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Volume 17
Issue 7
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J. Risk Financial Manag., Volume 17, Issue 7 (July 2024) – 57 articles

Cover Story (view full-size image): This study first investigates whether managers tend to choose between conservatism and meet/beat market expectations when developing financial reporting strategies. Second, it investigates whether managers prefer to use other earnings management strategies instead of MBME. Third, it tests whether information asymmetry between managers and shareholders affects managers’ decisions to sacrifice conservatism. The results show that managers are more likely to sacrifice conservatism to meet/beat market expectations but are less likely to do so if they can manage earnings using accrual-based or real earnings management. At the same time, managers are more likely to sacrifice conservatism when information asymmetry with shareholders is higher. View this paper
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17 pages, 297 KiB  
Article
Corporate Cash Holdings and Investment Efficiency: Do Women Directors and Financial Crisis Matter?
by Ardianto Ardianto and Noor Adwa Sulaiman
J. Risk Financial Manag. 2024, 17(7), 311; https://doi.org/10.3390/jrfm17070311 - 22 Jul 2024
Viewed by 1166
Abstract
This study investigates the relationship between corporate cash holdings and investment efficiency, with a focus on how COVID-19 and the presence of women directors may influence this relationship. Using data from Indonesian public companies during the COVID-19 period, comprising 2350 firm-year observations, we [...] Read more.
This study investigates the relationship between corporate cash holdings and investment efficiency, with a focus on how COVID-19 and the presence of women directors may influence this relationship. Using data from Indonesian public companies during the COVID-19 period, comprising 2350 firm-year observations, we employ fixed-effect regression models with industry and year controls to test our hypotheses. Robustness and endogeneity tests are conducted to ensure the reliability of our findings. Our research reveals that companies with larger cash reserves tend to experience decreased investment efficiency during the COVID-19 crisis. Moreover, the negative impact of substantial cash reserves on investment efficiency is exacerbated by the presence of female directors on the board. However, our findings also suggest that female directors can mitigate the adverse effects of excessive cash reserves on a company’s investment efficiency, particularly during unforeseen economic challenges such as the pandemic. Full article
(This article belongs to the Special Issue Risk Management in Capital Markets)
26 pages, 2075 KiB  
Article
Estimation of Optimal Hedge Ratio: A Wild Bootstrap Approach
by Phong Minh Nguyen, Darren Henry, Jae H. Kim and Sisira Colombage
J. Risk Financial Manag. 2024, 17(7), 310; https://doi.org/10.3390/jrfm17070310 - 20 Jul 2024
Viewed by 1789
Abstract
This paper proposes a new approach to estimating the minimum variance hedge ratio (MVHR) based on the wild bootstrap and evaluates the approach using a spectrum of conservative to aggressive alternative hedging strategies associated with the percentiles of the MVHR’s bootstrap distribution. This [...] Read more.
This paper proposes a new approach to estimating the minimum variance hedge ratio (MVHR) based on the wild bootstrap and evaluates the approach using a spectrum of conservative to aggressive alternative hedging strategies associated with the percentiles of the MVHR’s bootstrap distribution. This approach is suggested to be more informative and effective relative to the conventional method of hedging solely based on a single-point estimate. Furthermore, the percentile-based MVHRs are robust to influential outliers, non-normality, and unknown forms of heteroskedasticity. The bootstrap percentile-based hedging strategies’ effectiveness is compared with those from the naïve method and the asymmetric DCC-GARCH model for a range of financial assets and commodities. The bootstrap percentile-based hedging technique is identified to outperform its alternatives in terms of hedging effectiveness, downside risk, and return variability, suggesting its superiority to other methods in both the literature and in practice. Full article
(This article belongs to the Special Issue Financial Technology (Fintech) and Sustainable Financing, 3rd Edition)
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18 pages, 1562 KiB  
Review
Factors Influencing Sustainable Poverty Reduction: A Systematic Review of the Literature with a Microfinance Perspective
by Salvador Fonseca, António Moreira and Jorge Mota
J. Risk Financial Manag. 2024, 17(7), 309; https://doi.org/10.3390/jrfm17070309 - 19 Jul 2024
Viewed by 2266
Abstract
This research examined factors that help microfinance achieve sustained poverty reduction based on a systematic literature review (SLR). A search was conducted on the SCOPUS database up to December 2023. After analyzing hundreds of documents, a subset of 30 articles was subject to [...] Read more.
This research examined factors that help microfinance achieve sustained poverty reduction based on a systematic literature review (SLR). A search was conducted on the SCOPUS database up to December 2023. After analyzing hundreds of documents, a subset of 30 articles was subject to in-depth analysis, exploring factors and corresponding measurement indicators for sustainable poverty reduction in microfinance contexts. This article emphasizes that sustained poverty reduction is a gradual process requiring ongoing efforts from both Microfinance Institutions (MFIs) and governments. Two key success factors are empowering borrowers and ensuring the microfinance programs themselves are profitable. When implemented in an integrated and coordinated manner, these factors can empower individuals to escape poverty by fostering self-employment and income generation, ultimately reducing dependence on external support. Additionally, the study highlights the role of personality traits in influencing long-term entrepreneurial success. The findings provide valuable tools for MFIs and policymakers. MFIs gain a practical framework to guide their interventions towards sustained poverty reduction. Policymakers can leverage the identified factors and indicators when designing and implementing microfinance policies with a long-term focus on poverty alleviation. This study breaks new ground by presenting an operational framework that categorizes and integrates two critical factor groups: empowerment and beneficiary profitability. Furthermore, it links these factors to corresponding measurement indicators within a unified framework, enabling a more holistic assessment of poverty reduction efforts. Full article
(This article belongs to the Special Issue Building an Inclusive and Responsive Financial Ecosystem for Sustainable Development)
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6 pages, 201 KiB  
Editorial
Corporate Finance and Environmental, Social, and Governance (ESG) Practices
by Ștefan Cristian Gherghina
J. Risk Financial Manag. 2024, 17(7), 308; https://doi.org/10.3390/jrfm17070308 - 18 Jul 2024
Viewed by 7977
Abstract
As global warming progresses, implementing green finance to redirect resources into sustainable initiatives has emerged as a crucial strategy for governments to develop financial systems that are carbon-free, green, and sustainable (Jin et al [...] Full article
(This article belongs to the Special Issue Corporate Finance and Environmental, Social, and Governance (ESG) Practices)
38 pages, 515 KiB  
Article
Navigating the Storm: How Economic Uncertainty Shapes Audit Quality in BRICS Nations Amid CEO Power Dynamics
by Antonios Persakis and Ioannis Tsakalos
J. Risk Financial Manag. 2024, 17(7), 307; https://doi.org/10.3390/jrfm17070307 - 18 Jul 2024
Viewed by 1061
Abstract
This study investigates the association between economic uncertainty and audit quality in the BRICS nations, examining both input-based (e.g., audit fees, auditor tenure) and output-based (e.g., restatements, total accruals) measures of audit quality. Utilizing a dataset of 83,511 firm-year observations from 1995–2022, it [...] Read more.
