north american industry classification system (naics) sectors. an approach proposed by kothari, leone, and wasley (2005) which was a further modified jones. (1991) model was adopted to analyze the data. the findings showed inter-alia that ifrs adoption unintendedly increases earnings management (opacity). increased earnings management documented by mongrut and winkelried (2019) is constituent with the opinion of lev (2018). in canada however, no impact was recorded as said (2019) evaluated the impact of the adoption of ifrs on earnings management in canadian publicly listed firms (inclusive of the banking sector). panel data of 791 firms with 19,869 firm-year observations from 2000 to 2018 were utilized. the modified jones model was employed in analyzing the data. the findings suggested that ifrs adoption in canada has no impact on earnings management in publicly listed firms. ceccobelli and giosi (2019) investigated the purposes of earnings management in the banking industry via loan loss provisions. secondary data from a sample of 156 banks from 19 european countries under the single supervisory mechanism (ssm) for the period 2006-2016 were used. the data were analyzed using regression model. specifically, the banks were tested for income smoothing, capital management, and signaling purposes. findings strongly support income smoothing and signaling purpose. however, findings showed no evidence for capital management purpose. also the result revealed that non-discretionary components of loan loss provisions (basically non-performing loans) did not play major role during the global financial crisis. kouki (2018) examined the effect of investor protection on earnings management before and after ifrs adoption. a sample of 106 companies listed on germany, france and belgium stock markets for the pre-ifrs (2000-2004) and post-ifrs (2006-2011) periods was used. kothari et al. (2005) approach one of the modified versions of the jones. (1991) model was adopted for the analysis. findings revealed that ifrs adoption and investor protection significantly increased earnings management. malofeeva (2018) examined the effect of international financial reporting standards (ifrs) adoption on earnings management in russia. a sample consisting 361 firm-year observations of russian public firms from various industries (including banks) for the period 2010 to 2015 was used. modified jones model (dechow, sloan, & sweeney, 1995) focusing on discretionary accruals was employed to analyze the data. results showed among others that ifrs adoption increases earnings management. sellami and slimi (2016) investigated the effect of mandatory adoption of ifrs on earnings management in south african companies. a sample of 276 firm-year observations of https://www.sciencedirect.com/topics/economics-econometrics-and-finance/latin-american-economy financial risk and management reviews, 2020, 6(1): 52-78 64 © 2020 conscientia beam. all rights reserved. 46 firms drawn from the 413 south african listed companies was used. a regression model was employed to analyze the data. specifically, the study examined the relationship between mandatory adoption of ifrs, discretionary accruals and corporate governance mechanisms after controlling for other some factors that could influence earnings management. results indicated that mandatory adoption of ifrs in south africa lowers earnings management and hence improves the quality of accounting information. trabelsi and trabelsi (2014) examined the value relevance of accounting information for the banks listed in the dubai financial market for the period 2008 2013. empirical tests were based on the return and the price models of easton and harris (1991) and feltham and ohlson (1995). a sample comprising 12 banks listed on dubai financial market from january 2008 to march 2013 with 214 firm-quarterly observations was used. overall, the results showed that accounting information is associated with market valuation. the earnings are positively and significantly related to stock prices and stock returns implying reduced gap between firms‟ market indicators and financial information. this translates to reduced earnings management in the post adoption era. 3. research methodology the research design adopted for this study is ex-post facto since the examination focuses on what has happened before and after the adoption of ifrs by the nigerian banking sector. secondary data on nine listed deposit money banks on the nigerian stock exchange were used. the banks were selected through purposive sampling technique and consist those banks whose annual financial reports for 2011 and 2012 were available and contained figures under nigerian gaap/sas ( december 2011) and ifrs-equivalent of the 2011 figures (as at january 01, 2012) in the 2012 financial report. the 2011 and 2012 annual reports provided the required data which were analyzed using descriptive statistics and paired student t-test with the aid of spss (20). 3.1. the selected variables approximating earnings management the variables are carefully selected firm-level performance indicators which are usually affected or represented in discretionary accruals. a number of empirical studies have used discretionary accruals to represent earnings management (dechow et al., 1995; hassan, 2015; kothari et al., 2005; kouki, 2018). also in saidu, ocheni, and muktar (2017) loan loss provision was used as a proxy for earnings management. the variables are: average profit after tax (apat), average net interest income (anii) and average ratio of loan loss provision (llp/tla). the indicators are grouped under nigerian gaap (sas) and ifrs (ias). the nine selected banks are: access bank plc, eco bank plc, fidelity bank plc, first bank of nigeria plc, first city monument bank plc, guaranty trust bank plc, stanbic ibtc bank plc, united bank for africa plc, and zenith bank plc. 3.2. analytical procedure and model specification the analytical procedure followed in this book involved computation of the means of the various performance indicators under the nigerian gaap/sas and ifrs-equivalent (of the sas) and testing for significant difference for each variable employing paired student t-test at 5% significance level. descriptive statistics was also employed and further analysis carried out on the performance of each bank along the three selected performance indicators. the effect of the ifrs adoption is measured by the difference between the mean of each variable under the nigerian gaap/sas and ifrsequivalent. this view is supported by yahaya, et al. (2015) who suggest that the extent of discretionary behavior by managers which gives rise to earnings management depends on accounting regime (such as ifrs) among others. the model adopted in this book is a modified version of a paired student t-test model for unequal variances followed by nwaubani. and orikara (2019) and it is given as: is given as financial risk and management reviews, 2020, 6(1): 52-78 65 © 2020 conscientia beam. all rights reserved. where: t = the t-test statistic. s = the standard deviation for the paired data. n = the sample size/number of years. and ȳ are the respective means of the pair of variables in x and y categories which are ngaap/sas data before ifrs adoption and ifrs equivalent data as at the date of adoption. the justification for the use of 2011/sas data and their translated ifrs-equivalent is that this approach tends to eliminate the effects of concomitant factors such as socio-macroeconomic variables which also would influence performance of the deposit money banks in the post adoption era. more importantly, the actions or inaction of managers in the post adoption era (from 2012 financial report) such as taking advantage of some of the prescribed accounting treatment of some items by the ifrs standards to manipulate earnings were eliminated. the avoidance of such actions was achieved because translation of the 2011 sas (ngaap) accounting figures into their ifrs– equivalents was done by a software. this approach therefore, aims at isolating and showcasing the real effect of the ifrs adoption reasonably attributable to the fundamental differences between sas/cbn prudential guidelines and ifrs (ias). this fundamental framework follows the approach first established and used in nwaubani and okoro (2018). this present work is the first to adopt the fundamental framework in a study involving earnings management. 3.3. measurement of the variables the measurement of the selected variables are shown in table 1 below. table-1. measurement of variables of the study. s/n variable measurement/proxied as: a priori expectation 1 average profit after tax-apat profit before tax less total tax payable for the year of each bank or as given in the annual report. +/ 2 ave net interest income-anii gross interest income less interest expenses for the year for each bank or as given in the annual report. +/ 3 ratio of loan loss provision to total loans (llp/tl loan loss provision divided by total loans & advances of each bank or as given in the annual report. +/ 4. data presentation table-2. average profit after tax for the nine selected banks (in n‟ billions). bank sas a ifrs b change in pat( a-b) %change access 13.70 5.20 8.50 62.04% ecobank -2.30 19.00 -21.30 926.09% fcmb -11.60 11.00 -22.60 194.83% fidelity 6.00 4.00 2.00 33.33% fbn 47.50 23.10 24.40 51.37% gtb 51.70 51.60 0.10 0.19% stanbicibtc 6.50 6.60 -0.10 -1.54% uba -16.40 -8.00 8.40 51.22% zenith 37.14 48.70 -11.56 -31.13% average 14.69bn 17.91bn -3.22 21.90% table 2 above indicates that average profit after tax is higher under ifrs. one of the likely factors responsible for this outcome could be traced to “incurred loss” model in ias 39 (ifrs) which required that credit loss should not be recognized until a credit loss event had occurred. the model delayed recognition of credit impairment financial risk and management reviews, 2020, 6(1): 52-78 66 © 2020 conscientia beam. all rights reserved. leading to under provisioning and less charge to profit. thus, it seems earnings management is increased under ias/ifrs. figure-1. graph of the average profit after tax of the selected banks under sas and ifrs with differences in means. the movements in table 2 are graphically represented as in figure 1 above. the figure 1 is further analyzed under discussion of findings. table-3. average net interest income (anii) of the selected nine banks( in n‟ billions). bank sas a ifrs b change in nii(a-b) %change access 48.00 51.00 -3.00 -6.25% ecobank 28.20 31.30 3.10 -11.00% fcmb 28.10 31.30 3.20 -11.39% fidelity 29.20 30.50 -1.30 -4.45% fbn 178.00 167.00 11.00 6.17% gtb 99.00 94.00 5.00 5.05% stanbicibtc 29.80 27.60 2.20 7.38% uba 62.00 56.00 6.00 9.67% zenith 118.00 122.00 -4.00 -3.38% average 68.92bn 67.86bn 1.06 1.53% table 3 shows that the average net interest income of the banks is higher under the nigerian gaap (ngaap). one of the explanations for this position may derive from level of discretion allowed the manger under ngaap in applying his professional judgment in classifying loans for the purpose of interest income suspension among others. with the discretion, the manager could favor low interest income suspension hence higher interest income. manager‟s discretion under ias 39 (which was the operative ifrs on the date of mandatory ifrs adoption in nigeria) was much more curtailed. the lower average net interest income shown under ifrs suggests lower earnings management under ifrs regime. the graphical representation of table 3 is given in figure 2 below and is discussed further under findings. financial risk and management reviews, 2020, 6(1): 52-78 67 © 2020 conscientia beam. all rights reserved. figure-2. net interest income under sas and ifrs with differences in the means. table-4. average ratio of loan loss provisions to total loans and advances (allp/tl)of the banks. bank sas -a ifrs-b change( a-b) %change access 2.95 3.90 -0.95 -32.20% ecobank 0.02 3.72 3.70 -18,500% fcmb 12.70 6.70 6.00 47.24% fidelity 1.70 5.80 -4.10 -241.17% fbn 2.50 2.80 -0.30 12.00% gtb 2.80 2.80 0.00 0.00% stanbicibtc 1.60 1.30 0.30 -18.75% uba 3.00 1.50 1.50 50.00% zenith 3.50 1.90 1.60 -45.71% average 3.42% 3.38% 0.04 1.16% table 4 presents ratio of loan loss provisions to total loans and advances (ll/tl) of the selected banks under sas and ifrs/ias39. the ratio of loan loss provisions is one of the instruments for earnings management (dechow et al., 1995; hassan, 2015; kothari et al., 2005; kouki, 2018). under the “incurred loss” model in ias 39/ifrs managers could provide for credit impairment only when a credit-loss event had occurred. this requirement checkmated the ability of a manager to engage in earnings management exploiting loan loss provisioning avenue. on the other hand, the “perceived loss” model prescribed by sas/ngaap provided the managers the opportunity to bring their personal judgment to bear on recognition and treatment of credit impairment. this situation suggests presence of earnings management under the sas and less under ifrs. however, this would be confirm by the hypothesis testing. financial risk and management reviews, 2020, 6(1): 52-78 68 © 2020 conscientia beam. all rights reserved. figure-3. ratio of loan loss provisions under sas and ifrs with differences in the means. 4.1. results of the paired student t-test table-5. profit after tax result. t-testprofit after tax; pat paired samples statistics mean n std. deviation std. error mean pair 1 sas 14.6933 9 25.10036 8.36679 ifrs 17.9111 9 20.35064 6.78355 paired samples correlations n correlation sig. pat sas & ifrs 9 .808 .008 paired samples test paired differences t df sig. (2tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper pat sas ifrs -3.21778 14.77788 4.92596 -14.57706 8.14151 -.653 8 .532 from the result of the paired t-test on table 5 above, the ifrs adoption gives higher profit after tax with a mean of -3.21778 when compared with ngaap. this implies presence of higher earnings management. however, the increase is insignificant with p-value of 0.532. detailed analysis is given under discussion of finding below. financial risk and management reviews, 2020, 6(1): 52-78 69 © 2020 conscientia beam. all rights reserved. table-6. net interest income result. t-testnet interest income; nii paired samples statistics mean n std. deviation std. error mean nii sas 68.9222 9 52.59524 17.53175 ifrs 67.8556 9 49.44442 16.48147 paired samples correlations n correlation sig. nii sas & ifrs 9 .997 .000 paired samples test paired differences t df sig. (2tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper nii sas – ifrs 1.06667 5.28134 1.76045 -2.99293 5.12626 .606 8 .561 from the result of the paired t-test on table 6 above, the ifrs adoption results in lower net interest income with a positive a mean of 1.0666 when compared with ngaap. this suggests lower earnings management. however, the reduction is not significant with p-value of 0.561. further analysis is given under discussion of findings below. table-7. loan loss provision result. paired samples statistics mean n std. deviation std. error mean llp sas 3.4189 9 3.63290 1.21097 ifrs 3.3800 9 1.87045 .62348 paired samples correlations n correlation sig. llp sas & ifrs 9 .563 .115 paired samples test paired differences t df sig. (2tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper llp sas – ifrs .03889 3.00788 1.00263 -2.27317 2.35095 .039 8 .970 from the result of the paired t-test on table 7 above, the ifrs adoption results in slightly lower loan loss provisioning with a positive mean of 0.3889 when compared with ngaap. this implies higher earnings management. however, the increase is highly insignificant with p-value of 0.970. detailed analysis is given under discussion of results below. the table below summaries the analysis and the results of the paired student t-test at 5% significance level. financial risk and management reviews, 2020, 6(1): 52-78 70 © 2020 conscientia beam. all rights reserved. table-8. summary of the results of the paired student t-test (aggregate means). variables under sas mean under ifrs mean change in mean (ifrs sas) % change in mean std deviation sig.(2 tail) pvalue correlation(r) sig(2tail)/pvvaluecorrelation profit after tax (apat) 14.69 17.91 -3.22. -21.9% 14.7778 0.532 0.808 0.008 net interest income(anii) 68.92 67.86 1.06 1.53% 5.2813 0.561 0.997 0.000 ratio of loan loss provision to total loans (llp/tla) 3.42% 3.38% 0.04 1.16% 3.007 0.970 0.563 0.115 5. discussion of findings as the summarized result of the paired student t-test on table 8 above shows, the ifrs adoption gives rise to a lower loan loss provision which contributed to higher profit after tax /earnings with low earnings quality. this implies that ifrs as represented by ias 39 increases earnings management and lowers earnings quality. the earnings quality is considered low because of the under-provisioning which suggests that the higher reported earnings are not real as some charges to the earnings have been ignored. also figure 3 above (correlation graph of llp/tla under sas and ifrs)reproduced below, indicates the sharp difference between the “perceived loss” model of ngaap/sas and the “incurred loss” approach of the ias39/ifrs with regards to llp. the sas though, gave a lot of discretion to the managers on issues of loan loss provisioning, the “perceived loss” approach demanded that the managers would have to be proactive unlike in the “incurred loss” model of ias 39 in which they had to wait until a credit loss event had occurred. the inherent delay in ias 39/ifrs in recognizing credit impairment was fingered as the main culprit behind the 2007/2009 global financial meltdown (ernest & young, 2014). the sharp divide between the two accounting regimes in respect of loan loss provisioning is portrayed by the insignificant positive relationship (p-value of 0.115) between them as displayed in figure 5 reproduced below. in the figure 3, the most pointed curve (the first curve) is the sas curve while the second curve (a bit bell-shaped) is the ifrs curve. below the ifrs curve is the graph of the differences in means of the llp/tla under the two regimes. this is a sharp contrast with regard to the correlation between sas and ifrs among the other two variables with (p-values of 0.008-apat and 0.000-anii). this insignificant correlation between the loan loss provisioning under the sas and ifrs could also be linked to the fact that as at january 01, 2012 date of mandatory ifrs adoption in nigeria, the sas accounting figures for 2011 were translated to their ifrs-equivalents by use of computer software. the software was expected to have followed the ifrs /ias incurred loss model strictly being guided by the procedures set out to be followed in first time adoption as in ifrs 1. this fact minimized managers‟ discretion/intervention in the translation process and thus in the results obtained as ifrs-equivalent figures. this is the essence of the fundamental effect framework adopted in this study to showcase the effect of the adoption on earnings management and earnings quality traceable to the fundamental differences between the two accounting regimes. however, looking at the closeness of the means of the ratio of loan loss provisioning under the two regimes with just 0.04 difference in means, the under provisioning/earnings management is not considered significant. the paired student t-test result on the llp confirms the insignificant increase in earnings management under ifrs with a related p-value of 0.9700. with respect to profit after tax variable, table 8 indicates that apat rose from about n15billion under ngaap to n18billion under ifrs. this implies increased presence of earnings management and by extension lower earnings quality. however, the paired student t-test result also on table 8 shows that the increased earnings financial risk and management reviews, 2020, 6(1): 52-78 71 © 2020 conscientia beam. all rights reserved. management is not significant with p-value of 0.532. thus, the ifrs adoption does not have significant effect on earnings management. the finding in this work confirming that ifrs/ias 39 adoption has insignificant effect(increase) on earnings management is consistent with the findings in dang et al. (2018); yahaya, et al. (2015) all in nigerian but contradicts the outcomes in ceccobelli and giosi (2019) -european countries, mongrut and winkelried (2019) latin america, kouki (2018) -germany, belgium and france, malofeeva (2018)-rusia, uwuigbe. et al. (2017) nigeria where the studies documented significant increase in earnings management following ifrs adoption. again the rise in earnings management revealed with respect to llp and pat in this work (though insignificant), conflicts with the results in eneje et al. (2016) -nigeria, sellami and slimi (2016) -south africa, hassan (2015) nigeria, mechelli and cimini (2013) -eu, where ifrs adoption resulted in significant reduction in earnings management and by extension improved earnings quality. figure-5. reproduced. in order to discuss the effect of the ifrs adoption on net interest income and its implications on earnings management, we have to refer to the table 8 again. the table depicts that the ifrs adoption results in lower net interest income. the lower net interest income may be explained by the fact that ias 39(which was the operative ifrs as at the adoption date in nigeria) stipulated “incurred loss” model” while the nigerian gaap prescribed “perceived loss” model. the “perceived loss” model allowed the managers considerable discretion in applying their personal professional judgment in classifying loans for the purpose of interest income suspension among others. with enough discretion at their disposal, the managers could favor low interest income suspension in order to report higher earnings. manager‟s discretion under ias 39 was much more restricted because of the “incurred loss” requirement. the lower average net interest income shown under ifrs implies lower earnings management and improved earnings and earnings quality. however, the hypothesis testing indicates an insignificant reduced earnings management and insignificantly improved earnings quality with p-value of 0.561 at 5% significance level. the insignificant reduced earnings management is also implied from figure 2 (correlation graph of nii under sas and ifrs) reproduced below. from the figure 2 below, the correlation between sas and ifrs figures is positive and almost perfect with r-value of 0.997 and p-value of 0.000. also the curve of the difference in the means of the nii under the two regimes (the lower curve) is more of flat. these features imply that the factors which financial risk and management reviews, 2020, 6(1): 52-78 72 © 2020 conscientia beam. all rights reserved. shaped the net interest income were almost the same under the two accounting regimes when viewed from the industry average perspective. this outcome of insignificant reduction in earnings management and insignificantly improved earnings quality under ifrs agrees with the findings in dang et al. (2018); yahaya, et al. (2015). it also aligns with the general result of lower earnings management as recorded in eneje et al. (2016); sellami and slimi (2016); hassan (2015); mechelli and cimini (2013). equally, the lower earnings management seen in nii variable conflicts with the rise in earnings management observed in pat. figure-2. reproduced. it may be noted that ias 39 had been fully replaced by ifrs 9 in 2018 which was the effective implementation date for the latter. ifrs 9 stipulates forward-looking “expected loss” model which is close to the “perceived loss” approach of ngaap but is much more elaborate and objective. comparing ngaap and ifrs /ifrs9 may produce a different result from the findings recorded in this present work. though the analytical procedure followed in this work focuses on the average industry performance, a closer look at table 2– 4 throws more light on the performance of the selected individual banks in terms of earnings management and earnings quality. from table 2 (reproduced below), it could be seen that ecobank posted a loss of n2.3billion(nigerian naira) under ngaap/sas in its 2011 financial year. however, when the loss was translated to ifrs (according to ias 39), it turned out to be a huge profit of n19.billion 296% change. based on the descriptive statistics, this scenario suggests that the ifrs as seen from ias 39, significantly increases earnings management and reduces earnings quality. also from the same table 2, fcmb made a loss of n11.6billion under ngaap in 2011 but when the loss was translated under ifrs, it became n11.00billion profit194% change. this is another indication that ifrs (as ias39) promotes earnings management based on descriptive statistics. the position of the two individual banks under ifrs lends support to the findings with respect to apat and to the findings in ceccobelli and giosi (2019) -european countries, mongrut and winkelried (2019) -latin america, kouki (2018) -germany, belgium and france, malofeeva (2018) -rusia, uwuigbe. et al. (2017) -nigeria where the empirical findings revealed significant increase in earnings management following ifrs adoption. to assess presence of earnings management in terms of net interest income (nii) of the individual banks, we refer to table 3 (reproduced below). the table indicates that uba reported nii of n62.8billion under ngaap in 2011. however, when the amount was translated to ifrs according to ias38/ifrs, it became n56billionabout 10% fall. also, stanbicibtc and first bank nigeria achieved nii of n29.8billion and n178.00billion respectively under ngaap in 2011. however, when the figures were translated to ifrs according to ias 38/ifrs, the resulting nii became n27.6billion(7.7% decrease) and n167.00billion( 6% fall). financial risk and management reviews, 2020, 6(1): 52-78 73 © 2020 conscientia beam. all rights reserved. reproduced table-2. average profit after tax for the nine selected banks (in n‟ billions). bank sas a ifrs b change in pat( a-b) %change access 13.70 5.20 8.50 62.04% ecobank -2.30 19.00 -21.30 926.09% fcmb -11.60 11.00 -22.60 194.83% fidelity 6.00 4.00 2.00 33.33% fbn 47.50 23.10 24.40 51.37% gtb 51.70 51.60 0.10 0.19% stanbicibtc 6.50 6.60 -0.10 -1.54% uba -16.40 -8.00 8.40 51.22% zenith 37.14 48.70 -11.56 -31.13% average 14.69bn 17.91bn -3.22 21.90% based on these (descriptive) statistics, the nii perspective of the three individual banks suggests that ifrs (as ias 39) reduces earnings management while improving earnings quality. this is consistent the result of the t-test on nii which according to table 8 shows that based on average industry nii, ifrs adoption results in reduced earnings management and increases earnings quality. however, the reduction is statistically insignificant reproduced table-3. average net interest income (anii) of the selected nine banks ( in n‟ billions). bank sas a ifrs b change in nii(a-b) %change access 48.00 51.00 -3.00 -6.25% ecobank 28.20 31.30 3.10 -11.00% fcmb 28.10 31.30 3.20 -11.39% fidelity 29.20 30.50 -1.30 -4.45% fbn 178.00 167.00 11.00 6.17% gtb 99.00 94.00 5.00 5.05% stanbicibtc 29.80 27.60 2.20 7.33% uba 62.00 56.00 6.00 9.67% zenith 118.00 122.00 -4.00 -3.38% average 68.92 67.86 1.06 1.53% in terms of ratio of loan loss provisioning( llp), table 4 (reproduced below) suggests that managers had more opportunity to manipulate earnings through llp under ngaap than under ifrs(ias 38). for instance ecobank under ngaap/sas provided 0.02% of its total loan and advances as its loan loss provision in 2011. but when this was translated to ifrs(ias 39), it became 3.72 (18,500% rise). also, fidelity provided 1.7% under sas but this became 5.8 (241% increase) under ifrs. the positions of the two banks show that, in terms of loan loss provisioning, ifrs(ias 39) significantly reduces earnings management and enhances earnings quality. this result based on the descriptive statistics on the table 4 (reproduced below) contradicts the t-test‟s result on table 8 which confirms that based on average industry performance, ifrs adoption leads to a rise in earnings management. however, this effect is statistically insignificant. reproduced table-4. average ratio of loan loss provisions to total loans and advances (allp/tl)-of the banks. bank sas -a ifrs-b change( a-b) %change access 2.95 3.90 -0.95 -32.20% ecobank 0.02 3.72 3.70 -28,500% fcmb 12.70 6.70 6.00 47.24% fidelity 1.70 5.80 -4.10 241.17% fbn 2.50 2.80 -0.30 12.00% gtb 2.80 2.80 0.00 0.00% stanbicibtc 1.60 1.30 0.30 -18.75% uba 3.00 1.50 1.50 50.00% zenith 3.50 1.90 1.60 -45.71% average 3.42 3.38 0.04 1.16% financial risk and management reviews, 2020, 6(1): 52-78 74 © 2020 conscientia beam. all rights reserved. 6. conclusion and recommendations the main objective of this study is to examine the effect of ifrs adoption on earnings management and earnings quality in banks using fundamental effect framework. 6.1. conclusion based on the findings with respect to the average industry performance as it affects profit after tax and ratio of loan loss provision, ifrs adoption in nigeria results in increase earnings management and thus low earnings quality. however, when the average net interest income is considered, the ifrs adoption leads to reduced earnings management and thus improved earnings quality in the nigerian banking sector. in the two cases the effect is not significant fundamentally. it is therefore, concluded that though some individual banks recorded significant reduction in earnings management under ifrs, fundamentally, the ifrs adoption in nigeria has no significant effect on earnings management and earnings quality in the banking sector based on the reported average industry performance as at the date of the mandatory adoption in nigeria. 6.2. recommendations (i) ifrs foundation and the national reporting authorities in all the jurisdictions that adopt ifrs such as the financial reporting council of nigeria (frcn) should engage in a critical review of the procedures required to be followed in first-time adoption as set out in ifrs 1. this is to identify possible areas of amendment to ensure that the ifrs 1 is consistent with the objectives of other applicable ifrss for the banks. this recommendation is based on the finding that average industry ratio of loan loss provisioning is lower with higher profitability under ifrs and again a bank like fcmb recorded a much more lower ratiofrom 12.7% under ngaap to 6.7% under ifrs. specifically, fcmb reported profit after tax of n11billion from a loss of n11.6billion under ifrs while ecobank‟s profit jumped to n19billion from a loss of n2.3billion. (ii) the ifrs foundation and all the relevant reporting authorities as in (i) above should review all the iass still in force for amendments and possible replacement as ifrs proper. this recommendation is based on the finding that ias 39 increases earnings management and lower earnings quality. therefore, its review and replacement with ifrs 9 is justified. other iass still in force should be also be reviewed for improvement. (iii) there is need for ifrs foundation and the national reporting authorities in all the jurisdictions that adopt ifrs to monitor the implementation and application of ifrs 9 which is a replacement for ias39. this is because of the “forward -looking expectedcredit loss” model of the ifrs 9 which inevitably involves a manager‟s discretion. monitoring its implementation and subsequent application is to ensure that the manger‟s discretion is fairly objective. (iv) the financial reporting council of nigeria (frc) should engage the banks and central bank of nigeria in order to provide specific directives on areas of conflict between ifrs other existing regulations and laws in order to ensure coherence in the regulatory framework and promote effective implementation of the ifrs. (v) training and retraining of banks‟ staff particularly the accounting and internal control staff on the proper application of the ifrs requirements in order to reap the gains of the adoption. (vi) the individual banks whose performances in specific indicators result in significant earnings management and lower earnings quality under ifrs need to sincerely review their polices and procedures on the ifrs adoption. the review is to ensure that objective considerations are followed where manager‟s discretion is required in the application of the ifrs specifications. funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. financial risk and management reviews, 2020, 6(1): 52-78 75 © 2020 conscientia beam. all rights reserved. references abata, m. a. (2015). the impact of international financial reporting standards (ifrs) adoption on financial reporting practice in the nigerian banking sector. journal of policy and development studies, 289(1850), 1-16. akabom-ita, a. 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(2015). international financial reporting standards‟ adoption and financial statement e ffects: evidence from listed deposit money banks in nigeria. research journal of finance and accounting, 6(12), 107-122. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.cenbank.gov.gn/ http://www.cenbank.gov.gn/ http://www.investopedia.com/terms/e/earnings-management.asp 20 © 2022 conscientia beam. all rights reserved. does the business model increase bank stability? loan thi nguyet nguyen1 phuong thi lan tran2+ nguyet thi minh trinh3 anh quynh le4 1,2,3,4applied school of finance and banking, dai nam university, vietnam. 1email: loanntn@dainam.edu.vn tel: +84.977186893 2email: phuongtl@dainam.edu.vn tel: +84.389123898 3email: nguyetttm@dainam.edu.vn tel: +84.397966340 4email: anhlq@dainam.edu.vn tel: +84.838382185 (+ corresponding author) abstract article history received: 27 april 2022 revised: 17 june 2022 accepted: 30 april 2022 published: 14 july 2022 keywords business model bank risk bank stability non-performance loans. research on risk or sustainability in the banking system does play an important role in the banking industry, where competitiveness increases unceasingly. simultaneously, the trend of diversifying banks’ business models is becoming more popular. thus, this paper attempts to investigate the impact of business model diversification on bank risk and stability. the proxy of business models includes (1)non-net interest income; (2) trading income. the paper applied generalized least squares (gls) to conduct empirical research on 18 joint-stock commercial banks listed on the vietnam stock exchange from 2010 to 2019 (the gls with panel data). the results indicated the negative impact of non-net-interest income on bank stability. trading in foreign exchange, gold has no meaning for bank risk. the study offers some theoretical and practical implications for banks to control better risks based on new empirical findings. especially, the diversification of business models is ineffective, and banks need more suitable solutions. contribution/originality: this study has an important contribution as it shows that business model diversification is ineffective for banks in developing countries. therefore, this result has great significance in adjusting for profitable activities other than lending. 1. introduction the two-level banking system is organized in vietnam. the state bank of vietnam is responsible for implementing monetary policy, performing the function of inspection and state management of currency, banking activities, and foreign exchange; perform the functions of the central bank in terms of money issuance, banking of credit institutions, and provision of monetary services to the government. the second level includes commercial banks, cooperative banks, development banks, people’s credit funds, microfinance institutions, finance companies, finance leasing companies, and insurance companies. in 2021, the stock market witnessed a strong growth rate of 27 commercial banking stocks. to be considered the lifeblood of the economy, the bank has proven its performance when profits are still growing, despite the impact of the covid-19 epidemic. the restructuring, especially the digital transformation of the commercial banking system, is a matter of concern to policymakers, administrators, and investors, especially the ownership, size, and type of commercial bank. financial risk and management reviews 2022 vol. 8, no. 1, pp. 20-26. issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v8i1.3062 © 2022 conscientia beam. all rights reserved. https://orcid.org/0000-0002-5539-4786 https://orcid.org/0000-0001-7427-5662 https://orcid.org/0000-0002-8386-7456 https://orcid.org/0000-0002-6058-2538 mailto:loanntn@dainam.edu.vn mailto:phuongtl@dainam.edu.vn mailto:nguyetttm@dainam.edu.vn mailto:anhlq@dainam.edu.vn https://www.doi.org/10.18488/89.v8i1.3062 financial risk and management reviews, 2022, 8(1): 20-26 21 © 2022 conscientia beam. all rights reserved. so how do the above factors affect the bank risk level of vietnamese commercial banks? through data retrieved from 18 joint-stock commercial banks listed on the vietnam stock exchange in the period 2010 2019, this paper analyzes the impact of business models (different varieties of income), thereby offering some suggestions to contribute as a basis for the implementation of restructuring and digital transformation at vietnamese commercial banks in the coming time. 2. literature review a business model is defined as the way an organization does business (magretta, 2002) and aims to advance the company’s overall goals (this goal can be financial or non-financial (yip & bocken, 2018). business models can analyze and evaluate productivity (osterwalder, pigneur, & tucci, 2005). the growing interest in analyzing business models in enterprise innovation showed its usefulness in sustainable innovation (bocken, short, rana, & evans, 2014; boons & lüdeke-freund, 2013; lüdeke-freund, 2010; stubbs & cocklin, 2008). recently, it has been quite diverse. in addition to the business type of borrowing and lending, other business models such as money transfer, money withdrawal, and bill payment services have also become popular. for banks, business model diversification is other activities within the bank to increase the bank’s goals and mainly financial goals. implementing business model diversification in enterprises in general and banks, in particular, has certain risks. bank risk is the opposite of bank stability, meanwhile, sustainability represents a sustainable business with little volatility but high profits (köhler, 2015). therefore, sustainability will focus heavily on business results, capital adequacy ratios, and volatility of business results (köhler, 2015). as a result, the bank’s sustainability is inversely proportional to the risk in the bank. therefore, some studies research bank stability (abuzayed, al-fayoumi, & molyneux, 2018; köhler, 2015; nguyen, skully, & perera, 2012), and others do evaluate research on risk (nguyen, ho, van nguyen, pham, & nguyen, 2021). in addition, several market studies focus on bank performance (mergaerts & vander vennet, 2016). one factor considered important in influencing banks’ risk is the diversification of business models (mahdaleta, muda, & nasir, 2016). accordingly, the diversification of business models will aim to create more sources of income for the bank (köhler, 2015; nguyen et al., 2021). diversifying business models in the bank make different sources of income besides the main source interest income. business models describe how banks generate profits, what customers they serve, and which distribution channels they use (köhler, 2015). researches evaluating the impact of business model diversification on the sustainability of banks is still controversial. studies show a positive effect of the business model on bank stability (froot, scharfstein, & stein, 1993; köhler, 2015; trivedi, 2015b). banks implemented diversification of business models at that time, and business results grew well from this diversification (froot et al., 1993; froot & stein, 1998). this will show that the bank’s operating system for non-interest businesses is highly effective. the increase in non-interest income has helped banks develop more stably and reduce bank risk due to the increased role of banks as financial intermediaries (köhler, 2015). the diversification of business models will help reduce the level of risk concentration in the bank. people perform better based on management skills or existing management systems (trivedi, 2015b). besides the positive impact of business model diversification on bank sustainability, there is still a negative impact on bank sustainability (abuzayed et al., 2018; deyoung & torna, 2013; nguyen et al., 2021; williams & prather, 2010). banks will face more risks when diversifying their business models when the management system is limited (nguyen et al., 2021). concurrently, increased participation in the derivatives market and larger loan portfolios have increased the bank’s exposure to capital ratios (deyoung & torna, 2013). besides, some studies show that diversifying business models helps reduce risk but does not make banks more sustainable (abuzayed et al., 2018). 3. methodology 3.1. empirical research model this paper follows the previous research of köhler (2015), presenting as follows: financial risk and management reviews, 2022, 8(1): 20-26 22 © 2022 conscientia beam. all rights reserved. 𝐵𝑎𝑛𝑘 𝑟𝑖𝑠𝑘𝑖𝑡 = 𝛼𝑖 + 𝛽1 ∗ 𝐵𝑎𝑛𝑘 𝑏𝑢𝑠𝑖𝑛𝑒𝑠 𝑚𝑜𝑑𝑒𝑙𝑖𝑡 + 𝛽2 ∗ 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖𝑡 + 𝜀𝑖𝑡 table 1 presents the description of the variable. table 1. variables description. variables description expected sign dependent variables z-score bank risk, calculated by the sum of roa and car, divided by sdroa racar risk-adjusted car of banks= car/sdcar main independent variables nnii the fraction of net non-interest income divided by net operating income (+) trade the fraction of trading income divided by net operating income (+) control variables size banks’ total assets (+) loans the ratio of total loans to total assets (-) car the ratio of equity on total assets. (+) in the model, the bank risk index is used in contrast to bank stability. particularly, the higher the zscore and racar, the more sustainable the bank or reduce the bank risk. 3.2. data data is collected through the financial statements of commercial joint-stock banks listed in vietnam from 2010 to 2019. the collected data will be cleaned when excluding banks with missing values in 3 years and a missing rate of more than 15% of the general data. the final data included in the analysis of 18 banks were retained. the results describe the data collected in table 2. the mean zscore is 25.19, the largest is 57.43, and the smallest is 0.49. the mean racar was 23.02, the maximum was 53.31, and the smallest was 0. the mean nnii was 0.20, the maximum was 0.57, and the smallest was -0.05. the mean trade is 0.559, the largest is 8.54, and the smallest is -8.89. the mean loans is 0.55, the maximum is 0.74, and the smallest is 0.14. the mean car is 0.1, the maximum is 0.4, and the minimum is 0. table 2. descriptive variables. variables mean std. dev. min. max. zscore 25.197 16.722 0.495 57.440 racar 23.028 15.896 0 53.314 nnii 0.207 0.163 -0.055 0.576 trade 0.560 3.473 -8.893 8.657 size 32.596 1.083 30.162 34.937 loans 0.556 0.120 0.145 0.743 car 0.108 0.064 0 0.401 observations=180 4. methodology the study uses panel data analysis with basic models such as the fixed effect model (fem) and random effect model (rem). hausman test will be used to choose the fem or rem model that is more suitable for the data. additionally, autocorrelation and heteroskedasticity tests will be performed to check the model’s reliability. finally, if these defects exist in the model, the authors will proceed to calibrate the model through the generalized least squares (gls) model. financial risk and management reviews, 2022, 8(1): 20-26 23 © 2022 conscientia beam. all rights reserved. the paper runs fem and rem before the hausman test, which compares the two models and shows that the fem is more suitable than the rem in all models with the dependent variables zscore and racar. however, the autocorrelation and heteroskedasticity of change test show that the model exists in these phenomena. therefore, the gls correction model will be used for the analysis. the empirical results are shown in tables 3 and 4. table 3 describes the results of the impact of business model diversification represented by nnii and trade on the sustainability of zscore banks. the analysis results through the gls model show that nnii has a negative effect on zscore (negative beta coefficient and satisfies statistical significance). trade does not affect zscore (pvalue greater than 0.1). simultaneously, the study also shows that car and size positively affect zscore (positive and statistically significant beta coefficient). loans does not affect zscore (p-value greater than 0.1). table 3. regression with zscore. zscore (1) fem (2) fem (3) rem (4) rem (7) rem (8) gls nnii -13.25*** (4.204) -14.13*** (4.274) -22.47*** (6.227) trade 0.0505 (0.198) 0.00204 (0.199) -0.260 (0.317) size 0.261 (1.418) 0.464 (1.819) 1.604 (1.297) 1.957 (1.579) 6.284*** (1.068) 5.495*** (1.143) loans 7.382 (7.076) 2.567 (8.657) 6.209 (7.015) 1.558 (8.401) 17.58* (9.394) 17.02 (10.90) car 179.4*** (10.47) 183.3*** (12.83) 181.0*** (10.50) 185.5*** (12.48) 157.5*** (15.33) 162.5*** (16.98) constant -4.020 (44.54) -11.32 (57.59) -47.17 (40.70) -59.72 (49.93) -202.0*** (32.87) -181.8*** (35.64) observations 167 148 167 148 167 148 number of banks 18 18 18 18 18 18 hausman test 0.000 autocorrelation test 0.000 heteroskedasticity 0.000 note: standard errors in parentheses. *** p<0.01, * p<0.1. table 4 describes the results of the analysis of the impact of business model diversification represented by nnii and trade on the sustainability of racar banks. the analysis results through the gls model show that nnii has the opposite effect on racar (negative beta coefficient and statistical significance). table 4. regression with racar. racar (1) fem (2) fem (3) rem (4) rem (5) gls (6) gls nnii -12.71*** (4.126) -13.63*** (4.182) -21.29*** (5.851) trade 0.0527 (0.194) 0.00573 (0.194) -0.216 (0.299) size 0.398 (1.391) 0.440 (1.782) 1.681 (1.254) 1.879 (1.522) 5.629*** (1.004) 4.879*** (1.078) loans 6.443 (6.944) 1.587 (8.481) 5.562 (6.847) 0.846 (8.191) 17.39** (8.827) 16.30 (10.28) car 176.3*** (10.28) 180.1*** (12.57) 177.7*** (10.26) 182.0*** (12.17) 155.1*** (14.40) 159.9*** (16.01) constant -9.899 (43.71) -11.76 (56.43) -51.23 (39.34) -58.51 (48.12) -182.7*** (30.89) -163.1*** (33.62) observations 167 148 167 148 167 148 number of banks 18 18 18 18 18 18 hausman test 0.000 autocorrelation test 0.000 heteroskedasticity 0.000 note: standard errors in parentheses. *** p<0.01, ** p<0.05. financial risk and management reviews, 2022, 8(1): 20-26 24 © 2022 conscientia beam. all rights reserved. trade does not affect racar (p-value greater than 0.1). concurrently, the study also shows that car and size have a positive effect on racar (positive and statistically significant beta coefficient). loans have no impact on racar (p-value greater than 0.1). zscore and racar show that diversifying business models negatively impact banks. it can be seen that in the developing financial market like vietnam, banks are still gradually expanding other business forms. therefore, banks still face difficulties in implementing expectations (nguyen et al., 2021). in the case of vietnam, the banking system has begun to build new business models beyond lending to generate interest income. and the use of resources available in the bank is still not effective. this has led to inconsistent or bad business results and reduced the sustainability of banks. in vietnam, the business expansion based on fee activities (fees collected from lending, transaction, and payment activities) is consuming a lot of resources, and the income is not proportional (abuzayed et al., 2018). in addition, the fee-based activities worsen the quality of loans due to the psychological burden of associated fees leading to restrictions or changes in customer behavior. subsequently, trade does not affect the sustainability of the bank. this result shows that foreign exchange or gold trading activities reduce the bank’s sustainability. although it is the only unit authorized to conduct foreign exchange business, this activity has not been effective for the bank. this shows that foreign exchange-related activities are not being effectively controlled. moreover, the cause also comes from the policy of the state bank by tightening foreign currency lending to pursue the goal of anti-dollarization of the economy by gradually shifting from lending transactions to buying and selling foreign currencies is one of the main reasons foreign exchange revenue declined. it can be seen that this is a common influence on the state. additionally, the value of vnd remained stable in recent years despite strong fluctuations of many domestic currencies worldwide. the difference in interest rates between vnd and usd is no longer large, so there is not as much room to use financial leverage based on currency fluctuations as before. bank size (size) positively affects bank stability or reduces the bank’s risk. this result shows that expanding assets or scale helps banks approach customers better. this is a positive sign indicating the efficiency of the banks' size in recent times. concurrently, car has a positive effect on sustainability, showing that the higher the capital adequacy ratio of the bank, the lower the risk. although a high car may affect the effectiveness of lending activities, in terms of risk, the car ratio is helping banks better control risks. finally, loans do not affect the bank risk. the risk of bad debt accompanies the increase or decrease in lending, so these two factors are currently in balance, leading to no effect of loans on bank risk. 5. conclusion and implications the paper systematizes the business model diversification theory and banks' risk and sustainability. two noninterest income activities from fees and foreign exchange and gold trading activities are typical for diversifying business models in banks. furthermore, the study figured out the negative impact of nnii business model diversification on the bank’s sustainability through quantitative data analysis. meanwhile, the trade business is not meaningful in the research period due to the influence of the government’s policy on the issue of monetary tightening. finally, the paper suggests some following theoretical and practical implications based on new findings. 