Is executive compensation a substitute governance mechanism to debt financing and leasing?

This study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity

Board characteristics and microfinance institutions’ performance: Panel data evidence from Nigeria

Purpose: This paper examines the effect of board characteristics on MFIs performance in Nigeria. A specific country study is warranted given the results from pooled cross-country studies may be biased owing to a failure to control for country differences. It is also particularly challenging to generalise the outcome of these results into a specific country given that many factors about MFIs, ranging from the nature of governance, legal status, size and prudential regulations, are not similar across countries.Methodology: The relationship between board characteristics and microfinance banks performance in Nigeria is tested using a sample of 120 firm-year observations covering 30 MFIs in the periods of 2010 to 2013. The study extracted all microfinance level data from the Microfinance Information eXchange (MIX) database.Findings: We document a positive and significant relationship between board size and MFIs performance. We also find negative relation between female directors and MFIs performance, but not significant. The results suggest that larger board size indicates good corporate governance practice, which leads to reduced agency cost.Implications: This study sheds new lights on the Nigerian MFIs’ board room dynamic. As the government is increasingly contemplating on the board structure and corporate governance policies, our study offers useful and timely empirical guidance to the Nigerian regulators.Originality: Given the important role of microfinance industry in Nigeria, this is the first study of its kind analysing the impact of board characteristics on microfinance performance among Nigerian MFIs

Regulatory Arbitrage in Relation to International Human Rights

The adoption of the United Nations (UN) Charter in 1945 marked the legalization of international human rights. Despite the legalized status of human rights, their violation by states is not uncommon. This article questions why a state might violate international human rights. Analyzing this issue from an economic perspective, this article advances regulatory arbitrage theory to rationalize a state’s violation of human rights. It discusses regulatory arbitrage-type behaviours among state actors that derogate from the obligations to respect, protect and fulfil human rights. Defending state sovereignty, minimizing regulatory or compliance costs, and prioritizing economic achievement are identified as rational arbitrage actions that circumvent international human rights. We call for competent and credible governance mechanisms that can increase the cost of arbitrage to disincentivize state violation of international human rights

Islamic financial instruments in corporate firms’ balance sheet: a research note

Purpose: This paper examines the use of Islamic Financial Instruments (IFIs) in the corporate firms’ balance sheet.Methodology/Approach: The overall research approach involves an examination of annual reports of 20 top non-financial firms from 16 countries over the years 2005 through 2009 (i.e., a 5 year period).Findings: It documents two important findings. Firstly, there is lower proportion of IFIs in the capital structure mix of corporate firms. Secondly, the tendency to use IFIs in the firms’ capital structure mix is generally diverse across countries.Research limitations/implications: The research in this area is fraught with data non-availability. This could be due to different level of accounting development and modernisation in communicating the annual report, by the public listed firms, in a particular country.Practical implications: The paper supports the arguments that the tremendous growth in Islamic finance has been largely propelled by various governments’ needs of funds to develop the nations hence dominating the Islamic capital market.Originality/value of paper: This is the first study to document evidence in the use of IFIs in the corporate firms’ capital structure mix despite voluminous literature in this field of research

Creating big interest in non-interest Islamic finance

At the first glance, the interest in Islamic finance seems growing at an impressive scale. The statistics reported in the media and academic literature are encouraging. However, one can still be critical about the extent of real interest gained, especially from non-Islamic countries. In terms of corporate financing, we observed relatively low penetration of Islamic financing in corporate firms’ capital structure mix. We strongly believe that creating awareness about and effective exposure to Islamic finance is crucial to sustain the development of Islamic finance industry, or to turn the optimistic forecasts about its growth into reality. In this respect, the role of Islamic finance academics is key to success. The academics have to be proactive and creative in implementing strategic initiatives to create interest in Islamic finance among students from various backgrounds. In this article, we share some strategic initiatives that we have worked on over the past few years in our efforts to promote Islamic finance through higher educational institutions. Our strategy in teaching Islamic finance has been principally based on comparative approach. At Edinburgh Napier University, the experience of teaching Islamic finance could not be more interesting, especially the participants were mostly non-Muslim students. The strategic initiatives implemented at Edinburgh Napier University were also 'exported' to Hong Kong. There is, of course, a potential for Islamic finance to be as good as a profitable brand, which can be capitalised for private gains, if not fame. However, as academics in finance, our important agenda should be to promote a better and fairer financial system. Pursuing this social agenda strategically is perhaps more important than blindly profiting from a specific brand if we aim to capture big interest from the public at large.The full article can be viewed at this link: https://issuu.com/islamicfinancereview-isfire/docs/isfire-june2015_complete

