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Capital Markets Review Vol. 31, No. 1, pp. 1-23 (2023)

Corporate Risk-Taking and Cash Holdings: The Moderating Effect of Investor Protection

Fatima Saleh Abd Almajeed Al-Hamshary1,2; Akmalia M. Ariff1; Khairul Anuar Kamarudin3 & Norakma Abd Majid1
1Faculty of Business, Economics and Social Development, Universiti Malaysia Terengganu, Malaysia.
2Applied College, Imam Abdulrahman Bin Faisal University, Saudi Arabia.
3Faculty of Business, University of Wollongong in Dubai, United Arab Emirates.

Abstract: Research Question: This paper investigates the association between corporate risk-taking and cash holdings and whether investor protection moderates this association. Motivation: The motives of cash holding have important implications for corporate decisions making and performance. Understanding the relationship between corporate risk-taking and cash holdings across firms in different institutional contexts enhances better comprehension of how companies manage their financial resources. Idea: The perspectives of the precautionary savings and agency theory are employed in setting the views on the link between corporate risk-taking, investor protection, and cash holdings. This study incorporates both sources of managerial incentive at the firm-level i.e. corporate risk-taking and country-level i.e. governance through investor protection in examining the determinants of corporate cash holdings. Data: The dataset comprises 104,687 firm-year observations from 58 countries from 2011-2020. Firm-level data were gathered from Thomson Reuters Fundamentals, while country-level data were extracted from the World Bank. Method/Tools: The regression model employs corporate cash holdings, measured by the proportion of cash and cash equivalents to total assets, as the dependent variable. The test variables are corporate risk-taking which is based on the standard deviation of the return on the asset over three years and investor protection which is based on the strength in control of corruption. Findings: The findings indicate that firms with higher risk incentives exhibit lower cash holdings while firms in countries with high levels of investor protection are shown to have lower cash holdings. However, the negative association between corporate risk-taking and cash holdings is attenuated for firms in stronger investor protection countries as compared to those in weaker investor protection countries. Our findings are robust to various specification tests, such as those that employ alternative variables. Overall, the findings reveal that the strength of country-level investor protection moderates the negative association between corporate risk-taking and cash holdings. Contributions: The findings provide insights into the way country-level governance, through the strength of investor protection, mitigates the agency costs in high-risk-taking firms concerning their cash management.


Capital Markets Review Vol. 31, No. 1, pp. 25-45 (2023)

Impacts of COVID-19 and Related Government Policies on the Returns of the US Dollar Against the Malaysian Ringgit

Chee-Hong Law1 & Chee-Lip Tee2
1School of Social Sciences, Universiti Sains Malaysia, Malaysia.
2School of Economics and Management, Xiamen University Malaysia, Malaysia.

Abstract: Research Question: What are the implications of COVID-19 and the related government policies on the returns of the United States dollar (USD) against the Malaysian Ringgit? Motivation: The implications of a global-scale pandemic on the exchange rate are not frequently examined, especially on the role of government policies. The exchange rate movement will affect Malaysia’s economic performance as an open economy. Moreover, the suitability of government responses to the COVID-19 pandemic in exchange rate management should be investigated for future policymaking. Ideas: This paper estimates the exchange rate relationship with a few economic variables, including COVID-19 confirmed and death cases, by accounting for the high volatility in the exchange rate movement. Data: Daily data from March 3, 2020, to October 29, 2021, are analysed. The data are the confirmed and death cases of COVID-19, the COVID-19 response tracker (stringency index, containment and health index, economic support index, and government responses index), the return of the United States dollar against the Malaysian Ringgit, the weighted average of the 3-month interbank rate, FTSE Bursa Malaysia KLCI, West Texas Intermediate oil price and the United States 3-month treasury bill interest rate. The data is available from Bank Negara Malaysia, Our World in Data Databases, Blavatnik School of Government (University of Oxford), Yahoo Finance and Federal Reserve Bank of St. Louis. Method: The generalised autoregressive conditional heteroskedasticity estimation is deployed. Findings: An increase in the confirmed cases depreciates the value of the Malaysian Ringgit. Besides, the economic support initiatives bring the opposite effect. Other government policies lack robust evidence to show a significant impact on the exchange rate. Although COVID-19 and economic initiatives have an economically insignificant effect, comparing the coefficients show that the economic support initiatives could revert the implications of COVID-19 on the exchange rate. Furthermore, the stock market appreciates the examined exchange rate. Contributions: This paper provides empirical evidence of the impact of COVID-19 and the effectiveness of related responses in the Malaysian context. Besides, a few policy suggestions are given.


Capital Markets Review Vol. 31, No. 1, pp. 47-58 (2023)

Determinants of Dividend Policies in Shariah Compliant and Non-Shariah Compliant Firms: A Panel Quantile Approach

Mohd Ashari Bakri1 & Chia Chia Yong1
1Labuan Faculty of International Finance, Universiti Malaysia Sabah, Malaysia.