5.1. theoretical implication the paper tested the relationship between business model diversification and bank risk. in the developing financial market, business activities other than lending are not bringing sustainability to the bank. nevertheless, it can be said that lending activities are still an important factor in the maintenance and sustainable development of the bank. this will be an important factor in making a firmer addition to the relationship between business model diversification, bank risk, and bank stability. financial risk and management reviews, 2022, 8(1): 20-26 25 © 2022 conscientia beam. all rights reserved. 5.2. practical implication the impact of business model diversification on bank risk will help managers in the bank have appropriate intervention policies to make non-interest income more effectively. as fee-based activity increases, processes and resources for fee-based operations are experiencing problems leading to increased bank risk. simultaneously, income from foreign exchange or gold trading is not meaningful with bank risk, which shows that this activity needs to be maintained at a moderate level and wait for positive signals from the government about this foreign exchange business activity. 6. limitation and future research although the paper found a positive effect of business model diversification on bank risk, however, this still exist some limitations. first, the article has not yet considered the mediating role of business results, non-performance loans, to bank risk. diversifying business models can affect business results, and bank risks are different, so this nexus also has more in-depth judgments. similar to non-performance loans, lending problems can affect non-performance loans, and bank risk may also need to be considered for a more thorough judgment. second, the data source is currently only collected until 2019. therefore, the effects of the covid-19 pandemic and bank risk have not been considered. the study suggests that further research should consider adding more relationships with business results and non-performance loans to find more exciting relationships. the dataset can be collected closer to the present to include the impacts of a covid-19 pandemic. funding: this study received no specific financial support. competing interests: the authors declare that 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(2018). sustainable business model archetypes for the banking industry. journal of cleaner production, 174, 150-169.available at: https://doi.org/10.1016/j.jclepro.2017.10.190. views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 72 © 2025 conscientia beam. all rights reserved. revolutionizing supply chains: the role of emerging technologies in digital transformation naimul islam1 tipon tanchangya2 kamron naher3+ ummah tafsirun4 md rakib mia5 shoaibur rahman sarker6 fahad rashid7 1department of accounting, finance and economics, university of greenwich, se10 9ls, london, uk. email: naimmgtdu75@gmail.com 2department of finance, university of chittagong, chittagong 4331, bangladesh. email: tipon.tcg.edu@gmail.com 3department of business administration, presidency university, dhaka-1212, bangladesh. email: naherk@pu.edu.bd 4department of business administration, sonargaon university, dhaka, 1215, bangladesh. email: ummah.tafsirun@gmail.com 5department of business administration, ahsanullah university of science and technology, dhaka 1208, bangladesh. email: mdrakibmia087@gmail.com 6school of business and law, northumbria university, 110-114 middlesex street, london, e1 7ht, uk. email: shoaibur.fin.du@gmail.com 7centre for islamic finance, university of bolton, bolton bl3 5ab, uk. email: fr7bbs@bolton.ac.uk (+ corresponding author) abstract article history received: 30 january 2025 revised: 4 march 2025 accepted: 12 march 2025 published: 20 march 2025 keywords digital transformation emerging technologies operational efficiency supply chain management. the main objectives of the study are to provide a comprehensive overview of emerging technological solutions, their applications, and their impacts on supply chain digital transformation. it is qualitative research, and secondary data were collected. the study identified five effective applications of the individual solutions. ai provides effective insights, demand forecasting, warehouse automation, transportation and route optimization, supplier selection and management, and predictive maintenance. blockchain enables tracking and transparency, enhancing traceability, cutting down on counterfeiting, encouraging sustainable and ethical sourcing, and facilitating smart payments. business intelligence ensures improved communication, monitoring expenses, inventory management, tracking key performance indicators, and optimized visualization. data science facilitates demand prediction, route enhancement, inventory management, hazard assessment, and supplier administration. iot enables shipment and delivery tracking, warehouse capacity monitoring, inventory management, storage condition monitoring, and routine optimization and automation. rfid is effective for warehouse management, inventory management, freight transportation, supply chain visibility, and retail management. these emerging technologies collectively promote a more integrated, adaptable, and resilient supply chain landscape, address significant challenges, and open doors to future innovations. the results suggest that by adopting all emerging technologies within the supply chain context, business executives would increase their efficiency and enhance firm value as well. contribution/originality: the study highlights how the emerging technologies complementing each other in digital transformation. it also shows where and how these technologies are used so that the users can get an overview of the applications. financial risk and management reviews 2025 vol. 11, no. 1, pp. 72-102 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v11i1.4143 © 2025 conscientia beam. all rights reserved. https://orcid.org/0009-0005-7001-1770 https://orcid.org/0009-0009-2365-4959 https://orcid.org/0009-0001-9663-5427 https://orcid.org/0009-0005-5373-4619 https://orcid.org/0009-0004-7267-9515 https://orcid.org/0009-0000-4196-682x https://orcid.org/0009-0001-2482-3808 mailto:naimmgtdu75@gmail.com mailto:tipon.tcg.edu@gmail.com mailto:naherk@pu.edu.bd mailto:ummah.tafsirun@gmail.com mailto:mdrakibmia087@gmail.com mailto:shoaibur.fin.du@gmail.com mailto:fr7bbs@bolton.ac.uk https://www.doi.org/10.18488/89.v11i1.4143 financial risk and management reviews, 2025, 11(1): 72-102 73 © 2025 conscientia beam. all rights reserved. 1. introduction recent years have seen a dramatic shift in supply chain dynamics due to the advent of industry 4.0 and its range of revolutionary technologies, including the internet of things (iot), blockchain (bc), big data analytics, and artificial intelligence (ai). new paradigms, such as digital transformation and industry 4.0, are transforming supply chain management operations in business sectors (sahoo, kumar, & upadhyay, 2023). the seamless movement of products and services across long distances has always been made possible by supply chains, which have served as the basis of global trade. industry 4.0 has facilitated improved supply chain management through the emergence of new digital technologies (galati & bigliardi, 2019). however, the rise of emergent technologies is not just revolutionizing the way supply chains operate but also promising a future of transformation and efficiency. these technologies hold the potential to reshape supply chains, inspiring a future where efficiency and transparency are the norm (attaran, 2020). the supply chain can benefit significantly from digitalization, including better inventory management, real-time data collection, optimization of logistics practices, and enhanced information availability (bigliardi, filippelli, petroni, & tagliente, 2022). blockchain, for example, can offer a safe and transparent medium for monitoring the origin of products, thereby guaranteeing the quality and safety of food. additionally, blockchain can encourage the development of trust and mitigate the risk of fraud by enabling the seamless collaboration of supply chain stakeholders (attaran, 2020). emerging technologies are transforming the supply chain and ensuring a future of efficiency and transformation. these are merely a few instances of emerging technologies transforming the supply chain and indicating a future of efficiency and transformation. along with the rise of new technologies, there is a greater focus on being environmentally friendly. to boost their efficiency, innovation management, and corporate growth, businesses have put in more effort to become more sustainable. additionally, they wanted to improve their position in the marketplace and gain a significant edge over their competitors (schmidt & wagner, 2019). organizations must be equipped to confront the obstacles and opportunities that these emergent technologies present as supply chains become increasingly digitized. the adoption of a digital transformation paradigm is not only essential but also mandatory, as it enables organizations to remain agile and responsive in the presence of market challenges (hartley & sawaya, 2019). digitally driven organizations have transcended many conventional supply chains (verhoef et al., 2021). supply chains were changed after covid19 broke out, which affected the whole world. during this circumstance, companies with more resilient supply chains had a more significant edge over their competitors (li, zhang, & liu, 2022; sarkis, 2020). prior studies examined the impact of digital transformation on supply chain management. lerman, smith, and zhang (2024) investigated how digital transformation in supply chains supports firms' social and economic performance in emerging markets. akbari, nguyen, and le (2024) showed how digital technologies are changing the supply chain landscape in vietnam by embracing industry 4.0 technologies. the adoption of specific technologies and the relationship between sustainable supply chain management and digital transformation were examined by stroumpoulis and kopanaki (2022) and a conceptual framework was developed to better explain how the combination could result in the development of sustainable performances. almulhim (2021) looked into how smart technologies are an important part of building the link between digital transformation and firm performance. despite digital transformation's evident and substantial impact on companies, these advancements have received relatively little academic attention. in recent years, scholars have only recently begun investigating the domains of digitization, digitalization, and digital transformation (gao, li, & wang, 2022). therefore, an analysis of the existing research showed a significant gap that looked at the interaction between emerging technologies and digital transformation in the supply chain context. thus, an in-depth study is needed to clearly show how important new technologies are in bringing automation to supply chain activities. therefore, to address this need, this study aims to give an in-depth understanding of these technological advances, how they can be implemented, and how they influence the digital transformation of the supply chain. thus, this study provides insight into the role of new technologies (ai, iot, bc, bi) in supply chain digitalization and identifies the challenges financial risk and management reviews, 2025, 11(1): 72-102 74 © 2025 conscientia beam. all rights reserved. that companies must confront. it helps academics and practitioners grasp the potential of digitization for firms and management in supply chains. thus, the study can serve as a foundation for using and analyzing emerging technologies and future research. this paper is organized as follows. the current discourse regarding emerging technologies that are presently in use is reviewed in section 2. the application of these technologies in supply chain management is discussed in section 3, while the benefits of incorporating them into supply chain management are presented in section 4. in section 5, several successful case studies are presented and discussed. section 6 concludes by emphasizing the implications and opportunities for future research and some of the study's limitations. 2. emerging technologies industry 4.0 has fostered the development of innovative technologies that have created novel potential for business growth. supply chains are altered by these technologies, which accelerate the development of unique valuegenerating methods (arenkov, ivanov, & pavlov, 2019). this section highlights some such emerging technologies. 2.1. artificial intelligence (ai) numerous sectors have recently shown a growing interest in the potential applications of artificial intelligence (ai) technology (dubey, gunasekaran, & childe, 2020). artificial intelligence (ai) denotes the capacity of machines to acquire knowledge from experience and make decisions similar to human intelligence (duan, edwards, & dwivedi, 2019). rapid advancements and increased attention to ai began in the early 2000s, and the field has since been reconsidered in both research and practical settings (helo & hao, 2022). recently, ai has been growing and becoming more and more popular. this is due to several organizational and environmental factors, such as changing customer requirements, fierce global competition, companies going digital overall, and the fast-paced evolution of technology (dubey et al., 2020). ai has made the most essential progress in information technology through its unique ability to perceive and think. ai can be used for numerous purposes, such as computer vision, speech and voice recognition, robotic process automation, machine learning, and deep learning (sharma, singh, & gupta, 2022). the covid-19 pandemic demonstrated the vulnerability of global supply chains since they depend on many suppliers in different places and have longer physical flows. as a result, stakeholders' needs for resilience, agility, and flexibility have grown significantly. this calls for supply chain management systems that incorporate ai. it is used in almost every area of supply chain decision-making. for example, ai is used to predict supply chain risks (baryannis, validi, & nivolianitou, 2019) to predict fashion trends using logistic regression (chakraborty, choudhury, & tiwari, 2020) to predict backorder scenarios in the supply chain using gradient-boosting machine-learning techniques (islam & amin, 2020) to forecast (nguyen, phan, & le, 2021) and to analyze how machines break down (okabe & otsuka, 2021). 2.2. blockchain technology (bt) crosby, pattanayak, verma, and kalyanaraman (2016) define blockchain technology (bt) as a distributed database comprising records or shared public/private records of all digital transactions conducted and disseminated among participating agents in the blockchain network. four primary qualities make bt different from other information systems: non-localization, security, auditability, and smart execution (saberi, kouhizadeh, sarkis, & shen, 2019). bt could help move products and processes in the supply chain. any data could be attached to the item to connect the real item to its digital character in the blockchain (abeyratne & monfared, 2016). by connecting these two things, blockchain can help supply chains find fraudulent suppliers and fake goods since only authorized partners can record data. bt could also make information secure and unalterable, which means that it cannot be changed without the permission of the right people. this would stop cheating. besides these things, blockchain could help the environment by reducing and managing the need for recalls and rework in the supply chain (saberi et al., 2019). financial risk and management reviews, 2025, 11(1): 72-102 75 © 2025 conscientia beam. all rights reserved. as a result, bt might improve the control of the supply chain. by simplifying the supply chains, it is possible to follow goods from the chain's beginning to the customer's end. this stops waste, fraud, and other improper conduct. it may also inform people more about how a product is made and shipped so they can choose products that are better for the environment (stroumpoulis & kopanaki, 2022). 2.3. business intelligence (bi) the word "business intelligence" is usually used as a generic term for a system (shollo & kautz, 2010) or a set of ideas and methods (sabherwal & becerra-fernandez, 2013) that help people make better decisions by using reality support networks. in research, terms like "business intelligence," "business analytics," and "big data" are often used to refer to the identical phenomenon. some authors have called business intelligence "a process and a brand" (jourdan, rainer, & klein, 2008) "a process, a brand and a combination of methods, or a mixture of such" (shollo & kautz, 2010) and "a good or service alone" (seddon, constantinides, & tzuo, 2017). furthermore, according to wieder and ossimitz (2015) bi is an analytical, technology-supported process that accumulates and analyses scattered business and market data to reveal an organization's goals, prospects, and positioning. bi tools are bi software that is deployed in an organization, and bi solution is a collection of tools and related technologies, applications, and processes used to support bi goals. business intelligence integrates all news sources. it transforms operational data from the enterprise's resource planning system into actionable insight that supports strategic goals (al-mobaideen, 2014). companies of all sizes use bi tools. they are getting more and more popular. they help businesses make all kinds of decisions, from short-term to long-term ones. bi can be seen as a shield that keeps companies safe and a set of best practices and tools that let top leaders access and analyze company data and turn it into information, they can use promptly to make decisions (ragazou, apostolou, & karampinis, 2023). 2.4. data science (ds) data science is an area of knowledge that gives decision-makers predictive and statistical tools. it is also an effective way to run organizations from a data-driven viewpoint. ds needs a lot of different skills, like computer science, machine learning, predictive analytics, data-driven methods, and statistics (kotu & deshpande, 2019; waller & fawcett, 2013). in contrast to business data analytics, which is about gathering, storing, and analyzing data, data science is about more complicated data analytics. this mainly focuses on forecast analytics, like machine learning and deep learning algorithms. methodologically, data science and business data analytics help supply chain managers make choices at the strategic, tactical, and daily levels. businesses can gain a competitive edge using data science and business data analytics (kamley, prakash, & karan, 2016). by lowering costs, making supply chains more sustainable, lowering risk, and making them more resilient (baryannis et al., 2019) data science and business data analytics techniques also help companies better understand what customers want and predict market trends (hribar, pucihar, & rajh, 2019). 2.5. the internet of things (iot) international literature has a lot of different meanings for the internet of things (iot). because iot is a combination of two words and meanings, "internet" and "things," the scenario arises (atzori, iera, & morabito, 2010). the term and concept of the internet of things (iot) encompass a variety of disciplines and aspects associated with extending the internet and the web to physical devices. miorandi, sicari, de pellegrini, and chlamtac (2012) assert that the internet of things (iot) aims to establish a future in which digital and physical entities can be connected to generate new business opportunities. therefore, the internet of things (iot) is a novel information technology that is currently in the process of being developed. the technology framework has not yet been fully developed, and an integrated, standard structure has yet to be developed (wu, ma, & zhao, 2021). financial risk and management reviews, 2025, 11(1): 72-102 76 © 2025 conscientia beam. all rights reserved. using standard communication, the internet of things (iot) links physical objects to the digital world, like sensors, pumps, thermometers, and rfid tags (wortmann & flüchter, 2015). sensor-based technology in the iot makes it possible for all players in a supply chain to share information over the internet. as suggested by tu, liu, and li (2018) iot should be implemented within supply chain transportation systems. the proposed system would be able to monitor products throughout the supply chain. furthermore, the internet of things (iot) has the potential to enable stakeholders to participate in the decision-making process by providing them with real-time information (rezaei, ortt, & roodhooft, 2017). the iot could also improve food supply chains by facilitating the exchange of information with stakeholders and providing a continuous monitoring system (tagarakis, andriani, & sideris, 2021). 2.6. radio frequency identification (rfid) a key device that is widely used and seen as necessary for the iot is radio frequency identification (rfid). it has three main parts: an rfid tag, which is made up of a chip and an antenna; a reader, which sends radio signals and gets responses from tags; and middleware, which connects rfid hardware to business applications (sarac, abolhasani, & syntetos, 2010). as companies become more digital, rfid helps them do so by allowing a common framework across businesses, superior compatibility with it systems, ease of use, and collaboration between functional areas (kamble, gunasekaran, & sharma, 2019). rfid helps digitize supply chains because it creates data from sensors that can be analyzed to find ways to automate and improve processes. rfid technology works by detecting when an item is nearby, recording data, and then storing that data (musa & dabo, 2016). system data analysis produces data-driven ideas that help with optimization decision-making (fanti, gabbrielli, & pappalardo, 2017). rfid offers real-time data that boosts overall efficiency and accuracy, which can help increase inventory levels, shorten delivery routes, and improve the customer experience (choi, rogers, & vakil, 2018). 2.7. robotics and automation due to the need for faster and more efficient supply chains, robotics and automation have become crucial supply chain management technologies. robotics and automation increase supply chain management by lowering long-term costs, increasing work and usage strength, reducing errors, minimizing repetitive inventory checks, updating orchestration, managing times, and assembling induction to risky and problematic areas (mohan banur, patle, & pawar, 2024). advanced robotics is a common way to improve efficiency in warehousing and manufacturing tasks like picking and packaging, welding, and inspection (krueger, sutherland, & rohn, 2016). it eliminates the need for complex, repetitive work, lowers costs, saves energy, and creates a safer, healthier workplace (ganesan, gupta, & kumar, 2017). as automation rises, fewer workers are needed to do routine duties, which lowers emissions and saves energy (moglia, alvarez, & marquez, 2021). 3. emerging technologies in supply chain management 3.1. ai application in supply chain management over the past few years, ai has revolutionized scm by increasing the effectiveness and efficiency of supply chains at lower costs and with better information. the application of ai in various aspects of the supply chain enables organizations to handle the competitiveness of today’s approaches. some of the areas where ai is proving highly beneficial include demand planning, warehouse management, transportation and routing solutions, supplier identification, and predictive maintenance. this paper will discuss these applications in detail, with real-life data and case studies to show how pragmatic ai is for scm. 3.1.1. demand forecasting demand forecasting is one of the most crucial aspects of scm and a key application of ai in the field. it is essential to accurately forecast future needs to ensure the company purchases the right inventory to meet clients’ demands. financial risk and management reviews, 2025, 11(1): 72-102 77 © 2025 conscientia beam. all rights reserved. traditional forecasting methods rely on general trends and statistical models, but these approaches often fail to account for market fluctuations, social changes, global crises, or other disasters. figure 1. ai enhances demand forecasting accuracy with real-time data integration. figure 1 shows how ai criteria for demand forecasting are used to consider sales information, characteristics of potential buyers, and external conditions to enhance the reliability of the forecast, minimize lost sales, and minimize holding costs. businesses can more readily forecast demand by leveraging algorithms, thus making the right decisions about inventory, all of which lead to better business operations and costs. ai-based demand forecasting models surpass traditional methods by analyzing large amounts of data, including current sales data, customer behavior, and external factors like macroeconomic conditions and weather (see figure 1). these models use machine learning techniques to detect patterns and trends that human or traditional statistical models may not recognize. as stated in a mckinsey report, ai-driven demand forecasting models can reduce absolute forecast error by as much as 50%, leading to significant cost benefits in operations. specifically, companies can reduce lost sales by 65% and cut inventory holding costs by 10-15%, avoiding both stockouts and overstock situations (mckinsey & company, 2021). for instance, amazon is a prime example of a company that uses ai to manage its stock and predict product demand across its numerous outlets. with ai, amazon can predict network load during peak periods, such as the end of the year, ensuring that hubs with popular products are prepared for increased sales (mckinsey & company, 2021). 3.1.2. warehouse automation technology applications in warehousing have also seen a major boost with the integration of artificial intelligence in automated warehousing. in most conventional warehousing processes, like order picking, packing, and order moving, activities are done through human effort and thus are characterized by physical complexities, high costs, and many handling errors. autonomous mobile robots, agvs, mechanization, or a combination have radically changed warehouse operations as several activities are becoming automated. the application of ai technology in the warehouse has dramatically improved efficiency and reduced operational costs. for instance, in its report, deloitte highlighted that firms implementing ai-based automation systems had reduced labor costs by 70% (deloitte, 2020a). ai-run robots can work around the clock, which means order deliveries will be completed ahead of time compared to manned workers. ocado is the best example of how ai is yielding incredible efficiency in the warehousing sector of online selling companies. for example, ocado deploys ai to deliver over 222,000 orders weekly without the participation of employees. these robots are mainly used for picking and packing groceries within a system that is highly integrated financial risk and management reviews, 2025, 11(1): 72-102 78 © 2025 conscientia beam. all rights reserved. and mechanically engineered for efficiency in space and time within a warehouse (meticulous research, 2024). moreover, through ai-operated drones, real-time stock checks and monitoring of the storage conditions of the products are done to ensure proper conditions before sale. 3.1.3. transportation and route optimization transportation and logistics are some of the critical areas within the supply chain that have benefited from the use of artificial intelligence. ai can be used to adjust transportation routes based on factors such as traffic congestion, weather conditions, fuel prices, and delivery times. by applying predictive analytics, ai can help decrease fuel expenditure, optimize delivery times, and reduce transportation expenses. according to capgemini, companies that have integrated ai for route optimization saved between 10 to 30% on logistics costs and experienced delivery times that were 15 to 25% faster (capgemini research institute, 2020). a prime example of ai’s application in transportation is ups’s on-road integrated optimization and navigation (orion) system. orion uses ai to calculate millions of data points, including gps data and specifics related to parcel deliveries, in order to find the most efficient routes for delivery trucks. this system has helped ups reduce more than 100,000 metric tons of carbon emissions and save over 10 million gallons of fuel annually. not only does improving transportation routes lead to increased efficiency and reduced costs, but it also makes organizations more environmentally friendly. real-time data processing prevents companies from suffering delays and disruptions, making the supply chain more responsive. 3.1.4. supplier selection and management another area in scm where ai has been most pertinent is the supplier selection process. traditionally, supplier selection was a function that was not very integrated with its counterparts, and the primary inputs at its disposal were cost lead time, and performance. ai is disrupting this process by enabling firms to analyze multiple information vectors on suppliers, their performance, financial standing, sustainable operations, and risks. the absorption of information about the chosen suppliers is facilitated using advanced intelligent management systems to enhance decision-making. a study by gartner revealed that firms that implement ai in supply chain procurement for supplier identification and handling achieved a 30% improvement in supplier performance and a 40% reduction in supply chain disruptions (gartner, 2022a). for instance, siemens has installed a system that determines supplier credentials for sustainability compliance with the company’s high environmental and ethical requirements. with the use of ai, siemens can effectively monitor the performance of its suppliers and identify risks, including if the supplier has become insolvent or is unwilling or unable to meet environmental standards. supplier management is another function that the utilization of ai significantly improves, with unique new standards of cooperation between purchasing organizations and their suppliers. supply chain visibility leads to better supplier relations because the company can often get real-time data on the supplier, making it easier to negotiate with them. 3.1.5. predictive maintenance predictive maintenance is one of the most effective ai applications in supply chain management, particularly for companies with large and complex manufacturing and distribution systems. traditionally, maintenance has been classified as 'breakdown' maintenance, where equipment is only repaired when it fails. this approach often leads to high downtime, production delays, and unplanned repairs. ai-powered predictive maintenance involves real-time monitoring of equipment conditions using sensors to predict performance. by analyzing this data, ai can determine when equipment is likely to fail, allowing maintenance to be performed before a failure occurs. this highly efficient maintenance strategy reduces repair costs and prolongs the useful life of the equipment. financial risk and management reviews, 2025, 11(1): 72-102 79 © 2025 conscientia beam. all rights reserved. ibm (2021) revealed that companies that implemented ai-based predictive maintenance reduced unplanned downtime by half and cut maintenance costs by one-third. for example, ge uses ai to control its industrial systems, such as turbines and engines. predictive analytics help ge identify potential failures and schedule maintenance at times when it will cause the least impact on business operations (ibm, 2021). additionally, ai-powered predictive maintenance helps conserve energy demand and enhances the operational life of equipment, playing a crucial role in corporate sustainability initiatives. by applying the concept of relative loss, organizations that adopt predictive maintenance can run their operations in a more sustainable way while using fewer resources. 3.2. blockchain in supply chain management blockchain is an open distributed database that stores transactions so that any changes cannot be made afterward. due to the properties of immutability, transparency, and decentralization, blockchain can become effective in solving a large number of issues in supply chain management (scm). blockchain in scm is even said to offer improved tracking and control over products, more excellent product provenance, limited counterfeiting, increased sustainability, ethical sourcing, innovative contract payments, and more (see figure 2). this section then provides a critical review of the use of blockchain in the above-discussed areas of supply chain management. 3.2.1. tracking and transparency the traditional element questioned in scm is the opacity observed in most supply chain networks. blockchain solves this problem by creating a private ledger that records all transactions and processes in a blockchain. the consensus among all the parties in the chain is that each link in the supply chain, from raw materials and processing to distribution and delivery of the final product, is documented on blockchain technology for every stakeholder interested in the supply chain to verify. this enhances responsibility and enables different companies in the chain to trace merchandise as it flows through the channel in real-time. figure 2. blockchain enhances supply chain transparency, visibility, and ethical compliance across industries. financial risk and management reviews, 2025, 11(1): 72-102 80 © 2025 conscientia beam. all rights reserved. the figure 2 shows how blockchain improves supply chain transparency by enabling real-time tracking, creating immutable records, and ensuring regulatory compliance. this enhances accountability and visibility from raw materials to the final product, with examples like walmart's food safety traceability and ford's ethical cobalt sourcing. a deloitte (2020b) report pointed out that since blockchain has a decentralized, shared ledger that records every transaction, it dramatically improves supply chain transparency. for instance, blockchain has been applied in the food industry to handle produce and identify its origin and safety standards before reaching the consumer’s table. walmart inc., in collaboration with ibm, incorporated blockchain in tracing their suppliers of leafy greens, and it took only seconds to trace the source of contaminated production compared with weeks (deloitte, 2020b). in car production, ford has adopted blockchain to monitor cobalt flow, a material crucial to rechargeable batteries. blockchain also helps ford trace that cobalt is mined from specific regions free from conflict, thus passing the ethical standards accrued (ford motor company, 2021). these use cases demonstrate how blockchain can increase the clarity of the process, speed up operations, and meet legislative requirements. 3.2.2. enhancing traceability blockchain enhances traceability foundationally and principally, allowing companies to track products or raw materials from manufacturers to consumers. this is especially relevant in industries where product security is a concern, such as drug and food supply chains. a mckinsey & company (2021b) suggests that applying traceability through blockchain in the pharmaceutical sector also prevents the distribution of counterfeit drugs, which cost about $200 billion worldwide. using blockchain to track pharmaceuticals keeps fake products from reaching consumers while authentic products are granted easier access. with the food supply chain being among the most essential, blockchain blocks every aspect of food. nestlé and unilever, among other firms, have implemented it to enhance food safety. blockchain also facilitates traceability solutions for luxury goods such as diamonds. to address the issues of conflict-free and ethically sourced diamonds, the de beers group has created the tracr blockchain platform (de beers, 2020). it helps maintain customer confidence and curbs the cycles of so-called conflict diamonds. 3.2.3. cutting down on counterfeiting piracy has become a significant problem in supply chains worldwide, specifically in fashion accessories, medicines, and technology products. blockchain’s permanency means that it can't be altered once a trade has been made, confirming its genuineness. according to the world economic forum (2021), global counterfeiting costs about 2.8 trillion us dollars annually. counterfeiting is eliminated through the help of blockchain since every single product can be given a unique number. this identifier, stored in the blockchain, enables consumers and businesses to check the product’s genuineness throughout its lifecycle. specifically, within the luxury products sector, aura, developed by the luxury goods giant lvmh (moët hennessy louis vuitton), allows consumers to clearly check the origins of luxury goods using blockchain solutions. aura captures each interaction a product has through each phase of its lifecycle, from material acquisition to end-use, guaranteeing the authenticity of product supplies and stopping counterfeit products from reaching the end user (lvmh, 2020). in the pharmaceutical industry, blockchain makes it possible to effectively stop counterfeit drugs from circulating through the market by documenting transactions and movement through the supply chain. pfizer and merck recently partnered to utilize blockchain to verify medicines and prevent counterfeiting that poses financial and reputational damage to companies like pfizer (pfizer, 2021a). financial risk and management reviews, 2025, 11(1): 72-102 81 © 2025 conscientia beam. all rights reserved. 3.2.4. encouraging sustainable and ethical sourcing environmentalism and social responsibility remain high among consumers, shareholders, and governments. blockchain makes it possible to track products' environmental and social effects practically in real time as they journey through the supply chain. consequently, the gartner (2022b) study revealed that sustainability was a key concern in supply chain management, with 90% of consumers demanding sustainably produced products. blockchain guarantees that organizations can validate assertions about sustainability and sourcing concerning products and services by establishing credibility. it applies blockchain technology to the supply tracking of palm oil to promote sustainability and socially responsible production. it sources palm oil from the plantations by asking blockchain technology providers to track its journey from the plantation to the finished product while discouraging deforestation and ensuring fair labor practices for employees (unilever, 2021). blockchain also enhances the circular economy by tracking and tracing products through recycling and disposal across various value chains. for example, companies like coca-cola are already using blockchain to explore the possibilities of increasing their efficiency in recycling bottles and packaging materials (coca-cola, 2020). it also helps in waste management and makes the company look environmentally friendly in the eyes of the customer. 3.2.5. smart payments smart contracts use blockchain to automate the payment process. according to a pwc (2021) estimate, smart payments related to blockchain decrease the cost of transactions by 30-50%, especially in cross-border payments where multiple parties like banks and payment processors complicate the flow and charge additional fees (see figure 3). figure 3. how smart contracts revolutionize payments with blockchain for cost efficiency’. in the figure 3, intelligent contracts facilitate and reduce them by 30-50% while eliminating potential buyer characteristics effectiveness, especially in cross-border forecasts' reliability. the advantages include faster payments and lower charges, besides enabling suppliers to gain much-needed trust. smart contracts—digital contracts written in code that automatically execute based on parameters set out in the code—make intermediaries obsolete by cutting out the time and cost of a basic payment system. in supply chains, intelligent payments guarantee that suppliers receive payment once predefined conditions are fulfilled, such as the delivery of goods or the achievement of a specific target. financial risk and management reviews, 2025, 11(1): 72-102 82 © 2025 conscientia beam. all rights reserved. maersk, one of the world’s biggest international shipping companies, currently uses blockchain in the payment process for its shipment services. with smart contracts, maersk guarantees payments to be made immediately upon product delivery, thus increasing reliability and efficiency between buyers and sellers (maersk, 2020). this also reduces fraud and human error likely to disrupt the general supply chain, promoting innovative blockchain payments. 3.3. business intelligence in supply chain management bi is one of the most essential tools in scm since it provides timely information to enhance decision-making and facilitate operations. in the contemporary world, where data is a precious resource, firms use bi tools to gain a competitive advantage, improve their performance, and realize the optimum use of their resources. managing a supply chain is enhanced through bi with the benefits of communication improvements, tracking of costs, inventory control, key performance indicators (kpis), and visual display improvement (see figure 4). this section evaluates bi in scm based on empirical data and real-life experiences of organizations. 3.3.1. communication it is essential to have proper information flows between different levels of the supply chain to support the goal of this concept. advanced bi tools generate real-time data that optimize interactions between suppliers, manufacturers, and retailers. in organizations with centralized data systems, bi allows increased collaboration, breaks down silos, and ensures that the right people are getting the correct information. langlois and chauvel (2017) have identified that companies that apply bi to enhance communication with their supply chains recorded a 20% decrease in operation delays. the automotive industry has adopted bi tools, especially in communication between suppliers and manufacturing plants. in addition to the above, toyota has minimized production delays through real-time working updates on the quantity of available parts and delivery schedules (langlois & chauvel, 2017). bi tools like tableau and ms power bi offer dashboard features through which users and their teams can grab information in the form of stories and make decisions. as davenport and harris (2017) rightly pointed out, it has been estimated that organizations that use bi for communication can solve problems 40% faster than organizations that don’t use business intelligence for communication. most importantly, it helps reveal inter-departmental dependencies and improve collaboration, thus delivering a flexible supply chain. 3.3.2. monitoring expenses most functions of scm involve cost control, as most expenses will influence the firm's profit. business intelligence offers features to monitor expenses in real time and help detect flaws, avoiding unnecessary expenditures. some areas where an organization can implement it are transportation costs, procurement expenses, warehousing fees, and so on. accenture (2020a) report states that businesses that conduct bi on expenses have noted cost-cutting of up to 25%. for example, procter & gamble uses bi to manage spending within its global supply chain operations. by tracking the costs of transport and logistics solutions, p&g saw the options for choosing optimal routes when it came to fuel expenditure that was closely trimmed down (accenture, 2020b). furthermore, new bi tools like sap hana enable the analysis of operational and financial costs within a single system. they also help improve the efficiency of budget preparation, leading to better financial control in these firms' supply chain operations. a study by caserio and trucco (2018) identifies that organizations employing bi for controlling expenses are 30% more likely to meet their cost-cutting objectives than the average. financial risk and management reviews, 2025, 11(1): 72-102 83 © 2025 conscientia beam. all rights reserved. 3.3.3. inventory management inventory management is one of the areas that undergoes a massive transformation under the influence of business intelligence. bi tools allow companies to monitor and track their inventory levels, ensuring they get the right stock at the right time and avoid overstocking and stock shortages. the right positioning of stored stock must be done efficiently to avoid high holding costs while ensuring a constant flow of goods. as noted by fawcett, magnan, and mccarter (2008) organizations that have adopted bi for order management can decrease inventories by as much as 15–30 percent and increase order satisfaction by up to 25 percent. for instance, bi and predictive analyses help the world’s largest online retailer, amazon, track and organize its inventory. to do this, amazon organizes and analyzes customers’ perceived demand and other past data to fashion its supply so that there will be no stock-out situations or excessively high inventories in its warehouses. qlikview is one of the bi tools that helps determine how and when a particular product's inventory is sold, which product is selling very fast, or which is actually stagnant. this helps supply chain managers decide when to reorder, reduce prices for certain products, or stop offering them altogether. as sherman (2014) stated, many firms that adopted bi for inventory management decreased their holding costs by 20 percent, enhancing the business’s viability. 