This study investigates the association between economic uncertainty and audit quality in the BRICS nations, examining both input-based (e.g., audit fees, auditor tenure) and output-based (e.g., restatements, total accruals) measures of audit quality. Utilizing a dataset of 83,511 firm-year observations from 1995–2022, it reveals a significant negative impact of economic uncertainty on audit quality. Additionally, the research explores the moderating role of CEO power, employing principal component analysis to merge various indicators of CEO influence. Findings indicate that powerful CEOs can mitigate the adverse effects of economic uncertainty on audit quality, suggesting a U-shaped relationship between CEO power and audit quality. Methodologically robust, employing techniques like two-stage least squares (2SLS) and two-stage system generalized method of moments (system GMM) to address endogeneity, the study offers a comprehensive analysis of audit quality in the context of economic fluctuations and corporate governance, contributing significantly to the understanding of these dynamics in emerging economies, particularly in the diverse and influential BRICS nations. This study’s findings have significant implications for stakeholders and policymakers, providing insights that can inform policy decisions and enhance corporate governance frameworks. Full article
(This article belongs to the Special Issue Featured Papers in Corporate Finance and Governance)
30 pages, 2093 KiB  
Article
Productivity and Keynes’s 15-Hour Work Week Prediction for 2030: An Alternative, Macroeconomic Analysis for the United States
by Edoardo Beretta, Aurelio F. Bariviera, Marco Desogus, Costanza Naguib and Sergio Rossi
J. Risk Financial Manag. 2024, 17(7), 306; https://doi.org/10.3390/jrfm17070306 - 17 Jul 2024
Viewed by 1358
Abstract
This paper analyses Keynes’s 1930 prediction that technical advances would cut people’s working week to 15 h by 2030 and investigates why actual working hours are significantly higher in the United States. Elaborating on Keynes’s forecast to provide a general productivity formula while [...] Read more.
This paper analyses Keynes’s 1930 prediction that technical advances would cut people’s working week to 15 h by 2030 and investigates why actual working hours are significantly higher in the United States. Elaborating on Keynes’s forecast to provide a general productivity formula while keeping its simplicity, we ran tests on macro-data from 1929 to 2019 and on estimates for 2030, demonstrating that productivity is surprisingly still insufficient to allow for a reduction in working hours across the US economy. This finding represents a substantial contribution to the literature, which has mostly explained long working hours by means of new consumer needs. Even by using microdata, we show that consumption does not explain the stickiness of working hours to the bottom. Hence, this paper combines a macroeconomic, logical-analytical approach based on historical time series with rigorously constructed time series at the microeconomic level. Finally, we also provide policies to narrow the productivity differential to Keynes’s prediction for 2030 while fostering work-life balance and sustainable growth. To understand long working hours in the US despite technical advances—this being one of our main findings—productivity remains crucial. Full article
(This article belongs to the Special Issue Emerging Trends in International Macroeconomics: Insights and Challenges)
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21 pages, 727 KiB  
Article
The Impact of the Cryptocurrency Market on Islamic vs. Conventional Stock Returns: Evidence from Gulf Cooperation Council Countries
by Naji Mansour Nomran, Abdelkader Laallam, Razali Haron, Aghilasse Kashi, Zakir Hossen Shaikh and Joji Abey
J. Risk Financial Manag. 2024, 17(7), 305; https://doi.org/10.3390/jrfm17070305 - 17 Jul 2024
Viewed by 1371
Abstract
The rapid rise and widespread global adoption of cryptocurrencies in recent years has fundamentally transformed the international financial landscape, with digital assets increasingly being recognized for their potential to influence the stability and performance of traditional capital markets. Against this backdrop, this study [...] Read more.
The rapid rise and widespread global adoption of cryptocurrencies in recent years has fundamentally transformed the international financial landscape, with digital assets increasingly being recognized for their potential to influence the stability and performance of traditional capital markets. Against this backdrop, this study aims to empirically investigate the impact of cryptocurrency returns on Islamic vs. conventional stock returns in Gulf Cooperation Council (GCC) countries. The salient distinctions between Islamic and conventional stock markets include fundamental differences in principles, investment allocations, and risk profiles, underscoring the importance of examining the impact of cryptocurrency returns on these distinct equity segments. Daily data were collected from stock indices in five GCC countries over the period 2016–2019, including two sub-periods: before and after the 2017 crypto crash. Pooled OLS, fixed effects, random effects, and generalized linear models (GLMs) were used to analyze the data collected during the study. With the GCC increasingly focusing on cryptocurrency markets, there is growing concern about these markets’ potential impact on regional stocks. This study addresses the important questions of whether the impacts of the cryptocurrency market on Islamic vs. conventional stock markets differ throughout the GCC region and how these impacts have evolved since the crypto crash period. The findings reveal that cryptocurrency returns had a negative impact on both GCC Islamic and conventional stock market returns for the full sample period (2016–2019), and the negative effect was far more pronounced for conventional stocks. For the two sub-periods before and after the crash, only the cryptocurrency market and conventional GCC stocks remained negatively correlated, while the cryptocurrency market and the GCC Islamic stock markets became uncorrelated. Thus, for the calmer sub-periods before and after the crypto crash, the rise in cryptocurrency returns may have enticed GCC investors away from conventional stocks, perhaps resulting in a decline in their investment in these stocks. Meanwhile, those who invest in Islamic stocks may not be exposed to this temptation. Full article
(This article belongs to the Section Financial Markets)
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26 pages, 3317 KiB  
Article
Mapping Corporate Sustainability and Firm Performance Research: A Scientometric and Bibliometric Examination
by Akshat Chopra, Ashima Singh, Rajarshi Debnath and Majdi Anwar Quttainah
J. Risk Financial Manag. 2024, 17(7), 304; https://doi.org/10.3390/jrfm17070304 - 15 Jul 2024
Viewed by 1966
Abstract
Corporate sustainability has garnered increasing attention within the business community as corporations communicate to influence their stakeholders to build sustainable relationships. There has been a surge in research exploring its connection to firm performance, but existing studies lack a cohesive and concentrated approach. [...] Read more.