Abstract: Research Question: Do Shariah-compliant firms have a different dividend policy from non-Shariah-compliant firms? Does this policy reflect similarity at different quantile levels of dividend? Motivation: The purpose of this paper is to investigate whether Shariah-compliant firms have different determinants than non-Shariah-compliant firms, using the linear and panel quantile methods. Idea: The different selection criteria between Shariah-compliant and non-Shariah-compliant firms may contribute to a different dividend policy. Data: Data collected via DataStream and the Securities and Exchange Commission within the top 200 based on market capitalisation in 2019 for the period from 2010 to 2019. Method/ Tools: To test the hypothesis, the study used pooled OLS, random and fixed effects. To determine the most appropriate model, we use the Breusch-Pagan-Lagrange multiplier test (LM) and the Hausman test. To further investigate the difference between the dividend policy of Shariah-compliant and non-Shariah-compliant firms, the study also uses the quantile approach to examine the determinants of dividend at different quantile levels. Findings: The study not only reveals differences in the dividend policies of Shariah-compliant and non-Shariah-compliant firms in the linear approach, but also in the quantile approach. In a linear regression approach, firm size, growth opportunities, profitability, and free cash flow were found to be significant determinants of dividends for Shariah-compliant firms. On the other hand, firm size, growth opportunities, profitability, and risk were found to be significant determinants of dividends of non-Shariah-compliant firms. In the panel quantile approach, all tested variables (except at 0.50 quantile for non-Shariah compliant companies) were found to be significant determinants of dividend for both Shariah and non-Shariah compliant firms. The finding implies that the result of the linear approach may overgeneralize to different quantiles, so a comparison using a different approach may provide more insight into these determinants. Contributions: The study contributes to the existing knowledge on the determinants of dividend policy of Shariah-compliant and non-Shariah-compliant firms, especially by comparing it with the linear and quantile approaches, which has been neglected in previous studies.


Capital Markets Review Vol. 31, No. 1, pp. 59-71 (2023)

Weak Form of Call Auction Prices: Simulation Using Monte Carlo Variants

Dinabandhu Bag1 & Saurabh Goel2
1National Institute of Technology Rourkela, Odisha, India.
2Delhi Technological University, New Delhi, India.

Abstract: Research Question: This paper explores the pre-market auction price behaviour. The pre-market auction is a short duration auction, where the orders are executed with too little time for revision by the makers. The literature paid attention to application of random walk hypothesis (RWH) and its variants in efficient market (EMH) tests. Motivation: The pre-opening auction is an extremely short duration auction where traders are interested in a limited number of large cap stocks and the orders are not transparent. The interest lies on efficiency tests of discrete prices during the pre-market auction for the benefit of investors. Idea: The mechanism of price discovery in call auctions is important since they could impact normal markets. We aim to test major relevant hypotheses for pre-opening equilibrium prices. The rejection of the randomness would mean that it is possible to use historical stock prices alone. Data: The sample comprises all 50 NSE 50 Index constituent stocks sampled during the year 2019. The NSE constituent stocks maintain the highest market capitalization and have a long history of trading. Method/Tools: It summarizes the source literature on objectively driven synthesis on simulation-based decision making since the early period of 1973. Multivariate lognormal distribution is a challenging method than ordinary univariate Monte Carlo. By generating a 50 X 50 covariance matrix of prices and solving for Cholesky roots, the results were compared against lognormal multivariate Monte Carlo simulation to explore the estimates of volatility. Findings: The results demonstrate a good case for the tests of RWH and objectively arriving at the pre-opening equilibrium prices. The co-efficient of variation (COV) remained at 3.33%. We found that the stock prices were correlated among themselves, which infers the weak form of efficiency. Previous results had mentioned that MC generated higher sample variances and unsuitable, however, we found lower variances in using multi-variate Monte Carlo. Contributions: The contribution lies in the attempts using multi-variate log normal distribution to deduce prices with lower estimated variance. The results have implications to making trade decisions and portfolio construction during the Covid period, where high degree of persisting decline happened to indices.


Capital Markets Review Vol. 31, No. 1, pp. 73-84 (2023)

The Effects of Lockdown, Economic Stimulus Packages and National Recovery Plan Announcements on the Malaysian Stock Market

Kok Jun Tan1 & Mohd Edil Abd Sukor1
1Faculty of Business and Economics, University of Malaya, Malaysia.

Abstract: Research Question: This research aims to investigate the effects of lockdown, economic stimulus packages and national recovery plan announcements during the COVID-19 pandemic on the Malaysian stock market. Motivation: This study will provide insight on how the efforts made by the Malaysian government to battle the pandemic through different types of announcements will affect the Malaysian stock market across different industries. Idea: This study posits that all events i.e., lockdown, economic stimulus packages and recovery plan announcements will significantly influence the behaviour of the Malaysian stock market. Data: A sample of 13 sectorial indexes are selected. The sample period taken for the study is from January 2, 2019 to October 29, 2021. Method/Tools: The study employs an event study methodology. Cumulative abnormal return (CAR) is used to calculate the total of all abnormal returns surrounding the announcements. The event window employed in this study is 10 days i.e. five days before (-5 to -1) and five days after (+1 to +5) the announcements. When there is an overlapping event, a shorter event window such as one/two days before and one/two days after the announcement will be examined for robustness testing. Findings: The results of the study show that the impact of all announcements varies across different time periods. For example, the first three Movement Control Order (MCO) 1.0, 2.0 and 3.0 announcements have significantly affected the indexes negatively, while the Total Lockdown (TL) announcement at a later period lead to a positive impact. Contributions: Findings of this study have important implications for policymakers and investors. Handling and managing the stock market during the pandemic requires a sensible strategy, in which officials should quickly notify the public of their intended plan without causing panic or any feeling of insecurity. For investors, these results are useful for them to manage their investment portfolio and risk.



Updated on 31 March 2023