Effect of the Financial Dominance of Financial Institutions on the Risk-taking Level of Managers
Subject Areas : Financial Accounting
Mohsen Omidi
1
,
Majid Zanjirdar
2
1 - Department of Accounting, Arak Branch, Islamic Azad University, Arak, Iran
2 - Department of Finance, Islamic Azad University, Arak Branch, Arak, Iran
Keywords: Financial Dominance , Risk-Taking level of managers, Human Resources Expenses , Unexpected Marketing Costs,
Abstract :
The present study aimed to evaluate the effect of the financial dominance of financial institutions on the risk-taking level of managers. The study was conducted on the companies listed in Tehran Stock Exchange (TSE) during 2013-2017. In total, 110 companies were selected using the systematic removal method. Financial dominance of financial institutions was considered as the independent variable, and the risk-taking level of the managers was considered as the dependent variable. This was applied research in terms of type and a correlational study in terms of methodology. Data were collected using the library method by referring to financial statements, exploratory notes, and stock exchange monthly journal. In addition, descriptive and inferential statistics are applied to describe and allocate the collected data. Data analysis was performed using the analysis of variance (ANOVA), F-Limer test, Hausman test, and Jarque and Bera test. Afterwards, multivariate regression analysis was used to accept or reject the research hypotheses in the EViews software. According to the results, financial dominance of financial institutions affects the risk-taking level of the managers. In addition, unexpected marketing costs and human resources expenses influence the association between the financial dominance of financial institutions and risk-taking level of managers
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Advances in Mathematical Finance & Applications, 6(4), (2021), 895-907 DOI: 10.22034/amfa.2020.1883311.1334 |
| Published by IA University of Arak, Iran Homepage: www.amfa.iau- arak.ac.ir
|
Effect of the Financial Dominance of Financial Institutions on the Risk-Taking Level of Managers Mohsen Omidi a, Majid Zanjirdar, b,* aDepartment of Accounting, Arak Branch, Islamic Azad University, Arak, Iran bDepartment of Finance, Arak Branch, Islamic Azad University, Arak, Iran
| ||
Article Info Article History: Received 19 November 2019 Accepted 8 November 2020
Keywords: Financial Dominance Risk-Taking level of managers Human Resources Expenses Unexpected Marketing Costs |
| Abstract |
The present study aimed to evaluate the effect of the financial dominance of financial institutions on the risk-taking level of managers. The study was conducted on the companies listed in Tehran Stock Exchange (TSE) during 2013-2017. In total, 110 companies were selected using the systematic removal method. Financial dominance of financial institutions was considered as the independent variable, and the risk-taking level of the managers was considered as the dependent variable. This was applied research in terms of type and a correlational study in terms of methodology. Data were collected using the library method by referring to financial statements, exploratory notes, and stock exchange monthly journal. In addition, descriptive and inferential statistics are applied to describe and allocate the collected data. Data analysis was performed using the analysis of variance (ANOVA), F-Limer test, Hausman test, and Jarque and Bera test. Afterwards, multivariate regression analysis was used to accept or reject the research hypotheses in the EViews software. According to the results, financial dominance of financial institutions affects the risk-taking level of the managers. In addition, unexpected marketing costs and human resources expenses influence the association between the financial dominance of financial institutions and risk-taking level of managers. | ||
1 Introduction
Considering the lack of national research on the topics of the present study and its variables simultaneously in the capital market of Iran, there is a research gap on the impact of the financial dominance of financial institutions on the risk-taking of managers. Therefore, independent and efficient studies must be conducted in this regard. According to Hall and Oriani [9], the risk-taking level of managers in the United States, Britain, Germany, and France is 4.9%, 2.9%, 4.5%, and 4.2%, respectively. In 1992, research and development (R&D) expenditures reached 1.97% of the gross domestic product (GDP), while these rates reached 1.86%, 2.40%, and 2.16% in the United States, England, Germany, and France, respectively by the end of the 20th century. According to Xie and Fang [18], banking corrections and regional financial development promote investment in the innovation of the companies that are eager to expand their funding channels, and transmission mechanisms change the external funding of a firm into innovation. On the same note, Carmeli and Schaubroeck [4] report that higher efficiency of the knowledge of firm employees (unique, extraordinary, and irreplaceable function) increases the value of the staff to the company [4]. The current research