Corporate sustainability has garnered increasing attention within the business community as corporations communicate to influence their stakeholders to build sustainable relationships. There has been a surge in research exploring its connection to firm performance, but existing studies lack a cohesive and concentrated approach. The aim of this study is to explore the trends of growth of publications; gauge the annual growth rate, annual ratio of growth, relative growth rate, doubling time, and scientific production index; predict future production levels; and look at the relationship between corporate sustainability and firm performance by analysing the literature as well as identifying clusters and links with the Sustainable Development Goals (SDGs). The top countries contributing to the research were China, India, and the United States, accounting for over 45% of the global publications. The study analysed a focused corpus of 65 documents from the Scopus database on specific subfields of corporate sustainability and firm performance, identifying five main thematic clusters related to environmental performance, financial performance, corporate sustainability reporting, corporate social performance, and green supply chain management, with significant citations related to 17 SDGs. The annual growth rate (AGR) of publications was found to be −2.88%, with an average of 4.06 publications per year. The relative growth rate (RGR) decreased from 0.69 in 2010 to 0.36 in 2023, and the doubling time (Dt.) increased from 1.00 in 2010 to 1.93 in 2023. Employing structured methods and the PRISMA protocol, this scientifically rigorous study points towards identification of research themes linking sustainability practices to firm performance. Exponential smoothing (Holt’s linear trend model) is employed to project future research output within the field. The significant trends include an increase in publication frequency since 2017, indicating a growth phase in the research field. The findings highlight the need for greater investigation from developing countries and the importance of integrating sustainability considerations into business strategies. Full article
(This article belongs to the Special Issue Corporate Sustainability and Firm Performance: Models, Practices and Policy Perspective)
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18 pages, 4866 KiB  
Article
Financial Risk, Debt, and Efficiency in Indonesia’s Construction Industry: A Comparative Study of SOEs and Private Companies
by Febrianto Arif Wibowo, Arif Satria, Sahala Lumban Gaol and Dikky Indrawan
J. Risk Financial Manag. 2024, 17(7), 303; https://doi.org/10.3390/jrfm17070303 - 14 Jul 2024
Viewed by 1431
Abstract
This study aims to evaluate the financial risk, debt, and efficiency of state-owned enterprises (SOEs) in Indonesia’s construction industry and compare these aspects with those of private companies through financial ratio analysis and efficiency analysis approaches. Four SOEs from the construction sector were [...] Read more.
This study aims to evaluate the financial risk, debt, and efficiency of state-owned enterprises (SOEs) in Indonesia’s construction industry and compare these aspects with those of private companies through financial ratio analysis and efficiency analysis approaches. Four SOEs from the construction sector were evaluated and compared to five private companies with financial data ranging from 2015 to 2022. Financial ratio analysis was applied to assess debt and financial risk, while efficiency analysis utilized data envelopment analysis (DEA) and paired t-tests to validate differences between the two groups of companies. This study reveals that the financial ratio performance of state-owned companies is relatively poor, with low profitability, critical liquidity, and a high debt ratio. Debt, as a source of capital in financing construction projects, causes companies to face a greater debt risk. This study also validates that SOEs have lower efficiency compared to private companies. In response to current challenges, SOEs should prioritize enhancing liquidity through faster receivable collections, debt restructuring, capital infusions, and divestment, reducing non-essential investments, focusing on asset recycling, and improving project efficiency. Full article
(This article belongs to the Special Issue Featured Papers in Corporate Finance and Governance)
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22 pages, 346 KiB  
Article
Impact of Board Committee Characteristics on Social Sustainability Reporting in Sub-Saharan Africa: The Moderating Role of Institutional Ownership
by Marshall Wellington Blay, Prosper Kweku Hoeyi, Ebenezer Agyemang Badu and Abdul Bashiru Jibril
J. Risk Financial Manag. 2024, 17(7), 302; https://doi.org/10.3390/jrfm17070302 - 14 Jul 2024
Viewed by 1076
Abstract
The corporate strategic planning of businesses in sub-Saharan Africa (SSA) largely focuses on immediate financial performance with minimal credence to social sustainability. Thus, studies on the linkage between corporate governance (CG) and sustainability reporting have focused on developed economies. This study therefore investigated [...] Read more.
The corporate strategic planning of businesses in sub-Saharan Africa (SSA) largely focuses on immediate financial performance with minimal credence to social sustainability. Thus, studies on the linkage between corporate governance (CG) and sustainability reporting have focused on developed economies. This study therefore investigated the role of institutional ownership in the impact of board committee characteristics on social sustainability reporting. This study involved strongly balanced panel data with 1969 observations of 275 publicly listed non-financial firms in SSA within the timeframe of 2012 to 2021. Data were analyzed using STATA 14.1. The hypotheses were tested using the two-step system of the generalized method of moment (GMM) using the Arellano–Bond dynamic panel data estimation method. The rate of social sustainability reporting was 39.4%. Relatively, Mauritian and South African firms had the most effective board committee characteristics and higher levels of social sustainability reporting. Although institutional ownership had no significant effect on social sustainability reporting, it moderated the effect of sustainability committee independence and sustainability committee gender diversity on social sustainability reporting. This paper presents a new perspective on the corporate governance and social sustainability literature by examining the effect of institutional ownership on board committee characteristics and social sustainability reporting in SSA. In terms of policy implication, there is the need for mandatory regulatory and legal CG framework that is regularly updated at national and regional levels in SSA to motivate listed firms to establish sustainability committees with efficient characteristics to promote social sustainability reporting. Full article
(This article belongs to the Special Issue Banking during the COVID-19 Pandemia)
20 pages, 5067 KiB  
Article
Challenges and Trends in Green Finance in the Context of Sustainable Development—A Bibliometric Analysis
by Biser Krastev and Radosveta Krasteva-Hristova
J. Risk Financial Manag. 2024, 17(7), 301; https://doi.org/10.3390/jrfm17070301 - 14 Jul 2024
Cited by 2 | Viewed by 2590
Abstract
Green finance in the context of sustainable development sits within the broader discourse of environmental economics and sustainable finance. Their integration has become imperative in addressing global challenges, with the aims of understanding how financial mechanisms can be aligned with sustainability goals, investigating [...] Read more.