Determinants of the use of debt and leasing in UK corporate financing decisions

This thesis investigates the determinants of the use of debt and leasing in the UK using a comprehensive measure of debt and leases, in recognition of the link between lease and debt-type financing decisions, based on financial contracting theory and the tax advantage hypothesis. The design of the study takes account three lacunae in our current understanding of this topic. Firstly, despite the fact that the capital structure literature is voluminous, it is perhaps surprising that relatively little research has been carried out on lease finance, given its significant role as a major source of finance for many firms. Secondly, the role of tax in the capital structure decision is unclear. Empirically testing for tax effects is challenging because spurious relationships may exist between the financing decision and many commonly used tax proxies. More importantly, our understanding of the impact of taxes on UK financing decisions is far from complete, especially since several major corporate tax reforms have taken place in the last decade. Thirdly, empirical evidence on capital structure determinants is also voluminous but far from conclusive. Notably, contradictory signs and significance levels are commonly observed. Using the standard regression approach invariably involves identification of the average behaviour of firms, and therefore does not measure diversity across firms. In response to these three major issues, this study employs empirical research methods, namely cross-sectional pooled regression, static and dynamic panel data regression, and quantile regression to analyse a large sample of 361 non-financial firms, drawn from the FTSE 350 and FTSE All-Small indices over the tax years 1995 through 2003. The operating lease data are estimated using the constructive capitalisation method while the simulated before-financing marginal tax rate is used to proxy for the firms’ tax status. The endogeneity of corporate tax status is evident since the use of simple tax proxy, the effective tax rate, leads to a spurious negative relation between debt usage and tax rates. The problem was avoided with a better measure of tax variable that is the simulated before-financing marginal tax rate where it is found that the empirical relationships between the tax factor and debt and leasing are consistent with those theoretical predictions. Furthermore, there is a clear distinction between the effect of taxes on debt and leasing where the firm’s marginal tax status is only relevant when managers make decisions on debt financing. The use of quantile regression method in the present study represents a novel approach in investigating the determinants of the use of debt and leasing. The results reveal that the determinants of debt and leasing are heterogeneous across the whole distribution of firms, consistent with the notion of heterogeneity as promoted by Beattie et al. (2006), but contradicting their claim that the large-scale regression approach cannot measure firms’ diversity. This finding implies that average model results (e.g., from OLS or panel data models) may not apply to the tails of debt and leasing levels, and hence assuming that the determinants of debt and leasing decisions are the same for all firms in the economy is clearly unrealistic. Using the dynamic panel data model, this thesis confirms that debt and leasing are substitutes rather than complements, and that the degree of substitutability is more pronounced among smaller firms, where the degree of information asymmetry is greater. More importantly, the use of a joint specification for debt and leasing improves our understanding of the determinants of the two fixed-claim financing instruments. There is also significant evidence to support the view that firm characteristics affect contracting costs which in turn impact on the choice between alternative forms of finance, namely equity, debt and leasing

Hidden from public view, directors’ pay in Malaysia leads to inefficiency and inequality

Ownership and control of business corporations by state or government is common in Asian economies. Whether this is a better governance practice than the market-based model of developed economies remains a subject of intellectual discourse. Although studies on corporate governance question the efficiency of state ownership and control of business entities (Shleifer and Vishny, 1997), the efficiency of remuneration practices at the upper echelons of these entities is a matter of public interest