has emphasized on the effect of bank stock transfer mechanisms on the risk-taking level of the managers (tendency toward innovation). Furthermore, we assessed the impact of unexpected marketing, human resource costs, and their interactions with the financial dominance of financial institutions on the risk-taking level of the managers, assuming that companies with high levels of financial dominance are likely to commit to focusing on long-term goals. In the present study, the investigated funding channels included internal and external financing. Internal financing is associated with higher independency and lower risk, while it is a challenging funding to be used in an innovation project. This is not only due to the limitations imposed by business profits and fluctuations, but is also due to the structure of dominance, management incentives, investment risk, sovereignty of institutional investors, and competition in the product market. In fact, access to external funds is crucial to enhancing the risk-taking of finance managers [18]. Investors and shareholders are the individuals and organizations that are primarily involved in this area, who could benefit from the results of the present study to assess the risk-taking level of corporate managers and make decisions based on this information. In addition, our findings could be used for investment in corporate shares and selection of appropriate stocks. Investors could also evaluate firms more accurately, so that the issues assessed in the study would have no negative impact on their investment results. Moreover, financial analysts and capital market activists could benefit from our findings in line with corporate assessments in order to determine the extent to which the dominance of financial institutions affects the decisions of managers and their risk-taking level. In the present study, we attempted to assess the impact of the financial dominance of financial institutions on the risk-taking level of the managers. Some of the research questions were as follows:
1. What is the impact of unexpected marketing costs on the correlation between the financial dominance of financial institutions and risk-taking level of the managers?
2. How do financial resource costs affect the correlation between the financial dominance of financial institutions and risk-taking level of the managers?
2 Theoretical Foundation and Research Background
Connection to bank shares is a common mechanism in many developing countries. Based on the social capital theory, the links and communication between the members of a network is a valuable resource, and the development of norms and mutual trust results in the realization of the goals of the members. A network of social relations is formed by connecting to bank shares, helping provide the necessary resources for the innovation of firms [2]. On the other hand, the resource-based theory shows that a firm is a combination of resources and capabilities, with the capabilities referring to the ability of a firm to use the required resources (input) in order to achieve favorable goals (output). Therefore, it could be inferred that connection to bank shares could improve information, business sharing, and coordination between banks and companies through organizational arrangements, thereby internalizing the external taxes. This process contributes to resolving the problem of investment in innovation by reducing the loan limitations and increasing the credits. According to the information asymmetry theory, the reduction of information asymmetry decreases funding constraints [12].
The discrepancy between the underlying resources and investment risks of innovative projects is intensified by political interference [16]. Managers have more information regarding the future of their company compared to the investors, finding no reason for sharing the future profits with others when the prospects of the corporation are rather clear; consequently, they meet their financial needs by financing debts. If their prediction of the future is improper, they will meet their financial needs through publishing shares, and higher commitment to marketing expenditures will also be beneficial in the association between the financial governance of financial institutions and risk-taking level of the managers. For instance, a freight company could assess its employees and managers more appropriately by focusing on the process of service provision, education, and development of the employees. Teoder Shultz and Gary Baker are two contemporary economists who have changed the human capital theory from its classic, elementary stages into an advanced, modern analysis, defining investment in human capitals as the expenditures in social projects, such as the promotion of health, education, and social services. In this section, we have provided a review of some foreign and domestic studies performed on the research subject. Dustar et al. reported a reverse association between the risk-taking and herding behaviors of the managers of investment companies. In another research, Taghizadeh Khanghahi and Zeynali [17] marked that social accountability had a positive, significant effect on investment efficiency, while