Green finance in the context of sustainable development sits within the broader discourse of environmental economics and sustainable finance. Their integration has become imperative in addressing global challenges, with the aims of understanding how financial mechanisms can be aligned with sustainability goals, investigating the role of green finance in promoting environmentally friendly investments, and fostering sustainable development. This bibliometric analysis explores the evolution, trends, and challenges in green finance research. It examines 436 articles published between 2016 and 2024, revealing insights into influential publications, authors, journals, institutions, and countries engaged in green finance for sustainability. The study identifies China, the UK, and Pakistan as leaders in research output and citation impact. Furthermore, it highlights the interdisciplinary nature of green finance, reflected in diverse publication outlets spanning environmental, social, and economic domains. The analysis underscores the increasing global interest in green finance, as evidenced by the growing citation rates over time. Key findings include the pivotal role of green finance in energy efficiency, renewable energy development, and the promotion of sustainable economic growth. Overall, this research provides valuable insights for policymakers, researchers, and practitioners, emphasizing the importance of interdisciplinary collaboration and continued research efforts in advancing sustainable finance agendas. Full article
(This article belongs to the Special Issue Smart Solutions for Sustainable Economics and Finance)
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15 pages, 1322 KiB  
Article
Modeling and Forecasting Historical Volatility Using Econometric and Deep Learning Approaches: Evidence from the Moroccan and Bahraini Stock Markets
by Imane Boudri and Abdelhamid El Bouhadi
J. Risk Financial Manag. 2024, 17(7), 300; https://doi.org/10.3390/jrfm17070300 - 13 Jul 2024
Viewed by 1122
Abstract
This study challenges the prevailing belief in the necessity of complex models for accurate forecasting by demonstrating the effectiveness of parsimonious econometric models, namely ARCH(1) and GARCH(1,1), over deep learning robust approaches, such as LSTM and 1D-CNN neural networks, in modeling historical volatility [...] Read more.
This study challenges the prevailing belief in the necessity of complex models for accurate forecasting by demonstrating the effectiveness of parsimonious econometric models, namely ARCH(1) and GARCH(1,1), over deep learning robust approaches, such as LSTM and 1D-CNN neural networks, in modeling historical volatility within pre-emerging stock markets, specifically the Moroccan and Bahraini stock markets. The findings suggest reevaluating the balance between model complexity and predictive accuracy. Future research directions include investigating the potential existence of threshold effects in market capitalization for optimal model performance. This research contributes to a deeper understanding of volatility dynamics and enhances forecasting models’ effectiveness in diverse market conditions. Full article
(This article belongs to the Special Issue Financial Markets, Financial Volatility and Beyond, 3rd Edition)
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19 pages, 1307 KiB  
Article
An Investigation of the Co-Movement between Spot and Futures Prices for Chinese Agricultural Commodities
by Yongmei Fang, Bo Guan, Xu Huang, Hossein Hassani and Saeed Heravi
J. Risk Financial Manag. 2024, 17(7), 299; https://doi.org/10.3390/jrfm17070299 - 13 Jul 2024
Viewed by 858
Abstract
We employed a non-parametric causality test based on Singular Spectrum Analysis (SSA) and used the Vector Error Correction Model (VECM) and Information Share Model (IS) to measure the relationship between the futures and spot prices for seven major agricultural commodities in China from [...] Read more.
We employed a non-parametric causality test based on Singular Spectrum Analysis (SSA) and used the Vector Error Correction Model (VECM) and Information Share Model (IS) to measure the relationship between the futures and spot prices for seven major agricultural commodities in China from 2009 to 2017. We found that the agricultural futures market has potential leading information in price discovery. The results of an Impulse Response Function (IRF) analysis also showed that the spot prices react to shocks from the future market and have a lasting impact. This confirms our findings reported for the causality test and information share analysis. Full article
(This article belongs to the Section Financial Markets)
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15 pages, 797 KiB  
Article
The Real-Time Impact of Political Risk on Market Valuations: Evidence from Peru
by Juan Pablo Micozzi, Patricio Navia, Pablo Pinto and Sebastian Saiegh
J. Risk Financial Manag. 2024, 17(7), 298; https://doi.org/10.3390/jrfm17070298 - 13 Jul 2024
Viewed by 706
Abstract
This study examines the impact of political risk on financial markets by leveraging high-frequency (minute-by-minute) price data and precise event timestamps from media outlets’ Twitter feeds during Pedro Castillo’s failed coup attempt in Peru. Unlike previous research that relies on low-frequency data and [...] Read more.
This study examines the impact of political risk on financial markets by leveraging high-frequency (minute-by-minute) price data and precise event timestamps from media outlets’ Twitter feeds during Pedro Castillo’s failed coup attempt in Peru. Unlike previous research that relies on low-frequency data and protracted political changes, our analysis demonstrates that daily closing prices may misleadingly suggest negligible impact. In contrast, high-frequency data reveal that markets promptly and accurately incorporated news of the coup attempt and, in turn, its failure into asset prices. Our analysis shows that breakdowns in democratic governance negatively affect asset prices, while the restoration of the rule of law, in the form Congressional checks on the Executive branch, boosts them. Moreover, our analyses suggest that domestic companies and sectors with less mobile assets are more vulnerable to these political risks. Our findings underscore the crucial role of high-frequency data in accurately capturing how institutions and political risk affects equity markets. Full article
(This article belongs to the Special Issue Political Risk Management in Financial Markets)
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18 pages, 3256 KiB  
Review
The Conceptual, Social, and Intellectual Structure of the Financial Information/Accounting Manipulation Literature: A Bibliometric Analysis
by Mustafa Kıllı, Samet Evci and İlker Kefe
J. Risk Financial Manag. 2024, 17(7), 297; https://doi.org/10.3390/jrfm17070297 - 11 Jul 2024
Viewed by 1201
Abstract
This study presents a comprehensive bibliometric analysis of studies on financial information/accounting manipulation. The dataset of research includes 1.266 studies from the Web of Science database for the period 1991–2023. All studies included in the research contain either the term ‘financial information manipulation’ [...] Read more.
