The Journal of Risk Finance

Catastrophe reinsurance and risk capital in the wake of the credit crisis : Table of Contents

Christopher L. Culp, Kevin J. O'Donnell — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – Property and casualty (“P&C”) insurance companies rely on “risk capital” to absorb large losses that unexpectedly deplete claims-paying resources and reduce underwriting capacity. The purpose of this paper is to review the similarities and differences between two different types of risk capital raised by insurers to cover losses arising from natural catastrophes: internal risk capital provided by investors in insurance company debt and equity; and external risk capital provided by third parties. The paper also explores the distinctions between four types of external catastrophe risk capital: reinsurance, industry loss warranties, catastrophe derivatives, and insurance-linked securities. Finally, how the credit crisis has impacted alternative sources of catastrophe risk capital in different ways is considered. Design/methodology/approach – The discussion is based on the conceptual framework for analyzing risk capital developed by Merton and Perold. Findings – In 2008, the P&C insurance industry was adversely affected by significant natural catastrophe-related losses, floundering investments, and limited access to capital markets, all of which put upward pressure on catastrophe reinsurance premiums. But the influx of new risk capital that generally accompanies hardening markets has been slower than usual to occur in the wake of the credit crisis. Meanwhile, disparities between the relative costs and benefits of alternative sources of catastrophe risk capital are even more pronounced than usual. Originality/value – Although many insurance companies focus on how much reinsurance to buy, this paper emphasizes that a more important question is how much risk capital to acquire from external parties (and in what form) vis-à-vis investors in the insurance company's own securities.

Decisions on capital structure in a Zakat environment with prohibition of riba: The case of Saudi Arabia : Table of Contents

Jasim Al-Ajmi, Hameeda Abo Hussain, Nadhem Al-Saleh — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to assess and explain the leverage of Saudi companies (53 companies) during the period 2003-2007. Design/methodology/approach – This paper reviews two different classical capital structure theories, namely tradeoff theory and pecking order theory, to formulate testable propositions concerning the determinants of debt levels of Saudi companies. It develops a number of regression models (pooled OLS and panel techniques) to test the study's hypotheses. Findings – The results suggest that a firm's capital structure is positively affected by profitability, size, growth opportunities, and institutional ownership. It is negatively impacted by tangibility, government ownership, family ownership, business risk, dividend payment, and liquidity. Practical implications – Cost of capital is one of the pillars of corporate competitive advantage. Knowing which factors have the potential to influence capital structure can be essential to minimizing the cost of capital. Originality/value – This is the first study of the determinants of capital structure in Saudi Arabia that considers dividend payment, ownership structure (as a proxy for agency problems), and risk. This work also contributes to the current debate regarding theories of competitive capital structure.

Financial literacy and investment decisions of UAE investors : Table of Contents

Hussein A. Hassan Al-Tamimi, Al Anood Bin Kalli — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to assess the financial literacy of the UAE individual investors who invest in the local financial markets. In addition, it examines the relationship between financial literacy and the influence of the factors that affect the investment decision. Design/methodology/approach – A modified questionnaire has been developed divided into three parts. The first part covers demographic variables. The second part identifies 37 factors affecting the investment decision of the UAE investors. The third part is devoted to financial literacy using exam-type questions of true or false and includes 18 questions. A convenient sample of 290 of UAE national investors is used. Findings – The results indicate that the financial literacy of UAE investors is far from the needed level. The financial literacy level is found to be affected by income level, education level, and workplace activity. High-income respondents hold high educational degrees, and those who work in the field of finance/banking or investment had as expected a higher financial literacy level than others. Whereas, financial illiteracy exists regardless of the age of the respondents. A significant difference in the level of financial literacy was found as well between the respondents according to their gender. Specifically, women have a lower level of financial literacy than men. Finally, the results indicate that there is a significant relationship between financial literacy and investment decisions. The most influencing factor that affects the investment decision is religious reasons and the least affecting factor is rumors. Originality/value – The current study is considered the first of its kind conducted on the UAE. To the best of our knowledge, no such studies have been conducted regarding measuring financial literacy in the UAE or the relation between financial literacy level and the factors that influence the investment decisions.

