The Effects of Liquidity Risk and Interest-Rate Risk on Profitability and Firm Value among Banks in ASEAN-5 Countries
DOI:
https://doi.org/10.6000/1929-7092.2019.08.29Keywords:
Liquidity risk, interest-rate risk, profitability, firm value, ASEAN.Abstract
This study explores the issues relating to liquidity risk and interest-rate risk, recognizing that existing studies are mostly vague in emerging and developing markets. Panel data estimation technique is employed in the study based on data extracted from 63 commercial banks in ASEAN-5 countries over the period 2009 to 2017 making up to 567 observations. The empirical results reveal that loan to deposit ratio have a positive significant effect on firm value while liquid asset ratio, interest rate risk (net interest margin and asset interest yield) have a negative significant effect on firm value for ASEAN. The loan to deposit ratio have a positive significant impact on return on asset, interest rate risk and banks size have a significant negative effect on return on asset for ASEAN banks while GDP and inflation have a positive significant effect on return on asset. Also, the liquidity risk have a negative significant effect on return on equity while the interest rate risk have a positive significant effect, bank size have a significant negative effect on return on equity while inflation rate have a positive significant impact on return on equity. Hence, this empirical study provides implications that emphasizes on the need for banks to adhere to prudential and regulatory guidelines and ensure corporate management with respect to liquidity exposure that is capable of critically affecting banks profitability and firm value. The dynamics of interest rate volatility in banks operating environment necessitates that financial institutions use sound risk management practices in order to obtain higher valuations, achieve better financial performance and experience diminished costs of financial distress that's useful for policy implementations in ASEAN economies and suggest that further study can explore the interaction between abnormal loan growth and non-performing loans with a robust econometrics model.
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https://doi.org/10.1108/13581981211218342
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https://doi.org/10.1016/j.intfin.2006.07.001
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Bekele, B. (2015). The Nexus between Bank Specific Risk Management Practice and Financial Performance: A Study on Selected Commercial Banks in Ethiopia.
https://doi.org/10.2139/ssrn.2841206
Bhullar, P. S & Bhatnagar, D. (2013). Theoretical framework EV vs. Stock price – A better measurement of firm value. International Journal of Commerce, Business and Management, 2(6), pp. 335-343.
Bo?oc, C. (2015). Risk and Firm Value in European Companies: A Dynamic Panel Data Approach. The Annals of the University of Oradea, 792.
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https://doi.org/10.1016/0378-4266(89)90020-4
Cucinelli, D. (2013). The determinants of bank liquidity risk within the context of euro area. Interdisciplinary Journal of Research in Business, 2(10), 51-64.
?urak, M., Pepur, S., & Poposki, K. (2013). Determinants of non-performing loans–evidence from Southeastern banking systems. Banks & Bank System, 8(1), 45-54.
Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 13(2), 379-408.
https://doi.org/10.1093/wber/13.2.379
Den Haan, W. J., Sumner, S. W., & Yamashiro, G. M. (2007). Bank loan portfolios and the monetary transmission mechanism. Journal of Monetary Economics, 54(3), 904-924.
https://doi.org/10.1016/j.jmoneco.2006.01.008
Dewatripont, M., & Tirole, J. (1994). A theory of debt and equity: Diversity of securities and manager-shareholder congruence. The quarterly journal of economics, 109(4), 1027-1054.
https://doi.org/10.2307/2118355
Dewatripont, M., & Tirole, J. (1994). The prudential regulation of banks (No. 2013/9539). ULB--Universite Libre de Bruxelles.
Distinguin, I., Roulet, C., & Tarazi, A. (2012). Bank regulatory capital buffer and liquidity: evidence from US and European publicly traded banks.
https://doi.org/10.2139/ssrn.1884811
Du, J., Wu, F., & Liang, X. (2016). Corporate liquidity and firm value: evidence from China’s listed firms. In SHS Web of Conferences (Vol. 24, p. 01013). EDP Sciences.
https://doi.org/10.1051/shsconf/20162401013
Dumicic, M., & Ridzak, T. (2013). Determinants of banks net interest margin in Central and Eeastern Europe. Financial Theory and Practice, 37 (1), 1-30.
https://doi.org/10.3326/fintp.37.1.1
Ebrahim, H., Kazem, Y., Nader, M., & Reza, K. (2013). Effects of risk parameters (credit, operational, liquidity and market risk) on banking system efficiency: study of 15 top banks in Iran. Iranian Economic Review, 17(1), 1-23.
Entrop, O., Memmel, C., Wilkens, M., & Zeisler, A. (2008). Analyzing the interest rate risk of banks using time series of accounting-based data: Evidence from Germany.
Ferrouhi, E. M. (2014). Bank Liquidity and Financial Performance: Evidence from Moroccan Banking Industry. Business: Theory & Practice, 15(4).
https://doi.org/10.3846/btp.2014.443
Filip, B. F. (2016). Assessing the banking systems’ performance and its determinants in EU28 countries. Theoretical and Applied Economics, 23(Special (I)), 260-268.
Flannery, M. J. (1981). Market interest rates and commercial bank profitability: An empirical investigation. The Journal of Finance, 36(5), 1085-1101.
https://doi.org/10.1111/j.1540-6261.1981.tb01078.x
Flannery, M. J., & James, C. M. (1984). The effect of interest rate changes on the common stock returns of financial institutions. The Journal of Finance, 39(4), 1141-1153.
https://doi.org/10.1111/j.1540-6261.1984.tb03898.x
Goddard, J., Molyneux, P., & Wilson, J. O. (2004). The profitability of european banks: a cross?sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
https://doi.org/10.1111/j.1467-9957.2004.00397.x
Gorton, G., & Rosen, R. (1995). Banks and derivatives. NBER Macroeconomics Annual, 10, 299-339.
https://doi.org/10.1086/654283
Hamadi, H., & Awdeh, A. (2012). The determinants of banks net interest margin; Evidence from the Lebanese banking sector. . Journal of Money, Investment and Banking, (23), 85-98.