This study presents a comprehensive bibliometric analysis of studies on financial information/accounting manipulation. The dataset of research includes 1.266 studies from the Web of Science database for the period 1991–2023. All studies included in the research contain either the term ‘financial information manipulation’ or ‘accounting manipulation’ in the topic (title, abstract, or keywords). The bibliometric network mapping technique was used for the analysis of the data. The analysis was conducted utilizing the Biblioshiny interface of the R package programs Bibliometrix and Vosviewer. The results pointed out a notable upward trend in the publication and citation rates of financial information/accounting manipulation studies over the last two decades. Several key findings were identified. Firstly, a substantial rise in research output on financial information/accounting manipulation was observed, particularly after 2000, driven by global financial scandals. Secondly, prolific contributors to this field include authors such as Valaskova and Durana. Thirdly, the United States leads in research output, with significant contributions from institutions like the State University System of Florida and the State University System of Ohio. Lastly, The Accounting Review was identified as the most prolific journal in this domain, with the Journal of Accounting Economics being the most impactful based on citations. The most frequently used keywords indicate that the research topics focus on earnings management as a method of manipulation, fraudulent financial reporting, and the relationship with corporate governance. The comprehensiveness of the bibliometric data lends itself to a further examination of how financial information/accounting manipulation has progressed as a subject in the literature since the 2000s. In addition, this study reveals the social and intellectual structures of the issue, the key research streams, and potential research directions for future research. Full article
(This article belongs to the Section Business and Entrepreneurship)
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16 pages, 295 KiB  
Article
Unpacking Environmental, Social, and Governance Score Disparity: A Study of Indonesian Palm Oil Companies
by Iwan Suhardjo, Chris Akroyd and Meiliana Suparman
J. Risk Financial Manag. 2024, 17(7), 296; https://doi.org/10.3390/jrfm17070296 - 11 Jul 2024
Cited by 1 | Viewed by 1325
Abstract
This study investigates the inconsistencies in ESG scores assigned by different rating agencies. Focusing on two Indonesian palm oil companies, this paper examines the link between their reported sustainability performance and the resulting ESG scores. This study employs content analysis to assess how [...] Read more.
This study investigates the inconsistencies in ESG scores assigned by different rating agencies. Focusing on two Indonesian palm oil companies, this paper examines the link between their reported sustainability performance and the resulting ESG scores. This study employs content analysis to assess how the companies disclose information around double materiality, stakeholder engagement, and certifications. Additionally, the methodologies used by two rating agencies are reviewed to identify potential misalignments. The analysis reveals discrepancies in the ratings, suggesting factors like differences in the level of engagement with each company and scoring methodologies might be at play. This highlights the need for standardized sustainability reporting and more transparent rating methodologies within the palm oil industry. While limited to two companies and two agencies, the findings can inform efforts to improve transparency both in sustainability practices and scoring methodologies. This would ultimately lead to more reliable ESG scores, benefiting all related stakeholders. To goal of this study is to promote responsible practices in the palm oil industry by emphasizing the impact of reporting practices. Full article
(This article belongs to the Section Sustainability and Finance)
13 pages, 2278 KiB  
Article
Understanding Regulatory Changes: Deep Learning in Sustainable Finance and Banking
by Bogdan Ionut Anghel and Radu Lupu
J. Risk Financial Manag. 2024, 17(7), 295; https://doi.org/10.3390/jrfm17070295 - 10 Jul 2024
Cited by 1 | Viewed by 1915
Abstract
This paper examines the regulatory impact on the European Banking Sector using advanced deep learning techniques to analyze the relationship between Sustainable Finance guidelines and the SX7P Index from January 2012 to December 2023. Utilizing Long Short-Term Memory Auto-encoder (LSTM-AE), Variational Autoencoder (VAE), [...] Read more.
This paper examines the regulatory impact on the European Banking Sector using advanced deep learning techniques to analyze the relationship between Sustainable Finance guidelines and the SX7P Index from January 2012 to December 2023. Utilizing Long Short-Term Memory Auto-encoder (LSTM-AE), Variational Autoencoder (VAE), and Convolutional Neural Network (CNN) for anomaly detection, the study compares anomalies and investigates their correlation with European Banking Authority (EBA) events and Sustainable Finance guidelines from January 2020 to December 2023. Through the analysis of 43 pertinent EBA documents, the research identifies patterns and variations in anomalies, assessing their association with regulatory changes. The results reveal significant anomalies aligning with regulatory events, indicating a potential causal relationship. Notably, the VAE methodology shows the strongest correlation between EBA Sustainable Finance events and anomalies. This research advances the understanding of deep learning applications in financial markets and offers valuable insights for policymakers and financial institutions regarding regulatory shifts in Sustainable Finance. Full article
(This article belongs to the Special Issue Smart Solutions for Sustainable Economics and Finance)
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20 pages, 1452 KiB  
Article
Volatility Persistence and Spillover Effects of Indian Market in the Global Economy: A Pre- and Post-Pandemic Analysis Using VAR-BEKK-GARCH Model
by Narayana Maharana, Ashok Kumar Panigrahi and Suman Kalyan Chaudhury
J. Risk Financial Manag. 2024, 17(7), 294; https://doi.org/10.3390/jrfm17070294 - 10 Jul 2024
Cited by 1 | Viewed by 1813
Abstract
This study examines how the COVID-19 pandemic impacted stock market volatility and interconnectedness between India and other selected global economies. The analysis, using data from 2016 to 2024, reveals a substantial rise in volatility within both the Indian market and those of several [...] Read more.
This study examines how the COVID-19 pandemic impacted stock market volatility and interconnectedness between India and other selected global economies. The analysis, using data from 2016 to 2024, reveals a substantial rise in volatility within both the Indian market and those of several other countries after the pandemic. Interestingly, the volatility transmission patterns also changed. While the Indian market’s volatility significantly influenced Brazil, China, and Mexico throughout the entire period, the influence of the US market became negligible post-pandemic. In contrast, Russia exhibited a weak but statistically significant impact on India’s volatility only after the pandemic. These findings highlight the lasting impact of the pandemic on global financial markets and emphasize the need for investors and policymakers to adapt. By understanding these new dynamics, investors can make more informed decisions, and policymakers can develop stronger risk management strategies and international coordination during periods of increased volatility. This study offers valuable insights for navigating the current financial landscape and the interconnectedness of emerging economies. Full article
(This article belongs to the Special Issue Navigating Economic Volatility: Predictive Models and Risk Analysis of Business Cycles)
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16 pages, 5838 KiB  
Article
Assessing the Predictive Power of Transformers, ARIMA, and LSTM in Forecasting Stock Prices of Moroccan Credit Companies
by Karima Lahboub and Mimoun Benali
J. Risk Financial Manag. 2024, 17(7), 293; https://doi.org/10.3390/jrfm17070293 - 9 Jul 2024
Viewed by 1104
Abstract
In this paper, we present a data-driven approach to forecasting stock prices in the Moroccan Stock Exchange. Our study tests three predictive models: ARIMA, LSTM, and transformers, applied to the historical stock price data of three prominent credit companies (EQD, LES, and SLF) [...] Read more.