it negatively affected excessive and restrained investment. In addition, social responsibility was observed to have positive, significant impact on innovation. On the other hand, Mahmoudabadi and Zamani [13] realized that risk-taking level had a positive, significant correlation with financial performance, while the proportion of the independent members of the board of directors had a negative, significant impact on the risk-taking level. In addition, the independence and size of the board of directors and proportion of the ownership of institutional shareholders positively influenced and enhanced the correlation between risk-taking and financial performance. According to Yahyazadeh and Amiri, marketing costs had a positive, significant effect on the performance level [20]. In another research, Kazerouni et al. [10] denoted that GDP, accumulation of human capital, R&D expenditures, and intellectual property rights had positive, significant effects on innovation. With respect to international studies, Currim et al. [6] reported that the stock market performance of the companies that were committed to marketing costs in the past was higher under the pressure of analysts. Chung and Low [5] have also documented that the overall impact of finances on the effective management of marketing costs deteriorates with increased market turbulence, while the overall impact of financial issues on R&D costs deteriorates with increased technological turmoil. Xing and Shuiquan [19] affirmed that the correlation between banking shares and risk-taking level of managers not only significantly increases innovation, but it also improves innovative performance, and banking share relations have a significant, positive effect on innovation in companies. On the same note, Dzhumashev et al. [8] claimed that export has a competitive effect on the survival of companies. While export and investment complement each other in the profitability of activities, export activities are an additional source of uncertainty for companies. Schimke and Brenner [14] have reported that R&D activities positively influence the growth of financial return, while capital investments affect the growth of companies both negatively and positively. On the other hand, Ahmadi and Kordloui [1] evaluated the effect of financial pressure on the investment behavior of the firms in Tehran Stock Exchange (TSE), reporting that firms with fewer investment opportunities have lower tendency to investment, while anxious economic agencies with more investment opportunities are likely to increase their investment. In another study, Bohlouli et al. [3] assessed the effect of financial structure on the financial performance of the banks listed on TSE, and the results confirmed the positive effects of financial structure, demonstrating the significant decline in the intensity of investment and size of the correlations between financial structure, ROA, and ROE.
3 Research Hypotheses
Considering the theoretical framework proposed in the current research, the research hypotheses are as follows:
Hypothesis 1: Financial dominance of financial institutions affects the risk-taking level of managers.
Hypothesis 2: Unexpected marketing costs affect the correlation between the financial dominance of financial institutions and risk-taking level of managers.
Hypothesis 3: Human resource costs affect the correlations between the financial dominance of financial institutions and risk-taking level of managers.
4 Methodology
Model one was developed to evaluate the first hypothesis, as follows:
(1) |
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(2) |
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(3) |
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(4) |
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(5) |
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(6) |
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State of ownership: This variable was equal to the percentage of the shares in the hands of the government.
Time variable: This represented the variable of year, where the observation related to a specific year was equal to one; otherwise, it was equal to zero.
Industry variable: If the observation was related to a specific year, it was equal to one; otherwise, it was equal to zero.
4.3 Control Variables
A) OCF, which was equal to the operating cash flow homogenized to the total assets;
B) Firm size, estimation of which is shown in model 6;
C) Firm growth, which is equal to the corporate sales growth obtained based on the difference ratio in the sales of two years [15];
D) Return on assets, which was calculated using model 5;
E) Financial leverage, which is presented in the description of the independent research variable;
F) Firm age, which is equal to the logarithm of the difference in the date of the establishment of the company until this year;
G) Inverse Mills ratio for the ith company in t time, which was estimated using model 7, as follows:
(7)
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(8)
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(9) |
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(10) |
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| (11) | ||||||||||||||
