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ACRN Journal of Finance and Risk Perspectives
Vol. 3, Issue 3, Oct 2014, ISSN 2305-7394
Special Edition - Finance, Risk and Accounting Perspectives
TABLE OF CONTENTS
EDITORIAL BOARD
CHALLENGES IN IMPLEMENTING ENTERPRISE RISK MANAGEMENT
Dornberger Kerstin 1, Oberlehner Simone 2, Zadrazil Nicole 3
1, 2, 3 Controlling, Accounting and Finance at University of Applied Science, Upper Austria
Abstract: Since the financial crisis in 2008 organisations have been forced to rethink their risk management. Therefore entities have changed from silo-based Traditional Risk Management to the overarching framework Enterprise Risk Management. Yet Enterprise Risk Management is a young model and it has to contend with various challenges. At the moment there are just a few research papers but they claim that this approach is reasonable. The two frameworks COSO and GRC try to support Enterprise Risk Management. Research does not provide studies about their efficiency. The challenges of Enterprise Risk Management are the composition of the system, suitable metrics, the human factor and the complex environment.
Keywords: Traditional Risk Management; Silo; Enterprise Risk Management; ERM; COSO Cube; Governance, Risk and Compliance; GRC
CORPORATE GOVERNANCE: THE RIGHTS OF SHAREHOLDERS AND ROLE OF THE BOARD – A COMPARISON OF US, UK AND GERMANY
Haas Rosa 1, Humer Daniela 2, Reisinger Markus 3
1, 2, 3 University of Applied Sciences Upper Austria
Abstract: Corporate Governance is gaining importance in a global perspective, especially since financial scandals like Enron or Worldcom. Consequently on one hand investors’ protection, the rights of the shareholders and the role of the board became more essential for a company, on the other hand the attractiveness for (global) investors needs to be considered as well. This article is focusing on the role of the shareholders and boards in an international environment. Many different models due to diverse legal and cultural backgrounds are predominant regarding to Corporate Governance approaches. Exemplary this work is comparing the rights of the shareholders and role of the boards in Germany, the United Kingdom and the United States. The Corporate Governance Models of those economies find common ground, but can differ significantly in certain aspects. Especially the Appointment of Board members, Board Composition and Chair Duality are treated differently in the countries concerned.
Keywords: Corporate Governance, Right of Shareholders, Board of Directors
INTERNAL AND EXTERNAL DRIVERS OF RADICAL STRATEGIC CHANGES IN HIGH TECHNOLOGY NEW VENTURES
Eli Gimmon 1 and Eyal Benjamin 2
1Tel-Hai College, Israel
2The Academic College of Tel-Aviv-Yaffo, Iasrael
Abstract: High-technology new ventures, often funded by venture capital firms, operate in a turbulent environment. Consequently, these ventures frequently make radical changes in their strategies, adapting internal resources and capabilities to their changing environment. Those changes involve relatively high risk, as well as involvement of the investors. Building on previous research of strategic changes in established corporations, this study explores the common causes for radical changes in strategy of high-technology new ventures from the perspective of their venture capital investors, using a SWOT model. A dataset of 60 phrases extracted from interviews with 16 venture capital investors from 8 developed countries regarding their experience of 36 radical strategic changes in their 76 portfolio companies was analysed. The findings indicate significantly more unfavourable than favourable events. Internal factors were considered more likely than external factors to drive radical strategic changes, but only with marginal significance. Further research is required to validate these findings.
Keywords: Strategic change, venture capital, entrepreneurship, high technology ventures, SWOT model.