3.3.4. monitoring organization’s key performance indicators kpis (key performance indicators) are imperative to track performance efficiency in supply chain management. business intelligence tools keep all the kpi parameters in a real-time application, allowing companies to monitor performance and take corrective action if necessary. typical measures for evaluating scm performance include order fulfillment percentage, transportation expenses, time needed to complete an order, and supplier quality. according to a gartner (2021b) companies that used bi to monitor supply chain kpis experienced a 15% enhancement in operational efficiency. coca-cola uses bi to manage its key performance indicators affecting its supply chain operations globally, improving efficiency, delivery time, and customer satisfaction. this has helped maintain high service levels while reducing operating expenses (gartner, 2021b). enterprise bi systems like ibm cognos analytics enable firms to define personalized views of kpis, showing them in real-time on specific dashboards. these metrics can be used to determine critical elements of workflow, such as constraints, problems, and opportunities for improvement. jafari, zarei, azar, and moghaddam (2023) state that enterprises that monitor kpis with the help of bi are 35% more likely to reach their performance targets than those that track performance metrics using traditional tools. 3.3.5. optimized visualization the use of business intelligence tools has been found to enhance the optimal presentation of big data. different visualization tools help supply chain managers make sense of large datasets, which can be helpful when making different decisions. data visualization makes it easier for businesses to identify complex patterns that may not easily be seen through simple numbers and figures. figure 4. business intelligence tools enhance supply chain decision making with data. financial risk and management reviews, 2025, 11(1): 72-102 84 © 2025 conscientia beam. all rights reserved. the figure 4 shows how business intelligence tools such as power bi and tableau, in aspects such as supplier performance data, transport costs, and customer demand data, are helpful in decision-making, accurate, and costeffective in supply chain management using data visualization. a study by khakpour, colomo-palacios, and martini (2021) identified that data visualization tools enhanced decision-making by approximately 28% in supply chain management. current data used by unilever includes supplier performance, transportation costs, and customer demand, which are analyzed by business intelligence visualization tools. through visualizations of this data in various dashboards, unilever's supply chain managers can make beneficial decisions, such as minimizing costs (khakpour et al., 2021). tools like tableau and power bi offer powerful visualization capabilities, allowing users to create customized reports and dashboards that cater to their specific needs. these visualizations can be shared across the organization, ensuring that all stakeholders have access to the same data and insights. according to kirtane et al. (2024) companies that use bi for data visualization see a 20% improvement in decision-making accuracy, as visual insights enable better interpretation of complex data. 3.4. data science in supply chain management in recent years, data science has emerged as a critical insight for supply chain management (scm). through better data use, managers can forecast demand, optimize carrier selection and inventory management, evaluate risks, and improve supply vendor management. intelligent techniques help to improve supply chain responsiveness, effectiveness, and ability to recover from disruption. this section overviews the transformations introduced by data science into each of these areas and provides case evidence and statistical data. 3.4.1. demand prediction one key idea is demanding prediction to achieve supply chain responsiveness and flexibility in operations. historically, forecasting consumer behavior and market trends was highly basic, using statistical models to identify future trends based on past data. recent advancements in big data analysis, including the utilization of machine learning (ml), have helped optimize demand forecasting by processing large datasets in real time. as reported by feizabadi (2022) the application of machine learning models in demand forecasting increased predictive accuracy by 20–30 percent in the retail industry. these models consider temporal and spatial characteristics, leading customer behaviors, and systematic events (e.g., economic fluctuations or sudden epidemics). amazon, for example, leverages ml to predict demand to restock goods in the right place and at the right time (feizabadi, 2022). moreover, organizations, including pepsico, leverage data science to forecast high sales periods during holidays or events. pepsico's application of big data in determining stockout rates involved analyzing social media data, historical sales data, and even weather, which resulted in a 15% reduction in stockout problems (harvard business review, 2020). demand forecasting models help companies identify over or under-demand, reducing the impact of demand variability. 3.4.2. route enhancement transportation management is one of the most important functions of supply chain management, especially for organizations with a vast distribution network. in this case, data science provides methods to calculate traffic flow, weather conditions, and delivery timetables so that routes can be designed and fuel expenses minimized. anitha and patil (2018) assessed that transportation costs may decrease by 12–20% through data-driven route optimization. for example, ups applies analytical methods to optimize delivery routes. through its orion (onroad integrated optimization and navigation) system, ups identifies over 250 million data points daily, saving 10 million gallons of fuel every year (anitha & patil, 2018). applying data science to improve routes is critical to optimizing costs and addressing environmental concerns by eliminating unnecessary movement and emissions. financial risk and management reviews, 2025, 11(1): 72-102 85 © 2025 conscientia beam. all rights reserved. dhl applies real-time information to switch routes during operations depending on traffic density, barriers, and unfavorable conditions. this has resulted in a 15% improvement in the timely delivery of goods and services and a major decrease in their carbon footprint (dhl, 2022). data science allows organizations to adapt to new conditions on the ground so that goods are delivered to required locations on time and at reduced costs. 3.4.3. inventory management another clear example of the use of data science is in inventory management techniques. therefore, it is important to engage predictive analytics to help companies manage their inventories effectively and in the right way. this results in lower holding costs eliminates stockout incidences and improves customer satisfaction. according to a report by mckinsey & company (2021c) business organizations that applied data science in inventory management realized 15–25% reductions while achieving or surpassing service levels. for instance, walmart employs live analytics to monitor the quantity of products in its stores and estimate demand, leading to better restocking and minimal stock loss (mckinsey & company, 2021c). decision-support tools such as arima for demand forecasting and machine learning models enable firms to adapt their inventory holding to demand variability. this is especially crucial for manufacturing firms that deal with perishable commodities like food and drugs since overstocking can result in losses. the big supermarket chain kroger uses prescriptive analytics for fresher food and has reported a 10–15% reduction in food waste while adequately stocking its stores (gartner, 2020b). 3.4.4. hazard assessment conducting a hazard assessment for supply chain risk management is important in industries where disruptions can result in catastrophic consequences. risk management is another area where data science delivers value by showing businesses what threats might arise, such as hurricanes, failed suppliers, or geopolitical events, and how to avoid them. keurulainen (2024) argues that risk analytics and other data science tools can be used to forecast disruptions in their infancy, providing companies with ways to reduce such incidents. for instance, general motors (gm) employs big data systems to evaluate the risks of failed suppliers and natural calamities. this way, gm has adequate data to alter sourcing strategies and prevent process disruptions, as keurulainen (2024) recommends. additionally, organizations such as ibm have designed predictors that enable them to determine and evaluate the vulnerability of supply chains to climate change. these models assess parameters like weather conditions, infrastructure, and supplier locations to trace risky regions. implementing this data into companies’ supply chain management means that plans can be enhanced, even when some dangers are worth avoiding (ibm, 2020). 3.4.5. supplier administration supplier management is a sophisticated process that involves managing supplier relationships, supervising contracts, and minimizing risks associated with such partnerships. this is where data science comes in handy: when supplier performance data is analyzed and evaluated for risk, the supplier selection process is improved. stefanovic (2014) reported that embracing data science models can enhance supplier performance by 10–15 percent by observing reliability, quality of supply, and delivery performance in real time. for example, siemens (2021b) deploys data mining in real time to evaluate suppliers' efficiency and reliability. highlighting delivery times, product quality, and environmental compliance gives siemens the necessary information to decide which suppliers to work with (thirumalai, 2014). furthermore, data science techniques allow firms to minimize the time spent evaluating potential suppliers. companies like intel, for example, apply machine learning approaches to ranking their suppliers according to cost, financial risk and management reviews, 2025, 11(1): 72-102 86 © 2025 conscientia beam. all rights reserved. quality, and risk. this has enhanced the company’s supplier evaluation process by 20%, allowing it to work with the right suppliers (intel, 2021). 3.5. iot in supply chain management iot is one of the pillars that have dramatically impacted scm through the observation, optimization, and automation of the supply chain. examples of iot applications in scm include shipment tracking, delivery tracking, capacity tracking throughout the warehouse, inventory tracking, storage environment tracking, and routine tracking and automation. with the help of iot devices and sensors, businesses can gather and analyze data, significantly improving planning and controlling processes. this section discusses iot contributions based on selected areas of scm, supported by empirical evidence and case studies. 3.5.1. shipment and delivery tracking thanks to advanced iot, shipments and deliveries can be controlled in real-time, allowing for a better understanding of the entire supply chain process (see figure 5). smart tags embedded in the load, trucks, and containers allow continuous tracking of the shipment's location, temperature, humidity, and other aspects. figure 5. iot revolutionizes shipment tracking, enhances efficiency and reduces costs. the figure 5 demonstrates how iot-enabled shipment tracking using smart tags and sensors provides real-time monitoring of location, condition, humidity, and temperature. this technology improves timely deliveries by 20% and reduces costs by 15%, as seen in examples from bmw and dh. a report published by deloitte in 2021 established that enterprises that embraced the technology with the application of iot for shipment tracking witnessed a 20% increase in timely deliveries and a 15% decrease in transportation costs. this becomes equally important when time factors, such as health-related products and perishable goods, are critical in production and delivery to customers. for instance, dhl leverages iot by incorporating tracking devices that monitor consignments' physical condition and location to ensure they arrive in the best condition (deloitte, 2021b). another example of iot success is the automotive and industrial company bmw, which has installed iot sensors in its supply chain to monitor the flow of specific auto parts across the globe. real-time information about the location and status of shipments has helped bmw reduce its supply chain risks and increase efficiency (bmw, 2020). the application of iot technology helps to make forecasts in shipments to avoid delays resulting from other factors. 3.5.2. capacity analysis for warehouses one of iot's most noteworthy applications is in warehouse capacity monitoring. internet of things sensors in warehouses include space occupancy, inventory, and product movement within the warehouse. such information assists firms in managing warehouses by making the best use of space. financial risk and management reviews, 2025, 11(1): 72-102 87 © 2025 conscientia beam. all rights reserved. mckinsey & company (2022) showed that iot utilization for warehouse capacity monitoring reduced warehousing costs by 25% and upgraded inventory turnover by 30%. for instance, amazon incorporates iot sensors and robotics in its fulfillment centers to identify the number and location of products in available spaces and optimize storage (mckinsey & company, 2022). iot has improved picking and packing performance, making amazon's order fulfillment faster. furthermore, iot sensors can identify open spaces in warehouses, allowing organizations to enhance space utilization and potentially eliminate the need for new warehouse construction. this is not only cost-effective but also helps control the environmental impact of warehousing. 3.5.3. inventory management as one of the supply chain segments, inventory management is an essential element in which iot can be helpful. the implementation of iot sensors facilitates automated measurement of inventories by regularly capturing the quantity and availability of stocks, usage rates, and demand. this, in turn, offers organizations an alternative to holding too much or too little stock, saving on holding costs while enhancing customer satisfaction. when accenture (2021) studied an iot use case for inventory management, businesses reported a decrease in inventory by 15–30 percent without compromising or even potentially improving service quality. walmart uses iot sensors and rfid technology to track inventory without physically handling the products, which helps with better restocking and demand estimation (accenture, 2021). this has helped reduce stockout occurrences, especially during the holiday seasons, negatively affecting customer satisfaction. iot devices also support information that can be used to enhance inventory ordering mechanisms. if the amount of stock reaches a low level, the system can order the product to refill the stock and avoid running out of products. such automation enhances productivity and enables employees to focus on higher value-added roles. 3.5.4. periodical check of storage conditions in some industries, the quality of the product is highly influenced by the environment in which it is stored (such as pharmaceuticals, food, and chemicals). iot sensors monitor the storage environment, including temperature, humidity, and light exposure. research has established that proper product storage enhances a firm’s ability to avoid spoilage while adhering to regulatory requirements. for instance, pfizer deploys iot intelligent temperature sensors in its supply chain to track the conditions to which vaccines are exposed. these sensors provide instant notifications if temperatures exceed the set range necessary for the vaccines to remain potent during transportation and storage (pfizer, 2021b). gartner (2020a) identified research stating that firms employing iot in scm realized a 20% reduction in spoiled products and a 15% improvement in regulatory compliance. in the food industry, iot sensors are used by nestlé to monitor storage conditions. by ensuring that perishable products are correctly stored, nestlé has minimized wastage and improved product quality (gartner, 2020a). this benefits the organization in terms of increased customer satisfaction and helps minimize the environmental impact of supply chain management. 3.5.5. routine optimization and automation iot makes it easier to perform routine optimization and automation in scm by acquiring real-time data on various aspects of the supply chain that can be used to improve processes. remote equipment can be used to assess the performance of machinery, monitor employee activity, and track the movement of products within the supply chain, identifying potential areas for improvement. capgemini (2021) showed that industries leveraging iot for routine process improvements saw efficiency gains of 20–30%. iot makes p&g’s factories smart by determining equipment parameters and correlating them with the financial risk and management reviews, 2025, 11(1): 72-102 88 © 2025 conscientia beam. all rights reserved. likelihood of failure shortly. this has minimized downtime by 25%, while enhancing overall performance (capgemini, 2021). moreover, iot enables the automation of repetitive tasks like order selection, packaging, and delivery. zara has adopted iot in its depots to increase automation, reduce labor expenses, and expedite order processing (zara, 2021). with such tasks being automated, zara has quickly responded to changes in consumer demand, enhancing its competitiveness in the international fast fashion industry. 3.6. rfid in supply chain management rfid as an application has significantly impacted today’s supply chain management (scm). this technology creates new opportunities for a company to manage its assets, monitor stock, and improve the efficiency of warehouses, logistics, supply chain, and retailing. drawing on empirical data and pertinent examples, this section critically discusses how rfid can be used in scm. 3.6.1. warehouse management in warehouse management, rfid technology has significantly changed how organizations manage the flow of goods. with rfid tags and readers applied in warehouses, it is convenient for a company to monitor the position of products in real-time, increasing efficiency and requiring less workforce. compared to conventional barcode technology, rfid does not require an object to be aimed at directly to be scanned, making object scanning faster and more precise. specifically, accenture (2020b) argued that warehouses employing rfid reduce labor costs by 15–30% while gaining a 25% enhancement in inventory reliability. amazon uses rfid in its fulfillment centers to track stocks, ensuring faster order processing and minimal picking errors (accenture, 2020b). the integration of a tracking system to monitor the flow of goods without the need to involve personnel speeds up warehouse operations. additionally, rfid systems can easily interface with warehouse management software (wms) to further enhance inventory tracking activities and arrange the goods in proper storage. for instance, siemens adopted rfid technology to automate warehouse procedures, reducing the time for product identification and palletizing by 30% (siemens, 2021a). 3.6.2. inventory management one of the most practical uses of rfid technology is in inventory management. rfid technology makes realtime tracking of products possible, helping businesses achieve efficient stock management and reduce stock surplus. rfid tags differ from barcodes because they can hold significant information and provide the product’s location, status, and movement at any given time. zebra technologies (2021) identified that rfid has helped firms improve inventory visibility by 25% while reducing shrinkage by 20% among those that adopted it for inventory control. walmart has led the way in implementing rfid in its stores and retail distribution centers. walmart realized that rfid helped cut its inventory costs by 15% and increased shelf inventory accuracy or availability since products were reordered before they ran out of stock (zebra technologies, 2021). moreover, rfid technology adopted in stores helps perform automatic stock-taking, eliminating the need for physical counts. these audits give the company real-time information required to update stock periodically. carrefour, a european retailer, reduces inventory through stock counts over rfid, which cuts the time taken to perform audits by 50% and increases data accuracy (carrefour, 2020). financial risk and management reviews, 2025, 11(1): 72-102 89 © 2025 conscientia beam. all rights reserved. 3.6.3. freight transportation in freight transportation, rfid increases efficiency by enabling better shipment tracking. rfid tags attached to shipping containers or affixed to each product enable companies to track the status of assets in transit. they also foster high visibility of business operations, facilitate logistics management, reduce transportation costs, and ensure timely delivery. dhl (2022) reported that rfid technology reduced shipment processing time by 20%, and lost shipments decreased by less than 10%. rfid technology is used by maersk, a global shipping company that tracks containers in real time. an effective container tracking system provides location updates for items being shipped with maersk and helps the firm enhance asset turnover, reduce container idle time, and lower shipping costs (dhl, 2022). rfid also improves the security of freight transport by tracking the state of goods throughout transportation. with the help of rfid sensors, companies can recognize changes in temperature, humidity, or vibration, ensuring that goods are delivered in appropriate conditions. this is especially crucial for industries dealing with products that must meet certain standards, such as pharmaceuticals or food. for example, pfizer implements rfid technology to track vaccine temperatures during transportation, ensuring proper conditions (pfizer, 2021a). 3.6.4. supply chain visibility supply chain visibility is one of the most important factors in today’s complex supply chains. rfid enables realtime tracking of materials and products from raw material suppliers through distributors to customers. this increased visibility allows timely responses to disruptions, optimization of inventory, and improved customer service. mckinsey & company (2021d) established that companies applying rfid to increase supply chain visibility saw lead time reduced by 15–20% and on-time delivery increased by 10%. ford uses rfid systems across its supply chains to monitor the position of strategic components in real-time. this has eliminated production delays and enhanced the firm’s capacity to meet client needs (mckinsey & company, 2021a). it also helps companies track the performance of suppliers they conduct business with by tracking their suppliers’ data in real time. monitoring the flow of goods from suppliers enables firms to predict bottlenecks in the system accurately and take action to minimize lead time. unilever applies rfid technology to monitor its suppliers' shipments and avoid potential supply chain disruptions (unilever, 2020). 3.6.5. retail management rfid has also transformed retail management by providing retailers with real-time visibility into inventory levels, reducing shrinkage, and improving customer service. in retail environments, rfid tags can be used to track individual products, ensuring that shelves are stocked and that customers can easily find what they are looking for. a report by gartner (2022c) found that retailers using rfid experienced a 15-30% reduction in shrinkage and a 10% improvement in sales due to better stock visibility. zara, a global fashion retailer, has implemented rfid in its stores to track inventory in real-time. by providing accurate data on stock levels, zara ensures that its shelves are always stocked with the right products, reducing stockouts and improving customer satisfaction (gartner, 2022c). additionally, rfid enables faster checkout processes by allowing retailers to scan multiple items at once, reducing wait times for customers. decathlon, a leading sporting goods retailer, uses rfid to enable self-checkout in its stores. customers can scan their items with an rfid reader, and the system automatically detects the products and processes the payment. this has improved the customer experience and reduced the time spent in line by 30% (decathlon, 2021). 3.7. robotics and automation in supply chain management robotics and automation are essential strategic tools in today’s scm, offering increased efficiency, accuracy, and decreased costs. with technologies like as/rs, agvs, collaborative robots, and controls, organizations can reduce financial risk and management reviews, 2025, 11(1): 72-102 90 © 2025 conscientia beam. all rights reserved. worker intervention and increase efficiency. this section critically evaluates the use of robotics and automation in the context of supply chain management, with special consideration given to warehouse management, automation, and supervisory control. 3.7.1. warehouse management there has been tremendous change in warehouse management brought about by robotics and automation. warehouse management needed manual effort from people in the past, and this is quite a disadvantage since it is time-consuming and prone to errors, thus increasing the cost of running the whole process. today, robotics has enabled companies to enhance processes, including picking, packing, and inventory control. dhaliwal (2020) states that the use of robots in warehouses has helped to act as robots to increase productivity by 30 % while, at the same time, cutting down the costs of human labor by 20%. amazon is a clear example of this, having implemented the use of robotic arms, as well as mobile robots within its fulfillment centers. these operation robots are companions with human employees to minimize mistakes and enhance order fulfillment (dhaliwal, 2020). awareness can also be constant because robots do not require any rest, thus making the operations in the warehouse efficient. mckinsey & company (2021e) revealed that firms implementing robotic systems in warehousing cut the processing time by 25% while achieving 15% warehouse efficiency. this level of automation assists businesses in working with increased numbers of products without compromising accuracy and speed (mckinsey & company, 2021b). 3.7.2. automated storage and retrieval systems (as/rs) automated storage and retrieval systems are one of the significant categories of warehouse automation systems that find applications in the appropriate picking of stored products, especially those with high cube utilization but requiring low order selection variety. as/rs systems involve the storage and retrieval of goods and products by manual handling equipment without the intervention of man and, hence, the use of robotic systems to move goods in a particular warehouse. this saves time, helps avoid contact with people, and ensures the compactness of the storage space. deloitte (2021a) reported that, companies that employed as/rs garnered a 40% reduction in storage area footprint and a 30% improvement in throughput. for example, walmart utilized this technology in its warehouses to enhance stock control. such systems help walmart increase the density of specific products while improving efficiency in picking and space search (deloitte, 2021a). the use of as/rs systems also has another advantage: the time it takes to fulfill an order is also reduced. when using automated retrieval systems, karpova (2022) showed that picking times were reduced to half, thus enabling companies to respond effectively to increased customer demand for expeditious deliveries. besides, these systems can work in various hostile environments, for example, in refrigerated warehouses where people can work with some constraints (karpova, 2022). 3.7.3. automated guided vehicles (agvs) automated guided vehicles (agvs) are a standard supply chain technology used to transport materials within a warehouse, factory, and distribution center. partially automated guided vehicles, or agvs for short, move along specific tracks that may be marked using sensors, lasers, or magnetic strips, thus reducing the need for human control. these vehicles can lift large loads, which will help eliminate some of the handling equipment, such as forklifts. guru, khan, and deshmukh (2018) have indicated that companies using agvs have experienced a 20% decrease in material handling costs and an increase in operational efficiency by 15%, as supported by bechtsis, tsolakis, vlachos, and iakovou (2017). toyota employs agvs in all its manufacturing facilities to move parts from assembly financial risk and management reviews, 2025, 11(1): 72-102 91 © 2025 conscientia beam. all rights reserved. lines to stores. by implementing agv systems, toyota has increased the manufacturing productivity of materials and overall workplace safety by automatically handling material movement (bechtsis et al., 2017). agvs also help minimize downtime and enhance safety, which he believes has benefits. kiva systems, now a subsidiary of amazon robotics, has come up with vehicles that transport shelves of products to employees for packing and sorting. it also cuts the number of hours the workers are required to walk, something that would not be possible with human-operated forklifts (amazon robotics, 2021). the agvs can also be used in highly complicated and dynamic environments. with the increased technological features, they can avoid the obstacles in their path within their working area. 3.7.4. collaborative robots (cobots) collaborative robots, or cobots, are designed to work alongside human workers, enhancing productivity without replacing human labor entirely. unlike traditional industrial robots, which are typically isolated for safety reasons, cobots are equipped with advanced sensors and ai systems that allow them to operate safely in close proximity to people. a study by boston consulting group (2020) found that the adoption of cobots in supply chains can increase productivity by 20-40%. cobots can handle repetitive tasks, such as packaging, labeling, or quality control, freeing up human workers to focus on more complex and value-added activities. abb robotics has developed cobots that work in automotive supply chains, performing tasks such as assembling small components and checking product quality (boston consulting group, 2020). cobots also offer flexibility and scalability. universal robots has developed cobots that can be easily programmed to perform a wide range of tasks, making them ideal for small and medium-sized enterprises (smes) with varying production needs (universal robots, 2021). the collaborative nature of these robots allows companies to scale their operations quickly and adapt to changes in demand without the need for extensive reconfiguration. 3.7.5. control and supervision robotics and automation in supply chains require sophisticated control systems to ensure that all processes run smoothly and efficiently. advanced control systems use artificial intelligence (ai) and machine learning (ml) to monitor robotic operations, optimize workflows, and prevent equipment failures. these systems provide real-time data on the performance of robots, enabling companies to make data-driven decisions and improve operational efficiency. a report by gartner (2021a) revealed that companies using ai-driven control systems in their supply chains saw a 15-25% improvement in efficiency and a 20% reduction in downtime. siemens, for example, uses ai-powered control systems to monitor its automated manufacturing plants. these systems analyze data from sensors in real-time, predicting equipment failures before they occur and scheduling maintenance proactively (gartner, 2021a). moreover, ai-driven control systems enable supply chain managers to optimize robotic workflows, ensuring that resources are allocated efficiently. ge healthcare uses control systems to monitor its robotic systems in real-time, allowing for adjustments to be made dynamically based on demand fluctuations. this has led to a 20% increase in production efficiency and a 15% reduction in lead times (ge healthcare, 2021). 4. advantages of adopting emerging technologies in supply chains 4.1. an integrated and resilient supply chains in recent times, there has been a noticeable surge in interest in supply chain resilience, with practitioners and scholars concentrating on creating a supply chain that can withstand unfavourable circumstances (chatterjee, chaudhuri, & vrontis, 2024). organizations can implement emerging technologies like blockchain (bayramova, edwards, & roberts, 2021; kurpjuweit, neumann, & müller, 2021) industry 4.0, and artificial intelligence (birkel & financial risk and management reviews, 2025, 11(1): 72-102 92 © 2025 conscientia beam. all rights reserved. müller, 2021) to further enhance the effectiveness and resilience of their sustainable supply chain management (sscm) concept (karmaker et al., 2021). to increase the robustness of their sscs, many businesses would rather go beyond remote monitoring to control, optimization, and sophisticated autonomous ai-based systems. while ai technologies have applications in marketing, logistics, and production, they are also applicable in nearly every other area and subfield within supply chain management (sscm). these applications include high accuracy, high throughput, and fast issue-solving (kazancoglu, ozbiltekin-pala, mangla, kumar, & kazancoglu, 2023). adopting i4.0 technologies, often known as idt of i4.0, offers significant technical advancements that make it possible to integrate real-time supply chain partners and gather and analyze massive amounts of data automatically. making more precise judgments and enhancing supply chain integration may be facilitated by using more idt of i4.0, such as cloud computing, big data, and the internet of things (iot) (oliveira-dias, maqueira-marín, & moyano-fuentes, 2022). additionally, it is predicted that industry 4.0 technologies powered by ict would improve process integration, leading to long-term organizational performance. bt is an organizational capacity that unifies all of the resources and assets of sc, enhancing tasks like information sharing, product monitoring, and transaction transparency. in addition to its fundamental advantages, blockchain provides a platform for integrating cutting-edge technology like ai and iot. to demonstrate how blockchain technology has not only streamlined current procedures but also opened the door for innovative business models and cooperative ecosystems, case studies and experimental projects are investigated (oriekhoe et al., 2024). bt adds an extra degree of protection against intrusions and data breaches, which often happen through network-level attack vectors, by encrypting all data shared inside a network. decentralization reduces the risk of a single point of failure, while the traceability feature of a permanent record of all transactions carried out by authorized users in the permissioned network eliminates the threat of insider attacks (from people as an attack vector) (bayramova et al., 2021). the creation of a digital sc twin, or computerized digital sc model that represents the network state in real-time and enables complete end-to-end sc visibility to strengthen resilience and test contingency plans, is possible with the use of data analytics to enhance the current decision-support tools. for planning and making choices about control in real-time, a digital twin may be utilized to simulate the physical sc by using real transportation, inventory, demand, and capacity data (ivanov & dolgui, 2021). utilizing supplier it for exploitation streamlines upstream structured activities such as material shipment, inventory management, invoicing, and buying. businesses may swiftly find alternative materials by using standardized and institutionalized information when the upstream is harmed by disruptions. this enables businesses to address material shortages and bounce back from disruptions quickly, which improves supplier resilience (gu, yang, & huo, 2021). 4.2. addressing significant challenges the primary obstacles to ai adoption in supply chain management include change management, current technological constraints, human acceptance of these approaches, comprehension and usefulness of these techniques, and people's existing expertise, in addition to the high implementation costs of such solutions. other obstacles include a lack of openness, problems with security and privacy, a lack of technological principles and abilities, and deficiencies in data, documentation, and the resilience of these solutions (hangl, behrens, & krause, 2022). it is not easy to integrate blockchain into supply chain management. it is necessary to carefully negotiate regulatory constraints, scalability problems, and interoperability issues. unlocking blockchain's full potential and guaranteeing its smooth incorporation into various supply chain contexts require industry-wide cooperation and standardization initiatives (oriekhoe et al., 2024). even though the developing idt of i4.0 has attracted attention recently, research on the advantages and difficulties of adopting these idt and their role in fostering an agile supply chain is still in its infancy. cybersecurity, sophisticated and collaborative robots (cobots), virtual or augmented reality, and other technologies are not well understood (oliveira-dias et al., 2022). the fundamental issues with blockchain technology, such as security, usability, and technological immaturity, comprise the technological hurdles. policies, culture, and managerial commitment are examples of organizational aspects. the supply chain (inter-organizational) perspective financial risk and management reviews, 2025, 11(1): 72-102 93 © 2025 conscientia beam. all rights reserved. encompasses issues such as lack of knowledge, difficulty with collaboration, and information disclosure (kouhizadeh, saberi, & sarkis, 2021). one of the biggest obstacles to the effective adoption of blockchain technology is the business owner's reluctance to try out novel technologies. a significant obstacle to striking a balance between the benefits offered and the possibility of any unexpected repercussions that may follow is regulatory ambiguity (mathivathanan, mathiyazhagan, rana, khorana, & dwivedi, 2021). the most significant obstacles are transaction-level uncertainty (b1), usage in the underground economy (b2), management commitment (b5), scalability issues (b3), and privacy threats (b4), in that order of significance (vafadarnikjoo, badri ahmadi, liou, botelho, & chalvatzis, 2023). iot has a lot of potential uses in supply chains, however there are a lot of implementation issues with the technology. the supply chain faces major obstacles in utilizing iot to its full potential, including security, privacy, and scalability. iot is a wireless technology, and numerous sensor nodes provide the foundation for applications. as a result, it raises several possible security issues for users with relation to data storage, data breach during wireless transmission, and storage site security. certain iot data are extremely sensitive, may have significant societal repercussions, and are legally protected. rfid technology has the potential to violate civil rights and harm consumer privacy if protections are not put in place (attaran, 2020). given that supply chains are intricate systems of systems (sos), cyberattacks may have an impact at the corporate level, particularly if supply chain components depend on data from the internet of things. their effective security is challenged by the integration of infrastructure, technology, and supply chain subnetworks into broader military ecosystems. implementing enterprise architecture (ea) strategies is one possible way to lessen the hazards that system integration within complex supply chain systems poses (sobb, turnbull, & moustafa, 2020). 4.3. opening doors to future innovations new technology developments in the sc field prove to be game-changers for many firms. several writers claim that ai in supply chain management (scm) would enable businesses to see everything from the raw material to the final customer, giving them more time to make choices and take remedial action (hangl et al., 2022). blockchain will become an essential instrument for the optimization and transformation of global supply chains as a result of crossindustry collaboration and the development of decentralized autonomous organizations (daos). businesses who adapt to this changing environment by taking proactive measures to overcome obstacles, valuing teamwork, and utilizing all of block chain's possibilities will not only streamline their supply chain processes but also set themselves up for success as a leader in the coming era of international trade. as the voyage proceeds, block chain serves as a light, pointing the way in the direction of supply chain management's more inventive, transparent, and efficient future (oriekhoe et al., 2024). scrm is being revolutionized by ai and ml, which make predictive modeling possible for more precise risk assessment (coker, uzougbo, oguejiofor, & akagha, 2023). the growing integration of robots, automation, machine learning, and artificial intelligence will define future developments in scrm and technology. these developments enable businesses to automate decision-making procedures, streamline warehousing and logistics, and proactively detect and address hazards. organizations who adopt and strategically apply these technologies will be better able to handle the complexity of today's supply chain environment as these trends continue to develop (odimarha, ayodeji, & abaku, 2024). proactive risk mitigation techniques are made possible by early detection of possible threats. decision-making processes are improved by increased forecasting and risk assessment accuracy. in order to forecast the possibility of disruptions, ai algorithms may examine past supplier performance, market trends, and geopolitical variables. this capability enables businesses to take proactive risk management measures and make well-informed decisions. one of the main trends in future scrm is the automation of decisionmaking processes with ai and ml (ganesh & kalpana, 2022). in summary, there is a rising awareness of blockchain's ability to improve efficiency, transparency, and collaboration in supply chains, which characterizes the present stage of its adoption. these studies offer important insights into the major success factors, difficulties, and directions for future study related to the effective application of blockchain in supply chains. financial risk and management reviews, 2025, 11(1): 72-102 94 © 2025 conscientia beam. all rights reserved. 5. successful case studies essentially, a blockchain is an extensive network of it systems that functions as a digital record of transaction volume spread throughout the network. in the development of e-commerce, this technology serves as a dependable layer. to digitize the food supply chain process and bring transparency to the decentralized food supply ecosystem, walmart and ibm have been collaborating on a food safety blockchain solution. the success of walmart's blockchain experiment depended on departmental collaboration. because blockchain technology aligned with the regulators' mission, they were intrigued by its potential (sharma & kumar, 2021). four major players in the grocery and food industries—walmart stores inc., nestlé s.a., international business machines corporation, and dole food company inc.—decided to collaborate to address issues facing the global food supply chain. this decision is detailed in the case study, applications of blockchain technology in business and information systems. their goal is to accomplish this by tackling the issue of food safety by collaborating with several partners to create a blockchain-based traceability architecture. to explore the blockchain's potential for tracking food product origin, either individually or to obtain industry-wide insights, walmart has conducted two tests thus far (eze, ugwu chinyere, & ogenyi fabian, 2024). the success of amazon.com is a result of its significant commitment to automation innovation. the business started developing and implementing a variety of autonomous robots after acquiring kiva system in 2012, including the palletizer, robo-stow, and several drive unit variations. the acquisition of canvas technology, a technology that would be utilized to develop new drive robots with enhanced vision systems, demonstrated the company's ongoing commitment to innovation. additionally, amazon.com collaborates with businesses like smartpac and cartonwrap to automate the packaging and wrapping of goods for delivery. the upskilling 2025 effort was started by amazon.com and offers a variety of programs to help employees learn and advance their abilities in fields including software engineering, it, machine learning, and cloud computing (laber, thamma, & kirby, 2020). amazon adopted the concept of f-warehouses a new type of fulfillment warehouse that solely handles online orders. this allowed for an investigation, which revealed that the corporation operated over 175 of these types of centers, able to fulfill up to 0.5 million units daily (onal, zhu, & das, 2023). online grocery delivery is ocado's business, and it boasts the largest and most automated warehouse in the world. in its automated warehouses in london, ocado employs a fleet of 3,000 robots that get to work as soon as an order is placed and received. these robots head straight to the containers holding the necessary items and start the fulfilling procedure there. they shift apart by around five millimeters, illustrating how well-organized and fluid the codes and algorithms are, ultimately enabling ocado to optimize operational efficiency and overall company success. ocado's satisfaction the corporation can deliver 50% of client orders within 4 hours, compared to 10% if no warehouse automation was implemented, thanks to the 26 centers' architecture, which includes thousands of bots capable of picking 50 products in a matter of minutes (savushkin, 2024). with the might of a global corporation and the inventiveness of a start-up, dhl. dhl picks, sorts, and tags items in the warehouse using industry 4.0 technologies including ar (augmented reality) and iot (internet of things). with the usage of vuzix smart glasses, employees were able to operate in warehouses without using their hands thanks to the benefits of augmented reality (patil, 2020). furthermore, dhl logistics company investigates a wide range of augmented reality applications in several supply chain activities, including transportation optimization, last-mile delivery, warehouse operations, and improved value-added services (kamau & murori, 2024). 