Haque, S. M., & Wani, A. A. (2015). Relevance of Financial Risk with Financial Performance: An Insight of Indian Banking Sector. Pacific Business Review International, 8(5), 54-64.
Hendricks, D., & Hirtle, B. (1997). Bank capital requirements for market risk: The internal models approach.
Jarrow, R. A., & Turnbull, S. M. (2000). The intersection of market and credit risk. Journal of Banking & Finance, 24(1-2), 271-299.
https://doi.org/10.1016/S0378-4266(99)00060-6
Kalluci, I. (2011). Analysis of the Albanian banking system in a risk-performance framework.
Kasman, S., Vardar, G., & Tunç, G. (2011). The impact of interest rate and exchange rate volatility on banks' stock returns and
volatility: Evidence from Turkey. Economic Modelling, 28(3), 1328-1334.
https://doi.org/10.1016/j.econmod.2011.01.015
Khrawish, H. (2011). Determinant of commercial banks performance in Jordan. International Journal of Finance and Economics, (81), 81-95.
Kolapo, F. T., Ajayi, L. B., & Aluko, O. A. (2016). How is size related to profitability? Post-consolidation evidence from selected banks in Nigeria. Journal of Finance & Banking Studies, 5(4), 30-38.
https://doi.org/10.20525/ijfbs.v5i4.592
Kommunuri, J., Narayan, A., Wheaton, M., & Jandug, L. (2015). Enterprise Risk Management and Firm Performance Empirical evidence from Vietnam.
Kosmidou, K. (2008). The determinants of banks profit in Greece during the period of EU financial integration. Managerial Finance, 34 (3), 146-159.
https://doi.org/10.1108/03074350810848036
Kosmidou, K., Tanna, S., & Pasiouras, F. (2005). Determinants of profitability of domestic UK commercial banks: panel evidence from the period 1995-2002. In Money Macro and Finance (MMF) Research Group Conference (Vol. 45, pp. 1-27).
Lartey, V. C., Antwi, S., & Boadi, E. K. (2013). The relationship between liquidity and profitability of listed banks in Ghana. International Journal of Business and Social Science, 4(3).
Lifland, S. (2011). The impact of working capital efficiencies on the enterprise value option: Empirical analysis from the energy sector. Advances in business research, 2(1), pp. 57-70.
Lloyd, W. P., & Shick, R. A. (1977). A test of Stone's two-index model of returns. Journal of Financial and Quantitative Analysis, 12(3), 363-376.
https://doi.org/10.2307/2330540
Ly, K. C. (2015). Liquidity Risk, Regulation and Bank Performance: Evidence from European Banks. Global Economy and Finance Journal, 8(1), 11-33.
https://doi.org/10.21102/gefj.2015.03.81.02
Mamatzakis, E., & Bermpei, T. (2014). What drives investment bank performance? The role of risk, liquidity and fees prior to and during the crisis. International Review of Financial Analysis, 35, 102-117.
https://doi.org/10.1016/j.irfa.2014.07.012
Marozva, G. (2015). Liquidity and bank performance. The International Business & Economics Research Journal (Online), 14(3), 453.
https://doi.org/10.19030/iber.v14i3.9218
Memmel, C., & Raupach, P. (2010). How do banks adjust their capital ratios?. Journal of Financial Intermediation, 19(4), 509-528.
https://doi.org/10.1016/j.jfi.2009.10.002
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of banking & Finance, 16(6), 1173-1178.
https://doi.org/10.1016/0378-4266(92)90065-8
Naceur, S. B., & Kandil, M. (2008). The impact of capital requirement on banks costs of intermediation and performance. Journal of Economics and Business, 61, 70-89.
https://doi.org/10.1016/j.jeconbus.2007.12.001
Ngalawa, H., & Viegi, N. (2013). Interaction of formal and informal financial markets in quasi-emerging market economies. Economic Modelling, 31, 614-624.
https://doi.org/10.1016/j.econmod.2013.01.005
Nofiyanti, I. (2014). Effect of credit risk management, market risk and operational risk on banking financial performance in Indonesia. Unpublished research thesis.
Olagunju, A., David, A. O., & Samuel, O. O. (2012). Liquidity management and commercial banks' profitability in Nigeria. Research Journal of Finance and Accounting, 2(7-8), 24-38.
Ongore, V., & Kusa, G. (2013). Determinants of Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Financial, 3(1), 237-252.
Patnaik, I., & Shah, A. (2004). Interest rate volatility and risk in Indian banking (Vol. 4). International Monetary Fund.
Peng, W., Lai, K., Leung, F., & Shu, C. (2003). The impact of interest rate shocks on the performance of the banking sector. HKMA Quarterly Bulletin, 35, 20-7.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518-524.
https://doi.org/10.1016/S2212-5671(15)00104-5
Purnanandam, A. (2007). Interest rate derivatives at commercial banks: An empirical investigation. Journal of Monetary Economics, 54(6), 1769-1808.
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Published
2019-07-02
How to Cite
Ebenezer, O. O., Islam, M. A., Yusoff, W. S., & Rahman, S. (2019). The Effects of Liquidity Risk and Interest-Rate Risk on Profitability and Firm Value among Banks in ASEAN-5 Countries. Journal of Reviews on Global Economics, 8, 337–349. https://doi.org/10.6000/1929-7092.2019.08.29
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