In this paper, we present a data-driven approach to forecasting stock prices in the Moroccan Stock Exchange. Our study tests three predictive models: ARIMA, LSTM, and transformers, applied to the historical stock price data of three prominent credit companies (EQD, LES, and SLF) listed on the Casablanca Stock Exchange. We carefully selected and optimized hyperparameters for each model to achieve optimal performance. Our results showed that the LSTM model achieved high accuracy, with R-squared values exceeding 0.99 for EQD and LES and surpassing 0.95 for SLF. These findings highlighted the effectiveness of LSTM in stock price forecasting. Our study offers practical insights for traders and investors in the Moroccan Stock Exchange, demonstrating how predictive modeling can aid in making informed decisions. This research contributes to advancing stock market forecasting in Morocco, providing valuable tools for navigating the Casablanca Stock Exchange. Full article
(This article belongs to the Special Issue Applied Econometrics and Time Series Analysis (Volume II))
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31 pages, 557 KiB  
Article
Driving Venture Capital Interest: The Influence of the Big 4 Audit Firms on IPOs
by Manal Alidarous
J. Risk Financial Manag. 2024, 17(7), 292; https://doi.org/10.3390/jrfm17070292 - 9 Jul 2024
Viewed by 1357
Abstract
This paper investigated how hiring one of the Big 4 auditing firms helps initial public offering (IPO) owners attract venture capitalists’ (VCs) backing when going public to address the gap in auditing and venture capital literature. For this, the paper examined a large [...] Read more.
This paper investigated how hiring one of the Big 4 auditing firms helps initial public offering (IPO) owners attract venture capitalists’ (VCs) backing when going public to address the gap in auditing and venture capital literature. For this, the paper examined a large dataset from 1995 to 2019 consisting of 33,536 IPO firms from 22 countries with diverse socioeconomic, political, and cultural contexts. The study found that hiring Big 4 auditors increases IPO owners’ chances of recruiting VCs by up to 50%. The analysis also supports prior findings, which state that IPO owners strategically choose Big 4 audit firms to lower agency costs and send quality signals to improve openness and disclosure as well as boost VCs’ confidence in the IPO market. This research offers multiple benefits to academics, policymakers, investors, and issuers. Full article
(This article belongs to the Special Issue Advances in Accounting & Auditing Research)
17 pages, 273 KiB  
Article
Friendly Boards and the Cost of Debt
by Hoontaek Seo, Sangho Yi and William McCumber
J. Risk Financial Manag. 2024, 17(7), 291; https://doi.org/10.3390/jrfm17070291 - 9 Jul 2024
Viewed by 906
Abstract
For a sample of public bond issues by U.S. firms between 2000 and 2019, sourced from the Securities Data Corporation (SDC) New Issues database, we examine the relationship between CEO-friendly boards and the cost of debt. To explore this relationship, we construct proxies [...] Read more.
For a sample of public bond issues by U.S. firms between 2000 and 2019, sourced from the Securities Data Corporation (SDC) New Issues database, we examine the relationship between CEO-friendly boards and the cost of debt. To explore this relationship, we construct proxies for board friendliness based on social connections sourced from the BoardEx database, classifying a board as friendly if it includes at least one outside director who has a social connection with the CEO. Our regression analysis reveals a negative association between CEO-friendly boards and yield spreads and a positive association between CEO-friendly boards and credit ratings. These effects exist after controlling for firm and bond characteristics based on prior literature. The results are robust to an alternative measure of board friendliness and potential endogeneity. These findings imply that firms with a CEO-friendly board experience a lower cost of bond financing. This supports the argument that effective communication between CEOs and directors contributes to the enhancement of creditor interests. Our results carry a practical implication that firms heavily reliant on debt should actively employ CEO-friendly boards. Despite the burgeoning literature on CEO-friendly boards, there is a lack of research on the relationship between CEO-friendly boards and the cost of debt. Our results fill this gap in the extant literature on CEO-friendly boards. Full article
(This article belongs to the Section Business and Entrepreneurship)
23 pages, 2467 KiB  
Article
Reforming Sustainability-Linked Bonds by Strengthening Investor Trust
by Frederic de Mariz, Pieter Bosmans, Daniel Leal and Saumya Bisaria
J. Risk Financial Manag. 2024, 17(7), 290; https://doi.org/10.3390/jrfm17070290 - 8 Jul 2024
Viewed by 1500
Abstract
This paper explores the emergence of sustainability-linked bonds (SLBs) as an innovative instrument to finance sustainability objectives. SLBs are any type of bond instrument for which the financial characteristics vary depending on whether the issuer achieves predefined sustainability objectives. SLBs were launched in [...] Read more.
This paper explores the emergence of sustainability-linked bonds (SLBs) as an innovative instrument to finance sustainability objectives. SLBs are any type of bond instrument for which the financial characteristics vary depending on whether the issuer achieves predefined sustainability objectives. SLBs were launched in 2019, represent 7% of labeled bonds, and now exceed USD 250 billion. In the context of the growth of sustainable finance and concerns of greenwashing, this paper asks whether SLBs are an effective mechanism to attract sustainable finance. Drawing on a complete revision of the literature and interviews with practitioners, the findings highlight the potential of SLBs to contribute to sustainability financing, especially in hard-to-abate sectors. Recommendations include defining standardized KPIs based on a materiality assessment, requesting SPTs to be supported by science, and tailored step-up mechanisms. The academic literature and experts converge in their description of greenwashing risks posed by SLBs, their signaling effect, and the lack of sophistication in SLB pricing, in particular the optionality represented by step-ups. The literature differs from the practitioners’ perception on the existence of an issuance premium. Enhancing the design of SLBs represents an opportunity to add rigor to sustainable finance and better price externalities, where material topics have an explicit impact on the cost of funding. Full article
(This article belongs to the Special Issue Finance, Risk and Sustainable Development)
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20 pages, 301 KiB  
Article
Mapping Capital Ratios to Bank Lending Spreads: The Role of Efficiency and Asymmetry in Performance Indices
by Ali Golbabaei Pasandi, Mahmoud Botshekan, Abol Jalilvand, Mohammad Ali Rastegar and Mojtaba Rostami Noroozabad
J. Risk Financial Manag. 2024, 17(7), 289; https://doi.org/10.3390/jrfm17070289 - 8 Jul 2024
Viewed by 981
Abstract
Beyond the 2007–2008 financial crisis, the collapse of the Silicon Valley Bank and the acquisition of Credit Suisse by the Swiss investment bank UBS Group AG in 2023 have brought fresh attention to the need for new regulatory capital, liquidity risk management, and [...] Read more.