6. conclusion and implications the aim is to analyse how in the ecosystem of supply chain management, digital transformation is essential for business sectors to preserve their competitive edge and achieve operational efficiency. in the ecosystem of supply chain management, digital transformation is essential for business sectors to preserve their competitive edge and achieve operational efficiency. five more efficient uses for the single answer were found by the investigation. demand forecasting, warehouse automation, transportation and route optimization, supplier selection and management, and financial risk and management reviews, 2025, 11(1): 72-102 95 © 2025 conscientia beam. all rights reserved. predictive maintenance are all made possible by artificial intelligence. blockchain makes monitoring and transparency possible, improving traceability, reducing counterfeiting, promoting ethical and sustainable sourcing, and facilitating intelligent payments. better communication, cost monitoring, inventory control, tracking key performance indicators, and optimized visualization are all guaranteed by business intelligence. demand forecasting, route optimization, inventory control, risk assessment, and supplier management are all made easier by data science. tracking shipments and deliveries, inventory management, warehouse capacity monitoring, storage condition monitoring, routine optimization, and automation are all made possible by iot. rfid works well for supply chain visibility, retail management, freight transportation, warehouse management, and inventory management. automation and robotics are used in collaborative robots, automated guided vehicles, automated storage and retrieval systems, warehouse management, control, and monitoring. leaders in the industry and policymakers are urged to take these suggestions into account to fully utilize blockchain technology and improve scm processes' resilience, sustainability, and efficiency. scm's future is in utilizing these cutting-edge technologies, and blockchain is at the vanguard of this revolutionary voyage. for scrm to be effective, industry stakeholders must work together. organizations may communicate pertinent information about industry trends, best practices, and possible hazards by forming partnerships for data sharing. by establishing cooperative platforms, partners and rivals may both add to a shared knowledge of the supply chain environment and enable better-informed risk management tactics. the idea behind blockchain technology is to eliminate the supply chain's conventional division. blockchain offers a new value creation based on automotive supply chain theories, which is a basis for additional empirical research, from the perspectives of extensibility, degrees of freedom, redesign of automotive supply chain visibility, operational efficiency, and new business model. managers and staff members need to be more open-minded for digital technology to be used successfully. the process of digital transformation is mostly driven by the executives. they must embrace technology and give it top attention. they must critically examine their company and its goals; they must also establish business cases, solutions, strategies, and roadmaps. funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors declare that the manuscript is honest, truthful and transparent, that no important aspects of the study have been omitted and that all deviations from the planned study have been made clear. this study followed all rules of writing ethics. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. references abeyratne, s. a., & monfared, r. p. 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(2021). rfid in inventory management: improving visibility and reducing shrinkage. retrieved from https://www.zebra.com views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. https://doi.org/10.1007/s10479-021-04048-6 https://doi.org/10.1080/12460125.2015.1038404 https://www.weforum.org/ https://doi.org/10.1016/j.jii.2020.100118 https://www.zara.com/ https://www.zebra.com/ 37 © 2025 conscientia beam. all rights reserved. greenwashing within the context of financial technology and sustainable development: conceptual frameworks and theoretical perspectives tipon tanchangya1+ asif raihan2 md rakib mia3 ummah tafsirun4 kamron naher5 naimul islam6 fahad rashid7 shoaibur rahman sarker8 1department of finance, university of chittagong, chittagong 4331, bangladesh. email: tipon.tcg.edu@gmail.com 2institute of climate change, universiti kebangsaan malaysia, bangi 43600, malaysia. email: asifraihan666@gmail.com 3department of business administration, ahsanullah university of science and technology, dhaka -1212 bangladesh. email: mdrakibmia087@gmail.com 4department of business administration, noakhali science & technology university, noakhali-3814, bangladesh. email: ummah.tafsirun@gmail.com 5department of business, presidency university, dhaka-1212, bangladesh. email: naherk@pu.edu.bd 6department of accounting, finance and economics, university of greenwich, london se10 9ls, uk. email: naimmgtdu75@gmail.com 7centre for islamic finance, university of bolton, bolton bl3 5ab, uk. email: fr7bbs@bolton.ac.uk 8school of business and law, northumbria university, 110-114 middlesex street, e1 7ht, london, uk. email: shoaibur.fin.du@gmail.com (+ corresponding author) abstract article history received: 2 december 2024 revised: 6 january 2025 accepted: 27 january 205 published: 31 january 2025 keywords conceptual framework financial technology greenwashing sustainable development goals theoretical background. the study aims to explore the greenwashing phenomenon in the context of fintech and sustainable development and analyze the conceptual frameworks and theoretical perspectives that connect greenwashing, fintech, and sustainable development. a qualitative approach was employed in this research, which was primarily based on secondary data. the findings show that fintech significantly contributes to sustainability by promoting environmental conservation, economic growth, and financial inclusion across various sdg domains. additionally, the theoretical perspectives examine key theories (stakeholder theory, legitimacy theory, signaling theory, and institutional theory) and highlight how greenwashing practices might influence the fintech sector. furthermore, this study draws attention to the potential economic, social, and environmental impact of greenwashing on fintech. finally, the study offers valuable insights for strategy formulation to prevent companies from making misleading environmental claims. above all, the present study makes a substantial contribution to the ongoing debate regarding the links between greenwashing, fintech, and sustainable development. contribution/originality: this research integrates greenwashing within the fintech solutions and sustainable development goals (sdgs). the research fulfils the literature gap of conceptual framework and theoretical perspective to prevent greenwashing. this study offers insights into the way to associate fintech and sdgs as well as preserving moral practices. financial risk and management reviews 2025 vol. 11, no. 1, pp. 37-71 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v11i1.4076 © 2023 conscientia beam. all rights reserved. https://orcid.org/0009-0009-2365-4959 https://orcid.org/0000-0001-9757-9730 https://orcid.org/0009-0004-7267-9515 https://orcid.org/0009-0005-5373-4619 https://orcid.org/0009-0001-9663-5427 https://orcid.org/0009-0005-7001-1770 https://orcid.org/0009-0001-2482-3808 https://orcid.org/0009-0000-4196-682x mailto:tipon.tcg.edu@gmail.com mailto:asifraihan666@gmail.com mailto:mdrakibmia087@gmail.com mailto:ummah.tafsirun@gmail.com mailto:naherk@pu.edu.bd mailto:naimmgtdu75@gmail.com mailto:fr7bbs@bolton.ac.uk mailto:shoaibur.fin.du@gmail.com https://www.doi.org/10.18488/89.v11i1.4076 financial risk and management reviews, 2025, 11(1): 37-71 38 © 2025 conscientia beam. all rights reserved. 1. introduction 1.1. background and role of fintech in sustainable development nowadays, an increasing number of new challenges impact financial management. this is due to the increasing digital transformation and the growing concerns of customers about environmental sustainability and respect in the products they purchase (chueca vergara & ferruz agudo, 2021). traditional banks, fintech, fintech startups, and fully digital banks have all helped fuel the expansion of the financial products and services available in the modern economy (klimontowicz, 2023). the banking industry is at the forefront of the financial technology (fintech) revolution that is reshaping the industry and providing financial institutions with numerous advantages through the use of smartphones, ai, the internet of things (iot), and blockchains (dwivedi, alabdooli, & dwivedi, 2021; tanchangya et al., 2024b). the new digital realm has presented traditional banking institutions with substantial challenges, forcing them to adjust their operating models. the emergence and growth of fintech have significantly impacted the financial industry. research on the effects of financial technology on long-term sustainability is an emerging area. it is believed that the offerings of fintech can be pushed to use to accelerate social development and aid in the attainment of the sustainable development goals (sdgs) (dwivedi et al., 2021; klimontowicz, 2023). in addition, there is no doubting the evident social, environmental, and ecological advantages of this technology's implementation, which is driving investment in energy and environmental initiatives, renewable energy usage, and green infrastructure development (deng, huang, & cheng, 2019). furthermore, a more accessible, secure, and inexpensive financial system can be achieved through the use of fintech, which, along with better service quality, can lead to a more stable, diverse, and user-friendly financial environment (moro-visconti, cruz rambaud, & lópez pascual, 2020; tanchangya, raihan, rahman, ridwan, & islam, 2024a). fintech has made it easier for financial sectors to handle risks by incorporating new technologies with financial innovations like big data analysis and cloud computing. fintech aims to speed up the integration of real and financial economies, creating more decentralised opportunities for sustainable growth (castilla-rubio, robins, & zadek, 2016). fintech has the potential to accelerate the adoption of green finance, a method of investing that ensures both economic and environmental sustainability (yang, 2020). thereby, fintech stands out as the most "revolutionary" technology in the financial services industry because it uses technology such as artificial intelligence (ai) and machine learning. these technologies facilitate data collection to determine customers' esg ratings and encourage the funding of renewable energy projects that generate social, environmental, and ecological benefits (chen, siddik, zheng, masukujjaman, & bekhzod, 2022; rahman, tanchangya, rahman, aktar, & majumder, 2024; zhou, tang, & zhang, 2020). fintech contributes to sdgs by promoting financial inclusion and directing resources towards sustainable uses, providing access to diverse products and services to meet customer needs sustainably (chueca vergara & ferruz agudo, 2021; dwivedi et al., 2021). 1.2. definition and relevance of greenwashing in fintech sector the need to battle climate change and reach sustainable development goals is becoming increasingly apparent as fintech grows in popularity. ecological or environmentally friendly goods are in high demand as people seek to live more sustainably in response to the growing wave of environmental consciousness about the dangers of climate change. pressure from customers, investors, and government agencies is increasing on firms to be more transparent about the environmental effects of their operations (chueca vergara & ferruz agudo, 2021). but with this development comes a growing concern: the proliferation of greenwashing practices in the business sector. companies engage in "greenwashing" as a deceptive marketing strategy to attract environmentally conscious investors and consumers (pimonenko, bilan, horák, starchenko, & gajda, 2020; raihan et al., 2024). companies' misleading or false advertising techniques that falsely represent their environmental obligations are referred to as "greenwashing" (de freitas netto, sobral, ribeiro, & soares, 2020; delmas & burbano, 2011). financial risk and management reviews, 2025, 11(1): 37-71 39 © 2025 conscientia beam. all rights reserved. without real commitment or influence, it is the advertisement of sustainable financial products or services that undermines initiatives for sustainability (seele & gatti, 2017). this refers to a pattern of fraudulent behaviour that makes a product or company seem more environmentally friendly than it actually is, with the intent to deceive customers into buying it. this type of marketing misleads consumers by describing a product's environmental features in a way that is difficult to understand by making ecological claims that are not backed by evidence or by making exaggerated claims about the product's environmental features while concealing or omitting relevant facts (chueca vergara & ferruz agudo, 2021; rahman, rahman, tanchangya, & esquivias, 2023). people around the world are becoming more aware of the misleading or outright false environmental claims that businesses, non-governmental organizations (ngos), and even governments make when they communicate about their plans to deal with environmental and climate problems. organizations can exploit such claims to boost their reputations, customer and employee relationships, or short-term profitability. however, they are unlikely to implement the real changes that are needed to quickly lessen their harmful effects on the environment (nemes et al., 2022). greenwashing is still prevalent even if people are becoming more aware of it. when viewed from the lens of fintech, an area where new, sustainability-focused financial products have been made easier to create and market because of the combination of technology and finance, this issue takes on further significance. there have been cases where fintech companies have positioned their investing platform as eco-friendly, promising to reinvest in green projects and sustainable companies. investments made by companies could be greenwashed if they don't conduct impact assessments or comply with established environmental guidelines. 1.3. objectives and structure of the study the objectives of this study are to investigate greenwashing and its effects on fintech and sustainable development and to analyze the conceptual frameworks and theoretical perspectives that underpin the relationship between fintech, sustainability, and greenwashing. in section 2, conceptual framework is discussed. section 3, 4, 5 and 6 discussed on theoretical perspective, greenwashing impact on fintech, case studies, strategies to reduce greenwashing respectively. finally, conclusion is shown in section 7. 2. conceptual framework 2.1. conceptual framework for understanding greenwashing 2.1.1. historical background and evolution of greenwashing this practice of "greenwashing" is not new, and it's not a response to consumer demands for environmental protection. it was actually well-known as early as the mid-1980s (dahl, 2010). the term "greenwashing" was initially introduced by american environmentalist jay westerveld in 1986 to denote the falsified environmental practices that hotels implement in their daily operations. a new term has been coined by combining the words "green" and "bleaching." "green" means healthy, natural, and environmentally friendly. to use the term "bleaching" to describe the process of "washing away the material with water" for this discussion, greenwashing can be understood to mean the practice of applying a false green colour to an object in order to conceal the actual colour (wang et al., 2023). on the contrary, mitchell and ramey (2011) stated that greenwashing is a hybrid of "green" and "brainwashing," using the second term in reference to environmental issues. therefore, greenwashing arises when companies try to resolve the conflict between how much they really care about the environment and how much they try to play a role in greenwashing. scholars characterised greenwashing as a tactic that is founded on disclosure (cooper, raman, & yin, 2018; lee & raschke, 2023) and may be affected by external constraints, incentives, or forces that shape the institutional atmosphere where the strategies of falsely reporting green initiatives are made (li, li, seppänen, & koivumäki, 2023; seele & schultz, 2022; velte, 2022). many academic fields have looked into the idea of "greenwashing," and it has also been brought up in discussions among different government agencies and ngos. legal studies, production engineering, environmental financial risk and management reviews, 2025, 11(1): 37-71 40 © 2025 conscientia beam. all rights reserved. studies and management, advertising, ethics, and marketing are just a few of the areas that have contributed to its conceptualization and understanding. social science has also played a role. given the multitude of opinions, it's not surprising that there is no widely agreed-upon definition of greenwashing. concepts of greenwashing are also constantly changing in response to the issue's growing significance and attention, making it a shifting target in discussions among academics, practitioners, and policymakers (nemes et al., 2022). 2.1.2. types and characteristics of greenwashing greenwashing occurs when a company or organisation misleads its customers about its environmental practices (firm level) or the ecological benefits of its products and services (product/service level) (delmas & burbano, 2011). greenwashing can take various forms. prior research has mostly focused on two main categories of greenwashing: claim and execution greenwashing. so far, most studies have been conducted regarding product or service-level claims of greenwashing. this is when companies make an environmental claim about a product or service that isn't true by using textual justifications that directly or indirectly highlight how beneficial it is for the environment (de freitas netto et al., 2020). other kinds of claims, all taken from existing (nemes et al., 2022) studies, are also used in greenwashing. a) selective disclosure claims: based on a small number of characteristics, divert attention away from the broader environmental effect of the company. b) empty claims: when company policies or claims either overstate their accomplishments or do not deliver on their commitments. c) irrelevant claims: statements about achievements that are either inconsequential or compelled by law or rivals. d) lies: statements are completely false. e) just not credible: when a potentially harmful or divisive action, policy, or product is portrayed as having environmentfriendly benefits. f) dubious certifications and labels: the claim has certifications that are easy to counterfeit. g) political spin: proclaims its commitment to environmental sustainability while actively opposing environmental legislation. h) vagueness: the idea is not clearly articulated, and hence, the intended significance is ambiguous. i) jargon: the claim's language and facts are difficult for the consumers to understand and evaluate clearly. j) misleading symbols: a deceitful impression of the organisation's eco-friendliness is created by the usage of symbols and images. further, claim type and claim deceptiveness were the two categories of green claims that carlson, grove, and kangun (1993) proposed. in the first category, there is product orientation, which emphasises the ecological features of the product or service; second, process orientation, which emphasises the ecological features of the production process or technology; third, image orientation, which emphasises the creation and enhancement of an environmentally friendly company reputation, for example, by showing pro-environmental activities and initiatives; fourth, environmental fact, which includes claims including an organisation's allegedly factual statement regarding the environment as a whole; and finally, combination, which includes at least two of these types of approaches. the second category includes: a) vague or ambiguous: claims that are ambiguous, unclear, and not precise; b) omission: claims that lack the information required to evaluate their validity; c) false/outright lie: claims that are misleading or fabricated; d) combination: claims that fall into two or more of the above categories; and e) acceptable: claims that have no false elements. executional greenwashing was defined by parguel, benoit-moreau, and russell (2015) as a new type of greenwashing. this greenwashing tactic avoids making any of the above-mentioned claims to attract consumers. it rather uses imagery depicting natural aspects, such as the green and blue colours or the sounds of the ocean or birds. for example, materials that evoke nature in an execution could be backgrounds depicting mountains, woodlands, or beaches; images of endangered animals like pandas or dolphins; or renewable energy sources like wind or waterfalls (parguel et al., 2015). intentional or not, these aspects that portray nature could lead people to believe that the company is environmentally friendly erroneously. these elements can stimulate subconscious financial risk and management reviews, 2025, 11(1): 37-71 41 © 2025 conscientia beam. all rights reserved. allusions to the environment through nature visuals, consequently sparking ecological inferences subtly (hartmann & apaolaza-ibáñez, 2009; parguel et al., 2015). 2.1.3. mechanisms of greenwashing jones (2019) highlights that the act of greenwashing cannot be accurately uncovered through the evaluation of company narratives, whether through quantitative or qualitative methods, in commercials, corporate sustainability reports, or any other form of corporate disclosure. ultimately, it is impossible to evaluate these narratives for truthfulness because they are highly volatile, and the customer's focus is too automatically diverted. analyzing how greenwashing functions needs a way of thinking about the systems that allows for a more closely orientated view of how greenwashing acts. an examination of the three levels of analysis—micro (the product), meso (the company), and macro (the industry)—in this conceptual framework for greenwashing would be necessary. considerations of alternative products, competitors, and industry standards help us make sense of how greenwashing occurs. to broaden the scope of greenwashing, seele and gatti (2017) propose including the idea of subjectivity. they claim that the term "greenwashing" is subjective; that is, certain stakeholders might perceive a particular green message as greenwashing, and others may not. therefore, it emphasizes that greenwashing cannot exist in the absence of accusations. in simpler terms, greenwashing does not occur until a stakeholder group claims so. this further supports the argument of the ambiguous nature of greenwashing, as it is not a black-and-white concept. when stakeholders learn the truth about a greenwasher, the tactic works temporarily, but it damages the company's reputation and takes a long time to recover (ferrón‐vílchez, valero‐gil, & suárez‐perales, 2021). as an added downside, greenwashing can make stakeholders lose faith in a company and their investment plans (pizzetti, gatti, & seele, 2021). thus, businesses should think about the potential consequences since they can impact the market in unexpected ways. misleading communications influence the actions and attitudes of stakeholders, which in turn affect the credibility and image of the company; therefore, businesses must embrace a more genuine communication approach while making green claims (torelli, balluchi, & lazzini, 2020). 2.2. financial technology 2.2.1. definition and scope of fintech fintech (financial technology) is the technology and innovation that aims to deliver competitive financial services through cutting-edge technologies like artificial intelligence, robotics, or blockchain. fintech is an umbrella term that describes many kinds of applications (mobile banking, online payment processing, automated investment services, and more) and cryptocurrencies. by utilizing modern technology, fintech aims to provide financial services in the most efficient, cost-effective, and accessible way possible. fintech is a broad term that can be applied to almost any sector of the financial services arena or new financial products that have been previously unavailable or not easily accessible. this revolution, driven by technology, is currently changing the landscape of the value proposition of financial services by creating new distinctive models of operations, increasing the accessibility of financial services products, and improving the experience of customers. statista (2023) stated that the global fintech market was valued at $127 billion, which shows that the market is still growing steadily. in 2018, the total value reached 66 billion usd, and it predicts that the cagr will be around an annual growth rate of 24.8% from 2019 to 2025; the worth of the digital twin market will reach $460 billion in 2025. therefore, fintech has become a fundamental enabler of the new economy, as is evidenced by its exponential growth. financial risk and management reviews, 2025, 11(1): 37-71 42 © 2025 conscientia beam. all rights reserved. 2.2.2. key areas of fintech the fintech sector comprises several key areas, each contributing uniquely to the financial services landscape. these areas include blockchain, crowdfunding, digital banking, peer-to-peer lending, mobile banking payments, insuretech, and robo-advisors. figure 1 presents key fintech solutions and their individual market value and expected growth between 2021 and 2030. figure 1. market value and growth projections of key fintech areas (2021-2030). • blockchain: blockchain technology is one of the most disruptive innovations in fintech. information is saved on several computers in a distributed ledger system with a permissive consensus mechanism, providing transparency and security over the data records. the most famous use case for blockchain is in cryptocurrencies like bitcoin and ethereum, though it has far more applications beyond digital money. with its ability to ensure safe and transparent transactions, blockchain technology is a game-changer in the fight against fraud in the financial sector. it is not limited to activities such as cross-border payments and trade finance. pwc (2022) anticipates that blockchain will contribute $1.76 trillion in growth across a range of sectors globally, with financial services being a primary beneficiary. these factors have made blockchain the backbone of numerous fintech advancements, as it eliminates intermediaries and enhances trust, thereby making financial transactions more secure. • crowdfunding: crowdfunding is yet another substantial activity in fintech. these platforms make it possible to raise capital for a wide range of projects or funding opportunities for both individuals and organisations from many individuals, particularly over the internet. crowdfunding has made it easier for startups, small businesses, and individuals to access capital without constantly engaging and relying on the typical financial sector. platforms like kickstarter, indiegogo, and gofundme have transformed fundraising by offering direct connections between creators, entrepreneurs, and donors. for example, the global crowdfunding market was worth $12.27 billion in 2021, according to the cambridge centre for alternative finance (2022) with a prospective future of more people patronising the platform. • digital banking: digital banking is the term used in the retail industry for servicing using electronic payment systems. it allows customers to conduct transactions and receive various services through mobile apps or websites of registered financial institutions. digital banking has transformed how customers have traditionally financial risk and management reviews, 2025, 11(1): 37-71 43 © 2025 conscientia beam. all rights reserved. interacted with banks—it is faster, more convenient, cheaper, and, in many cases, provides better customer service. another developing concept is neobanks without a physical presence, which have received much attention recently. examples of these include chime, n26, and revolut. such services these banks provide are online savings accounts, payment transfers, investments, etc., at comparatively lower charges than the largescale banks. the global size of the digital banking market was estimated to be and is expected to reach $9.4 billion in 2021, and it is estimated to show an 8% cagr through the following years. 9% from 2022–2030. • peer-to-peer lending: peer-to-peer (p2p) lending platforms are those venues where individuals can lend or borrow money directly from or to each other without the involvement of a traditional bank or financial institution. these platforms connect people looking to lend with borrowers, which usually provides better rates for everyone. p2p lending has also emerged as one of the most critical segments of the overall fintech space, which helps different categories of borrowers who cannot get loans from banks regularly for specific reasons, such as lack of credit history. lendingclub and prosper are available, and through them, a few billion dollars for different loans have been provided, thus increasing access to credit. thus, statista (2023) revealed that the p2p lending market is expected to grow to $558 billion worldwide. up to 91 billion by 2027, the demand for non-banking institutions will only increase due to the need for new types of credit products. • mobile banking payments: mobile banking payments represent a significant portion of the fintech industry. users can make financial transactions directly through their smartphones, including everything from moving money to paying bills or even tapping a mobile app at the point of sale in-store. the emergence of mobile payment systems like apple pay, google wallet, and alipay has made cash transactions almost extinct, especially in emerging markets with high smartphone penetration. as per allied market research (2022) the global mobile payment market was valued at $1.48 trillion in 2021 and is expected to reach $12.06 trillion by 2030, registering a cagr of 29.1% from 2022 to 2030. • insuretech: insuretech, a division of fintech, is at the forefront of transforming the insurance industry. it uses technological means to create new pathways and sometimes acts as an intermediary for economic development. by revolutionising how insurance is distributed, data-driven insuretech companies significantly enhance the user experience and financial performance of transactions. they also introduce new payment products that are more tailored to specific needs, reshaping the insurance industry. insurtech innovations include usage-based insurance, on-demand insurance, and peer-to-peer models. startups such as lemonade and root have redefined insurance services with lower premiums, simplicity, and transparency compared to traditional methods. the global insuretech market is predicted to reach $60.98 billion in 2028 from the projections of accenture (2023) pushed by the growing utilisation of digital technologies in insurance technology, as reported here. • robo-advisors: robo-advisors, with their user-centric approach, are self-service applications that provide financial advice and management recommendations based on advanced algorithms with no human intervention. they offer investment strategies tailored to the user’s risk profile, budget, and time preferences, making the user feel considered and important. robo-advisors have made consulting affordable due to their relatively lowcost solutions, which otherwise would have been out of reach for most individuals. this has enabled firms such as betterment and wealthfront to emerge as some of the most prominent robo-advisors, managing several billions of dollars. the global robo-advisors market was worth $987 million and is expected to grow at a compound annual growth rate (cagr) of 18% over the next five years. it was valued at $4 billion in 2021, and its market is projected to rise at a cagr of 29% between 2022 and 2030 (research and markets, 2023). financial risk and management reviews, 2025, 11(1): 37-71 44 © 2025 conscientia beam. all rights reserved. following table 1 presents the key fintech solutions, their definition, market size, and project growth: table 1. key areas of fintech. key area definition market size (2021) projected growth blockchain decentralized ledger technology enabling secure transactions $6.6 billion $1.76 trillion by 2030 (pwc, 2022) crowdfunding online platforms for raising funds from the public $12.27 billion continuous growth (cambridge centre for alternative finance, 2022) digital banking banking services provided through digital channels $9.4 billion cagr of 8.9% (2022-2030) p2p lending direct lending and borrowing between individuals $158.6 billion $558.91 billion by 2027 (statista, 2023) mobile payments financial transactions conducted via smartphones $1.48 trillion $12.06 trillion by 2030 (allied market research, 2022) insuretech technology-driven innovations in insurance $60.98 billion by 2028 growing adoption (accenture, 2023) robo-advisors automated investment management services $987.4 billion cagr of 29% (2022-2030) (research and markets, 2023) 2.3. sustainable development goals 2.3.1. introduction to sdgs the sustainable development goals (sdgs) are a set of 17 integrated goals meant to be a ‘roadmap to a better and more sustainable future for humanity.’ the united nations set these goals out in 2015 and target areas like poverty, inequality, sustainability, the environment, peace, and justice, among others. these goals are intended to be realised by 2030 as part of the 2030 agenda for sustainable development, to which all un members have committed. the sdgs are well encapsulated, encompassing development in several areas of human endeavour in social, economic, and environmental realms. they are founded on the principles of equity with the aim of universalism in fulfilling development goals. these 17 specific objectives are characterised by 169 targets and 231 distinct indicators that clarify the steps to be followed in the monitoring process. the following table 2 summarises the 17 sdgs: table 2. summary of 17 sustainable development goals. sdg number goal description 1 no poverty end poverty in all its forms everywhere. 2 zero hunger end hunger, achieve food security and improved nutrition, and promote sustainable agriculture. 3 good health and well-being ensure healthy lives and promote well-being for all at all ages. 4 quality education ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. 5 gender equality achieve gender equality and empower all women and girls. 6 clean water and sanitation ensure availability and sustainable management of water and sanitation for all. 7 affordable and clean energy ensure access to affordable, reliable, sustainable, and modern energy for all. 8 decent work and economic growth promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all. 9 industry, innovation, and infrastructure build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation. 10 reduced inequality reduce inequality within and among countries. 11 sustainable cities and make cities and human settlements inclusive, safe, resilient, and financial risk and management reviews, 2025, 11(1): 37-71 45 © 2025 conscientia beam. all rights reserved. sdg number goal description communities sustainable. 12 responsible consumption and production ensure sustainable consumption and production patterns. 13 climate action take urgent action to combat climate change and its impacts. 14 life below water conserve and sustainably use the oceans, seas, and marine resources for sustainable development. 15 life on land protect, restore, and promote sustainable use of terrestrial ecosystems, manage forests sustainably, combat desertification, and halt biodiversity loss. 16 peace, justice, and strong institutions promote peaceful and inclusive societies, provide access to justice for all, and build effective, accountable institutions. 17 partnerships for the goals strengthen the means of implementation and revitalize the global partnership for sustainable development. 2.3.2. contribution of fintech in achieving sdgs financial technology (fintech) has played a significant role in implementing the sustainable development goals since it focuses on how technology can be used to develop new solutions to economic challenges, contributing to economic growth, financial inclusion, and promoting environmental conservation. in several areas, such as finance, climate, and the economy, fintech can help create an impact on the sdgs. • financial inclusion: fintech drives innovation in the delivery of financial services, which is crucial for eradicating poverty (sdg 1) and creating decent jobs (sdg 8). due to the use of technology, fintech firms can reach consumers in areas that traditional financial institutions cannot penetrate, such as rural regions. mobile banking, digital wallets, and microfinancing are excellent examples of innovative fintech systems that have helped bring financial services to millions worldwide. for example, the mobile money service m-pesa, developed in kenya, has significantly impacted financial literacy. by 2021, m-pesa had more than 50 million users in africa, enabling secure and easy transactions, as well as savings and loans (safaricom, 2021). this has led to a reduction in poverty levels and economic stability in the region, thereby improving the standard of living for the people. globally, the world bank (2020) reported that digital financial services could potentially contribute to a gdp boost of up to 6% in developing economies by 2025, clearly showing the power of fintech to drive economic growth. • climate action: another benefit of fintech is that it can help finance climate change mitigation and adaptation measures and support the shift towards a low-carbon economy. with green bonds, carbon trading, and crowdfunding for renewable energy projects, fintech innovations enable organisations to source capital for sustainable development. for instance, green bonds, fixed-income financial instruments designed to finance environmentally sustainable projects, have grown in popularity. the climate bonds initiative (2022) explains that global green bond issuance was recorded at $517.4 billion in 2021, an improvement of 49% from the previous year’s figure. through the issuance and trading of green bonds, fintech platforms help investors contribute to projects aligned with sdg 13, such as renewable energy, energy efficiency, and efficient transportation. furthermore, the study reveals that fintech can also improve transparency and accountability in carbon markets through the application of blockchain technology. this technology can be used to design ledgers of carbon credits that are resistant to tampering and misinformation about emissions reduction. this can help curb greenwashing, as the public can easily verify the environmental claims made by companies. • sustainable economic growth: by proactively encouraging the opening of financial markets, participating in, and promoting non-traditional financial innovation, fintech enables the construction of sustainable and efficient economic structures. by lowering the cost of transactions, enhancing credit availability, and financial risk and management reviews, 2025, 11(1): 37-71 46 © 2025 conscientia beam. all rights reserved. promoting superior resource mobilisation, fintech might help build sound physical infrastructure and sustainable industries. if we take the example of sdg 9 (industry, innovation, and infrastructure), fintech has offered the p2p lending platform to fund small and medium enterprises (smes). smes are a significant source of employment and economic growth, especially in the developing world. however, they need help accessing formal sources of financing with collateral or credit histories. funding circle and prosper are two peer-to-peer lending firms that offer a solution to this issue by allowing smes to borrow from individual investors, thus obtaining the capital needed for expansion. fintech's influence extends to promoting responsible consumption and production, aligning with sdg 12. by providing consumers with tools that offer immediate information about the carbon footprint of products, fintech empowers them to make informed decisions. furthermore, fintech's role in financing businesses that focus on recycling, reuse, and waste minimisation contributes to the development of the circular economy. table 3 shows some sdgs that can be contributed to with the help of fintech solutions. table 3. contribution of fintech to selected sdgs. sdg fintech contribution examples sdg 1: no poverty promotes financial inclusion by providing access to financial services for underserved populations. m-pesa, microfinance platforms sdg 7: affordable and clean energy facilitates investment in renewable energy projects through green bonds and crowdfunding platforms. green bonds, renewable energy crowdfunding sdg 8: decent work and economic growth supports economic growth by providing access to credit for smes and enabling more efficient financial transactions. p2p lending platforms like funding circle sdg 9: industry, innovation, and infrastructure drives innovation in financial services, reducing transaction costs, and improving resource allocation. blockchain technology, insuretech for resilience sdg 12: responsible consumption and production enables consumers to make informed choices by providing transparency on the environmental impact of products and services. supports the circular economy by financing sustainable businesses. digital platforms for sustainable consumption sdg 13: climate action enhances transparency in carbon markets through blockchain technology, and mobilizes capital for climate action through green finance instruments. carbon trading platforms, climate bonds although fintech can be a game changer in implementing the sdgs, we need to cautiously examine its associated risks and challenges. the most important fear is that fintech services may create inequities rather than reduce them. despite progress on financial inclusion, as in the case of mobile banking services, which allow people who live far from physical branches to access needed services, digital divides remain. this divide is key to ensuring fintech delivers widespread good. with the rapid growth of fintech, there have also been worries raised on greenwashing. if fintech companies continue to private-label their products and services as sustainable, some are at risk of greenwashing— exaggerating the environmental benefits that they offer. it underscores the importance of investing in strong regulatory frameworks and transparency to prevent fintech from advancing exclusively fictitious solutions for sustainable development. 3. theoretical perspective 3.1. stakeholder theory 3.1.1. explanation and relevance to greenwashing in fintech freeman (1984) developed stakeholder theory. it suggests that the concept of “business” focuses on satisfying the needs of stakeholders rather than just shareholders. a stakeholder is any person or group who has an interest in financial risk and management reviews, 2025, 11(1): 37-71 47 © 2025 conscientia beam. all rights reserved. or can influence the achievement of an organization’s objectives. when evaluating fintech and sustainable development, the key players involved are customers, employees, shareholders, the government, environmental officers, and other community members. the usefulness of stakeholder theory in the context of greenwashing in fintech lies in how the theory helps identify the roles and impacts of stakeholders who are either interested in or affected by greenwashing. companies in the fintech sector also make significant efforts to become pioneers of sustainable finance solutions in their daily operations. however, when such firms make false claims about their stewardship of the natural environment, it erodes the trust and legitimacy that are the lifeblood of these organizations. greenwashing in fintech comes in various forms, from covering up a financial product presented as ecologically beneficial without sufficient evidence, to overstating the ecological value of their operations, and failing to disclose the environmental drawbacks of their innovative technologies. not only does this mislead consumers and investors, but it also leads to severe consequences, including reputational damage, legal actions, and the loss of stakeholder trust. pimonenko et al. (2020) reported that about 78% of consumers consider environmental responsibility commitments when making their purchases; therefore, a genuine commitment to sustainability is crucial. 3.1.2. analysis of stakeholders' interests and impacts customers: in the current fintech environment, consumers are expecting more honesty and transparency from the organisations they transact with. according to accenture (2022) a survey revealed that 62% of consumers are willing to buy goods and services from firms that display or explain their environmental policies. greenwashing practices mislead customers, leading to consumer doubt, loss of customers, and a decline in market share. for instance, when a fintech firm promotes financing environmental projects but, in reality, channels the investments to fossil fuel projects, clients may feel deceived and seek other service providers. • investors: investors are another vital stakeholder category influenced by the phenomenon of greenwashing in fintech. sustainability reports are helpful to many investors, especially those interested in sustainable investments who prefer accurate sustainability reports. a publication by morningstar (2023) showed that sustainable funds globally were worth $3.9 trillion in 2022, signaling a high level of investor demand for green financial instruments. the consequences of greenwashing for a fintech company include: ivestment by investors keen on tracking sustainability issues, loss of share price and challenges in securing future rounds of funding. moreover, the dissemination of false information through greenwashing can lead to legal actions against companies. this is evidenced by several large firms that have been sued for greenwashing, highlighting the legal risks associated with misleading sustainability claims. • employees: the current generation of employees, particularly younger workers in the fintech industry, increasingly values the personal and ethical standards of their organizations. a survey report conducted by deloitte (2021) revealed that 49% of millennials and 44% of gen z employees would not join an organization that does not align with their values. greenwashing results in organizational withdrawal, low organizational commitment, and increased turnover among employees who perceive a discrepancy between the organization's actions and environmental claims. • regulators: various regulatory bodies are tasked with preventing organizations from engaging in greenwashing. regulations from central bodies, such as the u.s. securities and exchange commission (sec) or the eu green taxonomy, entail severe consequences for guilty fintech firms. penalties may include fines, suspension of operations, or corrective measures. for instance, in late 2021, the sec launched the climate and esg task force to investigate schemes of esg-related misconduct, highlighting the regulatory threats associated with greenwashing (u.s. securities and exchange commission (sec), 2021). financial risk and management reviews, 2025, 11(1): 37-71 48 © 2025 conscientia beam. all rights reserved. • environmental groups and the community: environmental groups, such as civil society organizations and environmentalists, play a crucial role in monitoring and policing companies’ environmental claims. when companies engage in greenwashing, they risk facing protest actions, negative publicity, and other detrimental effects on their brand image. furthermore, the deception that does not align with the vision of environmental sustainability poses harmful effects on the environment and society in the future, as climate change and social justice issues are pressing concerns today. 3.2. legitimacy theory 3.2.1. understanding legitimacy within the fintech context legitimacy theory originated from the idea that an organization aims to function in a manner that aligns with societal standards to be recognized and accredited. suchman (1995) defined legitimacy as a generalized assumption that an entity's actions are appropriate or warranted within a framework of established norms, values, beliefs, and definitions. in the context of fintech, legitimacy is crucial because it determines the level of acceptability of decisions made by fintech firms by their customers, investors, regulators, and the public. reasonably expected, fintech companies are situated where the financial and technology sectors coexist. both sectors are highly regulated and supervised entities that must respond to societal expectations. the financial products and services launched by such companies entail legitimacy based on several factors, including companies working in line with societal goals of addressing relevant financial problems, adhering to sustainable development goals, and respecting clients' privacy rights. such companies will find it easier to establish themselves in the market. the need to attain legitimacy in the fintech sector is well-founded, given that trust-building structures are the foundation for adopting financial solutions. in pwc (2021) global survey, 70% of consumers identified credibility as the primary factor when selecting their preferred financial services provider. for new firms operating in a dynamic sector that has yet to be fully developed, achieving and maintaining legitimacy to gain customers' trust, secure investments, and meet regulatory requirements is crucial. 