IFRS 9: THE NEW RULES FOR HEDGE ACCOUNTING FROM THE RISK MANAGEMENT’S PERSPECTIVE
Thomas Bernhardt 1, Daniel Erlinger 1, Lukas Unterrainer 1
1 University of Applied Sciences, Upper Austria
Abstract: Hedge accounting rules of IFRS ensure that earnings and expenses regarding hedging relationships are accounted simultaneously. These rules should avoid an economically not justifiable increase in earnings volatility through hedging relationship. The crucial issue in hedge accounting is the separation between financial instruments that are used for speculation purposes and financial instruments that are used by an entity to hedge a risk exposure. Hedge accounting rules of IAS 39 are often criticized as being too complex and not aligned with entities’ risk management strategies. Therefore, entities are faced by the trade-off between an optimal hedging strategy, which probably does not qualify for hedge accounting, and a sub-optimal hedging strategy, which qualifies for hedge accounting and decrease earnings volatility, but does not fully meet the objective of entity’s risk management. As a consequence of criticism the IASB published in November 2013 the new rules for hedge accounting under IFRS 9. The new rules should eliminate weaknesses of IAS 39 by making hedge accounting rules less complex. Furthermore IFRS 9 should align hedge accounting rules with companies’ risk management strategies.
Keywords: IFRS 9, IAS 39, hedge accounting, hedge effectiveness, risk management, derivative financial instruments
IMPACT FACTORS ON THE DEVELOPMENT OF INTERNAL AUDITING IN THE 21ST CENTURY
Elisabeth Grabmann 1, Daniel Hofer 1
1 University of Applied Sciences Upper Austria
Abstract: In recent years, there has been an increasing interest in internal auditing. The internal audit function (IAF) evolved as reaction to various impact factors that are poorly analysed, however. The purpose of this paper is therefore (1) to investigate internal auditing and its function at the end of the 20th century; (2) to examine the internal and external developments that affect IAF; and (3) to describe the new understanding of internal auditing. Based on the definition for internal auditing of the Institute of Internal Auditors (IIA) from 1999, the authors analysed the effects of six streams with impact on the IAF which were identified in literature. These are corporate governance, organisation and management as internal factors, and information technology, regulations and external auditors as external factors. As a result, a new understanding for internal auditing was developed. The key finding is that the diversity of the changes heightened the requirements for and enlarged the role of internal auditors.
Keywords: internal auditing, internal audit function, audit development, impact factors, corporate governance, Institute of Internal Auditors
THE EFFECT OF SOCIAL VALUE MEASUREMENT ON IMPACT INVESTMENT DECISIONS
Neil Reeder 1
1 Head and Heart Economics, London, UK
Abstract: Impact investing has great potential to address social problems by tapping into investors’ enthusiasm for underpinning activities that ‘make a difference to society’. Measurement of social benefits can therefore influence investor choices as perceptions of non-financial returns vary. To understand such choices, financial returns, social and environmental returns (SER) and SER measurement should all be taken into account. There has, however, been little consideration of these aspects in an integrated way. To advance the debate, this paper explores a basic model which extends a standard utility function to SER and draws on insights from theories of knowledge. Indicative results when plausible parameters from research and historical trends are put in indicate (i) a tightness of resources for measurement; (ii) investors becoming less willing to accept lower financial returns when they are less confident about social returns; and (iii) an increased lack of willingness to accept lower financial returns where SER returns relate to intangibles that are harder to measure.
Keywords: Social and environmental returns, social value, impact measurement, impact investment
JEL Classifications: D81, G11, G14, H23
THE NATURE OF DOMESTIC VOLATILITY TRANSMISSION BETWEEN SECTORS OF THE NIGERIAN ECONOMY
Emenike Kalu O 1. and Peter Ifeanyichukwu Ali 2
1 Department of Banking and Finance, Rhema University Aba, Nigeria
2 Department of Financial Management Technology, Federal University of Technology Owerri
Abstract: Volatility transmission between sectors of a market or an economy is important to successful portfolio selection and hedging strategy within the domestic economy. This paper examines domestic volatility transmission between sectors of the Nigerian economy using Multivariate Generalised Autoregressive Conditional Heteroscedasticity (MGARCH) procedure. The central focus is to evaluate the nature and direction shock and volatility transmission between the banking sector, the consumer goods sector and the Shari’ah compliant equities sector of the Nigerian Stock Exchange (NSE). The results indicate existence of unidirectional shock and volatility transmission from the banking sector to the consumer goods sector and the Shari’ah compliant equities sector, and bidirectional shock and volatility transmission between the consumer goods and the Shari’ah compliant equities sectors of the NSE. These findings have crucial implications for domestic portfolio selection and management through the hedging opportunities available in the NSE sectors.