Beyond the 2007–2008 financial crisis, the collapse of the Silicon Valley Bank and the acquisition of Credit Suisse by the Swiss investment bank UBS Group AG in 2023 have brought fresh attention to the need for new regulatory capital, liquidity risk management, and leverage requirements. To meet tightened capital requirements, banks have to increase their capital ratios either by increasing equity or by decreasing risk-weighted assets. Both options lead to banks’ performance deterioration. One remedy for banks to recover is raising their lending spread. A critical question is how much the lending spread should be increased to offset the drop in the bank’s financial performance level. In this study, we focus on the asymmetries and efficiency consequences of performance indices such as economic value added (EVA) and the more commonly used return on equity (ROE) in determining the loan spread. Using data on the largest U.S. banks over the period 2018–2022, our results show that the ROE rule significantly overestimates the magnitude of the lending spreads required to offset the negative financial consequences of increases in capital ratios. The EVA approach, on the other hand, prescribes on average a significantly lower lending spread of 0.4505 basis points against a lending spread of 21.0441 basis points associated with the use of the ROE approach. The efficiency and the level of lending spreads should enable banks to maintain their competitive advantages in the loan markets impacting overall economic productivity and growth. Full article
(This article belongs to the Section Business and Entrepreneurship)
24 pages, 1072 KiB  
Article
Evaluation of Total Risk-Weighted Assets in Islamic Banking through Fintech Innovations
by Asma S. Alzwi, Jamil J. Jaber, Hani Nuri Rohuma and Rania Al Omari
J. Risk Financial Manag. 2024, 17(7), 288; https://doi.org/10.3390/jrfm17070288 - 8 Jul 2024
Viewed by 1075
Abstract
The assessment of total risk-weighted assets (LTRWAs) in the banking sector is of the utmost importance. It serves as a critical component for regulatory compliance, risk management, and capital adequacy. By accurately assessing LTRWAs, banks can effectively meet regulatory requirements, efficiently allocate capital [...] Read more.
The assessment of total risk-weighted assets (LTRWAs) in the banking sector is of the utmost importance. It serves as a critical component for regulatory compliance, risk management, and capital adequacy. By accurately assessing LTRWAs, banks can effectively meet regulatory requirements, efficiently allocate capital resources, and proactively manage risks. Moreover, the accurate assessment of LTRWAs supports performance evaluation and fosters investor confidence in the financial stability of banks. This study presents statistical analyses and machine learning methods to identify factors influencing LTRWAs. Data from Bahrain, Jordan, Qatar, the United Arab Emirates, and Yemen, spanning from 2010 to 2021, was utilized. Various statistical tests and models, including ordinary least squares, fixed effect, random effect, correlation, variance inflation factor, tolerance tests, and fintech models, were conducted. The results indicated significant impacts of the unemployment rate, inflation rate, natural logarithm of the loan-to-asset ratio, and natural logarithm of total assets on LTRWAs in regression models. The dataset was divided into a training group (90% of the data) and a testing group (10% of the data) to evaluate the predictive capabilities of various fintech models, including an adaptive network-based fuzzy inference system (ANFIS), a hybrid neural fuzzy inference system (HyFIS), a fuzzy system with the heuristic gradient descent (FS.HGD), and fuzzy inference rules with the descent method (FIR.DM) models. The selection of the optimal model is contingent upon assessing its performance according to specific error criteria. The HyFIS model outperformed others with lower errors in predicting LTRWAs. Independent t-tests confirmed statistically significant differences between original and predicted LTRWA for all models, with HyFIS showing closer predictions. This study provides valuable insights into LTRWA prediction using advanced statistical and machine learning techniques, based on a dataset from multiple countries and years. Full article
(This article belongs to the Special Issue Emerging Issues in Economics, Finance and Business)
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26 pages, 364 KiB  
Article
Cost–Benefit Analysis of International Financial Reporting Standard and Russian Accounting Standard Integration: What Does Comparability Cost?
by Elizabeth H. Turner and Clark M. Wheatley
J. Risk Financial Manag. 2024, 17(7), 287; https://doi.org/10.3390/jrfm17070287 - 8 Jul 2024
Viewed by 898
Abstract
In Russia, firms with consolidated financial statements must produce financial statements in both RAS (Russian accounting standards) and IFRS (international financial reporting standards). Unconsolidated SMEs are only required to use RAS. Using hand-collected data from 2010–2013 (pre- and post-IFRS adoption periods), we find [...] Read more.
In Russia, firms with consolidated financial statements must produce financial statements in both RAS (Russian accounting standards) and IFRS (international financial reporting standards). Unconsolidated SMEs are only required to use RAS. Using hand-collected data from 2010–2013 (pre- and post-IFRS adoption periods), we find income measures under RAS are converging to income measures under IFRS. The quality of earnings exhibits no change under IFRS, while RAS earnings are being managed upward for firms that have adopted IFRS and downward for firms that have not adopted IFRS. The relative variation in market and book values differs more widely under IFRS when compared to RAS, implying more volatility and risk under IFRS. We attribute our findings to a monitoring effect derived from IFRS. Full article
(This article belongs to the Special Issue Advances in Accounting & Auditing Research)
24 pages, 300 KiB  
Article
Financial Distress Premium or Discount? Some New Evidence
by Ramya R. Aroul, Noura K. Kone and Sanjiv Sabherwal
J. Risk Financial Manag. 2024, 17(7), 286; https://doi.org/10.3390/jrfm17070286 - 7 Jul 2024
Cited by 1 | Viewed by 1062
Abstract
This study investigates the contradiction in the finding of a positive distress risk premium in Vassalou and Xing’s study and the finding of a negative distress risk premium, i.e., a distress risk discount, in several other studies. Using the default likelihood measure calculated [...] Read more.