3.2.2. impact of greenwashing on organizational legitimacy the threat of greenwashing, which involves a company or organization deliberately providing its stakeholders with false perceptions about its environmentally friendly products or operations, has jeopardized fintech companies' legitimacy. however, when fintech firms engage in greenwashing, they risk losing the trust of shareholders, damaging their reputation, and facing the consequences imposed by regulatory authorities, all of which erode their organizational legitimacy. in this respect, greenwashing threatens legitimacy as it creates a misalignment between a firm’s words and actions. for instance, when a fintech firm claims that its products are environmentally friendly or support sustainability but, in reality, do not contribute to this social cause, or when the firm does not support sustainability initiatives but publicly declares otherwise, stakeholders will view the firm as deceptive. this can create perceptions that are hard to dispel, and organizations and individuals who lose the public’s trust do so at a significant cost. according to seele and gatti (2017) greenwashing has significant consequences, as public trust is lost, and a company takes a long time to regain it. however, greenwashing puts a firm under the scrutiny of regulatory authorities and exposes it to costly legal suits, thereby challenging its legitimacy. various authorities from different countries, including the eu green taxonomy and the sec in the united states, require that organizations and firms not engage in greenwashing but instead disclose accurate and verifiable information regarding their environmental responsibility. for instance, in 2021, the sec declared that it would increase the scrutiny of esg disclosures, particularly concerning environmental statements (u.s. securities and exchange commission (sec), 2021). the penalties for such cases of financial risk and management reviews, 2025, 11(1): 37-71 49 © 2025 conscientia beam. all rights reserved. greenwashing may include fines, prosecution, restrictions on business activities, and, in worse cases, outright closure, which can ultimately erode legitimacy. the effect of greenwashing on organizational legitimacy is compounded by increasing concern and activism among customers and shareholders regarding ecological matters. according to lim, cheah, ngo, chan, and ting (2023) 66% of global consumers are willing to pay a premium for sustainable products, and 81% expect brands to lead on environmental change. when fintech companies engage in greenwashing, they risk losing environmentally conscious consumers and are likely to be abandoned by ethical investors. sustainable investment funds were valued at $35.3 trillion globally in 2022, representing a third of the total aum of sustainable investments (global sustainable investment alliance (gsia), 2022). shareholders of these funds are highly aware of greenwashing, and as soon as they detect such deception, they withdraw their investments, erasing any legitimacy the company may have had. however, most importantly, this study reveals that greenwashing puts organizational legitimacy at risk in the current year and in the future. it also limits a company’s capacity to adapt and develop its products and services. since fintech businesses depend on technology and customers to function, it is critical to maintain a suitable and lawful image. greenwashing damages this image and fosters skepticism and distrust, which hinders the continuous improvement of new innovations and reduces consumers’ and partners’ willingness to engage with the company. 3.3. signaling theory 3.3.1. basic principles of signaling theory signaling theory can be attributed to michael spence, who presented it in 1973. it deals with information asymmetry and how the party with the information, such as the seller or the company, holds information not available to the other party, like the buyer or the stakeholder. according to the theory, this gap is bridged when the informed party sends a signal to communicate qualities or intentions that would otherwise be impossible for the other party to observe. such signals can take actions, statements, or any other form of communication that helps reduce uncertainty. when applied to business, signaling theory clearly explains how companies convey information about their value, quality, and intentions to other agents, such as investors, customers, and regulators. the premise upon which it rests is that factors considered "credible" cannot be easily faked or replicated—in other words, they are costly or difficult to mimic. they are, therefore, effective signals of the traits that define a company. for instance, those engaged in environmentally friendly practices when managing their organizations communicate to stakeholders that they are sincere in their stewardship responsibilities. in contrast, favorable or accurate signals can create trust and a positive brand image, while negative or vague signals, such as greenwashing, can harm the business's brand image. information asymmetry is best explained by signaling theory, primarily when consumers or investors cannot physically assess the quality or ethical level of specific products from certain firms or companies. in such situations, organizations employ various forms of signaling, like certification labels, third-party endorsements, or sustainability reports, to express their adherence to various values, one of which is environmental sustainability. connelly, certo, ireland, and reutzel (2011) noted that signaling is pivotal in reducing information asymmetry and developing trust between the firm and its external stakeholders. 3.3.2. application to greenwashing practices in fintech signaling theory is of great significance in the fintech industry for understanding how companies can communicate their environmental and sustainability information to interested stakeholders. like most other industries, the fintech industry operates in a world where stakeholder entities with interests in the sector, including clients and investors, are becoming more conscious of sustainability. this concern creates a powerful financial risk and management reviews, 2025, 11(1): 37-71 50 © 2025 conscientia beam. all rights reserved. incentive for corporations to establish credibility by demonstrating their commitment to sustainable development strategies, which can be done through advertising, a specific logo, or sustainability reports. however, when such signals are false or lack objective support in the corresponding actions, they become greenwashing. ‘greenwashing’ is a process where an organization makes a product appear more environmentally friendly than it actually is, using fake signs and signals meant to attract environmentally concerned consumers and investors. for instance, a fintech company may claim that their services are ‘green’ or ‘sustainable,’ while the activities, products, or services they provide do not necessarily support the environment. this can involve general and unsubstantiated statements about reducing carbon emissions, generating energy from renewable sources, or sponsoring environmental programs without providing specific or provable information. when applying signaling theory to greenwashing in fintech, several problematic aspects can be identified. first, it shows that due to information asymmetry, companies can deliberately transmit misleading or exaggerated signals about their sustainability efforts. for instance, a study by de freitas netto et al. (2020) revealed that about a quarter of the sustainability-based claims made by firms across all sectors, including fintech organizations, were misleading or false. this poses a significant danger to stakeholders, especially those who rely on these signals in their decision-making processes. second, weak or false signals discourage trust and introduce pseudo-signaling, which, in theory, aims to reduce uncertainty and increase trust. when greenwashing occurs, fintech firms not only suffer reputational losses but also undermine the credibility that stakeholders have in the fintech sector. this is particularly worrisome, given that fintech firms depend on customer loyalty, underpinned by trust, and investor confidence, which is key to their growth and sustainability. seele and gatti (2017) found that consumers are concerned about the impact companies have on the environment, and 64% of them stated that if they are given false information by a company, they will stop buying its products. this means that the impacts of greenwashing can be severe, potentially costing a firm customers, investors, and triggering fines, among other consequences. however, applying signaling theory in this context, it is understood that the effectiveness of signals means that signals should be costly or difficult for potential rivals to imitate. in the case of greenwashing, however, firms might employ low-cost, easily imitable signals such as window dressing, sloganizing, or making tokenistic promises of ‘going green’ that do not reflect the true environmental impact. this not only misleads stakeholders but also leads to increasing doubt about corporate announcements on sustainability. this view is also supported by seele and gatti (2017) who pointed out that greenwashing contributes to what they refer to as the ‘legitimacy gap,’ where stakeholders become skeptical of any environmental claims, making it difficult for genuinely green firms to distinguish themselves. accordingly, to avoid tarnishing their green image as a signal and suffering the negative consequences associated with greenwashing, fintech firms should consider signaling theory by offering meaningful, credible, and concrete signals of their sustainability initiatives. this may involve seeking third-party certifications, preparing sustainability reports that include measurable results, and publicly reporting on sustainability ideologies and practices. in this way, companies can improve their legitimacy, gain trust from stakeholders, and build long-term partnerships. 3.4. institutional theory 3.4.1. explanation and relevance to greenwashing in fintech according to institutional theory, organizational structures, processes, and activities are shaped by the external context, which includes the culture, laws, and norms prevailing in a given society. this theory suggests that organizations engage in institutionalization by adhering to the laws and regulations of the institutional context in which they operate. in the context of fintech, institutional theory is appropriate as it highlights how companies financial risk and management reviews, 2025, 11(1): 37-71 51 © 2025 conscientia beam. all rights reserved. may choose to provide greenwashed solutions to clients due to society’s increasing sensitivity to environmental factors. greenwashing in the fintech sector can be defined as one of the mixed strategies that reflect the growing institutional pressure on companies to operate sustainably. especially in a world where environmental issues are becoming more prominent, there is increasing pressure from customers, shareholders, authorities, and other stakeholders to be environmentally conscious. this is particularly important for fintech companies that deliberately promote themselves as innovative and cutting-edge in their business approach, as they may feel pressured to demonstrate their commitment to sustainability to gain credibility and competitive advantage. however, when sustainability efforts are expensive or difficult to implement, this may lead to false reporting, where organizations appear more environmentally conscious than they are, a practice known as greenwashing. this behavior stems from a tendency to transform the business without making significant changes to fit institutional standards. for instance, a fintech firm might market its products as sustainable or carbon-neutral without providing clear evidence to support these claims. lyon and maxwell (2011) suggest that this occurs, mainly because no specific rules or international laws define what it means for a firm to be environmentally conscious, allowing firms to stretch the truth. 3.4.2. institutional pressures and responses external pressures may be set by regulation and legislation, be self-regulatory, stem from customer demand for sustainable products, or result from emerging social norms that fintech organizations need to meet. these pressures can be categorized into three types: coercive isomorphism, normative isomorphism, and mimetic isomorphism. coercive pressures refer to formal social norms and legislation governing how firms achieve environmental performance. over the last few years, there has been a rising trend in legal policies aimed at eliminating greenwashing. for example, the sustainable finance disclosure regulation (sfdr) for the european union requires investment firms and fintech companies to report how sustainability factors are integrated into investment analysis, recommendations, and financial product provision (european commission, 2021). noncompliance with such laws may lead to legal consequences and loss of reputation, forcing companies to either genuinely improve their sustainability profiles or, in some cases, creatively greenwash to meet the letter of the law without incurring the costs associated with the spirit of the law. external normative and implementing pressure is based on industry norms, professional communities, and the requirements of key customers and investors. as environmental consciousness becomes a policy factor for these stakeholders, fintech firms are under increased pressure to professionalize their environmental policies. a survey by globaldata (2022) indicated that 78% of consumers in the global financial services industry expect firms to engage in active environmental sustainability. to satisfy such expectations, some fintech firms may announce green certifications or participate in sustainability schemes, even if their operations do not fully align with their claims. mimetic pressures relate to the pressure organizations experience to imitate the practices of other organizations in the same sector they admire. in the case of fintech, some may resort to greenwashing to follow rivals they consider leaders in sustainable development. this can lead to a ‘window-dressing’ strategy, where organizations implement superficial environmental strategies to avoid being seen as the ‘odd one out.’ however, the danger is that this situation can lead to the standardization of greenwashing practices, blurring the distinction between genuinely environmentally conscious companies and those merely faking sustainable practices. finally, various responses from fintech companies to institutional pressures are possible. while some organizations may genuinely incorporate sustainability into their operations, others may engage in greenwashing as a cheaper way of responding to institutional demands. the challenge for regulators, consumers, and investors is financial risk and management reviews, 2025, 11(1): 37-71 52 © 2025 conscientia beam. all rights reserved. to find ways to differentiate between these responses and ensure that companies are held accountable for these environmental wake-up calls. 4. greenwashing impact on fintech 4.1. environmental impact greenwashing in the fintech sector has negative environmental consequences because it contributes to the whitewashing of sustainable efforts and the fight against climate change. misleading stakeholders about environmental benefits can lead to socio-ecological stagnation, where consumers and investors perceive progress toward sustainability, even when little to no positive environmental change is actually occurring. the adverse effects of greenwashing are most likely felt because it raises awareness and funds for practices that are not environmentally friendly. for instance, if a fintech company claims that its products are financing renewable energy projects but, in reality, these projects are negligible or nonexistent, it displaces capital from other impactful environmental initiatives. global sustainable investment alliance (gsia) (2022) shows that global sustainable investment amounted to $35 trillion during that period. according to the un, about $3 trillion was invested in sustainable assets in 2021 alone. however, greenwashing, which involves making a product seem ecofriendly when it is not, also exists, leading to a tendency for a portion of this funding to be channelled to firms that need to prioritize environmental interests, thus undermining sustainability genuinely. additionally, greenwashing worsens the state of the environment as companies can continue their harmful environmental practices while falsely claiming to be environmentally friendly. for example, a fintech company that acknowledges the importance of carbon offset programs may falsely claim their programs are highly effective, thus avoiding more significant changes. this maintains the company's negative impact on the environment and contributes to the declining credibility of sustainable practices within industries. greenwashing also discourages environmental innovation because protecting the environment is not the primary motivation for these firms. some companies choose low-level green strategies that are easily implemented and cheaper than genuinely committing to environmental improvement, thus gaining a competitive edge over true ecological improvement efforts. this can hamper the development of innovative technology and practices that are environmentally friendly, leading to slower progress in environmental sustainability within the fintech domain. 4.2. social impact the influence of greenwashing in fintech is social because it affects various aspects of relationships between firms and key stakeholders such as clients, workers, and the public. trust is an essential aspect of financial services, and the more fintech companies engage in greenwashing, the more negative implications arise. the most severe social effect of greenwashing is the potential for the general public to lose trust in organizations. today's consumers are increasingly conscious of their consumption patterns' impacts on the environment and society. according to a report by lim et al. (2023) 81% of global consumers believe companies should play a role in improving the environment. when consumers discover a company they engage with is involved in greenwashing, their emotions are likely to be negative, leading them to sever ties with the company, resulting in customer loss and reputational damage. the public loses trust in that company, which may take a long time to regain, which is detrimental to its reputation. greenwashing also hurts employee morale and engagement. the values and motives of a company in the fintech industry influence employee motivation. according a to deloitte (2021) survey, 49% of millennials and 44% of gen-z employees rejected jobs where their employer's values did not align with theirs. when employees discover that their company is less environmentally conscious than it claims to be, this leads to demotivation, lack of commitment, and high turnover rates. this affects the company's organizational culture and hinders the process of attracting and managing human capital. financial risk and management reviews, 2025, 11(1): 37-71 53 © 2025 conscientia beam. all rights reserved. lastly, greenwashing can cause consumers, employees, and society to lose faith in efforts to address environmental and social issues by promoting a misleading image. when organisations implement fake or misleading sustainability practices, public doubt often follows. this can prompt society to become sceptical of sustainability disclosures from corporate organisations, leading to setbacks in addressing issues like climate change and social justice. 4.3. economic impact the problems of greenwashing in the framework of fintech are diverse, as discussed below, and influence not only fintech companies but also the overall financial system. at an organizational level, greenwashing costs businesses significant fines, lawsuits, and reputational damage and invites strong criticism. while several new standards in esg disclosures have been emerging globally through accreditation authorities such as the u.s. securities and exchange commission (sec) and the european union, companies involved in greenwashing are now more vulnerable to legal consequences, including fines. for instance, in 2021, the sec climate and esg task force began cybersecurity probes on firms over greenwashing, exposing the real monetary dangers linked with such practices (u.s. securities and exchange commission (sec), 2021). some ways greenwashing causes business organizations to lose their reputation include customer turnover and decreased market share. a study conducted by the harvard business review in 2022 revealed that businesses indicted for greenwashing suffered an average erosion of brand value of 2%. after a year, the long-term effects on brand identity can affect an organization's sales, profits, and shareholder value. further, greenwashing creates a scenario where word-of-mouth communication interferes with market signals, leading to the misallocation of capital. investors who follow false signals may invest in companies that do not contribute to environmental or social sustainability goals, thereby misallocating resources. this can impact the economy as funds that could be used for sustainable projects are instead directed to these deceptive firms. in a report by morningstar (2023) global sustainable fund flows reached $3.30 trillion for the first time in 2022. still, the issue of greenwashing remains prevalent in such investments, leading to increased negative impacts on sustainability. lastly, the risk of greenwashing poses a systemic threat to the financial sector as it fosters misleading imagery and complacency towards environmental degradation. with the growing market size in sustainable finance, the industry's credibility is anchored on the truthfulness of sustainability claims made by firms. the failure to practice genuine sustainability in green finance can negatively impact consumer confidence and may lead the market to correct the situation or even experience a crisis. both outcomes could result in significant economic shocks to individual firms and the overall financial system. 5. case studies 5.1. greenwashing in digital banking by establishing a clear reference framework, green bonds can help reduce the risk of greenwashing and direct funding toward environmentally sustainable projects. the authors also mentioned the difficulties that issuers, investors, and intermediaries face as the green bond market expands (galletta, mazzù, naciti, & paltrinieri, 2024). a working group has been formed by the international organisation of securities commissions organisation (iosco), which represents 90% of global public market security regulators, to develop climate disclosure indicators for publicly traded corporations. metrics for climate disclosure are important and necessary to support boards and other stakeholders in evaluating the possibilities, risks, and climate performance of their companies (grove & clouse, 2021). banks engage in greenwashing for several reasons. the need to satisfy esg standards and show a commitment to sustainable finance is one of the primary causes. banks may influence their decisions to embrace more environmentally sustainable models by providing funding for the economy. therefore, to minimise moral financial risk and management reviews, 2025, 11(1): 37-71 54 © 2025 conscientia beam. all rights reserved. hazard attitudes, banks need to implement control and verification systems to guarantee that the money given to businesses for genuine eco-sustainable operations is used for such objectives (galletta et al., 2024). in a striking illustration of major banks' greenwashing, compare their targets for climate finance to the overall amount of money they will be funding fossil fuel companies between 2016 and 2020. the top four fossil fuel financing banks in the world, all american banks, plus the british bank hong kong and shanghai banking corporation (hsbc), which ranked thirteenth in the study, are reflected in the above list of the five banks' climate finance targets as follows: $316.7 billion is held by jpmorgan chase, $237.5 billion by citigroup, $233.3 billion by wells fargo, $198.5 billion by bank of america, and $110.8 billion by hsbc (grove & clouse, 2021). the global green bond indices are currently created by solactive, barclays, morgan stanley capital international (msci), standard & poor's, and bank of america merrill lynch. however, the european union just unveiled the eu taxonomy, a unified categorisation system for economically viable, ecologically friendly activities. this is one of the most important final phases since it will provide investors with a sense of security, stop greenwashing, lessen market fragmentation, and focus investments where they are most needed (de lucena barreiro, 2023). kenya has worked hard throughout the years to adapt the nation's plans, policies, initiatives, strategies, and programs to combat climate change. kenya is a signatory to the kyoto protocol, the paris agreement, and the un framework convention on climate change. kenya is dedicated to its sustainable environment program, even if the government is aware that there aren't enough public resources to support these eco-friendly projects. banking organisations have been pushed by the kenya bankers association, a governing body for kenya's commercial banks, to encourage green investments in collaboration with other organisations (wabwile, 2023). 5.2. blockchain and green claims varavallo, caragnano, bertone, vernetti-prot, and terzo (2022) offer a green blockchain-based traceability technology that uses less energy and saves money when used in the fontina protected designation of origin (pdo) cheese supply chain. this platform is a part of the eu-funded "typicalp" project. the suggested traceability solution is built on top of the algorand blockchain, a highly scalable and ecologically friendly consensus mechanism that leverages pure proof-of-stake. along with the economic and environmental advantages, the traceability platform that was established has allowed for the digitization of the whole production chain. this has resulted in data that is both immutable and readily available in real-time to operators of the fontina consortium and ultimate consumers. mercuri, della corte, and ricci (2021) carried out research using the caos ("characteristic, ambience, organization, start-up") model on a start-up named devoleum that operates in the agri-food industry but has not yet been institutionalized. the findings show that the application of blockchain can improve sustainability by enabling information traceability, protection, and non-manipulability—features that are very helpful in the agrifood industry. additionally, the lack of middlemen in blockchain technology lowers transaction costs and shortens the time needed to stabilize relationships between the business and the environment. alzoubi and mishra (2023) found and spoke about 23 bc platforms that make green or environmental claims. the renewable energy certificate mechanism, bfcf, the green digital finance alliance, the crypto climate accord, the clean energy buyers association, regal 38183, treelion, chimpzee, green technology asia, tomorrow, greentrust, ecoterra, the bc climate institute, the global bc business council sustainability working group, and the energy web foundation are some of the initiatives that are part of this series. solarcoin, the renewable energy certificate mechanism, bfcf, the green digital finance alliance, the crypto climate accord, the clean energy buyers association, regal 38183, treelion, efforce, chimpzee, earth day, greentrust, ecoterra, the bc climate institute, the global bc business council sustainability committee, and the energy the world wide web foundation are a few of these initiatives. maersk line, a logistics firm, and international business machines (ibm) corporation, a global information technology corporation, collaborated to build tradelens, a platform based on the blockchain ecosystem. to create an ecosystem that is connected from beginning to finish and includes all financial risk and management reviews, 2025, 11(1): 37-71 55 © 2025 conscientia beam. all rights reserved. participants in the global supply chain, including shippers, cargo owners, airports, and carriers, tradelens is a leading blockchain-based platform ecosystem in the shipping sector (jovanovic, kostić, sebastian, & sedej, 2022). 5.3. insurtech and environmental promises insurtech refers to businesses that use technology innovation to provide insurance services. they can provide a wide range of insurance products, including life, health, rent, and housing insurance. fintech businesses in the insurance industry employ data analytics to strive for a more direct interaction between the insurer and the consumer (puschmann, hoffmann, & khmarskyi, 2020). yolo, which stands for you only live once, was established in late 2017 and is the first italian insurtech company with an international reach that specialises in digital insurance broking services. it facilitates pay-per-use and on-demand underwriting of products from large insurance companies and serves as a technology facilitator for other parties interested in selling digital insurance solutions because of its unique platform (puschmann et al., 2020). there are only two insurtech businesses out of the twenty-two that were found to be fintechs after a thorough examination of the startups using the five criteria—provider type, interaction type, direct financial processes, indirect financial processes, and sdgs—was conducted. the majority of startups facilitate investment procedures (15), which are followed by cross-process, nonlife insurance (2), payments, advice and financing (6), and claims administration (1) in terms of direct financial processes. just seven firms assist financial processes indirectly through other processes, including living and leisure (e.g., paying for charging an electric car), shopping and logistics, entertainment and communication, transportation, health, and education and work (puschmann et al., 2020). in addition to being customer-focused, metromile encourages more responsible driving, which has positive social and environmental effects. the product proved to be quite successful. a few of the main causes include the following: accurate data collection, data-driven processing that proceeds straight through, regular updates to drivers on the timing of significant occurrences, and riskreduction strategies. the fundamental characteristics that set these models apart from more conventional models are what give them strength; below are some of those qualities that are exclusive to offers and their accompanying technological viability (jha & sahoo, 2022). 5.4. mobile payment platforms and green credentials nfc, which enables quick and safe exchange of information between electronic devices, is one of the most wellknown mobile payment systems of engagement paradigms. numerous near field communication (nfc) payment platforms exist globally, including apple pay, cityzi, google wallet, osaifukeitai, softcard, unionpay, visa paywave, and mastercard's mobile paypass. in today's fast-paced and transaction-heavy industries, such as transportation systems, contactless techniques are effectively implemented (penttilä, siira, & tihinen, 2016). a finnish business called idcontrol specialises in structural or physical identification. to improve a company's security, idcontrol offers visitor management, access control, and id tools. in the pace business case, idcontrol sent the credential—access privileges in this case—to the client's phones by air delivery. key management is a huge task, particularly for hotels but also for cottage rentals. all-access system administration may be essentially automated if the system can provide access privileges directly to the customers' phones, allowing the unlocking of certain locks during the allotted time (penttilä et al., 2016). apple has often stated in its environmental and responsibility reports that all of the energy used in its data centres and corporate offices globally is derived from renewable sources, accounting for over 90% of the energy used in the us (monyei & jenkins, 2018). the chinese ecommerce behemoth tencent group and asset bright company, which is listed on the thai stock exchange, have partnered to enable wechat payments that may potentially increase chinese visitors' spending in thailand. additional files have been submitted to the bot by asset bright and the drop. wechat invites local vendors to apply to become one of its 3,000–5,000 target suppliers. financial risk and management reviews, 2025, 11(1): 37-71 56 © 2025 conscientia beam. all rights reserved. since wechat is the most popular mobile application among the chinese, merchants who are interested in accepting money from this payment service must have a bank account. additionally, clients are thai chinese tourists who must get in touch with asset bright to confirm their identification. the payment mechanism functions similarly to that of credit cards, which retailers may obtain the next day (feng, 2020). a well-defined plan is necessary to maintain competitiveness and enhance sustainability as client demands change. the essential element of fintech services that allows users to buy using smartphones is mobile wallets. though much study hasn't been done in this area, the use of mobile wallets in retail and e-commerce has begun to rise. smartphones are an essential banking channel due to their simple accessibility and substantial value to clients, made possible by wireless connections and the growth of the internet. m-banking capitalises on the growing trend of smartphone use and drives the need for mobile wallet services among social consumers and retailers (hopalı, vayvay, kalender, turhan, & aysuna, 2022). 5.5. robo-advisors and sustainable investment robo-advisors are online investing services that are entirely automated and available to both institutional and private customers. this service's usage of artificial intelligence and mathematical algorithms for client advice are its distinguishing features. the online service does this in an attempt to mimic and even exceed human service (au, klingenberger, svoboda, & frère, 2021). the first robo-advisers were introduced by phoon and koh (2018). numerous more robo-advisers have now entered the market, and after 10 years, robo-advisors managed $200 billion in assets globally, and all indications point to continued expansion (iperen, 2024). the majority of roboadvisors choose and invest in stocks and bonds on their own. there are instances in which a single stock sector is heavily invested in and divided up. the other two businesses invest in less than ten assets, whereas schwab intelligent owns about thirty assets. specifically, when utilising robo-advisors, all three of these organisations invest in international bonds. the three firms' asset allocations differ slightly in that wealthfront and schwab intelligent invest in resources like gold and associated exchange-traded funds (etfs). improvement may be viewed as deficient from the standpoint of variety (park, ryu, & shin, 2016). one further feature shared by all three roboadvisors is their investment in us corporate bonds, which carries three different kinds of risk: call risk, liquidity risk, and credit risk. among corporate bonds, schwab intelligent specifically makes investments in high-yield bonds. high-yield bonds are not often traded since their transaction costs are greater than those of conventional bonds (park et al., 2016). the registered investment advisors (rias) that collaborate with fidelity, an american holding company that is among the biggest asset management firms globally, and td ameritrade holding corporation, an american business that established an electronic trading platform, are called futureadvisor. the investment assessment tool provided by this ria is trustworthy. users can link their current investment accounts to the system at no cost. based on productivity, diversification of operations, compensation, and taxes, it evaluates the viability of investments. additionally, advice on modifying the investor's allocation of assets may be offered by this product. 5.6. peer-to-peer lending platforms and environmental impact the platform often acts as a middleman between the customer and the business owner, charging a commission to one or both trading parties. when it comes to peer-to-peer lodging, for instance, platforms such as airbnb and vacation rentals by owner (vrbo) exist; individuals who offer their homes for short-term rentals are known as entrepreneurs, and those who rent from them are known as consumers. when it comes to peer-to-peer car rentals, getaround and relayrides are platforms; entrepreneurs are those who offer their vehicles for short-term rentals, and consumers are those who rent from these entrepreneurs. new methods of offering recognisable, "real world" services, such as short-term lodging (airbnb, couchsurfing), urban transportation (lyft, sidecar, uber), and financial risk and management reviews, 2025, 11(1): 37-71 57 © 2025 conscientia beam. all rights reserved. venture capital (indiegogo, kickstarter, rockethub), are commonly included in the emerging peer-to-peer enterprises (sundararajan, 2014). the founding of two businesses—the us-based prosper in 2006 and the ukbased zopa in 2005—is when p2p in finance first emerged. both made peer-to-peer lending possible, allowing lenders and borrowers to transact with one another directly through a central marketplace instead of going through banks. "ebay for credit" is how prosper's co-founder chris larsen referred to his company's product (milne & parboteeah, 2016). the amount and distribution of the investors' capital in the platform are essentially determined by them. in australia, the lender often determines other factors such as the amount and interest rate to invest in rather than the particular loans. after that, the platform functions as a matchmaker by matching the money with a borrower. there is some variation in this business model based on the degree of freedom provided to lenders. for example, ratesetter australia requests the investment amount, length of holding, and preferred interest rate when offering loans in the green loan lending market, which covers loans for renewable energy (lejcak & wiltshire, 2016). the top peer-to-peer lending platform in europe for investing in different kinds of loans is called mintos. the platform's funding volume in the past has been €9.5 billion, and as of november 2023, there were 400 million euros in outstanding loans. in this scenario, mintos serves as the technological middleman, providing a marketplace platform to create bilateral network effects. lending institutions that collaborate with the platform represent one side, while investors who are prepared to put money into the suggested loan options represent the other. lending businesses manage loan origination and debt collection; mintos does not provide loans to borrowers (manavoglu, 2023). 5.7. crowdfunding platforms and green initiatives crowdfunding platforms, like kickstarter and indiegogo, allow businesses to directly appeal to a vast number of potential investors, many of whom are avid tourists and locals, therefore increasing access to finance for a wider spectrum of individuals. involvement in the community and shared ownership are encouraged, which might boost customer loyalty and brand support (baber, kaluvilla, & ramkissoon, 2024). because crowdfunders that employ a keep-it-all financing model can keep all contributions from the crowd, regardless of the campaign's outcome, the indiegogo platform symbolises a signalling environment with greater uncertainty. since donations to indiegogo projects go to entrepreneurs even if they are underfunded, the public may view these initiatives as riskier because of the increased likelihood that the project would not be completed. because donations are only given to entrepreneurs if they reach their fundraising goals, the kickstarter platform creates a signalling environment with less ambiguity (huang, pickernell, battisti, & nguyen, 2022). gofundme projects span a wide range of topics, but the largest category, and one-third of all funds donated on the platform in 2017, were medical campaigns. gofundme allows users to build and publish campaigns in a matter of minutes. gofundme allows users to build and publish campaigns in a matter of minutes. gofundme provides ideas for raising money while you're building up your solicitation page. it is highly recommended for campaigners to link to their facebook profile and promote their campaign on social media so that supporters can confirm who is generating the money. for the campaign's primary body, gofundme also suggests using a narrative framework (klein, tran, & riley, 2020). the biggest membership network, patreon, facilitates the payment of nearly $1 billion to creators yearly and links millions of creators with millions of fans. since patreon launched creator-fan memberships in 2013, many new membership sites, like ko-fi, onlyfans, and buymeacoffee, have appeared. due to the popularity of this membership model, already existing social media platforms have begun to include subscriptions into their networks. examples of these are twitter superfollow, facebook subscriptions, and youtube memberships, which allow users to pay a monthly subscription fee in exchange for special access (sanyoura & anderson, 2022). financial risk and management reviews, 2025, 11(1): 37-71 58 © 2025 conscientia beam. all rights reserved. 6. strategies to reduce greenwashing 6.1. regulatory frameworks corporate greenwashing has a variety of negative effects on the environment, society, and economy. sincere environmental efforts are undermined by corporate greenwashing, which erodes public confidence and legitimacy. for firms to support sustainable development, trust must be rebuilt. since businesses spend more money creating a green image than making significant improvements, greenwashing impedes real progress by taking resources away from real sustainability activities. to successfully prevent greenwashing, governments and regulatory organizations should enhance rules, provide clear criteria for environmental claims, and ensure public reporting to hold firms responsible (maamir, 2024). 6.1.1. existing regulations and their effectiveness ensuring that enterprises and organisations are held responsible for their environmental effect and promoting sustainability requires a relationship between governmental institutions, regulations, and certifications. governments and regulatory bodies, for example, have the authority to enact laws and rules requiring companies and organisations to adhere to specific sustainability criteria. for instance, a government may mandate that businesses lower their greenhouse gas emissions or adopt environmentally friendly land use techniques (nygaard, 2023). mateo-márquez, gonzález-gonzález, and zamora-ramírez (2022) demonstrate that in countries with more extensive regulations about climate change and stricter oversight of organisations' compliance with said regulations, there will be fewer opportunities for companies to engage in greenwashing when disclosing voluntary carbon information. based on its wide power under section 5 of the federal trade commission (ftc) act, the commission pursued enforcement proceedings against deceptive environmental marketing claims throughout the 1970s and 1980s. under general policy, the ftc carried out these early enforcement actions gradually, which left the business and consumers feeling frustrated. in response to the rising issue of false environmental claims in marketing, states simultaneously passed their restrictions, which were enforced in state courts by state attorneys general and consumer advocacy organisations. in the end, it became clear from these dispersed initiatives that the ftc needed to publish national guidelines for claims regarding the environment in marketing (rotman, gossett, & goldman, 2020). the green guides are a set of interpretative principles designed to help marketers make ethical statements about the environment. they lay forth broad guidelines that apply to environmental claims made in the marketing or public sale of goods or services, whether they are related to products, packaging, or services. these guidelines lead marketers to rotman et al. (2020): • when making environmental claims, use the proper qualifiers and disclosures. transparency ought to be placed "near the qualified claim," "clear and noticeable," and "in straightforward and inadequate type." advertisers must avoid using distracting elements or making inconsistent claims that might undermine or contradict the disclosure." • clearly state if their claim applies to the product as a whole, to a certain part of the goods, or only to the packaging. • steer clear of exaggerating environmental qualities or advantages. • verify that assertions made in comparison are precise and supported. cherry (2013) proposed several options to combat greenwashing and fake corporate social responsibility, such as filing claims under securities fraud laws, pursuing remedies under false advertising laws, establishing private standards through independent groups or other watchdogs, and utilizing the recently formed bureau of consumer financial protection. few documented instances have been filed based on the premise of fake csr for deceptive advertising, and the ones that have usually included particular product labels that claimed the product was "green." for instance, successful lawsuits have been brought against pesticide manufacturers that falsely advertise their financial risk and management reviews, 2025, 11(1): 37-71 59 © 2025 conscientia beam. all rights reserved. products as safe or eco-friendly. furthermore, lawsuits have been filed based on the usage of terms like "biodegradable," "recycled," and "recyclable," all of which have tight legal meanings these days. "natural gas is clean" and "natural gas is a backup for renewable energy" are two of the most prevalent assertions about natural gas that fall under the category of "greenwashing" (clientearth communications, 2021). examining the eu's taxonomy regulation and delegated actions is one of the most important legislative processes. july 2020 saw the implementation of the eu's taxonomy, which entails an analysis of present regulations. its foundational idea is to make it possible for society to meet the energy and climate goals outlined in the european green deal and set for 2030. the european lawmaker believed that these accomplishments could only be made feasible by having a clear grasp of the ideas that go into creating the word "sustainable." this led to the creation of the eu taxonomy, a uniform classification scheme for sustainable economic endeavours (zych, budka, czarnecka, kinelski, & wójcik-jurkiewicz, 2021). the european commission has stated that the regulation under consideration seeks to achieve six environmental goals: preventing and controlling pollution, promoting the transition to a circular economy, protecting and restoring biodiversity and ecosystems, adapting to and mitigating the effects of climate change, and sustainable use and protection of water and marine resources. by defining a particular list of ecologically sustainable activities, these goals can be accomplished. 