Keywords: volatility transmission, sectors of economy, BEKK-GARCH Model, Nigeria
JEL Classification Numbers: G11, G32, C32
THE NEED AND IMPORTANCE OF A VOLUME BASED INDEX
Rishi Mehra 1, Nikhil Srivastava 1
1 Corporate Partners, India
Abstract: The importance of volume study has already been highlighted through various researches world-wide. Volume is studied in isolation as confidence proxy; as a liquidity parameter; depth assessment indicator, whereas, volume when studied along with other parameters such as price or returns, reveals interesting conclusions like price direction, momentum, etc. All these have been several times estimated and proven. The empirical results by some of these research initiatives conclude the imperative presence of Volume in market analysis and forecasting.
Volumes were and till date are studied in absolute terms for various time intervals. These intervals (normally daily volumes) reveals discontinued pattern of observations. By discontinued pattern of observations we mean the volumes start with zero and cumulate for a day and next day again starts with a zero. The study of such data poses lots of limitations and hindrances in day to day decision making such as relative understanding of volumes patterns, time series analysis and relative analysis of volume with price direction.
The aforesaid limitations can be mitigated if volumes studies get reinvented and shaped as a standardized tool like an Index. Volume index would not only help reveal the changes in volumes but also facilitate a long term continued study of market liquidity. The formation of such indices world-wide would also indicate the global fund flow process. Hence, the need of the hour is a volume based index in all the markets of the world to complement the analysis of stock market and facilitate analysts and investors to get a holistic view of the markets.
ACRN Journal of Finance and Risk Perspectives
Vol. 3, Issue 3, Oct 2014, ISSN 2305-7394
Special Edition - Finance, Risk and Accounting Perspectives
TABLE OF CONTENTS EDITORIAL BOARD CHALLENGES IN IMPLEMENTING ENTERPRISE RISK MANAGEMENTDornberger Kerstin 1, Oberlehner Simone 2, Zadrazil Nicole 3
1, 2, 3 Controlling, Accounting and Finance at University of Applied Science, Upper Austria
Abstract: Since the financial crisis in 2008 organisations have been forced to rethink their risk management. Therefore entities have changed from silo-based Traditional Risk Management to the overarching framework Enterprise Risk Management. Yet Enterprise Risk Management is a young model and it has to contend with various challenges. At the moment there are just a few research papers but they claim that this approach is reasonable. The two frameworks COSO and GRC try to support Enterprise Risk Management. Research does not provide studies about their efficiency. The challenges of Enterprise Risk Management are the composition of the system, suitable metrics, the human factor and the complex environment.
Keywords: Traditional Risk Management; Silo; Enterprise Risk Management; ERM; COSO Cube; Governance, Risk and Compliance; GRC
CORPORATE GOVERNANCE: THE RIGHTS OF SHAREHOLDERS AND ROLE OF THE BOARD – A COMPARISON OF US, UK AND GERMANYHaas Rosa 1, Humer Daniela 2, Reisinger Markus 3
1, 2, 3 University of Applied Sciences Upper Austria
Abstract: Corporate Governance is gaining importance in a global perspective, especially since financial scandals like Enron or Worldcom. Consequently on one hand investors’ protection, the rights of the shareholders and the role of the board became more essential for a company, on the other hand the attractiveness for (global) investors needs to be considered as well. This article is focusing on the role of the shareholders and boards in an international environment. Many different models due to diverse legal and cultural backgrounds are predominant regarding to Corporate Governance approaches. Exemplary this work is comparing the rights of the shareholders and role of the boards in Germany, the United Kingdom and the United States. The Corporate Governance Models of those economies find common ground, but can differ significantly in certain aspects. Especially the Appointment of Board members, Board Composition and Chair Duality are treated differently in the countries concerned.