This study investigates the contradiction in the finding of a positive distress risk premium in Vassalou and Xing’s study and the finding of a negative distress risk premium, i.e., a distress risk discount, in several other studies. Using the default likelihood measure calculated following Vassalou and Xing’s procedure for 1965–2023, we show that excluding outliers and including the time period beyond the end of Vassalou and Xing’s sample period in 1999 makes a difference in the results. Overall, using portfolio sorting and Fama-MacBeth regressions, this study supports the existence of a distress risk discount. This study also documents that the financial distress risk is negatively reflected in security prices even after accounting for size and book-to-market risk factors. Furthermore, it demonstrates that the negative distress risk premium is strong and persistent across economic expansions, recessions, and the COVID-19 pandemic. Full article
(This article belongs to the Special Issue Bankruptcy Prediction, Equity Valuation and Stock Returns)
12 pages, 2040 KiB  
Article
The Relationship between Environmental, Social and Governance Factors, Economic Growth, and Banking Activity
by Ioan-Iulian Norocel and Eugen-Marian Vierescu
J. Risk Financial Manag. 2024, 17(7), 285; https://doi.org/10.3390/jrfm17070285 - 7 Jul 2024
Cited by 1 | Viewed by 1536
Abstract
The sustainability-linked discussion has gained international importance, with the banking sector being an essential pillar of the new economy, particularly through channeling financial resources to environmentally friendly economic activities. It is, however, still unclear if ESG is profitable, both for the economy and [...] Read more.
The sustainability-linked discussion has gained international importance, with the banking sector being an essential pillar of the new economy, particularly through channeling financial resources to environmentally friendly economic activities. It is, however, still unclear if ESG is profitable, both for the economy and banks. This paper aims at filling this gap by presenting, from a macroeconomic perspective, the impact of ESG efforts and the banking sector’s contribution to a sustainable economy. Using panel regression models with fixed effects, the study investigates the impact of ESG factors and banking activity on economic growth. The results show a negative relationship between country-level ESG scores and economic growth, both in the short and long run, while increased financial intermediation by the banking sector, used as a proxy of potential green lending activity, does not necessarily enhance economic growth. Through delving into the interplay between the ESG score, economic development, and banking activity, this research could serve as a discussion point for economists, bankers, and policymakers when designing the economic and financial strategies for transitioning to a green economy. Full article
(This article belongs to the Special Issue Smart Solutions for Sustainable Economics and Finance)
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11 pages, 261 KiB  
Article
Do Investment Funds Audited by the Big Four Firms Exhibit Different Performances? Evidence from Brazil
by Rodrigo Fernandes Malaquias, Dermeval Martins Borges Junior and Pablo Zambra
J. Risk Financial Manag. 2024, 17(7), 284; https://doi.org/10.3390/jrfm17070284 - 6 Jul 2024
Viewed by 1159
Abstract
Investment funds manage a portfolio composed of financial instruments; therefore, their accounting reports should undergo a careful process of preparation and auditing. The main purpose of this study is to analyze the effect of being audited by a Big Four audit company on [...] Read more.
Investment funds manage a portfolio composed of financial instruments; therefore, their accounting reports should undergo a careful process of preparation and auditing. The main purpose of this study is to analyze the effect of being audited by a Big Four audit company on funds’ risk-adjusted performance. The database is composed of equity funds from the Brazilian financial market, with daily returns spanning from January 2005 to March 2023. The funds’ performance was measured based on three indicators, including the Sharpe Ratio and Jensen’s Alpha. Fama and MacBeth regressions were used to test the hypotheses. The main findings indicate that the benefits of audit quality also include a positive effect on the risk-adjusted performance of investment funds, as the coefficient of the variable “Big Four” was positive and significant based on the proxies for risk-adjusted performance. This study advances this area of research by demonstrating the effects of the type of audit on the risk-adjusted performance indicators of investment funds. Full article
(This article belongs to the Special Issue Advances in Accounting & Auditing Research)
20 pages, 2011 KiB  
Article
Sovereign Credit Risk in Saudi Arabia, Morocco and Egypt
by Amira Abid and Fathi Abid
J. Risk Financial Manag. 2024, 17(7), 283; https://doi.org/10.3390/jrfm17070283 - 5 Jul 2024
Cited by 1 | Viewed by 1116
Abstract
The purpose of this paper is to assess and predict sovereign credit risk for Egypt, Morroco and Saudi Arabia using credit default swap (CDS) spreads obtained from the DataStream database for the period from 2009 to 2022. Our approach consists of generating the [...] Read more.
The purpose of this paper is to assess and predict sovereign credit risk for Egypt, Morroco and Saudi Arabia using credit default swap (CDS) spreads obtained from the DataStream database for the period from 2009 to 2022. Our approach consists of generating the implied default probability and the corresponding credit rating in order to estimate the term structure of the implied default probability using the Nelson–Siegel model. In order to validate the prediction from the probability term structure, we calculate the transition matrices based on the implied rating using the homogeneous Markov model. The main results show that, overall, the probabilities of defaulting in the long term are higher than those in the short term, which implies that the future outlook is more pessimistic given the events that occurred during the study period. Egypt seems to be the country with the most fragile economy, especially after 2009, likely because of the political events that marked the country at that time. The economies of Morocco and Saudi Arabia are more resilient in terms of both default probability and credit rating. These findings can help policymakers develop targeted strategies to mitigate economic risks and enhance stability, and they provide investors with valuable insights for managing long-term investment risks in these countries. Full article
(This article belongs to the Special Issue Emerging Issues in Economics, Finance and Business)
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23 pages, 4491 KiB  
Article
A News Sentiment Index to Inform International Financial Reporting Standard 9 Impairments
by Yolanda S. Stander
J. Risk Financial Manag. 2024, 17(7), 282; https://doi.org/10.3390/jrfm17070282 - 4 Jul 2024
Viewed by 1685
Abstract
Economic and financial narratives inform market sentiment through the emotions that are triggered and the subjectivity that gets evoked. There is an important connection between narrative, sentiment, and human decision making. In this study, natural language processing is used to extract market sentiment [...] Read more.
Economic and financial narratives inform market sentiment through the emotions that are triggered and the subjectivity that gets evoked. There is an important connection between narrative, sentiment, and human decision making. In this study, natural language processing is used to extract market sentiment from the narratives using FinBERT, a Python library that has been pretrained on a large financial corpus. A news sentiment index is constructed and shown to be a leading indicator of systemic risk. A rolling regression shows how the impact of news sentiment on systemic risk changes over time, with the importance of news sentiment increasing in more recent years. Monitoring systemic risk is an important tool used by central banks to proactively identify and manage emerging risks to the financial system; it is also a key input into the credit loss provision quantification at banks. Credit loss provision is a key focus area for auditors because of the risk of material misstatement, but finding appropriate sources of audit evidence is challenging. The causal relationship between news sentiment and systemic risk suggests that news sentiment could serve as an early warning signal of increasing credit risk and an effective indicator of the state of the economic cycle. The news sentiment index is shown to be useful as audit evidence when benchmarking trends in accounting provisions, thus informing financial disclosures and serving as an exogenous variable in econometric forecast models. Full article
(This article belongs to the Section Economics and Finance)
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