6.1.2. proposed regulatory improvements • disregarding the validity of the mounting demands, in addition to positive environmental initiatives and actions like the advancement of renewable energy, the creation of sustainable urban planning (smart cities), or national commitments to cut greenhouse gas emissions within a given period, negative mechanisms like greenwashing are also beginning to emerge (zych et al., 2021). • it should be emphasized that preventing greenwashing techniques by giving lawmakers, investors, and private parties precise guidelines on what constitutes sustainable operations is one of the primary goals of this certification system. these endeavours aim to appropriately focus on two things: private investment (for investors and other private players) and maybe governmental subsidies or other types of assistance (for lawmakers). • it is important to acknowledge that, despite the examination of the regulator's actions through the lens of greenwashing, such regulation, particularly when aimed at influencing private entities' actions, may inadvertently foster the proliferation of greenwashing activities within the market. • gatti, seele, and rademacher (2019) suggest that a mix of required and voluntary measures might be a better way to stop greenwashing. the new paradigm should encourage innovative and successful corporate social responsibility (csr) activities while also defining the boundaries and guidelines for their implementation and dissemination, as companies run the danger of breaking the law by overstretching their csr messaging. • amendments do not and ought not to shield corporate actors from liability for making untrue or deceptive claims about how their operations would be affected by climate change, how their company will be affected by it, or about their plans and commitments on climate change (shanor & light, 2022). • additionally, it would be beneficial if the green guides addressed and standardized the kinds of research and methods that are allowed to back up certain assertions. should a lifecycle evaluation be carried out by the paper business itself, by outside scientists, or by firm staff on behalf of industry associations? which, if any, statements need to be supported by research that adheres to particular criteria—like being double-blind or randomized controlled trials, for example? which of these data should be available to scholars, decisionmakers, and the general public, and which, if any, must be reported to the ftc (shanor & light, 2022)? financial risk and management reviews, 2025, 11(1): 37-71 60 © 2025 conscientia beam. all rights reserved. 6.2. industry standards and certifications the belief that the organizations responsible for determining whether a certifying organization is appropriate are reliable, competent, and trustworthy in their work is the cornerstone of institutional trust. to ensure that the environmental and social performance they certify is reliable and not dishonest or fraudulent, for example, organizations that provide green certifications rely on institutional trust. although certifications play a major role in the global sustainability movement, changing market and technology factors may eventually erode institutional trust (nygaard & silkoset, 2023). 6.2.1. role of industry bodies in promoting transparency to promote sustainability and make sure that companies and organisations are held accountable for their environmental effect, it is crucial to understand the relationship between governmental institutions, legislation, certifications, and the role of ngos and activist groups (nygaard, 2023). the foundation of institutional trust is the conviction that the entities tasked with identifying the suitability of a certification organisation are trustworthy, competent, and dependable in carrying out their duties. as an illustration, organisations that provide green certifications depend on institutional trust to guarantee that the environmental and social performance they certify is trustworthy and not deceptive or fraudulent. while certifications contribute significantly to the global sustainability movement, institutional trust may gradually diminish due to shifting market and technological dynamics (nygaard & silkoset, 2023). the primary categories of certification schemes that support sustainability, such as those based on buildings, organisations, and products. product-based certifications concentrate on assessing the economic, social, and environmental effects of a single product or set of related items. building sustainability, encompassing the effects of construction and operation on the environment, society, and economy, is the focus of building-based certifications. buildings may have a substantial influence on people's health and well-being and are important sources of energy consumption and greenhouse gas emissions, which makes these certifications essential. a certification for green buildings called leadership in energy and environmental design (leed) is an example of a certification based on a building (nygaard, 2023). according to whelan and kronthal-sacco (2019) the fair trade certification attests to the fact that a product has been manufactured and traded in an ecologically and socially responsible manner and that workers have received fair remuneration. labelling requirements depending on the proportion of organic materials in a product are also part of the national organic program (nop) rules. the usda may suspend or cancel organic certificates under the nop and levy civil fines for violations. in a poll conducted by the organic trade association (ota), 60% of respondents strongly agreed, according to angela jagiello, associate director of conference and product development. "a certification process such as the usda uses to oversee and enforce the labelling of organic foods should also be used to cover (rotman et al., 2020). 6.2.2. importance of certifications and third-party audits certification programs influence the creation of new rules and regulations. for instance, the forest stewardship council's (fsc) certification program for sustainable forestry has impacted the creation of legislation and policies about the practice in several nations. these certifications are crucial because they empower companies to enhance their sustainability practices and assist customers in making better decisions about what to buy (nygaard, 2023). public consequences are not a sufficient basis for self-regulatory norms such as codes of conduct or private business efforts. finding ways to encourage compliance is therefore essential. in this regard, as covered in the previous chapter, scholars that study greenwashing add to the discourse by pointing out various strategies and actions (like tripartism, public enforcement of anti-greenwashing laws, and litigation about certification mark infringement) that reduce greenwashing and guarantee more equitable and transparent corporate social responsibility (csr) communication (gatti et al., 2019). leadership in energy and environmental design (leed) certifies low-energy buildings, makes use of sustainable materials, and benefits the environment and their financial risk and management reviews, 2025, 11(1): 37-71 61 © 2025 conscientia beam. all rights reserved. occupants. the well building standard certification for healthy buildings encourages healthy indoor environments by taking into account elements like air quality, lighting, and ergonomics (nygaard, 2023). the outcomes of public enforcement against greenwashing are superior to those of private enforcement of environmental marks or consumer activities. the most effective defences against the inappropriate use of eco-marks appear to be government agency investigations and certification mark enforcement lawsuits (gatti et al., 2019). according to research conducted in china based on interviews with senior quality managers, consultants, and auditors, obtaining certification through the use of phoney iso 9001 certifications and a dubious evaluation methodology is a common practice (heras‐saizarbitoria, boiral, & díaz de junguitu, 2020). seele and gatti (2017) acknowledge that greenwashing is a subjective phenomenon, which is another essential feature of the problem. no matter how much corporate csr advertising is untrue, greenwashing only occurs, according to the authors, when a message is emphasised as such by ngos, the press, or other interested parties. kirchhoff (2000) explored a greenwashing prevention concept based on adding a punishment to the environmental labelling system. the concept needs an impartial third-party labelling authority to function properly, and this authority's existence appears to promote csr standard compliance and reduce greenwashing. therefore, a crucial component of greenwashing is a third-party complaint. 6.3. corporate governance and ethical practices 6.3.1. best practices for corporate governance the three main forces that push businesses to participate in greenwashing are individual, internal/organisational, and external. researchers have shown that gaining credibility with stakeholders—also known as reputational benefits—is a major external driver behind companies' greenwashing practices. additional external factors include stakeholder pressure from investors, customers, and ngos, while internal factors include "inertia" and a lack of an ethical culture inside businesses (shanor & light, 2022). the field's adoption of a legal component may reduce suspicion and strengthen ties between institutions and the general public. but it necessitates acknowledging that the debate around csr is expanding beyond management and corporate communication to include legal, ethical, and political aspects of business (gatti et al., 2019). ethical businesses honour their csr pledges and fulfil their responsibilities. is it possible to forecast which businesses will give in to the allure of greenwashing? there is a spectrum of csr levels, suggesting that a company has discretion over the extent of its csr activities. businesses that breach the law or use it as a negotiating chip, paying fines or penalties to operate at the edge of what would be considered ultra vires, are at the bottom of these categories (cherry, 2013). paulet, parnaudeau, and relano (2015) examined the moral conundrums that the banking sector encountered both during and after the financial crisis, as well as the moral standards that ought to underpin the sector. the answers from ethical banks were different in key important ways from those of their conventional rivals. even though they are both governed by the same authorities and function in the same industry, ethical banks are a distinctly different kind of financial institution. unlike activities in secondary stock markets, local lending is the main activity of ethical banks. they have been able to weather the recent financial crisis thanks to their banking strategy without having to make many major operational changes. digital technology has changed the work culture in the banking industry, and many more traditional banks are finding that they have to reinvent their businesses and cultures in order to welcome diversity and inclusion, promote creativity and fresh perspectives, and promote openness and new degrees of customer trust. to ensure that their consumers are adequately protected, banks, as regulated companies, are also required to closely adhere to "responsible lending practices" in line with the present regulatory framework (prastyanti, rezi, & rahayu, 2023). businesses that put ethics first use eco-friendly practices, make investments in renewable energy sources, and maintain open lines of communication. environmental practices must be transparent for ethical corporate decision-making to promote trust and educated decision-making. it necessitates taking the long view and taking long-term effects into account. adherence to environmental rules and financial risk and management reviews, 2025, 11(1): 37-71 62 © 2025 conscientia beam. all rights reserved. regulations is of paramount importance, as proactive sustainability initiatives exemplify moral behaviour. greenwashing impedes sustainable growth and moral business decision-making, whereas businesses that put ethics first promote an open and accountable culture (yoganandham, kareem, & khan, 2024). 6.3.2. encouraging ethical behaviour in fintech companies without question, fintech lending has revolutionised the financial sector by offering accessible and practical loan solutions to both consumers and companies. but in the case of fintech loans, there are some ethical issues, just as in any tech-driven sector. a few significant ethical factors are as follows (prastyanti et al., 2023): • fintech lending platforms obtain and evaluate vast quantities of financial and personal data to determine creditworthiness (raj & upadhyay, 2020). ethical issues surface when this data is not sufficiently protected or is utilised for purposes beyond what it was originally intended. fintech businesses need to put data security, encryption, and permission first to preserve people's privacy. • fintech lenders often use sophisticated algorithms and machine learning models to make lending choices. the moral conundrum is to guarantee that these models are impartial and fair without supporting prejudice based on socioeconomic class, gender, or race (rovatsos, mittelstadt, & koene, 2019). fintech lenders have to follow responsible lending guidelines in order to stop predatory lending. • the goal of fintech lending ought to be to advance financial literacy and inclusiveness (moenjak, kongprajya, & monchaitrakul, 2020). additionally, initiatives to involve underserved populations and guarantee that fintech financing doesn't worsen already-existing disparities should be undertaken. • legal and financial risks are decreased by making ethical decisions because they guard against the consequences of unethical behaviour. by honouring contractual obligations and moral convictions, a business can lower its risk of litigation and related expenses, safeguarding its integrity and long-term profitability. by placing ethical principles first when making decisions, businesses may develop a culture of integrity, responsibility, and sustainability and position themselves as ethical leaders in their respective industries (yoganandham et al., 2024). 6.4. consumer awareness and advocacy 6.4.1. empowering consumers through education many businesses utilize the practice of "greenwashing," which involves making false claims about sustainability in an attempt to deceive customers into buying their products, rather than being sustainable. as a result, customer education and awareness became crucial to prevent these deceptive practices used by the companies (bosch, obeso, & palao, 2023). it is crucial to keep up the fight against greenwashing, to give clear information, and to empower customers with information and education. it supports the idea that fast fashion should be sustainable and that there should be a concentrated effort to counteract greenwashing (mende & scott, 2013). a key component of raising awareness is consumer education. encouraging customers to make more sustainable purchase decisions and holding corporations responsible for their green promises may be achieved through the implementation of educational programs, such as master classes and the integration of sustainability education into schools (bosch et al., 2023). there has been a need for increased consumer education on the identification and avoidance of false environmental claims in order to tackle the issue of greenwashing (tang, shen, & khachatryan, 2018). however, it is uncertain how much it will cost non-financially to educate customers about the issue of greenwashing. four subnarratives separate businesses with good and bad environmental responsibility records, even if the main narrative of consumer empowerment remains constant. though not unique to any one group, in our sample one of the two categories of firms uses these subnarratives more frequently and more heavily than the other. more specifically, businesses with bad environmental records tend to emphasize the value of charity and scientific advancement, whereas businesses with good environmental records emphasize the importance of political action and third-party ecolabels (jones, financial risk and management reviews, 2025, 11(1): 37-71 63 © 2025 conscientia beam. all rights reserved. 2019). green consumerism promotes environmentally friendly items without sacrificing preferences by giving customers the freedom to make knowledgeable decisions regarding both public and private commodities. this promotes sustainable habits. it was founded in the 1980s and promotes ecologically friendly companies and goods, even if they are more expensive. some consumers—gen y in particular—continue to buy greenwashed items despite their mistrust of green promises because of incomplete information and deceptive marketing. by using greenwashing, businesses run the danger of losing the confidence of consumers and harming their brand's reputation. businesses should implement clear eco-friendly processes, pursue certification, and effectively convey their environmental efforts if they want to attract environmentally sensitive clients. important insights may be gained from market research on greenwashing habits, especially about generation y (wang, walker, & barabanov, 2020). 6.4.2. role of advocacy groups in combating greenwashing environmental statements produced by these corporations have been more inflated or inaccurate, according to studies, advocacy organisations, and specialists in the financial sector (ochoa & holger, 2020). bingaman, kipkoech, and crowley (2022) implied that customer awareness and charges of greenwashing might hurt a brand by adversely influencing consumers' plans to make purchases. the results of this study should be used by environmental advocacy organisations and industry professionals to guide the development of marketing, public relations, and advertising campaigns aimed at countering greenwashing. to identify the possible dangers of eco-opportunistic conduct, economic actors have tightened their oversight and management of their whole supply chains. some businesses outsource unsustainable portions of their supply chains to grey or even illegal marketplaces, where it is difficult and costly to control (ndubisi, nygaard, & chunwe, 2020). establishing a sustainable corporate environment that guarantees future adaptation requires the use of an esg reporting framework. the increasing need for goods and reliable services might also confound the growing tendency of "greenwashing," which is the use of marketing techniques and narratives to portray a firm, its goods or services, initiatives, or brand as environmentally friendly when they aren't. as more and more people—from investors to employees to visitors— realise the importance of sustainability and the influence that global business has on sustainability and commercial governance, anybody who utilises esg or sustainability as a mere marketing technique is in danger (sarda, 2024). to counteract greenwashing, stakeholders—including corporations, non-governmental organisations, and governmental bodies—must collaborate to develop industry standards, exchange best practices, and hold enterprises responsible for their claims. long-term, systemic changes are necessary for corporate commitment to sustainability, and sustainable practices must be prioritised in key business initiatives. this change improves competitiveness, strengthens organisational resilience, and helps the environment. in summary, resolving the conflict around corporate greenwashing necessitates a thorough strategy including industry cooperation, consumer education, and regulatory intervention. businesses need to understand that genuine sustainability is a basic duty in the quest of a positive interaction between industry, society, and the environment, not merely a desirable quality (maamir, 2024). beyond the surface-level appeal of greenwashing, sustainable development can only be promoted by sincere dedication and coordinated efforts. one major problem that has an impact on social, economic, and environmental growth is corporate greenwashing. it entails businesses fabricating a false sense of environmental accountability, which raises social and environmental dangers. to tackle this issue, regulatory solutions, accountability systems, and consumer education are essential. cooperation is crucial between companies, customers, and authorities (maamir, 2024). financial risk and management reviews, 2025, 11(1): 37-71 64 © 2025 conscientia beam. all rights reserved. 7. conclusion 7.1. summary of key findings the study is conducted to provide theoretical perspectives and conceptual frameworks related to greenwashing in the context of sustainable development and fintech. its analysis of fintech's core areas includes a number of these areas, each of which adds something special to the field of financial services. blockchain, crowdsourcing, digital banking, peer-to-peer lending, mobile banking, payments, insuretech, and robot advisors are some of these fields. the findings show that since fintech focuses on how technology can be used to develop new solutions to economic challenges, it has played a significant role in implementing the sustainable development goals. fintech also promotes environmental conservation and growth as well as financial inclusion. fintech contributes to achieving the sdgs in several domains, including money, the economy, and climate change. fintech companies can reach customers in places where conventional financial institutions are unable to, including rural areas, thanks to the use of technology. fintech innovations such as digital wallets, microfinance, and mobile banking have made financial services accessible to millions of people throughout the globe. as a result, the region's economic stability and poverty rates have decreased, raising people's standards of living. fintech can also facilitate the transition to a low-carbon economy by helping to fund adaptation and mitigation strategies for climate change. fintech technologies allow organisations to access financing for sustainable development via the use of green bonds, carbon trading, and crowdfunding for renewable energy projects. fintech helps to build sustainable and effective economic structures by actively supporting the opening of financial markets, engaging in non-traditional financial innovation, and promoting it. fintech has the potential to contribute to the development of sustainable enterprises and solid physical infrastructure by fostering improved resource mobilisation, improving loan availability, and cutting transaction costs. moreover, the theoretical perspective shows that stakeholder theory helps identify the roles and effects of stakeholders who are either impacted or interested in greenwashing, which is why it is relevant in the context of fintech greenwashing. in their day-to-day operations, fintech companies also put a lot of work into being leaders in sustainable financial solutions. however, the confidence and legitimacy that these companies depend on are undermined when they make exaggerated claims about how well they are stewarding the environment. in the case of legitimacy theory, the validity of the financial goods and services offered by these firms is predicated on several elements, such as their alignment with societal objectives to solve pertinent financial issues, uphold sustainable development goals, and respect customers' right to privacy. it will be simpler for these businesses to get traction in the market. in the fintech sector, signalling theory plays a critical role in helping businesses convey information about sustainability and the environment to interested parties. similar to the majority of other businesses, the fintech sector functions in a global context where stakeholders with vested interests, such as investors and customers, are more mindful of sustainability. external constraints might come from self-regulation, new laws and regulations, consumer demand for sustainable goods, or societal values that fintech companies must conform to. in addition, corporate greenwashing has many detrimental repercussions on the economy, society, and environment. corporate greenwashing damages real environmental initiatives by undermining public trust and credibility. rebuilding trust is necessary if businesses are to promote sustainable development. greenwashing impedes actual progress by diverting resources away from genuine sustainability initiatives, as corporations invest more money in projecting a green image than in achieving meaningful changes. governments and regulatory bodies should strengthen regulations, establish precise standards for environmental claims, and guarantee public reporting to hold companies accountable in order to effectively combat greenwashing (maamir, 2024). the foundation of institutional trust is the conviction that the entities tasked with evaluating the suitability of a certifying organisation are dependable, capable, and trustworthy in their job. for example, organisations that issue green certifications depend on institutional trust to guarantee that the environmental and social performance they certify is trustworthy and not dishonest or fraudulent. while certifications are crucial to the global sustainability financial risk and management reviews, 2025, 11(1): 37-71 65 © 2025 conscientia beam. all rights reserved. movement, institutional trust may ultimately be undermined by shifting market conditions and technological advancements (nygaard & silkoset, 2023). 7.2. future research directions 7.2.1. emerging trends in fintech and sustainability a growing number of emerging issues that impact financial management are appearing these days. these are the results of increased consumer concerns about environmental sustainability and respect in the products and services they buy and use, along with the acceleration of digitalisation. environmental, social, and governance (esg) considerations and corporate social responsibility (csr) are two significant instances of these challenges. in a similar vein, the united nations' 2030 agenda for sustainable development goals (sdgs) is crucial to the fight against climate change. green innovation, as a novel technology paradigm, has promise for lowering resource use and raising resource efficiency. to achieve the carbon peak target by striking a balance between environmental conservation and economic development, green innovation is essential. building capacity is necessary for regulators to assess whether a bank is operating sustainably. furthermore, the bulk of institutions lacked sustainability policies, and only a small number of banks produced sustainability reports. sustainable investment has to be a fundamental principle and guiding concept in any company's day-to-day operations. adopting sustainable banking practices may lead to the banking sector being sustainable. the regulator must keep an eye on how sustainability is being applied. it is critical to take into account other strategies in this case as well, such as assessments of the strategic implications of poverty, legislation, sustainability, and the environment. based on their capacities, these instruments need to be employed to evaluate each bank's advancement toward climate finance and sustainable banking. it would be essential to examine various instances of sustainable fintech and identify their shortcomings in order to provide fresh approaches for improvement. additionally, to implement all of these steps, a strategy must be created for each platform. 7.2.2. interdisciplinary approaches within the explanation of each subject above, there are several potential areas for further study. many of these topics are included in the core areas of fintech, which served as the primary focus of our study. subsequent studies could investigate within-group disparities in non-g7 nations according to a range of classifications, such as political structure, economic standing, performance, and sources (e.g., level of reliance on foreign trade), predominance of specific industry clusters (e.g., manufacturing, services, technology, mining), types of organisations (e.g., stateowned, family enterprises, mncs, etc.), social stratification, etc. every one of these would be a multi-layered, nested design study that takes into consideration a range of contextual elements that are included as concentric variables and have an impact on how sustainability discourse and practice evolve in each environment. to establish strategies for reaching a wide agreement on sustainability reporting standards and indicators, it is important to comprehend these disparities. future researchers can also highlight the challenges and obstacles faced by the different organisations when trying to mitigate greenwashing. subsequent investigations need to aim to broaden the field of inquiry by including monographs or book chapters, which were not taken into account in this assessment. additionally, future studies may examine cultural variations in the perception and analysis of greenwashing by extending the analysis to non-english research. we limited the publications we selected for this research to those that included the search phrases in the abstract or title. we may have missed some fascinating instances or conversations by reducing the search in this manner, but the decision was justified by the need to find those articles with a clear emphasis on the subject. similar terminology and ideas should thus be taken into account when choosing greenwashing-related material to expand the study of greenwashing research. financial risk and management reviews, 2025, 11(1): 37-71 66 © 2025 conscientia beam. all rights reserved. 7.3. implications since the financial sector is responsible for providing the capital required to convert our economy into a more sustainable one, it is essential to the battle against climate change. traditional providers and, most importantly, fintech businesses provide new financial services related to sustainability to enhance, expand, and automate financial services. fintech uses techniques like crowdfunding, big data analytics, blockchain technology, and artificial intelligence to demonstrate continuity and consistency with esg requirements. as previously said, there are numerous similarities between sustainable finance and fintech. fintech may increase the sustainability of the financial industry as a whole by promoting green money. after analysing fintech platforms and greenwashing tactics, it is determined that these platforms still require development to inform and educate users, investors, and consumers about the conduct of the companies they typically do business with as well as the bonds and stocks they purchase. in light of this, this paper offers some helpful guidance and suggests enhancements to maximise the platforms' functionality in terms of consumer protection and information. using several real-world instances of sustainable fintech, the theoretical framework has been used to demonstrate how to encourage green investment and adopt sustainable practices. to counteract greenwashing, stakeholders—including corporations, non-governmental organisations, and governmental bodies—must collaborate to develop industry standards, exchange best practices, and hold enterprises responsible for their claims. long-term, systemic changes are necessary for corporate commitment to sustainability, and sustainable practices must be prioritised in key business initiatives. this change improves competitiveness, strengthens organisational resilience, and helps the environment. in summary, resolving the conflict around corporate greenwashing requires a thorough strategy, including industry cooperation, consumer education, and regulatory intervention. businesses need to understand that true sustainability is a basic duty in the quest of a positive interaction between industry, society, and the environment, not merely a desirable quality. beyond the surface-level appeal of greenwashing, sustainable development can only be promoted by sincere dedication and coordinated efforts. one major problem that has an impact on social, economic, and environmental growth is corporate greenwashing. it entails businesses fabricating a false sense of environmental accountability, which raises social and environmental dangers. in order to tackle this problem, regulatory solutions, accountability systems, and consumer education are essential. cooperation is crucial between companies, customers, and authorities. funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors declare that the manuscript is honest, truthful and transparent, that no important aspects of the study have been omitted and that all deviations from the planned study have been made clear. this study followed all rules of writing ethics. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. references accenture. 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(2021). concept, developments, and consequences of greenwashing. european research studies, 24(4b), 914-922. https://doi.org/10.35808/ersj/2779 views and opinions expressed in this article are the views and opinions of the author(s), financial risk and management reviews shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. https://doi.org/10.1002/bse.2373 https://www.sec.gov/news/press-release/2021-42 https://doi.org/10.3390/su14063321 https://doi.org/10.1007/s10997-021-09582-w https://doi.org/10.1108/jcm-06-2019-3257 https://doi.org/10.3390/su15032290 https://www.worldbank.org/en/topic/fintech https://doi.org/10.1007/s11356-020-08383-2 https://doi.org/10.35808/ersj/2779 1 © 2025 conscientia beam. all rights reserved. assessing the impact of financial technology: is it a curse or blessing for financial crimes in financial institutions? financial risk and management reviews 2025 vol. 11, no. 1, pp. 1-36 issn(e): 2411-6408 issn(p): 2412-3404 doi: 10.18488/89.v11i1.4075 © 2023 conscientia beam. all rights reserved. tipon tanchangya1+ kamron naher2 md rakib mia3 srima chowdhury4 naimul islam5 1department of finance, university of chittagong, chittagong 4331, bangladesh. email: tipon.tcg.edu@gmail.com 2department of business, presidency university, dhaka-1212, bangladesh. email: naherk@pu.edu.bd 3department of business administration, ahsanullah university of science and technology, dhaka, bangladesh. email: mdrakibmia087@gmail.com 4department of accounting, university of chittagong, chittagong 4203, bangladesh. email: srrimachy@gmail.com 5department of accounting, finance and economics, university of greenwich, london se10 9ls, uk. email: naimmgtdu75@gmail.com (+ corresponding author) abstract article history received: 30 september 2024 revised: 14 january 2025 accepted: 24 january 2024 published: 31 january 2025 keywords blessing of financial technologies curse of financial technologies financial crimes financial institutions financial technologies. cybercrimes the study aims to assess the dual (positive and negative) impact of fintech in financial institutions. in this study, secondary data were used, and they were collected from web of science, scopus, sciencedirect, and google scholar. in this regard, the key fintech technologies are identified, including blockchain and distributed ledger technology, artificial intelligence and machine learning, robo-advisors, mobile banking and digital banking, regulatory technology, and cloud computing. while major financial crimes are fraud, money laundering, insider trading, bribery and corruption, tax evasion, and cybercrime, the study shows that ai algorithms help to identify criminal activities, including credit card fraud, theft, and account takeovers, and ensure data privacy, accountability, and transparency. blockchain is useful for trustless transactions since it creates an unchangeable and secure, transparent record of every transaction. big data analytics help to acquire insights into customer behaviour and preferences. regtech tracks online transactions in real time to spot anomalies in the realm of digital payments. on the other hand, fintech is one of the most effective tools to facilitate cybercrime. moreover, the study shows the framework fintech has for mitigating wrongdoing, regulatory shortages, and customer threats. the article provides several implications for several stakeholders in the financial sector. contribution/originality: this study has significant contributions for the financial institutions. financial technologies are basically invented to work for the financial development all over the world. financial institutions should invest in a cybersecurity system to protect all information from cyberattacks. the government must ensure the security of the financial institutions. 1. introduction the financial crisis in 2008 had a significant influence on the emergence of financial technology (fintech), which was positively affected by the emergence of cryptocurrencies like bitcoin in 2009. the objective behind the implementation of fintech is to improve the financial performance of the organisation through digitalisation (schueffel, 2016). the growth of the industry is identified by the value of investment, which is enhanced by 75% in 2015 compared to the previous year, and furthermore, since 2010, approximately usd 50 billion has been invested https://www.doi.org/10.18488/89.v11i1.4075 https://orcid.org/0009-0009-2365-4959 https://orcid.org/0009-0001-9663-5427 https://orcid.org/0009-0004-7267-9515 https://orcid.org/0009-0009-5180-0749 https://orcid.org/0009-0005-7001-1770 mailto:tipon.tcg.edu@gmail.com mailto:naherk@pu.edu.bd mailto:mdrakibmia087@gmail.com mailto:srrimachy@gmail.com mailto:naimmgtdu75@gmail.com financial risk and management reviews, 2025, 11(1): 1-36 2 © 2025 conscientia beam. all rights reserved. (skan, dickerson, & gagliardi, 2016). fintech provides financial services more efficiently than traditional banking services by focusing on big data, efficient risk and maturity transformation, decentralised access to data, etc. (navaretti, calzolari, mansilla-fernandez, & pozzolo, 2018). however, the emergence of fintech magnifies the competition of traditional banking as new competitors (such as startups, neobanks, etc.) are entering the financial industry, which enhances the quality of services like remittance, payments, crowdfunding, and so on (murinde, rizopoulos, & zachariadis, 2022). the growth of financial crime is increasing dramatically. numerous notable regulations are introduced to minimise financial crime, including the foreign corrupt practices act, 1977, by the u.s. and the bribery act, 2010. according to rybalchenko, ryzhkov, and ohrimenco (2021) the main motive behind the financial or economic crime is economic gain through money laundering, tax evasion, investment fraud, etc. in the technological era, crime increases with the usage of hacking tools and engineering techniques (hasham, joshi, & mikkelsen, 2019). hence, the term “financial cybercrime” has been introduced in different studies by researchers, which consists of illegal economic activities for obtaining financial gain in cyberspace (nicholls, kuppa, & le-khac, 2021). in addition, the advertising standard authority and committee of advertising reveal a 190% increase in losses from cryptocurrency scams (trozze et al., 2022). the reason behind the global financial crisis is the weakness of the corporate governance architecture of the fintech firms, and therefore, a new infrastructural corporate governance that meets the fintech phenomenon will reduce the global financial crisis by developing an effective global financial system (alade, 2023). in the financial field, fintech is recognised as the most advanced innovation for enhancing quality and minimising cost in addition to widening an effective financial landscape (the fintech revolution, 2015). though numerous studies have been conducted, the motivations behind the study are identified from theoretical and empirical study points of view. firstly, the phenomenal growth of fintech in the sharing economy has a significant impact on the global financial industry, which is a competitive disadvantage for more than 83% of firms caused by the emergence of fintech startups, especially in china and the u.s. (kpmg, 2015; pwc, 2016). in addition, according to holland fintech (2015) a revenue transaction (approximately $660 billion) occurs from the traditional financial institute to these startups, and hence, to ensure competitive advantages, firms are required to invest in fintech. the operations of fintech are increasing every year that it plays a prominent role in strengthening the economy by stimulating the digital economy with the help of technological innovation. by this way, centralisation of the financial activities of local government will accumulate. here, by accumulating fintech and digital economy, local government can motivate the implementation of mutual development level (chen, teng, & chen, 2022). further, it will develop the quality of credit issue. even from the perspective of environmental degradation, fintech assists in diminishing the carbon-dioxide effect, which will lead to the achievement of a ‘low-carbon economy’ (tao, su, naqvi, & rizvi, 2022) secondly, the innovation of fintech not only enhances the quality of financial services to its customers with its diversified financial services like mobile payment, peer-to-peer services, robo-advisors, etc., but also ensures a financial upper hand by ensuring financial or economic benefit in risk-benefit analysis (nguyen, 2022). during the financial crisis in commercial banks in terms of meeting the loan demand, the involvement of fintech in smes operates as a remedy of the situation (adeosun, anagreh, tabash, & adedokun, 2023). also, mascarenhas, perpétuo, barrote, and perides (2021) reveal that the risk in the fintech is not considered by the brazilian fintech users, but they consider the early adopter’s economic benefits. here, the benefits and risks are diversified. for example, for the early adopter, operational risk influences their financial performance, while in the case of the late adopter, it is a financial risk due to seamless investment. furthermore, it has been disclosed that through the digitalisation of the public finance activities, the government can improve the operations of public finance with improved information technology, which will enhance the speed of government transactions (uña, verma, bazarbash, & griffin, 2023). better fiscal transparency and budgetary planning can be ensured with the help of high-frequency information technology processes, including resource allocation. a multi-diverse fintech service financial risk and management reviews, 2025, 11(1): 1-36 3 © 2025 conscientia beam. all rights reserved. ensures financial stability in brics (brazil, russia, india, china, south africa, egypt, ethiopia, indonesia, iran, and the united arab emirates) countries (vuković, hassan, kwakye, febtinugraini, & shakib, 2024). however, these revolutionising blockchain technologies have faced some challenges in fintech investment management, customer management, technology integration, and so on (lee & shin, 2018). among all of these challenges, security challenges in mobile phones are detrimental to the fintech industry. significant data storage in mobile phones, including information related to payment applications, can be jeopardized. in hayashi (2016) the consumer financial protection bureau (cfpb) compelled dwolla to pay a penalty for its data security breaches and misleading cybersecurity. thirdly, despite several benefits, fintech has provided an opportunity to increase the rate of financial crimes. the study will assist potential business leaders in understanding the classification and method of these crimes. by leveraging financial technologies, criminals are using fintech in money transfer, fraud, money laundering, etc. (nikkel, 2020). by studying the nature and method of financial crime, it will be easier to reduce the rate of financial crime by improving the financial information technology. for example, the lack of regulations and maximisation in the usage of cryptocurrencies encourages the perpetrators to abuse the fintech (despotović, parmaković, & miljković, 2023). to ensure the limits of legality among the economic users, an organic regulation like an anti-money laundering legal framework is developed (faccia, moşteanu, cavaliere, & matarunados-santos, 2020). yet, the regulatory loopholes in this advancing information technology in the financial area often generate obstacles to financial inclusion. the fraud triangle approach (motives, opportunities, and rationales) confirms the involvement of financial crimes in such regulatory loopholes (zakaria, 2023). according to saluja (2024) during the covid-19 period, financial crimes, especially “identity theft,” have increased at an enormous rate. at last, due to a lack of skilled developers, with the growth of fintech, the rate of customer vulnerability is also enhancing at a rapid rate (sampat, mogaji, & nguyen, 2024). ineffective data management increases customer vulnerability due to the lack of developed applications for mobile phone users and lack of proficiency among developers. moreover, improper integration between the new technology and the traditional one is another reason for which customer management becomes weak and the organisation loses competitive advantages (lee & shin, 2018). by the study, it will be easier for responsible authorities to identify the financial obstacles or financial crime or regulatory loopholes and then, to innovate effective information technology and formulate regulations to reduce financial loss. fintech has a prominent impact on the economy of the world. it has become a major player in the financial world. it has increased as a great phenomenon that in 2016 a 63% increase in the investment in the fintech industry has been shown (accenture, 2016). several researchers have studied numerous dimensions of fintech. however, as the operations of fintech are widening day by day, both as a blessing and a curse, they are not comparable in the existing literature. with the improvement of fintech, not only will the possibility of financial crime increase, but there will also be enhanced information technology to identify and mitigate those crimes. yet, there are few studies that have been conducted on this matter. as fintech is playing a prominent role in both mitigating and increasing financial crime, there is not enough study that provides any established or final verdict. hence, the aim of our study is to investigate the dual impact of fintech by analysing the financial crimes, their mechanism, and their impact with a case study. also, it will come to the decision that whether fintech is a curse or a blessing in terms of financial crime. the study explores the dual role of fintech in enabling and combating financial crime. therefore, the influence of fintech on the acceleration and vulnerability of financial crime has been investigated that highlights the impact of financial information technology on the landscape of financial crime in financial institutes, including economic, operational, and reputational aspects. by scrutinising several case studies, the role of fintech both in exacerbating and mitigating financial crime has been revealed. several technological innovations that are developed to ease financial activities have been elucidated. moreover, it is given to the fact that financial crime has become more pervasive with the proliferation of financial technology; the study discloses current, emerging, and international financial risk and management reviews, 2025, 11(1): 1-36 4 © 2025 conscientia beam. all rights reserved. regulatory trends to mitigate financial crime along with the method of financial crime. analysing the method of financial crime will assist potential academicians and businessmen to understand the context of financial crime and how to counterfeit it with the help of novel innovations and regulation. furthermore, the study provides a benefit and risk analysis to provide an acknowledgement of multifaceted technological advantages and a balanced and nuanced view of the financial role. to obtain the objection, in our study, we demonstrate a trend analysis and an in-depth analysis of key technologies in chapter 2. in the third chapter, we apply the fraud triangle approach in fraud analysis and hence, the investigation of financial crimes, its mechanism, and the social impact is shown. along with the challenges of fintech, the fourth chapter elucidates the steps of fintech’s crime prevention strategy in a theoretical way. however, the negative impact is also analysed in the next chapter. chapter 7 manifests some cases of the implementation of the technology both as a blessing and a curse. next, a trend analysis of the regulatory framework for governing fintech, financial crimes, and risks is given. chapter 8 is about the balancing act between financial benefits and risks that are identified. an analysis of the future outlook is illustrated in a theoretical way in chapter 9. chapters 10 and 11 are about conclusion and implications, respectively. 