| Managers’ risk-taking level | Financial dominance of financial institutions | Unexpected marketing costs | Interaction of the unexpected marketing costs with financial institutions' financial dominance | Human resource costs | Human resource cost interaction and financial dominance of financial institutions | Operating cash flow | Firm size | Firm age | Financial leverage | Firm growth | Return on assets | Inverse Mills ratio | Industry variable | Year variable |
Mean | 0.039 | 0.004 | 0.216 | 0.001 | 296.0 | 1.302 | 0.107 | 14.13 | 3.58 | 0.717 | 0.201 | 0.099 | 11.78 | 10.17 | 3.000 |
Median | 0.038 | 0.004 | 0.163 | 0.000 | 0.000 | 0.000 | 0.091 | 14.05 | 3.68 | 0.668 | 0.140 | 0.082 | 2.119 | 10.00 | 3.000 |
Maximum | 0.087 | 0.021 | 12.77 | 0.091 | 21741 | 101.7 | 0.642 | 19.05 | 4.17 | 2.852 | 7.815 | 0.902 | 9232. | 22.00 | 5.000 |
Minimum | 0.000 | -0.011 | 0.001 | -0.003 | 0.000 | -45.34 | -0.460 | 10.53 | 2.56 | 0.048 | -0.931 | -1.038 | -4381. | 1.000 | 1.000 |
Standard Deviation | 0.019 | 0.004 | 0.625 | 0.004 | 1657. | 7.865 | 0.129 | 1.429 | 0.35 | 0.352 | 0.552 | 0.178 | 492.1 | 5.137 | 1.415 |
Skewness | 0.063 | 0.438 | 16.52 | 19.72 | 8.928 | 7.591 | 0.344 | 0.596 | -0.74 | 1.979 | 5.570 | 0.072 | 11.17 | 0.335 | 0.000 |
Kurtosis | 2.511 | 4.224 | 311.7 | 430.0 | 91.38 | 84.31 | 4.794 | 4.090 | 2.69 | 10.98 | 69.63 | 8.037 | 242.8 | 1.964 | 1.700 |
Jarque-Bera test | 5.850 | 51.94 | 22101 | 421532 | 18634 | 15682 | 84.72 | 59.86 | 52.4 | 1821. | 10458 | 582.0 | 13301 | 34.87 | 38.72 |
Significance Level | 0.053 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.00 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
Observations | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 | 550 |
According to the information in Table 1, the mean value that showed the balance point and center of the distribution mass, as well as a good criterion to indicate the centrality of the data, was equal to 0.039 for the variable of the risk-taking level of the managers. The median was another central indicator, showing that half of the data was below this amount, while the other half was above this amount. In addition, the equal amounts of the mean and median were indicative of the normality of the variable, which was estimated at 0.038 for the variable of the risk-taking level of the managers.
Dispersion indices are a criterion to determine the degree of data dispersion from each other or rate of dispersion relative to the mean. Standard deviation is one of the most important dispersion indicators, which was estimated at 0.019 for the variable of the risk-taking level of the managers. The degree of asymmetry in the frequency curve is often referred to as skewness, the amount of which was positive and close to zero for the risk-taking level of the managers in the present study, thereby showing the normal distribution and very small, right-skewed distribution. Furthermore, the dispersion indicator of the elongation of the frequency curve to the normal standard curve is referred to as kurtosis, which was possible for all the variables in the current research. The results of the F-Limer and Hausman tests for the research hypotheses are presented in Table 2.
Table 2: F-Limer and Hausman Test Results
| F-Limer Test | Significance Level | Hausman Test | Significance Level |
Model of First Hypothesis | 3.476513 | 0.0000 | 409.419216 | 0.0000 |
Model Second Hypothesis | 3.284600 | 0.0000 | 430.614729 | 0.0000 |
Model of Third Hypothesis | 6.781504 | 0.0000 | 403.710996 | 0.0000 |
With regard to the research models, the possibility of the Chi-square was below 5%. Therefore, the fixed effects model was applied to estimate and analyze the models of the first, second, and third hypotheses. The results of the testing of the first hypothesis are shown in Table 3.
Table 3: Results of First Hypothesis Model
Variables | Coefficients | Standard Error | t-statistic | Significance Level |
y-intercept | -0.414213 | 0.031315 | -13.22749 | 0.0000 |
Financial Dominance of Financial Institutions | 0.779332 | 0.183543 | 4.246041 | 0.0000 |
Operating Cash Flow | 0.011421 | 0.003411 | 3.348698 | 0.0009 |
Firm Size | -0.003252 | 0.001704 | -1.908402 | 0.0570 |
Firm Age | 0.141655 | 0.009356 | 15.14104 | 0.0000 |
Financial Leverage | -0.001677 | 0.001626 | -1.031294 | 0.3030 |
Firm Growth | -0.003157 | 0.000589 | -5.360970 | 0.0000 |
Return on Assets | -0.032660 | 0.004072 | -8.019934 | 0.0000 |
Inverse Mills Ratio | -2.09E-05 | 6.76E-06 | -3.090234 | 0.0021 |
Coefficient of Determination | 0.895199 | f-statistic | 31.53918 | |
Modified Coefficient of Determination | 0.866815 | Significance Level | 0.000000 | |
| Durbin-Watson | 1.932778 |
| |
According to the information in Table 3, the probability of the t-statistic for the variables of the financial dominance of financial institutions, OCF, firm age, firm growth, ROA, and inverse Mills ratio regarding the risk-taking level of the managers was below 5%. Therefore, the mentioned correlation was considered statistically significant. However, the variable of the financial dominance of financial institutions had a negative, significant impact on the risk-taking level of the managers.
