This paper examines the impact of regulatory policies on banking market efficiency using a sample of 678 commercial banks from 21 European Union countries for the post-crisis year 2010, controlling for bank-specific and country-specific variables. Data on regulation, supervision and monitoring variables, and activity restrictions are from the most recent Bank Regulation and Supervision Survey database conducted by the World Bank, published 2012. Besides these we incorporate bank size, equity, market share, government ownership, and growth of Gross Domestic Product per capita, employing an Ordinary Least Squares method. Focus is on two alternative measures of banking market efficiency: net interest margin and overhead costs (operating expenses to assets). Elevated levels of these two ratios should indicate a low level of banking efficiency. The evidence suggests that the link between capital regulation and banking efficiency is not robust enough to control for other regulatory variables. Results confirm that activity restrictions have a negative and significant impact on banking efficiency. Policies encouraging official supervisory power do not enhance efficiency of the banking sector. The only approach positively and statistically significantly associated with efficiency is private monitoring. This leads to the suggestion that government regulation and supervision should be more focused on promoting transparency of information.
The financial system in the Kingdom of Saudi Arabia (KSA) has a history of relative soundness, particularly in banking, due to comparatively strict and enforced domestic supervision, and supported by what has been for the most part a reasonably robust economy. However, the sector is facing challenges of a sluggish economy, need for reform and negative effects of the COVID-19 pandemic. This paper strives to assess how well the government thus far has responded to the challenges in the financial sector. The working hypothesis is that the insurance industry has improved its position, resulting in higher efficiency and profitability and lower risk. This is an industry historically plagued by too many players, financial issues and less than adequate controls. The analysis undertaken bears out the hypothesis, as revealed by the enhanced contribution made by the industry since the pandemic. Analysis suggests that strides have been made in that industry in terms of helping to diversify the economy with the onset of the pandemic. Moreover, evidence is provided that the sensitivity to changes in oil volumes (rather than to changes in oil prices) is a key risk factor for the financial sector in the KSA. These findings have implications for policy makers in terms of leveraging the pandemic conditions as an opportunity to drive further reform and diversify the economy with lower risk.
Purpose The theoretical construct of the weighted average cost of capital (WACC), which uses an expected equity return, suggests that lower WACC, often facilitated by use of debt, should result in commensurate returns to shareholders, and higher shareholder value, that is if management is adept at investing in projects yielding returns at or above the WACC. In other words, finding good projects ought to be made easier by a lower hurdle rate on investment, thus translating into returns comparable to or above the WACC, and higher valuations. Is this actually the case? Does the relation between WACC, actual returns, and financial leverage also hold, as predicted, where higher leverage should result in lower WACC, and higher actual returns? Methodology This brief study looks at performance and valuation (total equity market returns to shareholders, and market values, on an annual basis) of S&P 500 companies over a recent ten year period (2006-2015), versus valuations implied by price to book ratios and WACC based on firm leverage. We compare theoretical valuations with the actual, and note variations year on year, but greater similarity over a longer time frame. Regression analysis is performed on these shareholder returns and valuations versus equity cost of these companies as computed using the Capital Asset Pricing Model (CAPM) and Bloomberg data. Another regression is run on WACC versus financial leverage (net debt to market capitalisation) for the same sample. Findings The study finds mixed evidence that expected return on equity, regarded as a benchmark for shareholder returns, was commensurate with actual returns and valuations on average over the time frame. R squared is low, but the analysis has significance. While the S&P 500 earned an annual total shareholder return of 11.8% over the period. and average cost of equity was 10.8%, there is a negative relation between values predicted by WACC and the actual ones. Implications This result leads us to look for other explanations as to why this should be. These include management capabilities, target capital structure and time horizon. We make suggestions for further research, encompassing different and wider samples.
Abstract:Purpose The theoretical framework of the weighted average cost of capital (WACC)
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