Keywords: Corporate Governance, Right of Shareholders, Board of Directors
INTERNAL AND EXTERNAL DRIVERS OF RADICAL STRATEGIC CHANGES IN HIGH TECHNOLOGY NEW VENTURES Eli Gimmon 1 and Eyal Benjamin 2
1Tel-Hai College, Israel
2The Academic College of Tel-Aviv-Yaffo, Iasrael
Abstract: High-technology new ventures, often funded by venture capital firms, operate in a turbulent environment. Consequently, these ventures frequently make radical changes in their strategies, adapting internal resources and capabilities to their changing environment. Those changes involve relatively high risk, as well as involvement of the investors. Building on previous research of strategic changes in established corporations, this study explores the common causes for radical changes in strategy of high-technology new ventures from the perspective of their venture capital investors, using a SWOT model. A dataset of 60 phrases extracted from interviews with 16 venture capital investors from 8 developed countries regarding their experience of 36 radical strategic changes in their 76 portfolio companies was analysed. The findings indicate significantly more unfavourable than favourable events. Internal factors were considered more likely than external factors to drive radical strategic changes, but only with marginal significance. Further research is required to validate these findings.
Keywords: Strategic change, venture capital, entrepreneurship, high technology ventures, SWOT model.
IFRS 9: THE NEW RULES FOR HEDGE ACCOUNTING FROM THE RISK MANAGEMENT’S PERSPECTIVEThomas Bernhardt 1, Daniel Erlinger 1, Lukas Unterrainer 1
1 University of Applied Sciences, Upper Austria
Abstract: Hedge accounting rules of IFRS ensure that earnings and expenses regarding hedging relationships are accounted simultaneously. These rules should avoid an economically not justifiable increase in earnings volatility through hedging relationship. The crucial issue in hedge accounting is the separation between financial instruments that are used for speculation purposes and financial instruments that are used by an entity to hedge a risk exposure. Hedge accounting rules of IAS 39 are often criticized as being too complex and not aligned with entities’ risk management strategies. Therefore, entities are faced by the trade-off between an optimal hedging strategy, which probably does not qualify for hedge accounting, and a sub-optimal hedging strategy, which qualifies for hedge accounting and decrease earnings volatility, but does not fully meet the objective of entity’s risk management. As a consequence of criticism the IASB published in November 2013 the new rules for hedge accounting under IFRS 9. The new rules should eliminate weaknesses of IAS 39 by making hedge accounting rules less complex. Furthermore IFRS 9 should align hedge accounting rules with companies’ risk management strategies.
Keywords: IFRS 9, IAS 39, hedge accounting, hedge effectiveness, risk management, derivative financial instruments
IMPACT FACTORS ON THE DEVELOPMENT OF INTERNAL AUDITING IN THE 21ST CENTURYElisabeth Grabmann 1, Daniel Hofer 1
1 University of Applied Sciences Upper Austria
Abstract: In recent years, there has been an increasing interest in internal auditing. The internal audit function (IAF) evolved as reaction to various impact factors that are poorly analysed, however. The purpose of this paper is therefore (1) to investigate internal auditing and its function at the end of the 20th century; (2) to examine the internal and external developments that affect IAF; and (3) to describe the new understanding of internal auditing. Based on the definition for internal auditing of the Institute of Internal Auditors (IIA) from 1999, the authors analysed the effects of six streams with impact on the IAF which were identified in literature. These are corporate governance, organisation and management as internal factors, and information technology, regulations and external auditors as external factors. As a result, a new understanding for internal auditing was developed. The key finding is that the diversity of the changes heightened the requirements for and enlarged the role of internal auditors.