The modified coefficient of determination indicated the explanatory power of the independent variables, explaining 87% of the changes in the dependent variable. In addition, the probability of the f-statistic demonstrated that the entire model was statistically significant. Since the variable of the financial dominance of financial institutions had a negative, significant impact on the risk-taking level of the managers, the zero hypothesis was rejected, confirming the impact of the financial dominance of financial institutions on the risk-taking level of the managers. The results of the testing of the second hypothesis are shown in Table 4.
Table 4: Results of Second Hypothesis Model
Variables | Coefficients | Standard Error | t-statistic | Significance Level | ||
y-intercept | -0.411356 | 0.030594 | -13.44584 | 0.0000 | ||
Financial Dominance of Financial Institutions | -0.977421 | 0.184444 | -5.299296 | 0.0000 | ||
Unexpected Marketing Costs | -0.006664 | 0.001759 | -3.789714 | 0.0002 | ||
Interaction between Unexpected Marketing Costs and Financial Dominance of Financial Institutions | 0.957519 | 0.206234 | 4.642885 | 0.0000 | ||
Operating Cash Flow | 0.010259 | 0.003354 | 3.058964 | 0.0024 | ||
Firm Size | -0.003411 | 0.001675 | -2.036161 | 0.0423 | ||
Firm Age | 0.141896 | 0.009163 | 15.48585 | 0.0000 | ||
Financial Leverage | -0.001723 | 0.001589 | -1.084806 | 0.2786 | ||
Firm Growth | -0.003185 | 0.000580 | -5.488918 | 0.0000 | ||
Return on Assets | -0.032274 | 0.003979 | -8.111584 | 0.0000 | ||
Inverse Mills Ratio | -1.99E-05 | 6.61E-06 | -3.012200 | 0.0027 | ||
Coefficient of Determination | 0.900482 | f-statistic | 32.69611 | |||
Modified Coefficient of Determination | 0.872941 | Significance Level | 0.000000 | |||
Durbin-Watson | 1.926064 | |||||
According to the information in Table 4, the probability of the t-statistic for the variables of the financial dominance of financial institutions, unexpected marketing costs, interaction between the unexpected marketing costs and financial dominance of financial institutions, OCF, firm size, firm age, firm growth, ROA, and inverse Mills ratio on the risk-taking level of the managers was below 5%. Therefore, the mentioned correlation was considered statistically significant. On the other hand, the probability of the f-statistic was indicative of the statistical significance of the entire model. With regard to the hypothesis, since the variable of the interaction between the unexpected marketing costs and financial dominance of financial institutions was positive and significant, the zero hypothesis was rejected. In other words, the unexpected marketing costs affected the correlation between the dominance of financial institutions and risk-taking level of the managers. The results of the testing of the third hypothesis are shown in Table 5. According to the information in Table 5, the probability of the t-statistic for the variables of the financial dominance of financial institutions, interaction between the human resource costs and financial dominance of financial institutions, OCF, firm size, firm age, firm growth, ROA, and inverse Mills ratio on the risk-taking level of the managers was below 5%. Therefore, the mentioned correlation was considered statistically significant. With regard to the hypothesis, since the variable of the interaction between the human resource costs and financial dominance of financial institutions was positive and significant, the zero hypothesis was rejected. In other words, the human resource costs affected the correlation between the financial dominance of financial institutions and risk-taking level of the managers.
