Review of Pacific Basin Financial Markets and Policies

Benford’s Law, a rule concerning first digits of an array of numbers, has frequently been used to test for the reporting quality of financial statements. When applied to the recent experience for Russian banks, one conclusion is that the 2004 regime shift in accounting standards produced higher quality financial statements. Prior to 2004, the Benford evidence suggests that Russian banks tended to round revenues up, expenses down and thus overstate net income. It also appears that banks may have presented stronger balance sheets than warranted. In the second part of the analysis, the practical use of Benford’s Law to discern a looming bank failure appears limited. While there is, perhaps, some beneficial information to be drawn from testing for Benford distribution conformity, in isolation the tests for financial statement manipulation are inconclusive. Instead, Benford might be used with other early warning detection algorithms to recognize impending bank failures.

This study examines the tracking performance of two Hong Kong exchange-traded funds (ETFs): Tracker Fund and X iShares A50. The turnover of these two ETFs was more than half the total turnover of the 141 ETFs in the Hong Kong market during 2005–2013. Tracking performance is assessed using pricing deviation, which is found to be nonzero and predictable. This indicates that the premium paid by investors is of considerable economic interest. The significant differences in the tracking performance of physical ETFs and synthetic ETFs highlight the relative inability of synthetic ETF to track the market. Additionally, we document the existence of co-integration between the ETF prices and stock market prices. An econometric model is estimated to forecast the pricing deviation, which shows different price dynamics between the two ETFs, but an absence of arbitrage opportunities. The time series regression model of pricing deviation is significantly influenced by market value, dividend yield, trading volume, bid-ask spread, and market risk. The size of the regression coefficients indicates that synthetic ETFs have relatively poor ability to track the market during market fluctuations.

This paper considers the accuracy (or otherwise) of cost of equity estimates provided by a range of Australian asset pricing models on industry returns. The results suggest that a simple, constant-benchmark approach (fixed excess return of five percent per annum) provides the best forecast for the cost of equity capital for the various industry segments of the Australian Securities Exchange examined across the observation window. Our results from Australia corroborate U.S. findings regarding the disconnect between asset pricing models that provide the best ex-post explanation of asset returns and models that produce superior ex-ante predictions of the cost of capital.

This paper employs panel data regression analysis to explore the measurable differences in risk-capitalization relationship between FHC and non-FHC organized Banks. The main contribution of this paper is in explaining some rethinking which shows the business of FHCBs take more risk than that of NFHCBs, and high degree of capitalization is negatively associated with asset risk and has higher interest rate spread increased bank’s asset risk in FHCBs only. It obviously has its strong anti-incentives domination for high capital banks group in NFHCHs, which a high degree of loans ratio, loans ratio is positively associated with asset risk in NFHCBs only. A large degree of bank size, bank size is negatively associated with asset risk in FHCBs only. The prior studies and previous hypothesis indicate that risk level increases when the bank capital size is high but the finding in this paper is inconsistent with the previous research.

In this paper, we examine the information content and value relevance of research and development (R&D) costs before and after the SEC eliminated the 20-F reconciliation to U.S. GAAP for Foreign Public Issuers (FPIs). Prior to the elimination both FPIs and U.S. firms experienced an increase in the indirect effect of R&D on operating income. After the requirement was eliminated, the direct effect increased for FPIs and the indirect effect decreased. This is in contrast to U.S. firms who experienced a continued increase in the indirect effect. This shift indicates there was a loss of informativeness in the R&D disclosures for FPIs.

In this paper, we examine the impact of the global financial crisis (GFC) on the interest rate pass-through for four types of loans in Australia: mortgages, residentially secured small business lending, nonsecured small business lending and personal loans. Australia is an interesting case study since its central bank lowered but also raised interest rates during the GFC. We find that after the onset of the crisis, there has been a shift in the way banks adjust their lending rates in response to changes in market interest rates; the markup has increased and there has been a drop in both short- and long-term pass-through from funding costs to lending rates. Closer analysis indicates that the drop in short-term pass-through is due to the slower response of banks to increases in funding costs. We also find asymmetries in the way banks adjust lending rates in relation to funding costs in the long-run for nonsecured small business lending and personal loans. The evidence shows that banks in Australia tightened lending standards and competed less aggressively for loans but more for deposits in response to heightened default risks following the global financial crisis. The wider margin allows banks to adjust their lending rates more slowly and asymmetrically.

The purpose of this study is to examine the equity pricing of other comprehensive income when earnings are disaggregated into several components. Our findings indicate that other comprehensive income can better explain variation in stock returns when net income is reported in a disaggregated form. Additionally, we find that disaggregating both net income and other comprehensive income can explain more of the variation in the stock returns than the two summary components of comprehensive income. Our results survive a series of robustness checks.