Ali Ataullah

Financial liberalization and bank efficiency: a comparative analysis of India and Pakistan

This paper provides a comparative analysis of the evolution of the technical efficiency of commercial banks in India and Pakistan during 1988–1998, a period characterized by far-reaching changes in the banking industry brought about by financial liberalization. Data Envelopment Analysis is applied to two alternative input–output specifications to measure technical efficiency, and to decompose technical efficiency into its two components, pure technical efficiency and scale efficiency. The consistency of the estimated efficiency scores are checked by examining their relationship with three traditional non-frontier measures of bank performance. In addition, the relationship between bank size and technical efficiency is examined. It is found that the overall technical efficiency of the banking industry of both countries improved gradually over the years, especially after 1995. Unlike public sector banks in India, public sector banks in Pakistan witnessed improvement in scale efficiency only. It is also found that banks are relatively more efficient in generating earning assets than in generating income. This is attributed to the presence of high non-performing loans. In addition, it is found that the gap between the pure technical efficiency of different size groups has declined over the years.

Economic reforms and bank efficiency in developing countries: the case of the Indian banking industry

Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) – namely, fiscal reforms, financial reforms, and private investment liberalisation – and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that fiscal deficits negatively influence bank efficiency.

Financial repression and liability of foreignness in developing countries

Using non-parametric Data Envelopment Analysis, this paper suggests that the era of financial repression in developing countries, by providing policy-induced competitive advantages to domestic banks, may create liability of foreignness for foreign banks that impeded their resource utilization. Implementation of financial liberalization programme, which endeavours to create a more market-oriented financial sector, may enable foreign banks to overcome the liability of foreignness and enhance their resource utilization.

A modified Corrado test for assessing abnormal security returns

Event studies typically use the methodology developed by Fama et al. [1969. The adjustment of stock prices to new information. International Economic Review 10, no. 1: 1–21] to segregate a stocks return into expected and unexpected components. Moreover, conventional practice assumes that abnormal returns evolve in terms of a normal distribution. There is, however, an increasing tendency for event studies to employ non-parametric testing procedures due to the mounting empirical evidence which shows that stock returns are incompatible with the normal distribution. This paper focuses on the widely used non-parametric ranking procedure developed by Corrado [1989. A nonparametric test for abnormal security price performance in event studies. Journal of Financial Economics 23, no. 2: 385–95] for assessing the significance of abnormal security returns. In particular, we develop a consistent estimator for the variance of the sum of ranks of the abnormal returns, and show how this leads to a more efficient test statistic (as well as to less cumbersome computational procedures) than the test originally proposed by Corrado (1989). We also use the theorem of Berry [1941. The accuracy of the Gaussian approximation to the sum of independent variates. Transactions of the American Mathematical Society 49, no. 1: 122–36] and Esseen [1945. Fourier analysis of distribution functions: A mathematical study of the Laplace–Gaussian law. Acta Mathematica 77, no. 1: 1–125] to demonstrate how the distribution of the modified Corrado test statistic developed here asymptotically converges towards the normal distribution. This shows that describing the distributional properties of the sum of the ranks in terms of the normal distribution is highly problematic for small sample sizes and small event windows. In these circumstances, we show that a second-order Edgeworth expansion provides a good approximation to the actual probability distribution of the modified Corrado test statistic. The application of the modified Corrado test developed here is illustrated using data for the purchase and sale by UK directors of shares in their own companies.

Non‐linear equity valuation

Abstract We incorporate a real option component into the Ohlson (1995) equity valuation model and then use this augmented model to make assessments about the form and nature of the systematic biases that are likely to arise when empirical work is based on linear models of the relationship between the market value of equity and its determining variables. We also demonstrate how one can expand equity valuation models in terms of an infinite series of ‘orthogonal’ polynomials and thereby determine the relative contribution which the linear and non‐linear components of the relationship between equity value and its determining variables make to overall equity value. This procedure shows that non‐linearities in equity valuation can be large and significant, particularly for firms with low earnings‐to‐book ratios or where the undeflated book value of equity is comparatively small. Moreover, it is highly unlikely the simple linear models that characterise this area of accounting research can form the basis of meaningful statistical tests of the relationship between equity value and its determining variables.

The Distributional Properties of the Debt to Equity Ratio: Some Implications for Empirical Research

The purpose here is to assess empirically the quasi-supply side model of the firm developed in the paper by Ashton et al. (2004) by testing the prediction of the model that the evolution of a firms debt to equity ratio will be compatible with a non-linear (target adjustment) process whose underlying probability density function possesses no convergent moments. Using a thirty-two-year history of the debt to equity ratio for each of ninety ‘mature’ United Kingdom firms, a non-parametric estimation procedure shows that the debt to equity ratio evolves in terms of a process which is largely consistent with the predictions of this model. In particular, the evolution of the debt to equity ratio is compatible with a ‘long (fat) tailed’ density function with no convergent moments. This has the important implication, supported by our empirical analysis, that the linear dynamic models which characterize empirical work in this area will be mis-specified and will return inconsistent and temporally unstable estimates of the target adjustment process as a consequence.

Time-varying managerial overconfidence and corporate debt maturity structure

ABSTRACT We examine the impact of managerial overconfidence on corporate debt maturity. We build upon the argument that managerial overconfidence is likely to mitigate the underinvestment problem, which is often the major concern for long-term debt investors. Within this context, we hypothesise that managerial overconfidence increases debt maturity. Our empirical evidence, based on time-varying measures of overconfidence derived from computational linguistic analysis and directors’ dealings in their own companies’ shares, supports this hypothesis. Specifically, we find that the changes in both first person singular pronouns and optimistic tone are positively related to the change in debt maturity. Moreover, we find that the insider trading-based overconfidence of CEO, who is most likely to influence investment decision and thus the underinvestment problem, has a stronger impact on debt maturity than the overconfidence of other directors (e.g. CFO). Overall, our study provides initial evidence for a positive overconfidence-debt maturity relation via overconfidence mitigating the agency cost of long-term debt.