Table 5: Results of Third Hypothesis Model
Variables | Coefficients | Standard Error | t-statistic | Significance Level | |
y-intercept | -0.400749 | 0.031827 | -12.59146 | 0.0000 | |
Financial Dominance of Financial Institutions | -0.666982 | 0.189811 | -3.513926 | 0.0005 | |
Human Resource Costs | 8.29E-05 | 4.73E-05 | 1.752443 | 0.0804 | |
Interaction between Human Resource Costs and Financial Dominance of Financial Institutions | 0.000167 | 7.11E-05 | 2.353753 | 0.0190 | |
Operating Cash Flow | 0.011013 | 0.003401 | 3.237825 | 0.0013 | |
Firm Size | -0.003831 | 0.001719 | -2.228735 | 0.0263 | |
Firm Age | 0.140196 | 0.009344 | 15.00449 | 0.0000 | |
Financial Leverage | -0.002199 | 0.001638 | -1.342909 | 0.1800 | |
Firm Growth | -0.002992 | 0.000591 | -5.060781 | 0.0000 | |
Return on Assets | -0.034860 | 0.004184 | -8.330856 | 0.0000 | |
Inverse Mills Ratio | -2.09E-05 | 6.73E-06 | -3.102421 | 0.0020 | |
Coefficient of Determination | 0.896538 | f-statistic | 31.31184 | ||
Modified Coefficient of Determination | 0.867905 | Significance Level | 0.000000 | ||
Durbin-Watson | 1.929761 | ||||
6 Discussion and Conclusions
The present study aimed to evaluate the effect of the financial dominance of financial institutions on the risk-taking level of the managers. According to the obtained results, the financial dominance of financial institutions had a direct, positive effect on the interaction between the unexpected marketing costs and risk-taking level of the managers. According to the information asymmetry theory, since the information asymmetry, ethical risk, and incorrect selection problems that are caused by information asymmetry are the key factors for financial support, connection to bank stocks could enhance the information, as well as business sharing and coordination between banks and companies through organizational arrangements, thereby internalizing external taxation. As a result, the risk-taking level of managers increases with higher investment in R&D expenses, which might be caused by the diminished problem of investment in innovation through reducing loan limitations and increasing credit. In a study in this regard, Xing and Shuiquan [19] claimed that the link between bank share and risk-taking level of the managers not only significantly increases innovation, but it also improves innovation performance, which is in line with our findings. According to the second hypothesis of the current research, it is beneficial to instigate more commitment to marketing costs through the association between the financial dominance of financial institutions and risk-taking level of the managers. This assumption relies on marketing studies, with the theory based on the notion that asset marketing protects the company against the price competition created by low-quality brands, while also increasing the acceptance and loyalty of the clients and distributors. Therefore, there should be more commitment to marketing costs through the past courses of analysts' pressures to create and enhance the marketing assets that could improve financial performance. These are the key reasons that managers could help increase their degree of risk-taking. In another research in this regard, Schimke and Brenner [14] reported that R&D activities had a positive effect on turnover growth, while the capital investments negatively and positively affected the firm growth. According to the third hypothesis of the current research, the financial dominance of financial institutions had a significant, direct effect on the interaction between the human resource costs and risk-taking level of the managers. According to the human capital theory, human resource cost indicators involve various perspectives, and it seems that this approach to human resource evaluation increases the accuracy of firm evaluations, thereby enhancing the risk-taking of managers. In a study in this regard, Kazerouni et al. [10] stated that higher education of an individual is associated with a more significant impact on the improvement of innovation. Moreover, higher R&D expenses were associated with higher innovation, which is consistent with our findings. Based on the results of the first hypothesis of the current research, it is proposed that the bank dependency of companies be emphasized by investors, creditors, and analysts in their evaluation of the competitive market in order to make proper decisions. This is mainly due to the fact that the companies that rely on commercial banks are often affected by risk.
Based on the results of the second hypothesis of the current research, it is suggested that educational classes and seminars be held by TSE in this regard in order to explain the extent to which a company enjoys information on unexpected marketing costs and its impact on achieving sustainable, competitive advantages, as well as higher innovation when providing counseling services to investors and shareholders. Based on the results of the third hypothesis, it is suggested that the recruitment system of the evaluated companies be assessed, and rational motivational programs be provided in order to enhance the role of human capital in improving the risk-taking level of the managers, which in turn reduced inefficiency and improved the performance quality of the employees.
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* Corresponding author. Tel.: E-mail address: m-zanjirdar@iau-arak-ac.ir |
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