2. the landscape of financial technology (fintech) historical context 2.1. definition and evolution of financial technology the adaptation of digitalisation in the financial sector leads to the path of information technology development, which is known as “fintech”, an it-induced financial product (lechman & marszk, 2021; puschmann, 2017). numerous it-induced transformation drivers have a significant influence. new models like crowdfunding and peerto-peer investment accelerate the efficiency of information technology to ensure the quality of financial services through automation (gomber, kauffman, parker, & weber, 2018). in addition, the growth of the customer base has played a prominent role in resizing the channel management road to customers by implementing hybrid client interaction (nüesch, alt, & puschmann, 2015). for the strategic importance of fintech, the cost of it is the second largest cost factor after labour cost, which is approximately 15% to 20% (gopalan, jain, kalani, & tan, 2012). hence, the usage of it in financial intermediaries, banks, and insurance companies has a long history. financial technology, known as fintech, first emerged at the beginning of the 1990s (hochstein, 2015). according to arner, barberis, and buckley (2015) and puschmann and alt (2016) the phases of information technology development in the financial sector are sectioned into three areas, which are internal digitalisation, provider-orientated digitisation, and customer-orientated digitisation. table 1. evolution of fintech technology. area internal digitalization provider-oriented digitalization customer-oriented digitalization focus phase 1 (until 1960) phase 2 (1960-1980) phase 3 (1980-2010) phase 4 (20102020) phase 5 (from 2020) strategy customer channel characterized as single two customer channels multiple customer channel cross customer channel hybrid customer channel organization the process of system back-office process front-office process provider process customer process system no system is integrated partially integrated system internally integrated system system integrated with external financial service provider system integrated with external nonfinancial service provider table 1 represents the evaluation of the fintech covering 5 phases, starting from phase 1 in 1960 to phase 5 in 2020. for each phase, it included strategy, organisation, and system. for example, in phase 1, users connections source: puschmann and alt (2016) and puschmann (2017). financial risk and management reviews, 2025, 11(1): 1-36 5 © 2025 conscientia beam. all rights reserved. were mainly restricted to a single channel, and the strategy was just data entry and record keeping. and there was no opportunity for system integration. phase 2 (1960-1980) was limited to two customer channels, and from then on, tech-based service increased, though the system was shared with a few people. within the phase 3, the number of channels has been increased, and customers got service through online banking. in phase 4, service providers offered their service to the customers effortlessly by using cross-customer channels. and currently going phase 5, which is more convenient by using hybrid customer channels. 2.1.1. internal digitalization the first three phases are considered internal digitalisation, where internal processes like payment method and transaction recording are concerned. at first, in banks and financial institutes, a single channel characteristic is implemented, which develops into two customer channels and a front-office process. in the third phase, a multiplechannel approach is implemented (gomber, koch, & siering, 2017; matt, hess, & benlian, 2015; puschmann, 2017). provider-orientated digitalisation: in this phase, to ensure a minimum degree of in-house production, integration of the process is focused. reduction of in-house production enhances efficiency and streamlines operations (bharadwaj, el sawy, pavlou, & venkatraman, 2013). the services started from support areas like it services (foundations of back-office operations), which reached back-office areas like payment methods, transactions, and bank accounts (gozman, liebenau, & mangan, 2018). a standardised process and application functions are prime concerns in reshaping the functions of financial institutes and implementing digital transformation strategy (matt et al., 2015). 2.1.2. customer-oriented digitalization the functions of this phase are centred around customers. the hybrid customer channel (a broader perspective of the channel) and customer process are the centre for the design of financial products and services, like a peer-topeer model, and the development of non-financial service providers to enhance customer satisfaction and experience (verhoef, kannan, & inman, 2015). therefore, optimisation of customer process will enhance the financial product and service delivery (matt et al., 2015). 2.2. key technologies of fintech 2.2.1. blockchain and distributed ledger technology the empowerment of public and private sector computing applications has been ensured through the implementation of blockchain technology. here, with the validation of multiple nodes, the technology complies with the cryptographic audit trail in a distributed audit trail. in addition, determining assets and agreements through the application of a common protocol reduces many third-party verification processes (treleaven, brown, & yang, 2017). a distributed ledger is recognised as a decentralised system, secured through a cryptographic method that shares, replicates, and synchronises the transaction records to parties (antal, cioara, anghel, antal, & salomie, 2021). 2.2.2. artificial intelligence and machine learning investment decisions, taken by discretionary portfolio managers, have been taken on the basis of raw information or intuition for which the degree of failure in quantitative finance is higher. therefore, machine learning in constructing financial decisions plays a prominent role. there are data curators who are responsible for collecting, indexing, and storing data, and also, the data is aligned in a tabulated or hierarchical manner. furthermore, this fintech technology is implemented in algorithm trading, fraud detection, risk management, and so on (de prado, 2018; kulkarni, 2023). financial risk and management reviews, 2025, 11(1): 1-36 6 © 2025 conscientia beam. all rights reserved. 2.2.3. robo-advisor and automated financial planning in sironi (2016) the collaboration between finance and technology is elucidated with the term “financial technology companies.”. here, in this section, robo-advisor has a significant influence in reshaping goal-based behaviour by turning it into goal-based, cost-effective decision-making (koistinen, 2023). this automated investment solution-making tool applies an investment philosophy of individual-centred. a strong interaction between individuals, advisors, and final investors is established to determine the risk tolerances with the help of this game-changing automated tool. big data and data analytics: chen, mao, and liu (2014) argued that big data is classified as “massive data,” which is improperly captured, recorded, obtained, and merged. apache hadoop identifies big data as datasets that are not maintained or captured within a satisfactory scope by general computers. data analytics tools assist project managers to develop data-driven decisions, predict trends, and so on, which enable project managers to implement project analytics (uddin, ong, & lu, 2022). 2.2.4. mobile payment and digital wallet in 1997, with the first transaction by mobile payment, researchers started the research about the financial and operational impact of these transactions (dahlberg, guo, & ondrus, 2015). another study claims mobile payment is the source of payment for goods and services through wireless connections (chen, 2008). biometric and security technologies: for enhancing perceived security, fintech companies should develop biometric identification technology. fraud detection has become a crucial point for every company to enhance and establish the quality of services and effectiveness. the biometric recognition technologies and their implementation affect the fintech security through fingerprint, voice, and facial recognition (wang, 2021). 2.2.5. regulatory technology regtech is a significant portion of fintech that refers to the incorporation of information technology in monitoring, reporting, and compliance in regulation (arner, barberis, & buckey, 2016). establishing a safer and more efficient financial system is considered the prime concern for financial companies and regulators to analyse the financial section. therefore, a strong and efficient risk management and cost-effective tool can be used as an economic incentive in fintech companies. 2.2.6. cloud computing the convergence of it efficiency and business agility is recognised in cloud computing, where it efficiency refers to the efficiency of modern computers with highly operational hardware and software, and business agility refers to the usage of it as a competitive tool (marston, li, bandyopadhyay, zhang, & ghalsasi, 2011). with the implementation of cloud computing, reduction in information asymmetry and limitations of finance have been ensured in fintech companies, and moreover, it enhances the activities in the utilisation of resources, green economic activity, and sustainable economic development. furthermore, the implementation of cloud computing provides assistance in scalability, cost-efficiency, and the rapid development of new applications and services (lăzăroiu et al., 2023; macchiavello & siri, 2022). 2.3. trends in fintech adoption and innovation in financial institutions fintech is an umbrella term for the technology-based innovative services to develop financial services and business models to improve the process, delivery, and services with a prominent impact on financial markets and implementation. it has turned into a global phenomenon for the researcher, business leaders, and academicians (chinnasamy, madbouly, & reyad, 2021; mention, 2019). in the broad array of technology-based financial services, some key trends in the adoption and innovation of fintech within financial institutions are mentioned: financial risk and management reviews, 2025, 11(1): 1-36 7 © 2025 conscientia beam. all rights reserved. 2.3.1. digital transformation and innovation a new competition by fintech companies causes existing challenges faced by the traditional banking environment. the convergence between emerging business models and technology improves streamlined operations and customer satisfaction (gomber et al., 2017). a digital finance cube is innovated with the consensus of business operations, technologies, and technological concepts, which has significant influence over various stakeholders from three dimensions (consumers, market players, and regulatory font) (sangwan, prakash, & singh, 2020). 2.3.2. blockchain and cryptocurrencies blockchain is a peer-to-peer network or a decentralised network environment with a shared ledger that is connected by nodes (sarmah, 2018; tapscott & tapscott, 2016). the consensus between blockchain and fintech is a lack of service quality in the development of necessary software development products for startups. blockchain provides credit or liquidity risk management services through an autonomous system. moreover, it revolutionises the traditional banking system through security, efficiency, and transparency (fernandez-vazquez, rosillo, de la fuente, & priore, 2019). 2.3.3. artificial intelligence and machine learning investment decisions that are taken by discretionary portfolio managers often count on raw information or intuition, resulting in a higher risk of failure in quantitative finance, especially in the case of establishing investment policy. consequently, machine learning plays a crucial role in shaping financial decisions. data curators are responsible for gathering, indexing, storing, and organising data in tabulated or hierarchical formats. this fintech technology is also applied in algorithmic trading, fraud detection, risk management, and other areas (de prado, 2018; kulkarni, 2023). 2.3.4. open-banking and api integration switching to a financial product or service requires a cost (known as “switching cost”), which is the prime switching inertia of consumers and new providers of banking services in the united kingdom (borgogno & colangelo, 2020). from this point of view, the term “open banking” has arisen, which depicts a financial technology to implement regulation so that banking consumers reduce the switching cost and maintain their accounts (chan, troshani, rao hill, & hoffmann, 2022). however, open banking allows its providers to share greater information with other providers, while traditional banking is based on the principle of a “closed and fragmented system.”. therefore, it increases the degree of fraud and customer privacy breaches (mah, 2020). 2.3.5. mobile banking and payment solution mobile banking has a vital role in elevating poverty by the inclusion of all social groups into economic growth. it has become a crucial tool for transforming society into a cashless one that enhances customer engagement and service delivery (dahlberg et al., 2015; yahaya & ahmad, 2018). in the fintech business, mobile banking has significant influence through large investments. here, by analysing the big data, this technology focuses on consumers and has the advantage of international technical support and bilateral cooperation (le, mai, phan, nguyen, & le, 2021). 2.3.6. peer-to-peer lending and crowdfunding fintech, a technology-based business model innovation, revolutionises the traditional process of financial product and service delivery (philippon, 2016). there are two alternatives to financing channels, which are peer-topeer lending and crowdfunding. here, peer-to-peer lending (another term is “social lending) refers to the process of financial risk and management reviews, 2025, 11(1): 1-36 8 © 2025 conscientia beam. all rights reserved. collaborating borrowers and lenders online at lowering interest rates. while, in the “crowdfunding” approach, a small amount of capital is raised from the small project and lent to the pool of users in a loan-based manner through an online platform (ghazali & yasuoka, 2018; gupta, raj, gupta, & sharma, 2023). 2.3.7. cloud computing the union of information technology (it) efficiency and business agility is epitomised in cloud computing, where it efficiency pertains to the performance of modern computers with advanced hardware and software, and business agility involves using it as a competitive advantage (marston et al., 2011). the adoption of cloud computing in fintech companies has shrunk information asymmetry and financial constraints while also augmenting resource utilisation, promoting green economic activity, and supporting sustainable economic development. additionally, cloud computing offers benefits such as scalability, cost-efficiency, and the rapid development of new applications and services (lăzăroiu et al., 2023; macchiavello & siri, 2022). 2.3.8. internet of things (iot) in financial services iot consists of two words, and these are “internet” and “things.”. the internet of things depicts a connection of objects with identifiable addresses that operate as traditional information carriers (abdul-qawy, pramod, magesh, & srinivasulu, 2015; gubbi, buyya, marusic, & palaniswami, 2013). the connection among existing objects, intelligence sensors, smart objects, traditional computing networks, and others enables the recording, generating, and exchange of data within data centres or network clouds, which assist project managers to operate complex and computational tasks in independent decision-making without human intervention (botta, de donato, persico, & pescapé, 2016). 3. financial crimes 3.1. overview of financial crimes the organisation for economic co-operation and development (oecd) is a key international standard-setting organisation that conducts valuable independent analysis and statistics on a range of economic and other policy areas. the rise of financial crime in the oecd has caught the attention where the term “economic crime” is more commonly used. here, ‘financial crime or economic crime’ indicates a range of criminal activities, including money laundering, mass-marketing fraud, or tax evasion, which result in the financial losses (achim & borlea, 2020; nicholls et al., 2021; ünvan, 2020). at first, fraud was considered a financial crime (prior to the 21st century), but from the late 1980s, money laundering or insider dealing also fell into the category. furthermore, crimes involving intellectual property will be included as financial crimes if they have a significant influence in “predicting crime” (levi, 2015). for a better understanding of the causes behind financial crime, the study requires a theory development. when a set of interrelated constructs, definitions, and propositions form a methodical view of phenomena and postulate the relationship between variables through case study, it is referred to as “theory development (amadi, 2023; gottschalk, 2010). the theoretical streams of financial crime have been divided into behavioural theories, organisational theories, and managerial theories (amadi, 2023). examining the perception of the individual behind the financial crime is the prime concern of behavioural theory. hansen (2009) depicts that such kinds of elite crimes are organised by the individual within the organisation for their own personal enrichment. another theory, organisational theory, elucidates that committing a crime requires a monopoly and official intervention where the framework and organisation of crime occur (chang, lu, & chen, 2005; christie, 1969). finally, managerial theory refers to the inclusion of management in financial crime. financial risk and management reviews, 2025, 11(1): 1-36 9 © 2025 conscientia beam. all rights reserved. 3.2. classification of financial crime financial crime encompasses a wide range of illegal activities with the usage of money and financial instruments. thus, it is critical to classify these crimes to set effective regulations, prevention policies, and enforcement of rules. the classification of financial crime is explained: 3.2.1. fraud fraud and violation of trust often distort the central role of trust in market facilitation (palmer, 2008; yenkey, 2018). traditionally, fraud encompasses deceit or misrepresentation of deceptive financial disclosure through unauthorised usage of credit cards (credit card fraud), deceitful claims against insurance (insurance fraud), unauthorised transactions within financial institutes (bank fraud), and so on (reurink, 2018). 3.2.2. money laundering apart from the official economy, the criminal economy is a part of the underground economy that seeks to annihilate the business environment through illegal transactions for financial advantages (schneider & windischbauer, 2008). hence, money laundering (originating from the us) is the process of laundering money or profit acquired from criminal activities like acquisition and possession of criminal activities (korejo, rajamanickam, & said, 2021). 3.2.3. insider trading an inefficient market for public company stock that trades established on material and non-public information for unlawful reasons is diagnosed as “insider trading” (bhattacharya & daouk, 2002). the unequal distribution of information often provides individuals with a higher financial advantage than general people. 3.2.4. bribery and corruption one of the most significant impairments in the development of a country is bribery, the worst form of corruption. there is a lack of comparability between the revenue stemming from bribery and the cost of it (loughman & sibery, 2011). the main motivation behind such financial crime is known as efficient corruption, bribery to reduce the bureaucratic system (fisman & svensson, 2007). 3.2.5. tax evasion tax evasion is an illegal framework of tax when an individual does not present the information relating to revenue stemming from labour and capital (principle taxable) (sandmo, 2005). such kind of financial crime is known as a federal crime, and a person committing tax evasion is subjected to a prison sentence (slemrod, 2007). 3.2.6. cybercrime cyberspace has been used as a financial crime with the usage of financial and hacking tools for annihilating social engineering for illegal economic gain. here, the term “cybercrime” is introduced, which encapsulates all of these factors (hasham et al., 2019). the profit-driven cybercrime compels financial institutes like banks to use inhouse-developed tools for the protection of financial information (nicholls et al., 2021). 3.3. methods and mechanism of financial crime determining the methods of financial crime is the pillar of developing mitigation strategies. on the other hand, different financial crimes have different mechanisms by which benefactors ensure illicit cash flow. financial risk and management reviews, 2025, 11(1): 1-36 10 © 2025 conscientia beam. all rights reserved. 3.3.1. fraud embezzlement, ponzi schemes, and accounting fraud are the most common methods of fraud to acquire illegitimate gain. embezzlement is the process of misappropriating funds or assets through falsifying records, diverting funds, and generating fake expenses by the employees. the unauthorised use of funds and assets leads to breaches of trust where the fund from normal operations is used as an illegitimate financial gain for embezzlers (medhi, singh, goswami, & singh, 2024). another method of financial fraud is a ponzi scheme, where the profit of shareholders is provided from the capital of new shareholders rather than the profit from operations. accounting fraud is the process of manipulation of financial information (inflating reimbursement, concealing expenses, and misstating assets and liabilities) to represent a false picture of financial health (bhasin, 2016; chorvatovičová & saxunová, 2016). 3.3.2. money laundering the rate of money laundering is enhancing along with the advancement of information technology. it is the process of transferring illicit cash flow for financial gain (korejo et al., 2021). at first, in the placement phase, by cash deposits, wire transfers, and purchasing high-value assets, perpetrators introduce illicit funds into the financial system (villányi, 2021). then, in the layering phase, to obscure the origin of the fund, a complex scheme of wire or financial transactions, like foreign money orders, offshore accounts, and multiple transactions, are made. finally, in the integrating phase, by investing in real estate and luxury goods, the laundered money is integrated into the economy, which is difficult to distinguish (boles, 2017). 3.3.3. cybercrime phishing, ransomware, and hacking are the methods of cybercrime. phishing is the process of obtaining sensitive information by entering as a trustworthy entity in the electronic community (alkhalil, hewage, nawaf, & khan, 2021). on the other hand, ransomware, malicious software, encrypts the data of the victim and demands ransom to restore access (o'kane, sezer, & carlin, 2018). unauthorised access to computer systems to steal, alter, or destroy data or to disrupt operations is known as “hacking” (goni & alam, 2022). 3.4. impact on financial institutes there is a multifaceted and profound impact on financial institutions due to the increasing rate of financial crime. as financial crime encapsulates a wide range of illegal activities, it has a significant influence (both directly and indirectly) on financial institutes. here, some of them are depicted. figure 1 demonstrates the impact of financial crimes on financial institutions. direct financial losses, operational impact, strategic and competitive impact, and reputational damage are the major financial crimes. figure 1. impact of financial crimes on financial institutes. financial risk and management reviews, 2025, 11(1): 1-36 11 © 2025 conscientia beam. all rights reserved. 3.4.1. direct financial loss financial institutes face monetary losses for the occurrence of financial fraud and embezzlement. financial misconduct leads to the financial failure of the misconduct of financial controller (tomasic, 2011). therefore, the amount of investment in the productive sector often lessens which erodes the profitability of financial institutes and thus, the path ends with the erosion of net worth (gelb, 1989). 3.4.2. reputational damage when an organisation is subjected to sanctions for misleading financial information, shareholders are the most vulnerable stakeholders that face financial loss, including a decreasing share price. furthermore, according to the basel committee of banking supervision, the financial institute has to face stricter regulations and higher compliance costs (karpoff, lee, & martin, 2008; supervision, 2011). 3.4.3. operational impact senior corporate managers of the financial institutes have to breach compliance with the regulations. hence, there is a requirement for both technological and intellectual resources for efficient operation (tomasic, 2011). in addition, certain services and operations may not be available due to the investigation of financial crime like white collar crime (pickett & pickett, 2002). 3.4.4. strategic and competitive impact after the investigation of financial crime, the financial institutes will face the reduction of competitive edge due to financial disruption or economic damage and losses of market share (crockett, 1996; financial crisis inquiry commission, 2011). to revive from the situation, a long-term strategic solution, consisting of a new business model and technology, is required. 3.5. social and economic impacts for individual, corporation and whole economy the social and economic impact of financial crime is extensive, and it widens the social and economic challenges along with the reduction of the confidence of investors. individuals may suffer direct financial losses like asset erosion and credit card fraud due to identity theft and cybercrime (nicholls et al., 2021; reurink, 2018). along with psychological impact (anxiety and stress due to lack of security), it will have a detrimental impact on victims. on corporations, the multilevel impact of financial crime is divided into direct financial loss, reputational losses, operational impact, and strategic and competitive impact. organisations suffer monetary losses due to incidents of financial fraud and embezzlement. such financial misconduct can result in the financial downfall of those responsible for overseeing financial activities (gelb, 1989; tomasic, 2011). furthermore, they lost the trust of the shareholders and investors, which caused reputational or social damage. financial crime has an extensive negative impact on the economy. financial or economic crimes are the portion of both individual and structural variables (saddiq & abu bakar, 2019). crimes like corruption disrupt the social welfare of developing and emerging countries, which lowers economic growth (uma & eboh, 2013). in financial crime, benefactors are the organisations or noteworthy figures, and victims are individuals or clusters of individuals who bear the economic cost (saddiq & abu bakar, 2019). therefore, the economic inequality between benefactors and victims is widened. in addition, money laundering and corruption can undermine economic development and stability (bartlett, 2002). 4. positive impacts of fintech on financial crime prevention 4.1. enhanced fraud detection ai plays a major role in cloud-based fintech apps' ability to avoid fraud. large-scale datasets may be processed by machine learning algorithms, which can identify patterns linked to criminal actions, including credit card fraud, financial risk and management reviews, 2025, 11(1): 1-36 12 © 2025 conscientia beam. all rights reserved. identity theft, and account takeovers. ai systems get better at identifying new fraud strategies by constantly learning from fresh data (kunduru, 2023). the likelihood of financial fraud has increased due to the expanding use of digital payments. as a result, national payment switches (npss), which are directly owned by central banks (cbs), are incorporating cutting-edge technology like cognitive computing more frequently to improve their capacity to identify fraudulent activity within their nations (roszkowska, 2021). ai technologies, such as machine learning (ml) and deep learning (dl), have completely changed how fraud is detected and stopped. fintech businesses can now handle enormous datasets, identify intricate fraud patterns, and anticipate fraudulent transactions with previously unheard-of accuracy and efficiency by utilising ai. this enhances the safety of financial transactions and guarantees a reliable and easy-to-use experience for users (philip olaseni shoetan & babajide tolulope familoni, 2024). real-world instances, like the federal bureau of investigation (fbi)'s financial crimes section's identification and stop of massive fraud schemes, demonstrate the vital role that machine learning and big data play in safeguarding the country's financial borders (saxena & vafin, 2019). 4.2. improved transparency fintech sets a realistic objective of considerably increased and sustained financial inclusion by drastically lowering the cost of delivering financial services. simultaneously, increased automation, streamlined operational procedures, and more sophisticated and affordable analytics provide the possibility of promoting improved openness while preserving or enhancing individual privacy and financial activity security. improved consumer protection, financial regulation, and oversight would all benefit from such transparency (barr, gifford, & klein, 2018). a degree of traceability and transparency made possible by blockchain technology is naturally advantageous to improved governance. because every transaction on a blockchain is captured on an immutable distributed ledger that is available to all network users, it is easier to audit and follow transactions to ensure they comply with legal requirements (okunleye, 2024). 4.3. automated compliance fintech organisations have benefitted from robotic process automation (rpa), which has enabled workers to concentrate on higher-value jobs by automating monotonous abor. efficiency has grown as a result, and customer satisfaction has gone up. fintech businesses have been able to create better financial goods and services by using big data analytics to acquire insights into client behaviour and preferences. biometrics has been significant in lowering the risk of fraud and enhancing the security of online financial transactions (jain, prajapati, & dangi, 2023). many tools for automating compliance and monitoring activities have been created or suggested to improve their efficiency. the reviewed studies offered automated reporting tools, digital wallet supervision and auditing tools, more effective know your customer (kyc) processes, and automated fraud detection (koskipää, 2022). north carolina department of public safety (ncdps) are frequently used by businesses to expedite the creation of cloudbased apps while maintaining alignment with corporate strategy. on low-code or no-code systems, for instance, audit trails and document creation may be automated, ensuring and enhancing compliance. fintech businesses and financial institutions that need to react fast to changes in the market will find this to be very helpful (fong, han, liu, qu, & shek, 2021). 4.4. blockchain integrity blockchain technology is gaining popularity across a range of sectors due to its promise to revolutionise data security and transaction integrity. it is most recognised for being the foundation of cryptocurrencies like bitcoin. fintech businesses may use blockchain to develop trustless systems—systems where trust is ingrained in the technology itself. the transparent nature of blockchain also helps with regulatory compliance since it creates an unchangeable, transparent record of every transaction (mustyala, 2023). the integrity and resistance to tampering financial risk and management reviews, 2025, 11(1): 1-36 13 © 2025 conscientia beam. all rights reserved. of financial transactions are preserved by the immutable record of blockchain technology. without network consensus, transactions on the blockchain cannot be altered or deleted. by reducing fraud, disputes, and mistakes, this feature enhances the auditability, accountability, and transparency of financial transactions (yerram et al., 2021). the integrity, validity, and anonymity of the blockchain are safeguarded by the encryption algorithms and methods employed in blockchain technology, such as electronic signatures and merkle trees (nelaturu, du, & le, 2022). 4.5. increased accountability important questions are also brought up by the use of ai in fraud detection, such as moral dilemmas over data privacy and the possibility of bias in ai systems. these difficulties demand a well-rounded strategy that makes use of ai's advantages while guaranteeing accountability, transparency, and justice in its use (philip olaseni shoetan & babajide tolulope familoni, 2024). a developing policy issue in the current open government partnership (ogp) action plans is digital governance. a greater number of members use government machine learning and artificial intelligence (ai) tools to concentrate on accountability. open data has emerged as one of the most potent tools in the fight against corruption in recent years; therefore, using it and holding public procurement authorities accountable are the priorities (lieonov, bozhenko, & mynenko, 2023). through the use of algorithmic protections, disruptive general-purpose technologies can ensure that socio-economic requirements are satisfied more swiftly and reliably, based on a far larger range of patterns. conventional regulation depends on big, centralised control organisations that utilise human (subjective) capabilities since it is founded on (sometimes vague and unworkable) regulations and their continuous accountability (achim et al., 2023). 4.6. real-time transaction monitoring regulatory technology (regtech) systems track online transactions in real time to spot anomalies or problems in the realm of digital payments. any anomaly is reported to the financial institution so that it may investigate and ascertain whether fraud is occurring. regtech can reduce the risks and expenses related to lost money and data breaches while also aiding in the identification of possible threats to financial security and stability (zeidy, 2022). monitoring or forecasting financial risks using intelligent agents is one way that fintech is being used to enhance corporate operations. before being transferred across the network, sensitive data is split into two portions so that privacy may be maintained even while enemies are keeping an eye on the transmissions (gai, qiu, & sun, 2018). fintech technologies can lower the cost of transactions. more precisely, the goal of blockchain and "smart contracts" is to lower the costs associated with enforcement and monitoring. financial organizations create "internal sandboxes" where "smart contracts" may be thoroughly examined and tracked before being implemented on blockchain systems. intermediaries have the authority to enforce contracts on behalf of any party, should the need arise, and can more readily oversee their performance than any one person can once they are signed (panisi, 2017). 4.7. efficient risk management risk management procedures are receiving a lot of attention from regulations and associated supervisory requirements, which in turn highlights the need for thorough, open, and auditable data analysis throughout enterprises. big data analytics, artificial intelligence, and blockchain ledgers are examples of technologies that might more effectively handle risk management needs and related expenses (giudici, 2018). regtech and supervisory technology (suptech) are two examples of this. regtech focuses on leveraging technology to help organizations manage their adherence to regulations, risk management, and regulatory duties (such as enhanced corporate reporting), whereas suptech helps deploy new technology to enhance supervisory and monitoring (mnohoghitnei, scorer, & shingala, 2019). fintech, particularly big data and technology supervision, will financial risk and management reviews, 2025, 11(1): 1-36 14 © 2025 conscientia beam. all rights reserved. transform commercial banks' risk-management models and strengthen their risk-management capacities, ultimately lowering overall risk. bank risk-taking is significantly influenced by risk management. commercial banks may improve the efficiency, precision, timeliness, and stability of risk management—particularly in risk detection and assessment—by relying on financial technology (li, elahi, & zhao, 2022). 4.8. enhanced data security data security, as defined by the international standard for information security management systems (iso 27002), is the availability, confidentiality, and integrity of data. the management and staff of fintech companies are crucial in protecting data, which affects consumers' faith in these services (stewart & jürjens, 2018). the word "fintech" has gained popularity to refer to cutting-edge technology that financial services firms have embraced. the approaches covered under this phrase range widely, from financial service delivery to data security (gai et al., 2018). financial data security and data protection are related to data interchange, and fintech takes into account all other online hazards currently in existence (mehrban et al., 2020). fintech organizations can improve data security standards, foster consumer confidence, and mitigate the risks associated with cyberattacks and data breaches by implementing encryption solutions appropriately. strict legal frameworks about data security and privacy must be followed by fintech companies. encryption methods that abide by legal criteria guarantee compliance and lessen the chance of fines or penalties (omolara et al., 2024). 4.9. identity verification biometrics plays a significant role in bolstering the identification of such security applications, particularly with the advent of fintech, which exploits mobile devices and applications as promotional platforms. nonetheless, people continue to worry about biometrics' privacy and reliability (wang, 2021). financial services firms employ several identification methods in fintech apps to enhance fraud monitoring and user experience (wang, xue, liu, & pei, 2019; zhu, li, wang, & li, 2020). ai-driven biometrics can reliably confirm user identities by examining distinctive biological characteristics like fingerprints, facial features, and speech patterns. this makes it more difficult for unwanted parties to access private financial data. the potential of ai-driven biometrics in fintech to strengthen security protocols is one of its main advantages. passwords and pins, which are considered traditional authentication techniques, are becoming more susceptible to fraud and hacking. conversely, ai-driven biometrics uses an individual's unique biological features to provide a better level of protection. this greatly increases the difficulty with which scammers may obtain private financial data (oseremi, yinka, nsisong, & damilola, 2024). some of the problems with passwords and/or personal identification numbers (pins) can be solved by biometric technology. for instance, these technologies enable illiterate clients to use financial services such as payment processing (hollanders, 2020). 4.10. anomaly detection financial cybersecurity study and development may take a positive turn in the future with the combined use of anomaly detection and federated learning, which may greatly improve the safety record of fintech systems. every organization uses its data to train a local model, and it only updates the model when it receives updates from a central server, which combines all of the changes into a better global model. this decentralized methodology allows for a more thorough and generalizable approach to threat detection while mitigating the hazards associated with data centralization. advanced anomaly detection techniques are essential for discovering fraudulent activity and system breaches when used in conjunction with federated learning (noul & hussain, 2024). ml includes anomaly detection methods that automatically recognize and categorize suspicious financial network data. to create models from a dataset, techniques including learning algorithms, statistical models, and artificial neural networks (ann) financial risk and management reviews, 2025, 11(1): 1-36 15 © 2025 conscientia beam. all rights reserved. are employed. after that, the final representation is examined to determine the best practices and guidelines for preventing fraud (stojanović et al., 2021). 5. negative impacts of fintech on financial crimes 5.1. increased cybersecurity threats phishing and malware assaults are two common cybersecurity concerns in the fintech sector that put financial institutions and their clients at serious risk. phishing attacks utilise a variety of strategies and tactics, such as phoney emails and websites used to obtain login credentials (gupta, arachchilage, & psannis, 2018). these assaults have the potential to harm financial institutions as well as people by causing identity theft, financial losses, loss of personal data, and reputational harm to brands (mohammad, thabtah, & mccluskey, 2015). financial institutions may suffer significant repercussions from these assaults, such as monetary losses, harm to their reputations, and regulatory scrutiny. furthermore, cloud storage has been the focus of an increase in ransomware occurrences, which has prompted the development of machine learning-based hypervisor-level ransomware detection (umoga, sodiya, amoo, & atadoga, 2024). fintech platforms hold sensitive financial information, including payment details, transaction records, and personal and financial data, which makes them appealing targets for fraudsters. the cybersecurity dangers that businesses in the sector confront are further increased by the interconnection of financial systems, the industry's reliance on outside providers, and the use of cutting-edge technology like cloud computing and mobile apps (ungureanu & filip, 2023). 5.2. greater anonymity in transactions digital footprints are left by a variety of online activities. since anonymity is only concerned with how to connect an individual to their purported identity, it is just a matter of institutional design and application administration. similar to how deposited money is connected to bank accounts, enabling the real-name administration of anonymous banknotes, anonymity is not a necessary feature in digital finance, except for money laundering (daofu, 2020). fintech not only puts its users at risk, but also the interests of the general public. for instance, the anonymity offered by an international marketplace may encourage illegal misuse. virtual currencies, like bitcoin, and the exchange systems that support them have developed into havens for blackmailers, tax evaders, drug and weapon traffickers, and money launderers (lehmann, 2020). 5.3. complexity in tracking digital crimes data protection is the second main area of concern, which is highlighted by the growing importance of data in the financial industry. distinct economies are developing distinct policies, some of which are reflective of essentially divergent social perspectives. the main instances of differing legal frameworks regarding the usage, ownership, and protection of data are the us, china, and the eu (buckley, arner, zetzsche, & selga, 2019). to cover their traces and launder money that has been stolen, thieves use money mules. sometimes, through online job portals or spam campaigns promising "earn extra money in your spare time!” people are recruited as mules in the hopes of obtaining part-time work as "financial intermediaries." after the money is deposited into the mule's account, it is assumed that they will take cash out, retain a certain amount, and send the remaining amount to another receiver (usually using a cash transfer service) (nikkel, 2020). once identification information has been recorded, it is more difficult for hostile actors to tamper with or alter it due to the immutability of the blockchain ledger. blockchain technology provides viable remedies for a range of issues of digital identification (utkina, 2023). 5.4. potential for regulatory gaps the challenge that bigtechs provide to central banks' responsibilities and the data gaps that arise in connection with their operations are further implications. bigtech businesses are trying to establish themselves as financial risk and management reviews, 2025, 11(1): 1-36 16 © 2025 conscientia beam. all rights reserved. an important category of fintech business. along with significant benefits like economies of scale and the international reach of their platforms, these businesses also enjoy the advantage of user-generated data and advanced data analytics. the region's financial authorities have a dilemma in light of all of these possible data gaps resulting from growing fintech activity in the banking system (marqués et al., 2021). when consumer credit originates from the banking industry rather than fintech, regulatory loopholes arise since supervisory frameworks tend to concentrate on this area. the financial ramifications encompass imprecise risk assessment as fintech companies endeavour to precisely handle and apply the extensive array of data at their disposal, and plausible conduct issues culminating in extensive nonpayment when impoverished populations, especially the unbanked, obtain official credit for the first time. numerous banks have expressed concern about the rise of fintech firms. additionally, they have publicly expressed their concerns regarding fintech competition and regulations that adhere to the same strict guidelines. the sector is under attack because the lines have likewise blurred: fintech is no longer the domain of established financial players, and regulators are no longer exclusively focused on financial institutions (anagnostopoulos, 2018). 5.5. rise of sophisticated fraud schemes deepfakes are an intriguing and captivating kind of faked and altered media. on the other hand, deepfakes cost fintech firms a lot of money every year, and the problem is only getting worse. the consequences of identity theft and con artists affected 47% of all foreign enterprises in 2020. according to preliminary data for the fiscal year 2021, fraud rates are rising and con artists' methods are constantly becoming more complex (saluja, 2024). complex issues are also brought about by the digital revolution, especially in the area of financial fraud, which is becoming more common and sophisticated. the financial ecosystem is greatly impacted by the consequences of these fraudulent acts, which lead to significant financial losses and erode consumer trust (saxena & vafin, 2019). consumers will now have to deal with the increased danger of fraud and scams in addition to cyber-insecurity. vulnerable consumer groups suffer the most from scams. according to the national council on aging, older consumers are being targeted more often, and predatory behaviours that target those with impairments are also on the rise (barefoot, 2020). 