Keywords: internal auditing, internal audit function, audit development, impact factors, corporate governance, Institute of Internal Auditors
THE EFFECT OF SOCIAL VALUE MEASUREMENT ON IMPACT INVESTMENT DECISIONSNeil Reeder 1
1 Head and Heart Economics, London, UK
Abstract: Impact investing has great potential to address social problems by tapping into investors’ enthusiasm for underpinning activities that ‘make a difference to society’. Measurement of social benefits can therefore influence investor choices as perceptions of non-financial returns vary. To understand such choices, financial returns, social and environmental returns (SER) and SER measurement should all be taken into account. There has, however, been little consideration of these aspects in an integrated way. To advance the debate, this paper explores a basic model which extends a standard utility function to SER and draws on insights from theories of knowledge. Indicative results when plausible parameters from research and historical trends are put in indicate (i) a tightness of resources for measurement; (ii) investors becoming less willing to accept lower financial returns when they are less confident about social returns; and (iii) an increased lack of willingness to accept lower financial returns where SER returns relate to intangibles that are harder to measure.
Keywords: Social and environmental returns, social value, impact measurement, impact investment
JEL Classifications: D81, G11, G14, H23
THE NATURE OF DOMESTIC VOLATILITY TRANSMISSION BETWEEN SECTORS OF THE NIGERIAN ECONOMYEmenike Kalu O 1. and Peter Ifeanyichukwu Ali 2
1 Department of Banking and Finance, Rhema University Aba, Nigeria
2 Department of Financial Management Technology, Federal University of Technology Owerri
Abstract: Volatility transmission between sectors of a market or an economy is important to successful portfolio selection and hedging strategy within the domestic economy. This paper examines domestic volatility transmission between sectors of the Nigerian economy using Multivariate Generalised Autoregressive Conditional Heteroscedasticity (MGARCH) procedure. The central focus is to evaluate the nature and direction shock and volatility transmission between the banking sector, the consumer goods sector and the Shari’ah compliant equities sector of the Nigerian Stock Exchange (NSE). The results indicate existence of unidirectional shock and volatility transmission from the banking sector to the consumer goods sector and the Shari’ah compliant equities sector, and bidirectional shock and volatility transmission between the consumer goods and the Shari’ah compliant equities sectors of the NSE. These findings have crucial implications for domestic portfolio selection and management through the hedging opportunities available in the NSE sectors.
Keywords: volatility transmission, sectors of economy, BEKK-GARCH Model, Nigeria
JEL Classification Numbers: G11, G32, C32
THE NEED AND IMPORTANCE OF A VOLUME BASED INDEXRishi Mehra 1, Nikhil Srivastava 1
1 Corporate Partners, India
Abstract: The importance of volume study has already been highlighted through various researches world-wide. Volume is studied in isolation as confidence proxy; as a liquidity parameter; depth assessment indicator, whereas, volume when studied along with other parameters such as price or returns, reveals interesting conclusions like price direction, momentum, etc. All these have been several times estimated and proven. The empirical results by some of these research initiatives conclude the imperative presence of Volume in market analysis and forecasting.
Volumes were and till date are studied in absolute terms for various time intervals. These intervals (normally daily volumes) reveals discontinued pattern of observations. By discontinued pattern of observations we mean the volumes start with zero and cumulate for a day and next day again starts with a zero. The study of such data poses lots of limitations and hindrances in day to day decision making such as relative understanding of volumes patterns, time series analysis and relative analysis of volume with price direction.
The aforesaid limitations can be mitigated if volumes studies get reinvented and shaped as a standardized tool like an Index. Volume index would not only help reveal the changes in volumes but also facilitate a long term continued study of market liquidity. The formation of such indices world-wide would also indicate the global fund flow process. Hence, the need of the hour is a volume based index in all the markets of the world to complement the analysis of stock market and facilitate analysts and investors to get a holistic view of the markets.