The impact of capital-structure choice on firm performance: empirical evidence from Egypt : Table of Contents

Ibrahim El-Sayed Ebaid — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in Egypt as one of emerging or transition economies. Design/methodology/approach – Multiple regression analysis is used in the study in estimating the relationship between the leverage level and firm's performance. Findings – Using three of accounting-based measures of financial performance (i.e. return on equity (ROE), return on assets (ROA), and gross profit margin), and based on a sample of non-financial Egyptian listed firms from 1997 to 2005 the results reveal that capital structure choice decision, in general terms, has a weak-to-no impact on firm's performance. Originality/value – This is the first study that examines the relationship between leverage level and firm performance in Egypt.

Basis risk and hedging efficiency of weather derivatives : Table of Contents

Charles C. Yang, Patrick L. Brockett, Min-Ming Wen — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to examine empirically the basis risk and hedging efficiency of temperature-indexed standardized weather derivatives in hedging weather risks in the US energy industry. Design/methodology/approach – Within the risk minimization framework, using power load and temperature data, this research analyzes both linear and nonlinear hedging strategies using the two most popular types of standardized indexes – city indexes and regional indexes. Findings – The results indicate that the city indexes and regional indexes are not consistently superior to each other and the regional indexes should be a good complement to the current exchange-listed indexes. The results also document that the basis risk is sufficiently low for the diversified power producers serving the US Northeast or Mid-Atlantic regions in both the summer and winter seasons and California in the summer season. However, the basis risk is very high for the diversified power producers serving California in hedging the weather risk in the winter season. More discrepancies are observed in the hedging efficiency among the power producers serving the Texas region. Originality/value – This research provides important implications about the survivability and superiority of current and proposed standardized weather contracts and the design of effective standardized weather derivatives for the extant and potential weather markets.

Corporate governance, ownership structure, cash holdings, and firm value on the Ghana Stock Exchange : Table of Contents

Zangina Isshaq, Godfred A. Bokpin, Joseph Mensah Onumah — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to examine the interaction between corporate governance, ownership structure, cash holdings, and firm value on the Ghana Stock Exchange. Design/methodology/approach – A multiple regression approach using the seemingly unrelated regression to mitigate the problems of multicollinearity between the cash-holding variable and other control variables is adopted. Findings – Board size is found to be positively and statistically significantly related to share price among the corporate governance variables. However, a significant relationship between inside ownership and share price is not found. The results also indicate that additional units of cash holdings do not have a statistically significant influence on share price. Finally, leverage and income volatility are found to be significant determinants of share price. Originality/value – This is the first of its kind in the country that considers the impact of corporate governance, ownership structure, and firm value on the Ghana Stock Exchange (GSE).

How money got its tail (not too light; not too heavy; but “just so”) : Table of Contents

Michael R. Powers — Sat Oct 31 08:00:32 GMT 2009

Abstract:
Purpose – The purpose of this paper is to explore the theoretical basis for heavy-tailed asset-return distributions. Design/methodology/approach – Through a simple model of asset-price formation, one can formulate the asset-return random variable, ln?(Pt/Pt-1), as a constant plus the natural log of a ratio of Bernoulli proportions. This random variable admits of different approximations, whose distributions may be studied analytically. Findings – The paper finds that for two reasonable approximations to the asset-return random variable, the tails are approximately exponential. This suggests that the Gaussian assumption provides a poor “starting point” for asset-pricing models, and empirically validated heavy-tailed behavior is likely the result of time-dependent components in the tail parameters. Originality/value – The editorial offers a theoretical analysis of asset-return distributions using parsimonious modeling assumptions.