5.6. vulnerabilities in decentralized systems because blockchain uses cryptographic hash functions, transactions may be made tamper-proof, but attackers can still take advantage of other flaws. a malevolent opponent might be able to substitute or alter the input data without altering the digest if there is a collision in the hash algorithms. unauthorized transactions might result from the forging of a signature (nelaturu et al., 2022). to reduce users need for reliable third parties, the majority of smart contract implementations are made with decentralized use cases in mind. nevertheless, they frequently have the same flaws and vulnerabilities as the system's payments layer (han, huang, & zhong, 2023). because this platform offers an environment in which smart contracts may be executed, vulnerabilities that are exploited also give a malevolent opponent the ability to benefit without the connected parties' consent in the smart contract signature (nelaturu et al., 2022). as with other fintech technologies, smart contracts' hazards are not completely recognized because of their novelty. however, there are general factors to take into account when it comes to technological innovation and adaptation, such as where we are in the entire lifecycle. for example, if new technology is not extensively tested or used in real-world applications, defects and vulnerabilities may remain undiscovered (duran & griffin, 2021). 5.7. challenges in international cooperation one specific issue is the issuance and use of virtual currencies, which, if widely accepted, have the potential to alter the two main pillars that sustain the reserve currency status: the composition and dynamics of international financial risk and management reviews, 2025, 11(1): 1-36 17 © 2025 conscientia beam. all rights reserved. commerce and the impacts of the financial network. the requirement for reserves (buffered inventories and/or liquid assets) and the formation of new reserve currencies might be influenced by the liquidity and degree of confidence in the new cryptocurrencies. this will thus have an impact on foreign exchange and gold reserves, the exchange rate regime that is selected, and the dimensions and composition of the global financial safety net (gfsn) (st. petersburg state university et al., 2020). government-to-government implementing authorities (treasuries, banks, etc., depending on each state's administrative structure) pledge to hold regular (at least quarterly) workinglevel discussions (with political officials, legal experts, and regulators in attendance) to discuss the development of fintech policies in each jurisdiction. this often entails promptly informing people about crucial fintech-related news. these channels allow for the exploration of the perceived difficulties faced by fintech companies in the nations set to sign fintech bridge agreements (tache, 2022). 5.8. exposure to digital payment frauds fintech is becoming more externally visible, raising cyber vulnerability, in contrast to the rising reliance on intricate digitalized information technology hubs without replacement. these security holes can be used by cyber attackers to compromise data at custodian banks or central securities depositories, interfere with payment systems, or destroy equipment that supports the financial system (buckley et al., 2019). the likelihood of financial fraud has increased due to the expanding use of digital payments. because of this, npss—which are directly owned by central banks (cbs)—are progressively using cutting-edge technology, such as cognitive computing, to improve their capacity to identify fraud in their nations (alessio faccia, 2023). the need for payment security is growing as a result of an increase in card fraud losses and data breaches, which cause financial institutions to suffer both direct and indirect costs. users of payment handling software may become irritated by the more stringent security measures used in electronic payment systems (ramesh, amudha, prasob, & kanna, 2023). 5.9. proliferation of dark web activities investigating cyber-related money laundering crimes is made more difficult by the widespread usage of encryption technology and the anonymity offered by the dark web. although encryption is necessary to protect legal communications, it may also be a dangerous tool for cybercriminals trying to hide their illegal activity. a safe refuge for many types of illegal financial activity, the dark web offers untraceable transactions and encrypted communication methods (bin azero et al., 2024). robust privacy and defence against government monitoring are offered by the dark web. people who live under repressive regimes that restrict free speech, prohibit access to huge portions of the internet, and prohibit criticizing government actions are drawn to the network. because of the dark web's robust anonymity and plethora of identity masking strategies, thieves frequently use it to market and deliver their goods (dhali, hassan, mehar, shahzad, & zaman, 2023). 6. case studies 6.1. successful implementation of fintech in crime prevention 6.1.1. enhanced fraud detection with ai-powered solutions one prominent example of successful fintech implementation in fraud prevention is the arictm risk hub developed by feature space. this ai-powered platform employs adaptive behavioral analytics to build detailed profiles of genuine customers by analyzing transaction data and third-party information. this approach allows for near-real-time anomaly detection, identifying fraudulent activities within milliseconds. deployed across 70 major financial institutions, arictm risk hub has been reported to block 75% of fraud attacks, safeguarding over 500 million consumers globally. the adoption of such ai-driven systems has significantly reduced financial losses and operational costs, illustrating the transformative potential of fintech in crime prevention (nvidia, 2022). the ai capabilities of aric risk hub enable it to analyze vast amounts of data quickly and efficiently, learning from each financial risk and management reviews, 2025, 11(1): 1-36 18 © 2025 conscientia beam. all rights reserved. transaction to improve its fraud detection accuracy continuously. this dynamic and adaptive approach not only protects consumers but also helps financial institutions stay ahead of increasingly sophisticated fraud schemes (nvidia, 2022). 6.1.2. blockchain technology for enhanced transparency transparency and accountability in financial institutions have been significantly enhanced by blockchain technology. blockchain creates an immutable ledger, ensuring that record-keeping transactions remain honest and transparent because all actions are permanently recorded on the chain. this technology has been effectively used in money laundering prevention and regulatory scrutiny. specifically, financial institutions that utilize blockchain technology to monitor transactions have experienced greater efficacy in detecting and preventing fraudulent activities (mckinsey & company, 2021a). in cash transactions, blockchain technology increases validity as every small transaction made is recorded and cannot be altered in the future. due to these features, this tool has significant value in safeguarding the integrity of financial documentation and compliance with various legal requirements. because of its structure, blockchain provides greater transparency, allowing for the immediate detection of inefficiencies and potential crimes (mckinsey & company, 2021b). 6.1.3. real-time transaction monitoring another sector in which fintech has proven effective is real-time transaction monitoring. psps have integrated sophisticated computational models to identify fraudulent transactions based on real-time assessments. it can detect abnormal procedures or transactions as the algorithm follows transactional patterns. to monitor and detect internal unethical behavior, psps have incorporated these advanced systems to manage better financial crime risks (mckinsey & company, 2021a). real-time monitoring systems enhance the ability of psps to catch fraudulent activities as they occur. as transactions are processed, these systems scrutinize transaction details for signs of potential fraud, such as substantial withdrawals or transfers that deviate from a customer's regular activity. this proactive fraud-tracking and detection strategy enables financial institutions to mitigate losses and implement better safeguards more securely (mckinsey & company, 2021a). 6.2. instances of fintech exploitation by criminals 6.2.1. rise of sophisticated fraud schemes while fraud prevention technology has evolved, criminals have also leveraged advancements in fintech to become even more sophisticated in their schemes. for instance, the evolving nature of crimes has given rise to vectors such as identity theft and fraudulent account creation, mainly due to the increased use of digital payment platforms. digital onboarding is a significant weakness for digital scammers who fabricate fake identities and gain unauthorized access to financial services. this has led to substantial financial losses and has proven challenging for institutions to maintain robust security (nvidia, 2022). 6.2.2. cryptocurrency and money laundering another aspect regarding cryptocurrencies is the anonymity these currencies provide. criminals have exploited the ability to anonymously transfer money online using cryptocurrencies, including laundering illicit gains and moving currency across borders in cybercrime activities. since blockchain technology is decentralized, it poses challenges when regulatory authorities attempt to track and eliminate such activities. although data on these categories is limited, numerous instances of money laundering through cryptocurrencies have been reported worldwide, highlighting our limited understanding of this risk (mckinsey & company, 2021a). financial risk and management reviews, 2025, 11(1): 1-36 19 © 2025 conscientia beam. all rights reserved. 6.2.3. dark web activities fintech has also made financial crimes more pervasive through the proliferation of dark web activities. cybercriminals use the dark web to trade stolen data, counterfeit money, and other illicit products and services. this underground economy thrives on the overarching pseudonymity and security offered by fintech platforms, which significantly complicates law enforcement efforts to track and dismantle these criminal networks. over the decades, the dark web has increasingly been associated with financial crimes, according to various reports, suggesting the need for much stricter monitoring and enforcement (home of fintech & banking news, 2021). 7. regulatory landscape of fintech and financial crimes 7.1. current regulatory framework the regulatory landscape for fintech and financial crimes is complex and multifaceted, with numerous laws and regulations designed to maintain economic stability, protect end-users, and prevent illicit activities. in the u.s., various agencies have regulatory jurisdiction. these laws include regulations that can lead to technical non-compliance, such as the anti-money laundering (aml) legislation, exemplified by the bank secrecy act and the patriot act, which require financial institutions to create aml programs and report suspicious activities. the securities and exchange commission (sec) regulates issues surrounding securities, while the commodity futures trading commission (cftc) oversees commodities. additionally, the office of the comptroller of the currency (occ) supervises all nationally chartered banks (tran & kevin, 2023). in the e.u. regulatory environment, the market structure is defined by directives like the fifth anti-money laundering directive (5amld) and the markets in financial instruments directive ii (mifid ii). these guidelines mandate thorough customer due diligence (cdd) and reporting of suspicious activities to prevent money laundering and terrorist financing. furthermore, the general data protection regulation (gdpr) tightly regulates data protection and privacy (global legal insights, 2023). the regulatory framework has evolved post-brexit by introducing the financial services and markets act 2023, replacing retained e.u. laws with bespoke u.k. legislation. the financial conduct authority (fca) and the prudential regulation authority (pra) enforce compliance and ensure financial stability. the money laundering, terrorist financing and transfer of funds (information on the payer) regulations 2017 (as amended in 2020) ensure that uk aml laws comply with international fatf standards (gov.uk, 2023). table 2 represents the summary of nations, including the usa, european union, and united kingdom, that have enough regulations and regulatory forces to prevent financial crimes. table 2. key regulations and regulatory bodies governing fintech and financial crimes. region key regulations regulatory bodies description united states bank secrecy act (bsa) financial crimes enforcement network (fincen) requires financial institutions to implement aml programs and report suspicious activities. united states usa patriot act fincen, sec, cftc, occ expands aml requirements, including mandatory information sharing and enhanced due diligence. united states securities act securities and exchange commission (sec) regulates the securities market, including initial public offerings (ipos) and securities trading. united states commodity exchange act commodity futures trading commission (cftc) oversees the trading of commodity futures and options markets. united states office of the comptroller of the currency (occ) office of the comptroller of the currency (occ) supervises national banks and federal savings associations, ensuring safe and sound operations. european union fifth anti-money laundering directive (5amld) european commission, european banking authority (eba) enhances cdd requirements and reporting mechanisms to combat money laundering and terrorist financing. financial risk and management reviews, 2025, 11(1): 1-36 20 © 2025 conscientia beam. all rights reserved. region key regulations regulatory bodies description european union markets in financial instruments directive ii (mifid ii) european securities and markets authority (esma) regulates financial markets, ensuring transparency and investor protection. european union general data protection regulation (gdpr) european data protection board (edpb), national data protection authorities (dpas) sets stringent guidelines on data protection and privacy, impacting how financial institutions handle customer data. united kingdom financial services and markets act 2023 financial conduct authority (fca), prudential regulation authority (pra) replaces retained eu laws with uk-specific regulations, ensuring compliance and financial stability post-brexit. united kingdom money laundering, terrorist financing and transfer of funds (information on the payer) regulations 2017 (updated 2020) fca, pra aligns uk aml laws with international standards set by fatf, incorporating enhanced due diligence and reporting requirements. united kingdom general data protection regulation (gdpr) information commissioner's office (ico) although brexit has led to uk gdpr, the principles remain largely consistent with eu gdpr, ensuring high standards of data protection and privacy. united kingdom payment services regulations 2017 fca implements the eu’s second payment services directive (psd2), promoting competition and innovation while enhancing security in electronic payments. 7.2. emerging regulatory trends the evolution of fintech services has been unprecedented and has fostered the use of dynamic and flexible regulatory systems worldwide. with fintech becoming increasingly popular in delivering financial services, managing the associated risks has become paramount. 7.2.1. digital assets and cryptocurrencies with the growing use of digital assets like bitcoins, regulation is the only available option to mitigate risks and issues such as fraud, malpractice, market manipulation, and financial volatility. in the united states, distinct federal authorities such as the security exchange commissions (sec) and the commodity futures trading commission (cftc) play a crucial role in overseeing the crypto assets category. the sec is responsible for the securities aspect, investor protection, and overall market protection, while the cftc regulates the derivatives and commodities segment. in the eu context, the proposed markets in crypto-assets (mica) regulation has been designed to create a constructive legal framework for digital assets. according to tran and kevin (2023) mica aims to offer more explicit legal specifications, propel innovation, and bolster consumer protection across member states. this regulation is also expected to reduce fragmentation in this area and provide more certainty to those who invest in digital assets. 7.2.2. artificial intelligence (ai) and machine learning adopting ai and machine learning in financial services has attracted controversy over data privacy, security, and the ethical implications of the algorithms used. regulators are not idle; they are actively working to develop policies and standards to prevent the misuse of ai. for instance, the uk government convened the ai safety summit, where it was evident that the government was paying adequate attention to implementing proper regulatory measures. most discussions focused on the transparency of ai programming, accountability for ai decision-making, and mechanisms to ensure that ai does not act in a discriminatory manner. furthermore, the whitepaper on ai published by the uk government outlines plans to govern ai and emphasizes the need to prevent financial risk and management reviews, 2025, 11(1): 1-36 21 © 2025 conscientia beam. all rights reserved. adverse effects while fostering technological advancement (int-comp.org, 2023). the eu and the us also face these challenges, and their regulatory authorities are developing regulations for ai to address these issues. 7.2.3. sustainable finance esg has gradually become one of the key issues affecting financial regulation. the sustainable finance disclosure regulation (sfdr) applies to firms in the eu, requiring them to make sustainable investments and disclose them based on esg factors included in the investment process. this regulation aims to enhance disclosure practices in such enterprises so that investors can make decisions based on sustainability. furthermore, the corporate sustainability due diligence directive (csddd) proposes that firms must identify and address risks of human rights violations and environmental crimes throughout the supply chain (int-comp.org, 2023). these are signs of a more profound transition towards integrating sustainability in financial activities due to investors' growing demand for sustainable funds. 7.3. role of international cooperation fintech is a facilitator of global financial crimes, and for this reason, they can only be fought through international collaboration. however, fintech innovations also introduce risks in the form of opportunities for some of these financial crimes, as they are frequently transnational and demand an international response. 7.3.1. anti-money laundering (aml) and counter-terrorist financing (ctf) fatf is renowned for implementing recommendations and maintaining an international list of countries concerning aml and ctf. money laundering is a focus of fatf, which requires countries to adopt very stringent measures to combat this vice. the mutual evaluations performed by fatf assess how states incorporate these standards and provide information, thus encouraging the timely ratification of best practices. these evaluations reveal a lack of measures to implement substantial norms at the national level regarding aml/ctf, thereby continuing to provide recommendations for improving norms worldwide, with the purpose of uniting to fight financial crimes (financial action task force (fatf), 2023). fatf’s approach entails cooperation through which these countries work together, thereby improving best practices in the financial field and enhancing financial security globally. 7.3.2. cybersecurity growing cybersecurity threats present significant risks to the finance sector and thus call for global collaboration. organizations such as the european union agency for cybersecurity (enisa) and the us cybersecurity & infrastructure security agency (cisa) facilitate the sharing of best practices and threat intelligence between nations. these organizations work to create uniform cybersecurity standards and strengthen incident response mechanisms. facilitating international cooperation helps reduce the cyber risks experienced by financial entities worldwide. collaborating around cybersecurity, including sharing information and orchestrating cyber-threat responses, is essential to protecting enterprises from advanced threats that can have far-reaching impacts. joint efforts dealing with cyber risks, such as data protection of sensitive personal identities, provide critical capabilities for identifying new attack trends (mckinsey & company, 2021a). cyber threats are global, and no country can solve these challenges alone, emphasizing the necessity of international cooperation. 7.3.3. data security and privacy the global data movement necessitates standard policies around data protection. the eu has established a high standard for data privacy with its general data protection regulation (gdpr), and more governments worldwide are expected to follow suit. the goal is to enable data transfers while maintaining privacy, forming the financial risk and management reviews, 2025, 11(1): 1-36 22 © 2025 conscientia beam. all rights reserved. basis of collaborative organizations such as the eu-us privacy shield. this agreement allows the processing and transfer of personal data between the eu and the us while reconciling regulatory requirements with global commerce (global legal insights, 2023). streamlining data protection legislation globally safeguards individuals' privacy rights and ensures clarity for businesses operating across borders. 7.3.4. global financial regulation international initiatives led by the financial stability board (fsb), the basel committee on banking supervision (bcbs), and forums like the g20 act as platforms to harmonize and discuss key financial landscape issues. these forums provide a synchronized global regulatory framework, allowing for comprehensive discussions and understanding of prudential requirements and financial reforms. conclusively, international collaboration is vital to tackle the nuances and challenges of financial crimes in the fintech era. countries need to work collaboratively and independently to develop more muscular regulatory structures, share intelligence, and execute better strategies to eradicate financial crimes, creating a secure world of finance. 8. weighing the benefits and risks 8.1. benefits to financial institutions 8.1.1. enhanced efficiency and cost reduction fintech solutions improve the operations of financial institutions by reducing the need for the workforce to perform various tasks. automated systems for customer acquisition, loan processing, and compliance save time, leading to significant cost savings. for instance, automated customer verification systems allow firms to address kyc requirements much faster, completing the process in minutes rather than the days or weeks required for manual procedures. research conducted by accenture shows that integrating fintech solutions can optimize operational costs by up to 30% (accenture, 2021). 8.1.2. improved customer experience various innovations in financial technology have enhanced customer experience by adopting mobile banking apps and other online services. customers can now manage their banking needs, conduct transactions, borrow, invest, and more, all from the comfort of their homes. this convenience increases customer satisfaction and, consequently, customer loyalty. a study by pricewaterhousecoopers (pwc) revealed that nearly half of consumers now rely solely on digital means to access their financial services; 46% of consumers have transitioned to purely digital channels for their financial needs (pwc, 2021). 8.1.3. enhanced fraud detection and security fintech solutions equipped with artificial intelligence (ai) and machine learning (ml) algorithms provide robust fraud detection capabilities. systems like the aric risk hub by feature space use adaptive behavioral analytics to detect anomalies and potential fraud in real-time. these technologies have been shown to block up to 75% of fraudulent transactions, significantly reducing financial losses and enhancing security (sutton, 2022). 8.1.4. financial inclusion fintech has played a crucial role in promoting financial inclusion by providing financial services to underserved populations. mobile banking and microfinance platforms allow individuals in remote or underbanked regions to access financial services, thereby fostering economic growth. according to the world bank, fintech innovations have contributed to a 20% increase in financial inclusion in developing countries over the past decade (world bank, 2022). financial risk and management reviews, 2025, 11(1): 1-36 23 © 2025 conscientia beam. all rights reserved. 8.1.5. data-driven decision making the vast amounts of data generated by fintech applications enable financial institutions to make more informed decisions. advanced data analytics tools allow banks to analyze customer behavior, market trends, and financial risks more accurately. this leads to better product offerings, personalized services, and efficient risk management. a report by mckinsey & company highlighted that data-driven decision-making processes can increase the profitability of financial institutions by 20% (mckinsey & company, 2021b). 8.2. risks to financial integrity and strategies for mitigating risks adopting new fintech solutions has introduced new threats to financial stability and integrity. while innovation brings numerous benefits, it poses significant risks that must be managed effectively to ensure security and compliance. 8.2.1. cybersecurity threats fintech relies heavily on digital platforms, making financial institutions vulnerable to cyber risks. criminals target these platforms to exploit their vulnerabilities. data breaches, ransomware attacks, and hacking can result in substantial financial losses and damage the institution's reputation. for example, the average cost of a data breach in the financial sector was $5.72 million in 2021 (ibm, 2021). the interconnected nature of fintech systems exacerbates the issue, as an attack on one part can directly impact the entire system. 8.2.2. regulatory and compliance challenges rapid innovation within the fintech sector significantly pressures compliance. financial institutions must navigate a complex and ever-evolving landscape of regulations. the challenge is further compounded by regional regulatory differences, particularly for institutions operating in multiple countries. non-compliance can lead to severe fines and legal consequences. in 2021, compliance expenditures for financial institutions were estimated at $270 billion (deloitte, 2021). developing and maintaining compliance frameworks requires ongoing investment and adaptation to regulatory changes. 8.2.3. increased fraud and money laundering the flexibility offered by digital transactions and cryptocurrencies can facilitate fraud and money laundering. according to the european union agency for cybersecurity (enisa), there was a 50% increase in financial crimes involving cryptocurrencies within a year (enisa, 2022). criminals exploit gaps in digital identity management to create fake identities, leading to significant financial losses for institutions and customers. 8.2.4. technological dependence and system failures heavy reliance on technology introduces risks related to system failures and technological disruptions. technical glitches, software bugs, or failures in third-party services can disrupt operations, leading to financial losses and customer dissatisfaction. for instance, the 2021 outage of the payment processing service fastly disrupted numerous financial services globally (mckinsey & company, 2021a). this dependence necessitates robust disaster recovery and continuity planning. 8.2.5. privacy and data protection concerns fintech’s use of large volumes of sensitive customer data raises significant privacy and data protection concerns. compliance with data protection regulations, such as the general data protection regulation (gdpr) in the eu, is crucial to avoid legal repercussions and maintain customer trust. data breaches not only result in financial risk and management reviews, 2025, 11(1): 1-36 24 © 2025 conscientia beam. all rights reserved. financial losses but also lead to severe reputational damage. according to the world economic forum, 58% of data breaches in the financial sector involve insider threats, emphasizing the need for stringent data protection measures (world economic forum, 2022). the only way to counteract these threats with any hope of success is through financial institutions' heavy investment in cybersecurity measures. this involves leveraging high-level encryption, two-factor authentication, and real-time network monitoring. partnering with cybersecurity companies and joining intelligence-sharing efforts can give institutions an upper hand on new threats. by implementing ai-powered security systems, organizations are better equipped to detect and respond to threats quickly, creating an added level of defense. table 3 provides an overview of the potential fintech-related risks, their effects, and strategies for mitigating the risks. table 3. risks and strategies for mitigating risks. risk impact mitigation strategies cybersecurity threats data breaches, ransomware attacks, financial losses, reputational damage implement advanced encryption, multi-factor authentication, continuous network monitoring, collaborate with cybersecurity firms, participate in information-sharing initiatives (ibm, 2021). regulatory and compliance challenges hefty fines, legal repercussions, operational disruptions establish dedicated compliance teams, engage with regulators, invest in regtech solutions, monitor regulatory changes, participate in industry forums (deloitte, 2021). increased fraud and money laundering financial losses, reputational damage, regulatory fines adopt ai and ml-based fraud detection systems, implement stringent kyc and aml protocols, conduct regular audits and assessments (enisa, 2022). technological dependence system failures, operational disruptions, financial losses, customer dissatisfaction develop comprehensive disaster recovery and business continuity plans, invest in resilient it infrastructure, conduct regular drills and simulations (mckinsey & company, 2021a). privacy and data protection concerns legal repercussions, financial losses, reputational damage comply with data protection regulations (e.g., gdpr), implement stringent data protection measures, conduct regular audits and assessments, promote a culture of data security (world economic forum, 2022). another critical factor in risk management is compliance. banks should hire compliance officers to monitor regulations and implement changes immediately. this approach makes it easier for institutions to remain compliant and to understand potential issues from regulators shortly. using technology solutions in compliance, such as regtechs, is another way to address non-compliance risk, as some processes can be automated. the elements of the right balance for success in iot depend heavily on the capacity of financial institutions to combat fraud and money laundering. systems that can detect deviations from typical transactions in real-time play a crucial role in fraud prevention. however, it's the comprehensive audits and assessments that truly increase awareness of weaknesses, providing necessary checks for a secure institution and ensuring the institution is ready to combat fraud and money laundering. disasters caused by technological disruptions are devastating and should be addressed by recovery and continuity management. backup, redundancy, and crisis management strategies should also be part of the essential plans. banks should train through drills and simulations to ensure they are prepared to respond to calamities in various scenarios. methods such as establishing a robust information technology framework and relying on cloud services assist in improving dependability, thereby minimizing the disruptive effects on activities. financial marketing and customer education can also be beneficial. teaching customers responsible behaviors and how to protect themselves while conducting transactions via digital financial services will significantly minimize the risk of fraud. financial institutions must offer resources and tools to help customers recognize financial risk and management reviews, 2025, 11(1): 1-36 25 © 2025 conscientia beam. all rights reserved. suspicious activities, such as mule accounts, and proactively stay informed on ways to protect themselves against future financial crimes. this approach enhances security and builds customer trust and confidence in digital financial services. 9. future outlook 9.1. emerging technologies and trends the international monetary fund (imf) is focusing on utilizing distributed ledger technology to leverage fintech for cross-border payments; augmented reality to improve customer satisfaction is one of the rising themes. digital invoicing, digital insurance, crowdsourcing, investing in crowds, robotics investment advising, the regulatory function of central banks and their future connections with fintech companies (pant, 2020). emerging trends include the use of mobile wallets, the rise of virtualized neo-banks, and the increased interaction of millennial consumers with internet giants like google and amazon. these companies have used blockchain for peer-to-peer lending and contract administration, artificial intelligence for investment advice, machine learning and data analytics for customer service, etc. augmented reality (ar) has the potential to significantly differentiate services from one another and improve client engagement. with ar, users may view information in a clear, simple, and immersive manner (dubey, 2019). fintech companies employ a variety of significant technologies in their product development processes, including blockchain, machine learning, artificial intelligence, data analytics, robots, and cloud computing. according to an evidence-based analysis, the three most beneficial breakthroughs for the financial sector are blockchain, robo-advising, and the internet of things (iot) (chen, wu, & yang, 2019). unmanned aerial vehicles have been used in the insurance, financial, and underwriting domains employing sensor data collection and wireless transmission to adjust insurance claims (luciani, distasio, bungert, sumner, & bozzo, 2016). china and india are the world's leaders in the adoption and awareness of digital payments. it is now the foundation of many non-financial businesses, including fast-moving consumer goods (fmcg) (point of sale), e-commerce, insurance (comparison, purchase), telecom & utility (recharges, bill payments), travel (bookings, payments, offers), hospitality (booking, payments), entertainment (content purchases), and fmcg (travel). even in many nations, such as india, the government transfers funds directly for purchases and subsidies to cut down on corruption and save transaction costs. with more innovation, digital payments will remain a fundamental component of fintech services (pant, 2020). robotic advisors and chatbots are perceived as ways to assist clients that human advisors cannot. for example, unlike human advisors, robo-advisers often use technology that may simplify and expedite client communication, apply repeatable algorithms based on financial theory, and are far more transparent (d’acunto, prabhala, & rossi, 2019). one cannot isolate the application of big data, ai, and machine learning from emerging technological advancements in the fintech industry. the impact of using data is wide-ranging and complex, which is why this sector is so concerned about data security. in this setting, data security is just as important as technical security. fintech must safeguard customers from problems with data breaches and limitations on data access, including the security of personal data. therefore, it is necessary to have rigorous regulations about the security of personal data. digital literacy is another thing that consumers need to know. cyberliteracy necessitates careful technology users. to prevent fraud, the fintech sector must also preserve the calibre of its software and make use of technological integration (hua, huang, & zheng, 2019). at the moment, fintech companies must work together with more established financial institutions like banks. this tackles the issue that fintech is a disruptive technological advancement. because fintech is thought to follow digital transformation more quickly than other companies, banks need to work with them as strategic partners (fermay, santosa, kertopati, & eprianto, 2018). 9.2. predictions for financial crime landscape with a few notable exceptions, including mortgage fraud, practically all fraud categories have experienced significant rises. the quantity of external fraud has increased, as has the volume of transactions overall (kurshan, financial risk and management reviews, 2025, 11(1): 1-36 26 © 2025 conscientia beam. all rights reserved. shen, & yu, 2020). fraud involving payments includes transactions using credit and debit cards, automated clearing houses (ach), wire transfers, person-to-person (p2p) transactions, online payments, automated bill payments, cheques, and deposits, among other payment channels. across all payment channels, fraud has increased significantly in recent years, with digital transactions seeing the largest rise (dorphy & hultquist, 2018). a variety of strategies, such as atm skimming devices, phishing, smishing, dumpster diving, and infiltrated wireless networks, are employed by identity theft schemes. identity theft is becoming one of the most common forms of fraud reported in criminal files made to the federal trade commission (kurshan et al., 2020). one of the main issues in the fraud environment these days is financial frauds. these crimes employ ever-evolving strategies, including scams using phones, elderly victims (like grandmother scams), tech support scams, scams involving charities and lotteries, scams involving tickets, etc (spreng, ebner, levin, & turner, 2021). when thieves obtain unauthorized access to a victim's account, account takeover fraud takes place. to prevent the victim from accessing the account, thieves usually alter the contact details and account login passwords throughout this procedure. eventually, they use one or more payment channels to drain the cash. australian taxation office (ato) is closely related to cybersecurity because of the frequent use of hacked devices and networks, sim hijacking, and large-scale data breaches as means of attack (gies, piquero, piquero, green, & bobnis, 2021). the capacity to quickly adjust to new trends, weaknesses, and preventative measures is demonstrated by crime techniques. they utilize cross-channel strategies in addition to demonstrating astounding degrees of personalization to the specific channels they use. in terms of transaction type (amounts, processing times), channel, devices, authentication requirements, etc., there are noticeable variations in fraud characteristics. because of this, automated teller machine (atm) fraud differs greatly from online bill payment fraud in several ways, including frequency, quantities, transaction and processing time spans, parties involved, compromised access, and devices involved (kurshan et al., 2020). 10. conclusion 10.1. summary of findings the goal of the paper is to evaluate fintech's impact and to analyze whether it is a curse or blessing for financial institutions. the paper discusses the landscape of the fintech historical context and current trends, overview, classification, methods and mechanism of financial crimes, and the impact of those crimes on financial institutions, government, economy and consumers. positive impacts of fintech on financial crime prevention also have been discussed including the cases of successful implementation. the findings of the paper show that fintech is acknowledged as the most cutting-edge innovation in the financial sector for improving quality, lowering costs, and expanding an efficient financial environment. several drivers of transformation brought about by it have a big impact. through automation, new models such as peerto-peer investing and crowdfunding boost information technology efficiency and guarantee the quality of financial services. blockchain-based systems and biometrics (such as fingerprints, face recognition, and iris scans) are examples of new technologies that can enhance digital identification procedures. by providing improved security, decreased fraud, and expedited identification verification processes, these technologies help stop theft and other associated crimes. systems for monitoring finances can benefit from the application of artificial intelligence, machine learning, and advanced data analytics. these technological advancements facilitate the prompt and precise detection of dubious transactions, money laundering operations, and fiscal offenses. automated systems can analyze enormous volumes of data and spot trends that are hard for people to see, which helps law enforcement fight financial crimes. to guarantee successful adoption and adherence to international standards as these technologies advance, regulatory agencies, financial institutions, and technology suppliers must work together. this will eventually help to create a more robust and safer financial environment. big data's ascent has revolutionized fraud detection and financial security by offering previously unheard-of analytical powers. financial institutions are increasingly able to financial risk and management reviews, 2025, 11(1): 1-36 27 © 2025 conscientia beam. all rights reserved. expose sophisticated fraud schemes through the use of large datasets. these schemes can involve everything from money laundering and complicated securities fraud to improper credit card transactions and insurance fraud. additionally, by utilizing hybrid client contact, the expansion of the customer base significantly contributes to the resizing of the channel management route to clients. a new competition by fintech companies causes existing challenges, faced by the traditional banking environment. the convergence between emerging business models and technology improves streamlined operations and customer satisfaction. a digital finance cube is innovated with the consensus of business operations, technologies and technological concepts which has significant influence over various stakeholders from three dimensions (consumers, market players and regulatory font). 10.2. final verdict: curse or blessing? the effectiveness of cloud-based finance apps to prevent fraud is greatly influenced by ai. machine learning algorithms have the capability to process vast datasets and detect patterns associated with fraudulent activities such as credit card fraud, identity theft, and account takeovers. ai systems continuously learn from new data, which helps them become more adept at spotting novel fraud techniques. fintech companies utilize an array of emerging technologies, including big data, iot, blockchain, robotics, augmented reality, artificial intelligence, robotics, robotics, and drones. as a major international financial organization, the international monetary fund (imf) thinks that blockchain distributed ledger technology might help fintech companies increase cross-border payment services, transaction costs, and transparency. more study may be done on the more recent subjects of digital insurance, digital invoicing, electronic factoring, electronic leasing, crowd investing, and the connections between cryptocurrencies other than bitcoin. robotic financial advice has the potential to upend the investment consulting industry. these robo-advisors are more affordable, provide more educated information, and satisfy client expectations for trust and opennesss (pant, 2020). blockchain has the power to completely change industries, save money, and increase openness and trust in company operations. one of blockchain's most potent features is its ability to track any transaction from source to target with reliable middlemen. this has many applications, including tracking diamonds from mine to retail establishments, organic farming from farmer to market, land records for transparent ownership history, and sharing patient medical records. the extraordinary rise in digital payments in recent years has led to significant shifts in financial crimes and fraud. in contrast to the growing reliance on complex digitalized information technology hubs without replacement, fintech is becoming increasingly visible from the outside, increasing cyber exposure. cybercriminals may utilize these security flaws to hijack equipment supporting the financial system, disrupt payment systems, or access data at custodian banks or central securities depositories (buckley et al., 2019). with the growing use of digital payments, there is a greater chance of financial fraud. consequently, npss—which are directly controlled by central banks (cbs)—are increasingly utilizing state-of-the-art technologies, such cognitive computing, to enhance their ability to detect fraud inside their countries (alessio faccia, 2023). after thorough analyses of both the positive and negative implications of fintech, we can conclude that for every disruptive technology, there are some drawbacks along with the benefits. however, by capitalizing the emerging technologies we can tackle the problems. experiments in the real world, such as the financial crimes section of the fbi's detection and disruption of large-scale fraud schemes, show how important machine learning and big data are to protecting the nation's financial borders (saxena & vafin, 2019). solutions based on graph computing concepts for ai and machine learning have attracted a lot of attention. graph neural networks and newly developed adaptive solutions provide promising prospects for the identification of financial crimes and fraud in the future. financial risk and management reviews, 2025, 11(1): 1-36 28 © 2025 conscientia beam. all rights reserved. 11. implications our paper provides insights into both the positive and negative impact of fintech on financial institutions, the economy and consumers that contribute to both practical and theoretical implications. financial institutions will be more aware of the different kinds of crimes and related crimes generated by employing fintech. future researchers can add more knowledge by suggesting and finding out how emerging crimes can be mitigated. the following are some ways that trade and investment implementing authorities can help the fintech pod succeed: assigning fintech experts to oversee fintech bridge initiatives, such as offering customized strategic counsel to fintech companies establishing operations in a state party; acting as a point of contact for fintech companies in each market, offering support with inquiries and opportunity identification; establishing connections amongst fintech personnel employed by appropriate trade and investment implementing authorities; assisting in matching events, gatherings, and networking chances for businesses interested in partnering. like scammers always come up with new methods to trick financial institutions, fintech is changing as a result of the emergence of cutting-edge technology that employ ai to stop and identify fraud. detecting and preventing fraud is a continuous process. in the fintech industry, fraud may be prevented and detected with the use of contemporary technology like ai and machine learning. at the corporate, managerial, and personal levels, integrity and ethical concerns with fintech would presumably never go away. it is crucial to remember that cybersecurity education and training would be ineffective if it didn't address the fraud concerns related to human ethics and integrity. for the fintech experts working on the overall architecture and growth of the fintech infrastructure, such moral behaviour is even more important. funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors declare that the manuscript is honest, truthful and transparent, that no important aspects of the study have been omitted and that all deviations from the planned study have been made clear. this study followed all rules of writing ethics. data availability statement: the corresponding author can provide the supporting data of this study upon a reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. references abdul-qawy, a. s., pramod, p., magesh, e., & srinivasulu, t. 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